Upland Software Inc (UPLD) 2018 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Upland Software First Quarter 2018 Earnings Call. (Operator Instructions)

The conference call will be simultaneously webcast on Upland's Investor Relations website, which can be accessed at investor.uplandsoftware.com.

As a reminder, this conference call is being recorded. Following the completion of the conference call, a webcast replay will be available for 12 months on Upland's Investor Relations website at investor.uplandsoftware.com.

By now everyone should have access to the first quarter 2018 earnings release, which was distributed today at approximately 3:00 p.m. Central Time, 4:00 p.m. Eastern Time. If you've not received the release, it's available on the Investor Relations tab of Upland's website at investor.uplandsoftware.com.

I'd now like to turn the conference over to our host, Mr. Jack McDonald, Chairman and CEO of Upland Software. Please go ahead, sir.

All right. Thank you. Good afternoon, everyone, and welcome to our Q1 2018 earnings call. With me this afternoon are Tim Mattox, our President and COO; and Mike Hill, our CFO.

On today's call, I'll summarize our results and some recent highlights. After that, Mike will give a more detailed look at the numbers and talk about our guidance in more detail both for the second quarter and the full year 2018. And then Tim will cover sales and operations highlights from the first quarter. After that, we'll open the call up for questions. But before we get started, Mike will read the safe harbor statement. Mike?

Thank you, Jack. And good afternoon, everyone.

During today's call, we will include statements that are considered forward-looking within the meaning of the securities laws. In addition, we may make additional forward-looking statements in response to your questions. These statements are subject to certain risks, assumptions and uncertainties that could cause our actual results to differ materially. We caution you to consider our discussion of risk factors and other uncertainties that could cause actual results to differ materially from those in the forward-looking statements contained in the press release and in this conference call.

A detailed discussion of such risks and uncertainties are contained in our annual report on Form 10-K, as periodically updated, as needed in our quarterly reports on Form 10-Q filed with the SEC.

The forward-looking statements made today are based on our views and assumptions and on information currently available to Upland management as of today, May 9, 2018. We do not intend or undertake any duty to release publicly any updates or revisions to any forward-looking statements whether as a result of new information, future events or otherwise.

On this call, Upland will refer to non-GAAP financial measures that when used in combination with GAAP results provide Upland management with additional analytical tools to understand its operations. Upland has provided reconciliations of non-GAAP measures to the most comparable GAAP measures in our press release announcing our first quarter 2018 results, which is available on our Investor Relations section of our website at investor.uplandsoftware.com.

To learn more about our outreach plans, please feel free to contact us at investor-relations@uplandsoftware.com.

And with that, I'll turn the call back over to Jack.

All right. Thanks, Mike. I would say, 8 major headlines today. We had a record Q1 with better than 50% growth in total revenue, better than 50% growth in recurring revenues, so really stellar revenue growth in total in recurring revenues. It's worth noting that Q1 recurring revenues broke through $100 million on an annualized basis for the first time. So actually, it broke through $110 million, and that number continues to grow, so a very -- a strong percentage of our total revenues are comprised of contractually recurring revenues, providing a great stability for the business.

We had record adjusted EBITDA. And again, if you look at the annualized run rate, it is now north of $40 million in Q1 and getting close to $50 million annualized adjusted EBITDA run rate in the second quarter based on the midpoint of our guidance, so we see cash flow growing rapidly. This was the 15th straight quarter of meeting or beating guidance, and that's every quarter since going public, so delivering results on a consistent and predictable basis. We had a host of new product innovations in the first quarter. Tim will cover some of those in more detail in a few minutes. But it shows that our model is not only generating best-in-class adjusted EBITDA margin, but it is enabling us to invest in our products to grow customer value, to grow customer satisfaction, to grow our position in the marketplace and long-term enterprise value.

On the organic growth side, we had a very strong quarter, with organic growth in recurring revenues at 6%, 6% growth -- organic growth in recurring revenue. Now we're very pleased by that, but we are not ready to declare that as sustainable. We had a relatively easy compare to Q1 of last year, and we had a number of customer go-lives that increased revenue in the quarter. Tim will touch in a few minutes on a number of the investments we are making in product, in customer success and in sales to drive organic growth in the future for the long term. And again, very happy with that 6% organic growth number in the quarter but not ready to declare this the new normal.

We had a strategic and accretive acquisition of InterFAX in the first quarter. This was our first in Europe. It added $15 million in revenues, immediately accretive on adjusted EBITDA basis. It added foundational capabilities to our Workflow Automation product family with HIPAA, PCI and ISO-compliant cloud fax and secured document distribution capabilities. And of course, as I say, the first in Europe, so provided a platform for additional growth in Europe and additional acquisitions there as well. And I would note that our M&A pipeline remains strong and that we have the operational and financial resources to execute.

And finally, our guidance for Q2. Strong guidance, as I say, annualized adjusted EBITDA run rate approaching $50 million in the second quarter and accelerating growth in recurring revenues. So the Upland engine is firing on all cylinders, and we are looking forward to a great 2018.

So with that, I'm going to turn the call over to Mike to give you a more detailed look at the numbers. Mike?

Thank you, Jack. Today, I'll cover the financial results for the first quarter and our outlook for the second quarter and full year 2018.

Total revenue for the first quarter was $31.6 million, representing growth of 52%. Recurring revenues from subscription and support grew 53% year-over-year to $27.7 million. Professional services revenue was $2.3 million for the quarter, an 18% year-over-year increase. And perpetual license revenue was $1.6 million for the first quarter for an increase of 134% year-over-year.

Moving down the P&L to gross margins. Overall, gross margin was 66% during the first quarter. And our product gross margins remained strong at 68% or 75% when you add back depreciation of equipment, amortization of acquired intangible assets. So 75% cash gross margins, we call it.

Professional services gross margins were 38% during the quarter, which is slightly below our target of 40%, as a result of newly acquired businesses entering the mix. And we continue to bring those newly acquired PSO teams into model over the coming quarters.

Turning to our operating expenses. Research and development expense, net of refundable Canadian tax credits, was $4.8 million for the quarter, representing 15% of total revenue for the first quarter.

Sales and marketing expense was $4.4 million, representing 14% of total revenue for the first quarter.

As a result of our adoption of the new accounting regulation ASC 606, we now defer the recognition of sales commission expense over the expected customer relationship life. The net effect of this adoption is a reduction of sales commission expense by a couple of $100,000 per quarter, which has been mostly offset by the incremental investments in sales personnel from our more recent acquisitions like Qvidian and further offset by our continued investment in infrastructure systems in preparation for our future growth.

General and administrative expense was $7 million in the first quarter, representing 22% of revenue. But excluding noncash stock compensation for the first quarter, G&A expense was $4.7 million or 15% of total revenue.

Acquisition-related expenses were $3.1 million in the first quarter, representing -- resulting from recent acquisition activity. These expenses are expected to taper off over the next few quarters unless until we have additional acquisitions.

Operating loss was $0.5 million in the first quarter compared to a loss of $3.6 million for the same period in 2017. GAAP net loss was $3.2 million or a loss of $0.16 per share compared to a GAAP net loss of $5.6 million or a loss of $0.33 per share in the first quarter of 2017.

Non-GAAP net income was $7.7 million or non-GAAP net income of $0.37 per share in the first quarter of 2018 compared to non-GAAP net income of $2.9 million or non-GAAP net income of $0.16 per share in the first quarter of 2017.

Our first quarter 2018 adjusted EBITDA was $10.8 million or 34% of total revenue, up 98% compared to the $5.5 million or 26% of revenue for the same period last year.

Now on to our balance sheet and statement of cash flows. We ended the first quarter with $32.5 million in cash. Cash flows used in our operating activities were $0.5 million for the quarter. And removing the cash portion of onetime acquisition transaction restructuring costs from our operating cash outflows, adjusted operating cash flows would have been positive $4.2 million for the quarter.

During Q1 of 2018 here, we acquired InterFAX, for which we spent $34.2 million net of the cash acquired, and we expect to pay another $1.1 million in Q2 to settle the purchase price obligation. We also expect to pay $5 million of cash holdbacks, which are payable over the 18 months of holdback period, which is subject to reduction for indemnification claims. And this excludes any future earnout payments tied to performance-based goals.

In order to fund this acquisition during Q1 of 2018 here, we expanded our credit facility from $200 million to $258.7 million. Specifically, $50 million of new term debt was drawn down, taking Upland's gross debt outstanding from $113.7 million up to $163 million, with debt net of cash on hand now at approximately $130 million as of March 31, 2018.

Now I'll cover the second quarter 2018 guidance. For the quarter ended June 30, 2018, Upland expects reported total revenue to be in the range of $33.5 million to $34.5 million, including subscription support revenue in the range of $30.5 million to $31.5 million, for growth in recurring revenue of 60% at the midpoint over the quarter ended June 30, 2017. Adjusted EBITDA is expected to be in the range of $11.7 million to $12.3 million, for an adjusted EBITDA margin of 35% at the midpoint, representing growth of 76% at the midpoint over the quarter ended June 30, 2017.

For the full year ended December 31, 2018, we expect reported total revenue to be in the range of $133.2 million to $136.2 million, including subscription and support revenue in the range of from $119.9 million to $122.9 million for growth in recurring revenue of 42% at the midpoint over the -- over last year-end.

Adjusted EBITDA is expected to be in the range of $46.8 million to $48.8 million, for an adjusted EBITDA margin of 35% at the midpoint, representing growth of 58% at the midpoint over last year.

With that, I'll turn the call over to Tim Mattox, our President and COO.

Thanks, Mike. And good afternoon, everyone. I'm going to cover our Q1 results across sales, product and operating areas. Our Q1 results continue to show the power of Upland's model, combining our commitment to 100% customer success with ongoing investments in the UplandOne operating platform to enable our enterprise customers to achieve greater success and improve outcomes for their businesses.

With respect to sales, we expanded relationships with 193 existing customers in Q1, including 22 major expansions, over $25,000 in annual recurring revenue. In addition, 55 of our expanding customers increased their annual recurring revenue by 25% or more. Some examples of major renewals and expansions include a social services administration of a major city who expanded its commitment to our mobile messaging platform by more than $230,000 per year; a major financial institution who expanded its commitment to our secure document capture product for more than $165,000 per year; an IT services provider who expanded its commitment to our Professional Services Automation solution by just shy of $120,000 per year; and a global agricultural firm who expanded its commitment to our project and portfolio management solution by more than $95,000 per year. In aggregate, 189 other customers expanded commitments by more than $1.7 million per year.

We also welcomed 91 new customers to the Upland family, 19 of which were major accounts with at least $25,000 in annual recurring revenue. Notably, a department of the federal government committed to our knowledge management platform for more than $340,000 per year; a major financial institution, a top public accounting firm and a telecommunications equipment provider each committed to our RFP and sales proposal automation platform for more than $120,000 per year, $85,000 per year and $60,000 per year, respectively. And an industrial service provider committed to our project and portfolio management solutions for more than $90,000 per year. In aggregate, 86 other new customers made commitments of more than $1.1 million per year.

Stepping back, as Jack mentioned, we grew our recurring revenue 6% organically in Q1. Some of the investment areas that could help support similar organic growth in recurring revenue going forward are the marketing of our Premier Success plans, our cross-sell promotions, the launch of Upland Analytics, our Upland mobile messaging usage initiative and sales capacity additions. Again, it's a bit early to gauge the payoff of these investments, and our guidance doesn't contemplate any improvement over the historical baseline from these incremental investments, but we're monitoring them closely and are optimistic.

On the product front, we enhanced our Workflow Automation product family by acquiring InterFAX, as Mike and Jack mentioned. It's the leading provider of secure cloud-based messaging solutions, including enterprise cloud fax and secure document distribution. With the addition of InterFAX, Upland now offers comprehensive document management and Workflow Automation solutions and capabilities that include document capture, data extraction, data loss detection, secure storage, intelligent routing and approval and secure document distribution through cloud fax, mobile messaging and e-mail.

We also invested in customer-driven product innovation, including the release of Upland's knowledge-enabled Professional Services Automation solutions, which integrates our Tenrox PSA with RightAnswers Enterprise Knowledge Management for a much more powerful solution; enhancements to the Project & IT Management product family included improvements to resource and project management in our Tenrox PSA solution as well as significant improvement in dashboards and reporting of our ITFM solution, ComSci, to support our Upland Analytics initiative; improvements in the Workflow and Automation product family by enhancing performance and user experience to streamline the RFP approval process for Qvidian, our automated business proposals offering; and improved FileBound interconnectivity with other applications. FileBound, our Workflow Automation solutions.

We also delivered significant performance upgrades to Upland mobile messaging.

Turning to operations. We continued to invest in UplandOne, our unified operating platform. Progress in Q1 included completing the full integration of RightAnswers and Qvidian into Upland's support model and reducing cost per ticket while keeping customer satisfaction at very high levels; augmenting our Upland integration playbook to incorporate acquisitions outside the United States as the next milestone in our integration approach. For example, our integration process for InterFAX covers teams in Ireland and Israel.

We also extended our formal Executive Outreach program to include partners of our recently acquired InterFAX business. And as Mike mentioned, we continue to transition from our company managed data centers to Amazon Web Services, creating a much more scalable, secure and cost-efficient cloud environment to support our ongoing customer growth. We migrated 2 additional products in Q1 and expect to have fully migrated all existing products in 2018.

In summary, we are pleased with Q1's strong results across each of our sales product and operations areas and anticipate sustained positive momentum going forward.

With that, I'll hand the call back to Jack.

All right. Thank you, Tim. So at this point, we're ready to open the call up for questions. So operator, if you could please go ahead and do that.

(Operator Instructions) Your first question comes from the line of Bhavan Suri from William Blair.

I guess I just wanted to touch on something that really stuck out. Obviously, just solid results all around, but your net expansions above 25% on the ARR side, I mean, the 55 number, I think, you quoted was really, really high, especially compared to the 102 expansions for the whole year of that size for last year. So I guess I'm just trying to figure out what you guys are doing or what you've done to sort of drive this sort of really enhanced expansion within customers.

I would say that it's really part of the entire UplandOne model where we are focused on customer success. We've got a regular and intensive communications cadence. We've got product road maps that are aligned to customer needs. We've got a Net Promoter Score in a virtuous loop where we're taking that feedback and putting it back into what we're doing around product, what we're doing around service, what we're doing around support. And on support, we continue to invest there and provide -- and we can see it in the customer SAT numbers and the NPS scores a higher level of customer satisfaction. And we're doing that at the same time that we're increasing margins. So it's really an all of the above kind of an answer, Bhavan.

I wanted to talk -- we've talked about cross-sell, and you guys touched a little bit on sort of not -- sort of sticking -- or not sustaining the organic growth enough. It's not a trend line yet. But as you think about the cross-sell initiatives, which have now been going on for a few quarters and obviously driving some of the expansions you've just discussed, help us understand a little bit about how to think about the go to market with the cross-sell and the sort of structure of that sales force and the layering for each one of the stove pipe sets of applications you have, the workflow automation and marketing automation, et cetera. Just help to understand sort of how that's going and if there's some sort of predictability that we're going to see here.

Yes. I'll take that, Bhavan. It's Tim here. Good question. So yes, in terms of the cross-sell initiatives, we do have a focused effort that we've kicked off targeting some of our larger customers and tailoring the cross-sell efforts to those. As you've probably noted, as we have expanded our product portfolio with some very relevant products, like in the knowledge management area and the business proposals area, we're finding relevance in more and more customers. And in some cases, we're linking or integrating those products more directly. So we announced the knowledge management-enabled Professional Services Automation solution that actually got significant interest. So we have some pipeline going on from that. And so the more relevance to the existing decision maker or to the current installed products, the easier it is to do the cross-sell. Short of that, it becomes a warm lead and we rely on the customer loyalty and high NPS that we've generated within the customer to basically get a warm introduction and begin the selling process that way. But I'll tell you, knowledge management is a very hot area, and we have a strong offering there, so lots of interest on that. The automated business proposals also very relevant from a cross-sell perspective, so we're seeing good initiative on that as well.

(Operator Instructions) Your next question comes from the line of Scott Berg from Needham.

I have 2 quick ones, I guess. I don't know if Jack or Tim wants to take this. But the 6% organic growth number in the quarter, not putting the cart before the horse, obviously, but wanted to see if you had any maybe examples or any thoughts as to what was different in the quarter to drive some of those sales. And not certainly thinking it's consistent yet, but is any of that then repeatable?

Yes. So I would say that obviously we're very pleased with the 6%, but we had relatively easy compare to the first quarter of last year. We had a number of customer go-lives, which also increased revenue in the first quarter. So I would not call it sustainable or the new normal at this point. Now we are at the 6% rate. We've always talked about sort of flat to 5% organic growth range for the business. And we talked about the fact that there are number of investments we're making in product, in customer success, in sales, in lead generation, in clustering products together, in bundling products, in cross-sell, in Platinum support and in uniform price increases that we think are going to help us achieve long-term organic growth at the upper end of that range. So we continue to execute. This first quarter was a bit of an outlier on the upside, which was nice to see, but we are laying in all of the things we need to be to drive organic growth.

Great. And then a follow-up question for Mike. Your gross margins continue to obviously trend up here over time and were better than we're modeling Q1 here. With the migration of the last applications and computer and data center (inaudible) to Amazon this fall, how should we think about gross margins maybe over the short and medium term? Not sure what type of upside there is from this kind of low 70s level?

Scott, yes, it's Mike. The AWS migrations, we've got those slated to be completed here at the end of the year, so Q4 time frame, which is what we've talked about before. So no change in that. We expect, hopefully, a 50 basis point maybe even a little bit more improvement in margins once we get through that sort of lift and shift double-bubble cost of making those migrations. In the meantime here, we do still expect to see margins improving just a little bit here. We've got the InterFAX acquisition that's going to come into play here in Q2 since we acquired them at the end of Q1. So that should be a little bit more improvement to margins. We're not really quantifying that from a guidance standpoint, but it's one of those things where we should see some incremental improvement and then, hopefully, some year-end improvement as well.

Your next question comes from the line of Richard Davis from Canaccord Genuity.

So I was thinking when you go on to AWS, we've seen this with other companies, is there a benefit in addition -- obviously, gross margins are always cool. But doesn't that save you on CapEx as well? And wouldn't that be logical? And if so, kind of can you put a circle around how much that would be? And then the second question I have is -- and you kind of touched on this a bit in the prepared remarks. But have you found -- is there any best go-to-market strategy, i.e, inside sales, light touch kind of developer -- because you have a bunch of different products, so I was just kind of trying to think is there some way that you're seeing success in one particular methodology?

Richard, it's Mike. I'll take that first one on the CapEx. And yes, you're exactly right. What we've done -- you can actually see -- go back to our historical CapEx spending and really see that when we started the AWS migration at the beginning of last year for our products, we really quit spending much on CapEx at that point. And knowing that we were in the process of migrating and we did not want to continue to buy equipment hardware for that purpose. So from a quantification standpoint, if you go back to before we started the AWS migration, when everything was in the server farms, we were spending a couple of million dollars in CapEx per year, probably underspending. But as we've weaned ourselves off, you've seen the CapEx drop down to $1 million-or-so last year, and it should continue to fall. Probably $0.5 million a year is what we'll end up with in CapEx going forward. We did have an extra CapEx spend here in Q1, but that was a onetime thing that we don't expect to repeat. So anyway, yes, lots of improvements and benefits from AWS.

Richard, it's Tim here. In terms of the go-to-market strategy, it really does vary a bit by product for us. Clearly, a lower ARR type of offering and inside model is most effective in that context. For the complex sales, field sales still is a component for us. Though I will say that with webinars, self-discovery by customers themselves, them talking within their own networks of folks, us using ROI examples and building case studies on that, and doing -- being able to do demos remotely, the need to visit a customer frequently and sometimes maybe only the critical point in the selling process is all you need for that. That said, we do see a payoff in that area, and we have added some additional capacity as part of our investment strategy in that area.

Your next question comes from the line of Brian Peterson from Raymond James.

This is Vince Celentano on for Brian. Can you talk about how you're seeing the pace of synergies with these larger deals compared to the ones you've done historically? And then, have you seen any differences with some of these larger companies that offer any additional complexity to completing them?

So thanks for the question. This is Jack. We have a developed model called UplandOne. And every acquisition we do gets ported on to the UplandOne operating platform. So it's a consistent way to do everything from quote to cash, to account management, to customer support, to product management, to development, to the entire back office. So whether it's a $4 million or $5 million revenue acquisition or a $15 million to $20 million revenue acquisition, that process and those synergies are the same. In terms of M&A generally, we like the pipeline we've got right now. Mike mentioned the increase in the size of our credit facility. So we've got plenty of capacity to go after new deals. We've got a healthy pipeline, and we feel very good about the prospects for additional M&A this year and keeping our growth rate going here.

Got it. And as you do look towards more M&As, is there any particular product group that you think is best suited for near-term acquisitions?

If we look at it, I'd say it's pretty even across the 3 product families today. And we've talked about the fact that we think those 3 product families can take us through to $250 million in revenue as a business, and so we will continue to look at all 3. The pipeline today is pretty evenly divided among those 3 product families, and we've got growth targets within each of them. So I continue to think it's -- they're relatively evenly weighted from an M&A standpoint.

There are no further telephone questions at this time. I will turn the call back over to the presenters.

Okay, great. Well, thank you so much for your time today, and we look forward to getting back together with you on the Q2 call later this year. So thank you, and good afternoon.

This concludes today's conference call. You may now disconnect.