Upland Software - Q1 2023

Transcript

Operator (participant)

Thank you for standing by, and welcome to the Upland Software first quarter 2003 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. The conference call will be recorded, webcast at investor.uplandsoftware.com, and a replay will be available there for 12 months. By now, everyone should have access to the first quarter 2003 earnings release, which was distributed today at 4:00 P.M. Eastern Standard Time. If you have not received this release, it's available on Upland's website. I would now like to turn the call over to Jack McDonald, Chairman and CEO of Upland Software. Sir, go ahead.

Jack McDonald (Chairman and CEO)

All right. Thank you. Welcome to our Q1 2023 earnings call. I'm joined by Mike Hill, our CFO. On today's call, I'm going to start with a Q1 review, and following that, Mike will provide some detail on the numbers and our guidance. After that, we'll open it up for Q&A. Before we get started, Mike will read the safe harbor statement. Mike.

Mike Hill (CFO)

Well, thank you, Jack. During today's call, we will include statements that are considered forward-looking within the... We do not intend or undertake any duty to release... call, Upland will refer to non-GAAP financial... Upland has provided reconciliations of... press release announcing our first quarter results. With that, I'll turn the call back over to Jack.

Jack McDonald (Chairman and CEO)

All right. Thanks, Mike. The headlines for Q1. In the quarter, we beat our Q1 revenue and adjusted EBITDA guidance midpoints. Our cash on hand as of March 31, was $258 million, and that's after generating $15.6 million of free cash flow in Q1. Again, we anticipate generating $30 million-$40 million of free cash flow in 2023, as we have previously indicated. In the first quarter, we expanded relationships with 333 existing customers, 38 of which were major expansions. We also welcomed 207 new customers to Upland in the first quarter, including 20 new major customers. New customer deals were distributed across our products and industry verticals.

On the product front in Q1, I'll note that we hosted a webinar featuring Forrester to discuss the future of knowledge management and the beta release of Upland's RightAnswers AI Knowledge Assistant. That is a new beta release which utilizes OpenAI's ChatGPT AI, so knowledge workers can streamline the creation of knowledge bases by simply requesting content related to their topic at hand and receiving a real-time response with full article content summarization and identification of keywords. Of course, all of that is then fed into an enterprise system and knowledge base with integrations to key systems of record and enterprise workflows.

On the FileBound side, we once again were recognized as a gold medalist and leader in enterprise content management in the Data Quadrant and the report from SoftwareReviews for document management and workflow automation capabilities. AccuRoute had another release in the quarter, and this quarter release extends MFP integrations with Lexmark. It increases DMS visibility, it expands Fax API support to ensure the security of personally identifiable information in highly regulated industries, such as healthcare. BA Insight, a product that we're very excited about, was recognized by KMWorld's 2023 list of 100 Companies that Matter in Knowledge Management.

I'd say overall on our growth plan, it's still early in the process, but we are making progress on the growth plan, and we remain excited on the prospects and about building shareholder value through time. We look forward to sharing appropriate updates on our progress as we go. With that, I'm gonna turn the call over to Mike.

Mike Hill (CFO)

Well, thank you, Jack. I'll cover the financial results for the first quarter, our outlook for the second quarter, and I'll reaffirm our guidance for the full year of 2023. Income statement. Total revenue for the first quarter was $77.1 million, representing a decrease. Without FX impact, growth would have been roughly flat. Recurring revenue from subscription and support decreased 1% year-over-year to $72.9 million. Without FX impact, recurring growth would have been 1% positive. Perpetual license revenue decreased to one point- Professional services revenue was $2.6 million for the quarter, a twenty-two- Overall gross margin was 67% during the first quarter, and our product gross margin remained strong at 68%.

73% when adding back depreciation. Operating expenses, excluding acquisition-related expenses, depreciation, $37.8 million for the quarter. All generally as expected. We did incur $128.8 million. Triggered by the dip in our stock price. Had our stock price not decreased, we would not have had. Acquisition-related expenses were in line with plan. Expect acquisition-related expenses to further decline to a relatively small amount here in Q2, and should remain after Q2 until our acquisition activity. First quarter 2023 adjusted EBITDA was $17.6 million, or 23%. 30% of total revenue for the first quarter of 2022. For the first quarter of 2023, GAAP operating cash flow was. Free cash flow was $15.6 million.

Working capital accounts of approximately $4.5 million, which temporarily improved our free cash flow generation in Q1. We do not expect these positive temporary timing of approximately $318 million. $258 million of cash on our balance. Plus our $60 million undrawn revolver. March 31, 2023, we had $263 million after factoring in cash on our balance sheet. Guidance. We are issuing guidance for Q2. For the quarter ending June 30, 2023, Upland expects total revenue to be between $69.8 million and $75.8 million, including subscription and support revenue between $65.7 million and. For a decline in total revenue of 9% at the midpoint.

quarter ended, June 30th, 2020. Second quarter 2023 adjusted EBITDA is expected to be. Adjusted EBITDA margin of 23% at the midpoint. Adjusted EBITDA guide at the midpoint is a decrea- quarter ended, June 30th, 2022. Full year ending December 31st, 2023- $ million, including subscription and support revenue between $269 million and $280-. Full year 2023 adjusted EBITDA is expec-. With that, I'll turn the call back to Jack.

Jack McDonald (Chairman and CEO)

All right. Thanks, Mike. We are ready to open the call up for Q&A.

Operator (participant)

At this time, if you would like to ask a question, please press star then the number one on your telephone keypad. Again, that is star, then the number one on your telephone keypad. Your first question comes from the line of Jeff Van Rhee.

Jeff Van Rhee (Senior Research Analyst)

Great. Thanks, guys. A couple from me. Jack, the new growth plan, I think the outline last quarter was that you were thinking about $15 million a year of spend for a variety of reasons. Just where are you in terms of putting that annualized amount to work? Namely, what did you get done in Q1 in terms of that spend?

Mike Hill (CFO)

You know, it's still early, but we're moving with urgency. We've added a number of folks in digital marketing and SDRs and DSRs. Really great energy and obviously we're driving, you know, to see results as soon as we can.

Jeff Van Rhee (Senior Research Analyst)

Yeah. I guess what I was saying is just more so, you know, if we're talking three and a half, give or take.

Mike Hill (CFO)

Yeah, I'm not gonna break out the dollar amount that we spent on the growth plan in the first-.

Jeff Van Rhee (Senior Research Analyst)

Could you comment on G&A being up from $14 million to $17 million sequentially?

Mike Hill (CFO)

Well, yeah, Jeff, this is Mike. Yeah, we.

Jack McDonald (Chairman and CEO)

Accruals in the quarter on G&A related to bonus accruals. That was it. Those things tend to fluctuate from quarter to quarter. There's a little bit of noise in Q1 but that's.

Jeff Van Rhee (Senior Research Analyst)

Okay. Macro conditions, we're hearing a lot of changes in buyer behavior. What did you observe at the end of quarter and since then?

Jack McDonald (Chairman and CEO)

You know, we were pretty pleased with how the quarter turned out from a bookings perspective. Obviously we're cautious on outlook because we don't know what's coming. In terms of our Q1 bookings, you know, things came in where we were hoping they would come in. Again, what happens to the rest of the year here?

Jeff Van Rhee (Senior Research Analyst)

Okay. That's it for me. Thanks.

Operator (participant)

Your last question comes from the line of Jake Roberge.

Jake Roberge (Equity Research Analyst for Software)

Hey, thanks for taking my questions. Curious how demand is tracking for some of your faster growing products that you talked about looking to prioritize during this transition. Just on the macro as well, are there any product suites that have been more or less prioritized just given the changing demand environment?

Jack McDonald (Chairman and CEO)

You know, I would say that, as I mentioned a moment ago, the demand environment in Q1 came in pretty much as we expected it, and we had a, you know, relatively good quarter, in that regard. We have put in place a plan here to prioritize investment behind those products that we think have the highest growth potential. You know, still too early to report anything there. I will say that we're seeing, you know, some nice activity in our knowledge management products. Again, we see significant opportunities across, you know, a variety of our product groups.

Jake Roberge (Equity Research Analyst for Software)

Great. Thanks. Is there any update on your plans for M&A, just given the macro uncertainty and just compressions that we're seeing in valuations? Are you still actively looking at deals, or is that something that's kind of put on pause until you sunset these products and make the go-to-market investments that you're looking to do over the next year or so?

Jack McDonald (Chairman and CEO)

No, we're definitely still looking at deals. We're actively in the market. I haven't seen the price adjustment in private market values that I'd wanna see. Of course, we've got capital, and we control the timing, so we're gonna be patient and, you know, move when it makes sense. As of, you know, right now, I haven't seen enough of a price adjustment to get super excited, but I'm sure it's coming.

Jake Roberge (Equity Research Analyst for Software)

Great. Thanks for taking my questions.

Operator (participant)

There are no further questions at this time, Mr. MacDonald, if you'd like to close.

Jack McDonald (Chairman and CEO)

Great. All right. Well, thank you so much, and we will see you on the next earnings call.

Operator (participant)

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.