Upland Software, Inc. (NASDAQ:UPLD) Q2 2023 Earnings Call Transcript August 4, 2023
Operator: Thank you for standing by and welcome to the Upland Software Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. The conference call will be recorded and simultaneously webcast at investor.uplandsoftware.com and a replay will be available there for 12 months. By now everyone should have access to the second quarter 2023 earnings release which was distributed today at 4 P.M. Eastern Time. If you haven’t received the release it’s available on Upland’s website. I’d now like to turn the call over to Jack McDonald, Chairman and CEO of Upland Software. Please go ahead sir.
Jack McDonald: All right. Well thank you and welcome to our Q2 2023 earnings call. I’m joined today by Mike Hill, our CFO. On today’s call I will start with our Q2 review. And following that Mike will provide some detail on the Q2 numbers and our guidance. After that we’ll open the call up for Q&A. But before we get started Mike can you read the Safe Harbor statement?
Mike Hill: Yes, sure things Jack. During today’s call we will include statements that are considered forward-looking within the meanings of the securities laws. A detailed discussion of these risks and uncertainties associated with such statements is contained in our periodic reports 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. We do not intend or undertake any duty to release publicly any updates or revisions to any forward-looking statements. 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 second quarter results which are available on the Investor Relations section of our website. Please note that we’re unable to reconcile any forward-looking non-GAAP financial measures to their directly comparable GAAP financial measures because the information which is needed to complete a reconciliation is unavailable at this time without unreasonable effort. And with that, I’ll turn the call back over to Jack.
Jack McDonald: All right. Thanks Mike. So, here are the headlines for Q2. We beat our Q2 revenue and EBITDA guidance midpoints. We in the second quarter expanded relationships with 313 existing customers, 32 of which were major expansions. We also welcomed 155 new customers to Upland in the second quarter including 20 new major customers. New customer deals were distributed across our products and industry verticals. On the product front in Q2, I’ll note that this was a busy quarter for our sales enablement product Altify starting with a webinar that featured Forrester, which covered best practices for B2B enterprise sales. Following that, a launch of the new Altify book not just another vendor, which is a collection of real experiences and best practices from outstanding sales leaders who have used account planning to multiply pipeline and grow revenue.
Two of Upland’s products were listed among notable vendors in recent Forrester landscape reports. Upland Altify was included in The Account-Based Selling Technologies Landscape that was the Q2 2023 report. And Upland Kapost was included in the content enablement solutions landscape again the Q2 2023 report. Qvidian announced its latest release, which is focused on UI and UX improvements really optimizing the user experience and also a revamped — significantly revamped content library that aims to help customers increase productivity shortened sales cycles and accelerate win rates on deals. In June, Upland was awarded HP’s Global Partner Excellence Award for our continued efforts in providing HP customers with flexible dynamic product solutions that enable modern document life cycles for their businesses and that align with their unique requirements.
It’s still early in the process but we are making solid progress on our new growth plan and remain focused on building shareholder value. Specifically, our goal is to achieve a mid-single-digit core organic growth rate next year. So, targeting 5% core organic growth next year plus or minus. It’s not guidance. It’s a goal and no guarantees, but our organization our team is laser-focused on that achievement. So, with that, I’m going to turn the call back over to Mike.
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Mike Hill: Thank you, Jack. So, I’ll cover the financial results for the second quarter and our outlook for the third quarter and full year 2023. On the income statement total revenue from the second quarter was $74.5 million representing a decrease of 7% year-over-year. Recurring revenue from subscription and support decreased 6% year-over-year to $70.5 million. Perpetual license revenue decreased to $1.3 million in the second quarter down from $1.9 million in the second quarter of 2022. Professional services revenue was $2.8 million for the quarter an 18% year-over-year decline. These revenue declines are generally as expected pursuant to our strategic product realignments and future growth initiatives described, on our previous calls.
Overall, gross margin was 68% during the second quarter and our product gross margin remained strong at 69% or 74% when adding back depreciation and amortization which we refer to as cash gross margin. Operating expenses, excluding acquisition-related expenses depreciation amortization and stock-based compensation were $37.7 million for the quarter or 51% of total revenue all generally as expected. Also, acquisition-related expenses were approximately $1.1 million in the second quarter which represents the last of our restructuring costs from our acquisitions in Q1 of 2022. Acquisition-related expenses should remain insignificant going forward, until our acquisition activity picks back up in the future. Our second quarter 2023 adjusted EBITDA was $16.6 million or 22% of total revenue, down from $24.5 million or 31% of total revenue for the second quarter of 2022.
This adjusted EBITDA decline is generally as expected considering our growth investments described on previous calls. Cash flow for the second quarter of 2023, GAAP operating cash flow was $7 million and free cash flow was $6.7 million. We continue to anticipate $30 million to $40 million of free cash flow generation for the full year 2023. Our ongoing free cash flow generation is in addition to our existing liquidity of approximately $323 million, comprised of approximate $263 million of cash on our balance sheet as of June 30th 2023 plus our $60 million undrawn revolver. As of June 30th 2023, we had outstanding net debt of approximately $257 million after factoring in the cash on our balance sheet. Now for guidance, we are lowering our full year 2023 revenue guidance by — midpoint by $2 million due to accelerated win not if, Sunset Asset churn and lower perpetual license and PSO revenue.
We are revising down our 2023 adjusted EBITDA guidance by $2.8 million — the midpoint by $2.8 million due to that lower revenue level as well as some incremental growth investment in our CLA product group. With that, for the quarter ending September 30 2023, Upland expects reported total revenue to be between $70.4 million and $76.4 million, including subscription and support revenue between $65.5 million and $70.5 million for a decline in total revenue of 8% at the midpoint over the quarter ended September 30th 2022. Third quarter 2023 adjusted EBITDA is expected to be between $14.5 million and $17.5 million for an adjusted EBITDA margin of 22% at the midpoint. This adjusted EBITDA guide at the midpoint is a decrease of 36% from the quarter ended September 30th 2022.
For the full year ending December 31st 2023, Upland expect reported total revenue to be between $292.1 million and $304.1 million, including subscription and support revenue between $274 million and $284 million for a decline in total revenue of 6% at the midpoint over the year ended December 31st 2022. Full year 2023 adjusted EBITDA is expected to be between $63.2 million and $69.2 million, for an adjusted EBITDA margin of 22% at the midpoint. This adjusted EBITDA guide at the midpoint is a decrease of 32% over the year ended December 31st 2022. And with that, I’ll pass the call back to Jack.
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