Upland Software, Inc. (NASDAQ:UPLD) Q3 2023 Earnings Call Transcript
Upland Software, Inc. (NASDAQ:UPLD) Q3 2023 Earnings Call Transcript November 3, 2023
Operator: Thank you for standing by, and welcome to the Upland Software Third 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 for that 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 third quarter 2023 earnings release, which was distributed today at 4:00 p.m. Eastern Time. If you've not 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: Hi. Thank you and welcome to our Q3 2023 earnings call. I'm joined by Mike Hill, our CFO. On today's call, I'll start with a Q3 review and following that Mike is going to provide some detail on the numbers and our guidance and then we'll open it up for Q&A. But before we get started, Mike can you read the safe harbor statement?
Mike Hill: Yes. Thank you, 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 third 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. Headlines for the quarter. We beat Q3 revenue and adjusted EBITDA guidance midpoint. In the third quarter, we expanded relationships with 279 customers, 28 of which were major expansions. We also welcomed 162 new customers to Upland in the third quarter including 26 new major customers. New customer deals were distributed across products and verticals. On the product front in Q3, Qvidian was listed among notable vendors in the Forrester Q3 report which was The B2B Response Management Technologies Landscape report. Panviva, which is one of our knowledge management solutions, went live on the Genesys AppFoundry exchange that was earlier this month and that AppFoundry is the industry's largest dedicated marketplace focused on customer experience solutions.
AccuRoute and BA Insight attended the annual legal technology event ILTACON. Our Upland subject matter experts spoke at two sessions which highlighted the implications of AI for legal teams and how intelligent search like BA Insight's SmartHub 6.0 can enhance business process efficiency. RightAnswers, our enterprise knowledge management software was included in KM World's AI100 list, that's of companies empowering intelligent knowledge management. Altify announced the release of Altify Insights, its first-to-market solution which is designed to reduce sales cycle times and increase win rates for B2B sales organizations. And then in G2's Fall 2023 market report, Upland and our products earned 33 badges including High Performer badges for our knowledge management solution RightAnswers and 22 badges for our audience development solutions Second Street, a result of our dedication to meeting customer needs and innovation.
So it's still early, but we are making progress on our new growth plan and remain focused on building shareholder value over time. And with that I'm going to turn the call back over to Mike.
Mike Hill: All right. Thank you, Jack. I'll cover the financial results for the third quarter and our outlook for the fourth quarter and full year 2023. Total revenue for the third quarter was $74.1 million representing a decrease of 7% year-over-year. Recurring revenue from subscription and support decreased 7% year-over-year to $70 million. Perpetual license revenue decreased to $1.5 million for the third quarter, down from $1.7 million in the third quarter of 2022. Professional services revenue was $2.7 million for the quarter, a 4% 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 69% during the third quarter, and our product gross margin remained strong at 71% or 76% 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; was $39.1 million for the quarter or 53% of total revenue all generally as expected. Also acquisition-related expenses were approximately $0.4 million in the third quarter, which should represent the last of our restructuring costs for our acquisitions last year. Acquisition-related expenses should remain insignificant going forward, until our acquisition activity picks back up in the future. Our third quarter 2023, adjusted EBITDA was $16.2 million or 22% of total revenue down from $24.9 million or 31% of total revenue for the third quarter of 2022. This adjusted EBITDA decline is generally, as expected considering our growth investments described in previous calls.
For the third quarter 2023, GAAP operating cash flow was $18.3 million and free cash flow was $17.8 million. Our Q3 operating and free cash flow was significantly benefited by the liquidation of one half of our interest rate swaps resulting in an operating cash inflow of $20.5 million. This was a onetime event, unless we decide to liquidate more swaps in the future. Excluding the cash flow impact of the interest rate swaps liquidation in Q3, we anticipate $25 million to $35 million of free cash flow generation for the full year 2023. With the positive impact of the swaps liquidation, we anticipate $45 million to $55 million of free cash flow generation in the full year 2023. Our ongoing free cash flow generation is in addition to our existing liquidity of approximately $300 million comprised of the approximate $240 million of cash on our balance sheet as of September 30 2023, plus our $60 million undrawn revolver.
During Q3, we paid down an additional $35 million of our outstanding debt. As of September 30 2023, we had outstanding net debt of approximately $244 million after factoring in the cash on our balance sheet. As of September 30 2023, our gross debt was approximately $483 million of which approximately $259 million is still fully hedged effectively locking our interest rate at 5.4% through the full maturity of our term debt, which is August of 2026. The remaining approximately $224 million of term debt now floats at an interest rate of SOFR plus 385 basis points which was 9.2% at September 30 2023. Additionally, I will note that we used about $3.2 million of cash to buy back approximately 783,000 shares of our common stock during the quarter ended September 30 2023, under our limited stock repurchase program that began in early September of 2023.
For guidance. For the quarter ending December 31 2023, Upland expects reported total revenue to be between $69 million and $75 million including, subscription and support revenue between $65.5 million and $70.5 million for a decline in total revenue of 9% at the midpoint over the quarter ended December 31 2022. The following adjusted EBITDA guidance reflects an estimated noncash charge of $1.5 million related to our Sunset Assets. For the fourth quarter 2023, adjusted EBITDA is expected to be between $12.6 million and $15.6 million for an adjusted EBITDA margin of 20% at the midpoint. This adjusted EBITDA guidance at the midpoint, is a decrease of 42% from the quarter ended December 31 2022. For the full year ending December 31 2023, Upland expects reported total revenue to be between $294.7 million and $300.7 million including subscription and support revenue between $278.9 million and $283.9 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 million and $66 million for an adjusted EBITDA margin of 22% at the midpoint. This adjusted EBITDA guide at the midpoint is a decrease of 34% over the year ended December 31st, 2022. And with that I'll pass the call back over to Jack.
Jack McDonald: All right. Thanks Mike. We're ready to open the call up for Q&A.
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