Yahoo Finance Upland Software, Inc. (NASDAQ:UPLD) Q4 2023 Earnings Call Transcript
Upland Software, Inc. (NASDAQ:UPLD) Q4 2023 Earnings Call Transcript February 22, 2024
Upland Software, Inc. misses on earnings expectations. Reported EPS is $0.14 EPS, expectations were $0.22. UPLD isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by, and welcome to the Upland Software Fourth 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 fourth 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. The headlines, we beat in Q4 our revenue and adjusted EBITDA guidance midpoint. We welcomed 154 new customers to Upland in Q4, making that a total of 678 new customers in 2023. In the fourth quarter, that new customer add included 15 new major customers. On the product front, very busy in Q4. And of course, we've got a number of initiatives underway on the AI front that are very exciting. And of course, we saw some great recognition of our products in Q4, Upland was recognized for the third year in a row as a gold medalist and leader in the 2023 Enterprise Content Management Data Quadrant report from software reviews. That was for our document management and workflow automation product, which is called Filebound.
The award is based on the combined knowledge of real users and placement is based on overall satisfaction with product features, vendor experience, capabilities, and emotional sentiment. In addition to that, Upland RO Innovation has launched a new customer reference activity hub to help sales, marketing, and customer success teams find and engage with their most influential customer references so they can boost brand awareness and generate more business. In December, we hosted a webinar on content search intelligence, featuring and covering how Azure AI Search, when seamlessly integrated with BA Insights, cutting edge technology, can revolutionize how organizations access, manage, and derive insights from their data, again, just one of many exciting AI initiatives that we've got underway across a half dozen or so products or more.
And then also in the fourth quarter, we earned 44 badges in G2's Winter 2024 market reports, and that was across a variety of products. These included our knowledge management solutions, Upland RightAnswers, and Upland Panviva, along with Upland Qvidian, our proposal management software, and our digital marketing products, Upland Adestra and Upland Second Street. And rankings on those G2 reports, of course, are based on independent data provided by real software buyers. Overall, we continue to make progress on our go-to-market growth plan, and we remain focused on building great software and delivering value for customers. We feel encouraged by the progress we've made to date on the growth plan. We are processing out the Sunset assets as planned and clearing the way for core growth.
And our goal, Mike's going to cover 2024 guidance in a few minutes, but our goal is to exit 2024 at a core organic growth rate of around 3%. Now, our guide will be more conservative than that, probably closer to 1% exit, but the goal is to get to a 3% exit. Again, we've spent a year building and investing and are encouraged by the progress we've seen to date and view this year as our year to turn the business back to positive core organic growth and exit with positive core organic growth. So more to come on that later, and let me now turn the call over to Mike.
Mike Hill: Yeah, thank you, Jack. I'll cover the financial results for the fourth quarter of 2023. And as Jack said, our outlook for the first quarter and full year of 2024. These results and our outlook for 2024 reflect another year of significant incremental sales, marketing, and product investments, as well as the planned runoff of the sunset assets revenue. Total revenue for the fourth quarter was $72.2 million, representing a decrease of 8% year-over-year. Recurring revenue from subscription support decreased 8% year-over-year to $68.2 million. Perpetual license revenue decreased to $1.8 million in the fourth quarter, down from one -- down from, or that actually increased up from $1.6 million in the fourth quarter of 2022.
Professional services revenue was $2.2 million for the quarter, a 26% year-over-year decline. These revenue declines are consistent with the planned runoff of the sunset assets revenue. Overall gross margin was 67% during the fourth quarter, and our product gross margin was 68% or 72% when adding back depreciation amortization, which we refer to as cash gross margin. Operating expenses, excluding acquisition-related expenses, depreciation amortization, stock-based comp, were $38.4 million for the quarter, or 53% of total revenue, all generally as expected. Also, acquisition-related expenses were approximately $0.5 million in the fourth quarter, which should represent the last of our restructuring costs from those acquisitions that we did last year, those are the acquisitions in 2022.
Acquisitions-related expenses should remain insignificant going forward until our acquisition activity picks back up in the future. Our fourth quarter 2023 adjusted EBITDA was $14.1 million, or 19% of total revenue, down from $24.3 million, or 31% of total revenue for the fourth quarter of 2022. This adjusted EBITDA decline is generally as expected considering our growth investments and our decision regarding the sunset assets as described earlier. For cash flow for the fourth quarter of 2023, gap operating cash flow was $8.8 million, and free cash flow was $8.6 million, bringing our full year 2023 free cash flow to $48.7 million, which was in-line with our expectations. Now, as a reminder, our full year 2023 free cash flow was benefited by the liquidation of half of our interest rate swaps in Q3, adding $20.5 million of additional free cash flow in 2023.
This one-time event is just a one-time event unless we decide to liquidate more swaps in the future. Our ongoing free cash flow generation is in addition to our existing liquidity of approximately $297 million, comprised of the approximate $237 million of cash in our balance sheet as of December 3one, 2023, plus our $60 million undrawn revolver. As of December 3one, 2023, we had outstanding net debt of approximately $245 million after factoring in the cash on our balance sheet. As of December 3one, 2023, our gross debt was approximately $482 million, of which approximately $259 million is still fully hedged, effectively locking our interest rate at 5.4% on that portion of our debt 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 about 9.2% at December 3one, 2023. I will also note that we used $10.8 million of cash to buy back stock, approximately 2.5 million shares of common stock during the quarter into December 3one, 2023 under our limited stock repurchase program that began in early September of 2023. This brings the cumulative total of our stock buybacks through December 31 of 2023 to $14.2 million. And as a reminder, our stock buyback plan is for a potential total of $25 million should it fully execute. Now for guidance, the following guidance reflects another year of significant incremental sales, marketing and product investments. We are making as part of our comprehensive growth plan, as well as the effects of decreasing revenue and expenses related to the Sunset Assets.
I will note that as usual, our forward guidance assumes no M&A activity. So our forward guidance will of course be adjusted upon future acquisitions. For the fourth quarter ending March 3one, 2024, Upland expects reported total revenue to be between $65 million and $71 million, including subscription and support revenue between $62.5 million and $67.5 million for a decline in total revenue of 12% at the midpoint from the quarter ended March 3one, 2023. For the first quarter 2024 adjusted EBITDA is expected to be between $11.3 million and $14.3 million, for an adjusted EBITDA margin of 19% at the midpoint, this adjusted EBITDA guidance at the midpoint is a decrease of 27% from the quarter ended March 3one, 2023. For the full year ending December 3one, 2024, Upland expects reported total revenue to be between $259 million and $283 million, including subscription and support revenue between $247 million and $267 million for a decline in total revenue of 9% at the midpoint from the year ended December 3one, 2023.
Full year 2024 adjusted EBITDA is expected to be between $49 million and $61 million for an adjusted EBITDA margin of 20% at the midpoint. This adjusted EBITDA guide at the midpoint is a decrease of 15% from the year ended December 3one, 2023. So with that, I'll pass the call back over to Jack.
Jack McDonald: All right. Thanks, Mike. We are now ready to open the call up for Q&A..
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