Ladies and gentlemen, thank you for standing by, and welcome to the Upland Software first quarter 2016 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 simultaneously webcast on Upland 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 telephone replay and webcast replay will be available on Upland's Investor Relations website at investor.uplandsoftware.com. By now everyone should have accessed to the first quarter 2016 earnings release, which was distributed today at approximately 4:00 PM 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.

Thank you, and good afternoon, everyone, and welcome to our Q1 2016 earnings call. Tim Mattox, our President and COO is here; as is Mike Hill, our CFO. I'm going to summarize our results and some recent highlights up front. Following that Mike will provide a more detailed look at the Q1 numbers as well as share with you our guidance for the second quarter and full year. And then Tim will cover some sales and operations highlights from the first quarter. After that, we'll open it up for questions. Before we get started, Mike is going to read the Safe Harbor statement.

Thank you, Jack, and good afternoon, everyone. The press release announcing our quarterly results and our business outlook, as well as a reconciliation of management's use of non-GAAP financial measures as compared to the most comparable GAAP measures is available on the Investor Relations section of our website at investor.uplandsoftware.com. During today's call we may include statements that are considered forward-looking within the meanings of 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 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 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 12, 2016. We do not intend to 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 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 to the most comparable GAAP measures in our press release announcing our first quarter 2016 results. Before I turn the call back over to Jack, I would like to announce that we will be presenting at the Needham Emerging Technology Conference in New York on May 19, the William Blair Annual Growth Stock Conference in Chicago on June 15 and the Canaccord Genuity Growth Conference on August 10 and 11. 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.

Thanks, Mike. I would say three major headlines for Q1 and for the call. Strong Q1 results, our EBITDA ramp is nicely underway and our M&A strength continues. So as to the Q1 results, we started the year strong with record adjusted EBITDA, 9% constant currency growth in recurring revenues. We have now met or exceeded guidance in each of the seven quarters that we've reported since going public. So a track record of consistency there. On the EBITDA ramp, our strong Q2 guidance shows 16% growth in constant currency, recurring revenues and a big jump in adjusted EBITDA, as we deliver on that quarterly progression of higher EBITDA margins that we've talked about for 2016. On the M&A side, in Q2 we completed two acquisitions that expanded our Digital Engagement product family by adding some new powerful cloud-based web analytics capabilities and by growing our Mobile Commons cloud-based mobile messaging platform with the addition of Hipcricket. We also announced the third acquisition just after the Q1 close in our Workflow Automation area. So post those acquisitions and the other work we've done over the past year to shed lower margin revenue, we are now looking at a business staring here in Q2, in which almost 90% of our revenue is high margin recurring revenue, and that's up over 1,500 basis points. So at the time of the IPO, we were 73% recurring revenue, now its 89% close to 90%. So a 1,500 basis point increase and that makes our business both more predictable and more profitable. So as we talked about in the past, in 2016 our focus is on growing high margin recurring revenue on dramatically expanding our EBITDA margins, and on building scale and market presence through accretive tuck-in acquisitions. Again, it's a simple strategy, it leverages our operating platform and our M&A capabilities to drive growth in cash flow, growth in EBITDA, which we believe will be the real value creator for our plant and which will be the key financial metric that we focused on in measuring our progress. So with that, I'm going to turn the call back over to Mike at this time.

Thanks, Jack. Today I'll cover the financial results for the first quarter and our outlook for the second quarter and full year 2016. Total revenue for the first quarter was $17.6 million, substantially unchanged year-over-year, but grew 3% on a constant currency basis. Recurring revenues from subscription and support grew 6% year-over-year to $15.2 million or 9% growth on a constant currency basis. Professional services revenue was $2 million for the quarter, a 16% year-over-year decline. Perpetual license revenue was $318,000 for the first quarter for a decline of 61% year-over-year. As planned, professional services and perpetual license revenue have become a smaller portion of our overall revenue mix, this beneficial shift in revenue mix was accelerated by the Hipcricket acquisition, in which we acquired a recurring revenue business in exchange for stock and our EPM Live product. EPM Live generated a substantial portion of revenue from professional services and perpetual licenses. Moving down the P&L to gross margins. Overall gross margin was 61% during the first quarter and our product gross margin remained strong at 66% or 73% when adding back depreciation of equipment and amortization of acquired intangible assets. Professional services gross margin was 20% during the first quarter, and we expect services margins to increase in 2016 towards our normal target of 30%. Turning to our operating expenses. Research and development expense, net of refundable Canadian tax credits, was $3.8 million for the quarter, representing 22% of total revenue for the first quarter. Sales and marketing expense was $3.1 million, representing 17% of total revenue for the first quarter. General and administrative expenses was $4.1 million for first quarter, representing 23% of revenue. And excluding non-cash stock compensation for the first quarter, G&A expense was $3.5 million or 20% of total revenue. Acquisition related expenses were $2.4…

Thanks, Mike, and good afternoon, everyone. I'm going to cover our sales, product and operating areas. The results continue to show that our enterprise customers are achieving greater success and improved outcomes by relying on the Upland family of products. Upland continues to demonstrate to both new and existing customers via our products of their choice for those who require exceptional technology and service. On the sales front, we acquired over 80 new customers, of which five were major accounts. We continue to see strength in our expansion sales to existing customers with 11 major expansions over 25,000 and about 20% of our expanding customers increasing their annual recurring revenue by 25% or more. Verticals with particular strength were financial services, government, healthcare and media. Some examples of major renewals and expansion were, a large Canadian newspaper recommitted to our web content management offering for over $150,000 per year. Five other key customers recommitted or expanded to the tune of $690,000 as well. A large non-profit recommitted to our interactive mobile messaging offering for $185,000 per year. And a large global financial services firm expanded by over 36% to over $400,000 per year, with our IT financial management offering. And finally a large U.K. government agency expanded by over 30% to over $300,000 per year with our project and portfolio management offering. On the product front, we continue to focus on customer-driven innovation and delivering consistent reliable service through a strong technical foundation. In Q1 these investments in our technical foundation resulted in improved performance, reliability and security. Q1 also included three major releases with customer-driven productivity enhancing features. Within our project and IT management applications, we improved our program management capability, look for automation and usability. Within our Workflow Automation applications, we enhanced our forms, forms portal, integration and automation. And for our Digital Engagement applications, we improved performance, usability and handling of media objects within our web content management offering. In Q1, as Jack mentioned, we also announced two acquisitions that expanded our Digital Engagement product family by adding a powerful new cloud-based web analytics offering and growing our Mobile Commons cloud-based mobile messaging platform with the addition of Hipcricket. In addition, in April, we acquired an advanced workflow automation offering, focusing on the education and government verticals. We are combining the platform from a file down to both services these customers more effectively and to enhance the offering. In summary, we have a lot of high impact initiatives underway that are yielding results and overtime we believe will enable us to scale the business even more effectively. With that, I'll turn the call back over to Jack.

At this point, we are ready to open up the call for questions.

[Operator Instructions] Your first question comes from Bhavan Suri from William Blair.

Just to dive into sort of the topline or more importantly the recurring rev growth rate, certainly, Q2 nice solid recurring rev growth and then for the full year. Just give us a sense of sort of how that looks on an organic basis, if you're splitting that out? And then just some sense of the pipeline in terms of your confidence and visibility in achieving the full year sort of recurring rev numbers will be helpful?

We're not really splitting out organic versus inorganic on the growth for the guidance. But like you've been seeing, we've been [ph] ceiling growth, a little bit of growth on a constant currency basis. Overall, it's generally flat, as we talked about for a number of quarters here. This is because of our focus on EBITDA. And we've got some customers at the low-end of pricing that is just not as profitable. So we're doing some things that are healthy for the business. We're not going to retain every dollar topline revenue at the sacrifice of bottomline EBITDA. So for the most part, we think that these are easy trade-offs.

And as you look at the numbers just visibility-wise, Mike maybe Jack, and you look at that full year number. Give us some sense of visibility into that, given sort of that's reasonably healthy growth rates on those numbers too?

I'd say a high degree of confidence in those numbers. Again, seven consecutive quarters here now meeting or beating guidance. And as we talked about at the opening of the call, the percentage of our revenue that's comprised by high margin recurring revenue has grown substantially up now, to close to 90%. So that's going to positively impact, not just the profitability, but also the predictability of the business. And of course, we've also got additional M&A opportunities on the horizon, which can further add to the topline. So we feel very good about the year.

And then one quick one for Tim. Tim, obviously with Mobile Commons and Hipcricket, certainly the marketing side of the business seems to be doing well. If you were to look at every segment of business over the IT stack, kind of marketing, Digital Engagement stack, is there a difference in how those are growing and interest from customers or those sort of playing out evenly as you guys look at the out year on growth.

It's a good question, Bhavan. And obviously, we're getting more schematic in our acquisitions and building the business, particularly in the Digital Engagement area through some of these tuck-ins. And so we're seeing growth there. We're engaging with those customers, both understanding what they're looking for, not only within the product they're buying, but also within the Upland portfolio. So we're seeing interest there. And little greater tie-in relationship with respect the Mobile Commons offering and our web analytics offering, which is great, and that is typically the same decision makers, the web content management offering. So some good pipeline development around that. If you look over at our project in IT Management area, a lot of focus on the existing customer base; we saw some nice expansion deals as a result from that and are seeing incrementally better loyalty in our larger customers in those products. So I would say that there are definitely different businesses, different decision makers, and those dynamics play out slightly different as a result. The final one was Workflow Automation, where we did our latest acquisition. It's another one that we're seeing interest. Typically the offerings there are actually part of a broader solution. So with our FileBound business, that our recent acquisition we'll tuck into, we have a reseller channel that embeds the FileBound solution in there. And that's been doing well both in terms of retention, as well as improved revenue from the resellers.

And then one quick one for me just to wrap up and then I'll hop back out. When you look at cross-sells, you've been talking about for a little while, given that you now have multiple offerings within each of these areas, and maybe the IT, the marketing domain class, all those happen to be our different buyers, are you sort of seeing cross-sell within each of these areas and the products having natural synergies within, say, marketing function to pull along a couple of more modules as the customers deploy the first one. How are you seeing that play out?

It's a good observation. I mean when the decision maker is the same for multiple products, it's certainly is easier to introduce and then advance the pipeline. We found in areas where we have different decision makers and we're trying to cross-sell that it's almost the same cycle as a new sale, although more of a warm lead obviously, because we have a happy customer reference that's passing us off to the other decision maker. So common buyer will accelerate and we'll see more opportunities there. We are also looking at for some of our larger ARR offerings, the potential of embedding some of the lower ARR offerings, where there's real value to create for the customer. And so we're playing with that and seeing if we can come up with some compelling things for our customers that could also help drive further penetration.

Your next question comes from Brian Peterson from Raymond James.

I wanted to follow-up on Bhavan's question. And I know you mentioned the over 100 customers selling into the install base, but is there any way to segment that on a high-level on how much is upsell of the current product versus potentially cross-selling different product in the portfolio?

The over 100 customers that expanded their relationship with us that is with the same product that they were using. So they either bought more seats of that product or bought an incremental module that was related to that particular product. So those were not cross-sells. In fact, based on the selling cycle comments that I made to Bhavan, we're treating cross-sells like they're new customer acquisitions at least in terms of how we're thinking about them. So when I reference the over 100 customers that was purely expansion. And then also the other fact toward in there that was of interest was we had roughly 20% of those customers expand their existing relationship with us by over 25% in terms of ARR increase of that existing product.

And maybe one for you Jack. Just on the $10 million to $15 million target in terms of M&A, I think you gave last quarter, obviously pretty healthy deal activity in the first half of the year. Any update you can give us there and how maybe the later stage pipeline looks from your angle?

Sure. I think we are still on track for that $10 million to $15 million number. Obviously with M&A, you can never predict it fully. But pipeline to your question looks healthy, particularly the bottom of the funnel, so that when we look at those half dozen or so deals that are in sort of the red zone that is, it's looking good. So we feel good about the prospects for hitting that range of $10 million to $15 million this year.

Your next question comes from Richard Davis from Canaccord.

It's [ph] Mark on for Richard. Again, looking at future M&A for the rest of the year, do you guys watch yourself being more selective now that you have closed a few already? And when you think about deals to come, if you look at paying -- and valuations have obviously come in a bit, do you looking at paying less for same targets that you're looking at or would you rather keep your criteria the same and try to get some higher quality acquisitions under your belt.

So in terms of being more selective, yes, so I mean the entire aperture for M&A is more focused in 2016 than it's been before. Really there are just a couple of three platforms that we have where we're looking at tuck-in acquisitions. And that's because those tuck-ins will support the kind of product contribution margins that will support our overall corporate adjusted EBITDA margin goals, right. So we've already brought it in and really said we're looking at some tuck-in around FileBound, around our Mobile Commons, SMS mobile messaging platform, and to some degree as well around our Tenrox Professional Services Automation platform. So it's a much more focused strategy there for 2016. I think you alluded to that the market is in our favor, and we maintain pricing discipline at 5x to 8x EBITDA. And again, maintain tight discipline around the core -- again, you're assuming it's a tuck in, so a very tight strategic fit, and then of course, looking the quality of customer relationships, churn rates, compatibility of technology and operations. And so that spectrum of criteria that we use to evaluate these deals hasn't changed. Final point I'd make is that I think we've got some pretty good visibility into what we want to get done in 2016; 2017, is when I think you start to see deal sizes grow for us. Part of that will be market dependent and part of it is when we feel we're ready to start digesting some larger businesses. And we're making a ton of progress this year just in terms of tuning our operating platform, you're seeing that in the numbers and the EBITDA numbers, and I think we're going to be in a very strong position as we cross into 2017 and start taking on some larger acquisitions. And I think that's going to be well-timed in terms of where the markets at, in terms of the availability. When I say larger, I still mean within our sort of sub-$25 million category, but we've been doing these sort of $5 million and smaller tuck-ins, I think you'll start to see some of those numbers move up to the $5 million to $10 million to $15 million revenue range.

Your next question comes from Rich Baldry from ROTH Capital.

I hate to look at picky little items, but the [ph] operating income line was a bit of a drag this quarter, which actually kind of let your adjusted EBITDA to be significantly higher. So is there any of sort of one-time things in there and how do we think about that line on a go forward?

So that $700,000 that you see there in the loss, that's the loss on the divestiture of the EPM business in conjunction with the Hipcricket acquisition. And interesting thing there that actually would not have been a loss had we do not added to our goodwill with the acquisition earlier in Q1. The GAAP accounting is to basically take a proportion of the goodwill and allocate it. And the $700,000 therefore is represented by goodwill that came on to books in January, and then come right back off the books on the EPM divestiture and it was all non-cash and it was all one-time, so it will not recur, it is non-cash, and it actually wouldn't even have happened, had we not added goodwill earlier in the second quarter.

When you think about you putting these acquisitions together, think about how integrated you feel you are at maybe things like the backend systems, is that still where you think there is significantly more synergies to come from or it seems like the license pieces decline, other parts of the business that support that, that you'd be able to pull away, sort of trying to figure out where are the incremental synergies sort of focused as you keeping looking for it?

It's a great question. And we see those synergies in a number of areas. One, on the R&D side with the adaption of A line platform from DevFactory last year where we've put all of our products up on this code management and continuous development platform, that's enabled us to begin driving additional efficiency in R&D taking more resources offshore, automating more of our testing processes, and in general, bringing down costs, but it's still early innings in that effort. I would say its second inning in that effort. So I think you're going to see an opportunity to pick up 300, 400, 500 basis points in this business as we look out over the next couple of years from additional R&D efficiencies. In addition to that, in sales and marketing, whether it's everything from quoting an order to account management to support, we are implementing improvements to our operating platform to continue to drive additional efficiencies, and again, we see 500 basis points there. In addition, to that above the cost of goods line, we already referenced support, which should be above cost of goods, but in addition to that on the cloud operation side, we've got a significant datacenter consolidation effort underway this year where we will dramatically reduce the number of data centers where we have co-lo arrangements, and we see an opportunity for a couple of 300 basis points there in the near term and potentially more longer term as we look to more complete migration to AWS or a similar provider. And then finally, G&A, where we have certain amount of fixed costs associated with being a public company, still relatively small in the topline, and as bad revenue scales, those fixed cost will not grow proportionately and that will open up additional margin. At your conference, Rich, when we presented, Mike talked about our increase in our long term EBITDA margin target from 20% to 30% and you can see and we've already talked about that 20% target, its not guidance, but 20% target in adjusted EBITDA for the end of this year, and we see beyond that a path to 30% through these other synergy, so it's a huge part of our organizational focus. We're on the business part of it, but we're also constantly improving the business, there's lot of excitement about it internally, both in terms of building and increasingly more sustainable and scalable business, while at the same time generating some significant value for shareholders.

And lastly, as your EBITDA scales, is there a way to think about what level of comfort you've got carrying from a ratio maybe of debt to EBITDA, so we can kind of get our hands around how much incremental acquisitions you can do internally funding, and it looks like you're coming on $10 million this year, you get to a level where using that plus debt, plus some equity you can internally fund a lot of this and scaling that maybe easier to understand if you could help us at the right shelves?

So the lenders in this area on a recurring revenue business will go up to 6x trailing EBITDA leverage. Now they want a path to get to 3x leverage overtime, which means, as long as you're growing EBITDA that's going to be fine. But what they tend to do, and this is the way Wells Fargo has looked at or facility, is they'll sort of loan off of their recurring revenue as a borrowing base in our facility that's 80% of the recurring revenue and then over time it will migrate over to more of a traditional leverage ratio and move from that sort of 6x multiple down to 3x over a number of years, our facilities five years in duration. So that's a few metrics there. Nothing is hard and fast. That's in general a guidepost. In addition to just sort of capital for M&A as you mentioned, so far the deal that we've done this year there has been a mix of cash and stock and the consideration. We continue to think that that's probably going to be the case in the future. Typically about one-third of the deal consideration is in stock, two-thirds in cash, we do have under our credit facility with Wells Fargo the ability to issue some subordinated debt from sellers, as well $10 million for that is already provided for, so we think we've got $60 million worth of capital resources from those various baskets to execute on our $10 million to $15 million of M&A this year. Of course the $60 million that I am referring to should take us well beyond just this year that we're talking about here on this call. We feel like we're well positioned from a capital resource standpoint, and of course, if we continue to execute on growing EBITDA, then that should provide even more capital force in the future. End of Q&A

Well, I think that is it for the questions for this call, so let me thank everyone for their time and we will see you next quarter. Thanks very much.

With that, this concludes today's conference call. You may now disconnect.