Ladies and gentlemen, thank you for standing by, and welcome to the Upland Software Second Quarter 2017 Earnings Call. At this time, all participants are in 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's 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 the webcast replay will be available on Upland's Investor Relations website at investor.uplandsoftware.com. By now everyone should have access to the second quarter 2017 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. Good afternoon and welcome to our second quarter 2017 earnings call. Joined on the today are Tim Mattox, our President and COO; and Mike Hill, our CFO. So on today's call, I'll start by summarizing our Q2 results, recent highlights and outlook and following that Mike will providing more detailed look at the numbers and share the full guidance for Q3 and full-year 2017. And then Tim will cover some sales and operations highlights from the second quarter. After that, we'll open the call up for Q&A. But before we get started, Mike could you 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 will 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, August 10, 2017. We do not intend or 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 second quarter 2017 results. 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.

All right thanks, Mike. So four major headlines today. First, record second quarter record Q2 - record Q3 and full-year 2017 guidance and again the stage set and we’re executing against a very, very strong 2017. We had continued execution on the M&A front. We announced in the second quarter a great acquisition and RightAnswers and then of course subsequent to the second quarter her just announced the acquisition of waterfall. So that means three strategic and accretive acquisitions already this year and we feel great about our M&A pipeline it's ever been stronger and our ability to execute additional smart accretive acquisitions. Now of course with M&A there's never any guarantee on timing or cadence but we feel great about the pipeline. And of course we're loaded for bear here now on the acquisition client having raised a total of 243 million since the beginning of the second quarter that is comprised of the $43 million net follow-on offerings in June, and of course, just last week announced an expansion of our credit facility to $200 million. So we have a ton of dry powder here for acquisitions. We have got the resources now both financially and operationally to execute. As we have said before, we are hitting a stride with an acquisitive growth platform company with the proven ability to acquire great software products to do it dramatically in our focus product families to do it on a disciplined basis to restructure these businesses, for improved profitability and sustainable growth, and to do it while delivering a world class customer experience, increase in customer loyalty and consistent strong growth in revenues, and really best in class now expanding EBITDA margins. So just to dive a little deeper on each of those key points. On Q2 20% growth in…

Thanks Jack. Today I'll cover the financial results for the second quarter and our outlook for the third quarter and full-year 2017. Total revenue for the second quarter was $23.3 million, representing growth of 25%. Recurring revenues from subscription and support grew 20% year-over-year to $19.4 million. Professional services revenue was $2.1 million for the quarter, a 12% year-over-year increase and perpetual license revenue was $1.7 million for the second quarter, for an increase of 281% year-over-year. I should note that perpetual license revenue is inherently unpredictable and while – we always have the opportunity to outperform on perpetual license revenue in any given quarter like we have done here in Q2, such out performance should not be expected in future quarters. Moving down to P&L to gross margins, overall, gross margin was 66% during the second quarter and our product gross margin remains strong at 68% or 75% when adding back depreciation of equipment and amortization of acquired intangible assets. Professional services gross margin was 38% during the second quarter. Turning to our operating expenses, research and development expense, net of refundable Canadian tax credits was $3.9 million for the second quarter, representing 17% of total revenue. Sales and marketing expense was $4 million representing 17% of total revenue for the second quarter. General and administrative expense was $6.6 million in the second quarter, representing 28% of revenue. However, excluding non-cash stock compensation for the second quarter G&A expense was $3.4 million or 15% of total revenue. Acquisition-related expenses were $2.3 million in the second quarter, resulting from our recent significant acquisition activity. Operating loss was $2.8 million in the second quarter compared to a loss of $2.5 million for the same period in 2016. GAAP net loss was $5.8 million or a loss of $0.33 per share compared…

Thanks Mike, and good afternoon, everyone. I am going to cover our sales, product and operating areas. Our Q2 results clearly demonstrate that the combination of our customer centric model and our family of leading products delivered through the up in one platform continues to enable our enterprise customers to achieve greater success and improved outcomes for their businesses. With respect to sales we maintained our focus on expanding relationships with existing customers and achieved outstanding results. We expanded relationships with over 150 existing customers in the quarter including 17 major expansions over 25,000 in annual recurring revenue. Further 25 of our expanding customers increase their annual recurring revenue by 25% or more. Some examples of major renewals and expansions include a major U.S. non-profit recommitting to our mobile messaging platform for over 190,000 per year. A global financial services firm recommitting to our secure document process capture platform for over 185,000 per year. A global airline recommitting to our knowledge management platform for over per year. A large national provider E-learning solutions. We committed to our secure document process automation platform for over 1,500 per year. A leading national claims administrator expanded use of our professional services automation platform by over 80,000 per year. In addition, over 140 other customers expanded to the tune of well over 101 million dollars in aggregate annual recurring revenue. While our focus was on expanding existing customer relationships we also acquired 116 new customers of which 11 were major accounts. Again, with annual recurrent revenue over $25,000. We were leveraging our references from our customer base and our growing reputation within their of our brand to achieve that. For example, two separate organizations within the American arm of an international humanitarian organization committed to over $150,000 per year and over $900,000 per year…

Thanks Tim. At this time, we are ready to open the call up or Q&A. Operator, so let’s please do that.

[Operator Instructions] Your first question comes from Bhavan Suri with William Blair. Your line is open.

Hey guys. Thanks for taking the question and sorry for the background noise. Congrats, great set of numbers. I guess my first question is really to Tim. Tim if I look at the customer account, you said you’ve got new customer accounts of 116 versus [156] last quarter, but you expanded really, really nicely [indiscernible] with the customers. So as you look at that, does that part of the acquisition of the new customer account? And if the cross-sell motion started working across a bunch different cross-sell initiatives, just some color would be great. Thank you.

Sure. Great question Bhavan and things are going well in Europe. To answer your question, the 116 new customers that we acquired were actually organically acquired new logos. So they weren't additions through acquisition. That said, we have been able to successfully acquire new logos in those newly acquired companies, so that's working well. But your point around expansion is well taken. We've put a lot of focus on that effort with our enhanced executive outreach and certainly our focus on net promoter score in terms of customer loyalty and we're seeing those results come through principally through new seat additions and expanded relationships with our customers. We do have a decent cross-sell pipeline. We are executing against that particularly with the integration with our Project & Portfolio Management, offering PowerSteering and our Professional Services Automation product Tenrox. That integration is resonating with customers and I think as we market into the PowerSteering base, we’ll sell more Tenrox and vice versa. So that cross-sell motion is working well. Also the Workflow Automation product, FileBound and it’s being leveraged in – with PowerSteering as well as another opportunity to. So those are really important. I will call out RightAnswers is interesting offering that it really is more horizontal than exclusive to one product family. I think you heard Jack mention in the Digital Engagement. I mentioned it in the Project and IT Management. It’s definitely going to be relevant in Workflow Automation. So we think there's opportunity to sell RightAnswers really across the customer base as knowledge management is more of a horizontal issue across different industries and applications. So hopefully that gives you – our sales efforts.

I apologize for the background noise. I guess, one for my good friend there Jack. Jack, your commentary on acquisition qualifies, is really a conservative, I guess help me understand if it just because you don’t want us, investors, in a sense to get over skis? But you've been a little more conservative about acquisitions that you probably have in the past, something has to answer thought process there? And one quick follow-up and Mike answer that.

Yes, so Bhavan, I'm glad you asked that question, not feeling conservative in the sense that the outlook is great. I mean the pipeline has never been stronger. I’m just – when I say that there were no guarantees on acquisitions that's something I've been saying for 15 year at profession and on the Upland calls, just that I never want to – we just want to remind that that no timing can be guaranteed. But let me say affirmatively that our pipeline is never been stronger our capacity to execute against these deals, financially with follow-on and $200 million credit facility has never been better and our presence in the marketplace among community of bankers and other intermediaries for whom we source acquisitions and through our direct outreach program has been stronger. So I feel more optimistic on the acquisition front, really than I ever had. And so that’s – any indication to the contrary.

Got it. Thanks Jack. And then one question for Mike, so obviously you made the acquisition, I feel like a months ago and you raised the midpoint of EBITDA margin guidance. You obviously raised the low end of EBITDA absolute numbers, but we actually brought the margin number down. Mike, just some color of what's going on there I mean obviously numbers going up. So not much we worried about it. But trying to understand what happened? Is it integration costs or CapEx costs? What it was to bring sort of the margin number down. Thank you.

Hi, thanks for the question Bhavan. Really what we're doing – look we're getting more revenue than we expected. We beat on revenue here in Q2. So from a margin standpoint, we've got more revenue divide that EBITDA into. No that we are exiting the year at the same margin target, exit run rate to 35% that we talk about the all time. So really we’re just taking those et cetera revenue dollars and plowing those into investments for scale of this business. So it's all good, there's been no real changes, it's just we've got the opportunity here to make investments for the future and we're still exiting at the EBITDA margin run rate that we wanted to all year long here.

Great, thanks guys. Congrats, thanks for my question.

Thank you.

Your next question comes from Scott Berg with Needham. Your line is open.

Hi everyone. Congrats on a great quarter and a couple here for me. Jack, I guess – let's start off with the recent expansion of your credit facility, obviously had roughly $100 million there. The company size has grown over the last year with the different acquisitions. Do you start looking at different sized acquisitions than what you've done recently won to get the impact that you wanted to maybe put more that capital to work.

So we talked about sweet spot for us being $10 million to $15 million of revenue and I think that continues to be the case now last couple of acquisitions we've announced have been more of that $9 million to $10 million range. So I'd love to see that it's up a bit here. The pipelines very strong we do have a mix of opportunities and there are different sizes ranging from $5 to $20 plus million. So we clearly have the capacity financially and operationally to do deals that up through that $20 million number but that would still be sticking the our knitting right because that's the range we've always talked about $5 million to $25 million. So you could see some slightly larger deals nothing out of the ordinary though it'll still be within that same kind of $10 to $15 maybe as much as $10 million to $20 million revenue range.

Got it. Helpful. And then I guess a question or a follow-up question and the bonds last item there is. Mike you talked about revenue outperformance that you are investing back into the business here? Can you maybe help detail what those are the one product side something different with the sales and marketing - that incremental item might be gone.

No those are things like we have the opportunity to go ahead and cancel some datacenter contracts take those charges as we migrate to AWS, our cloud operations to AWS. So it's investments like that that are really sort of driving where those dollars are going. And then of course you know the extra revenue did have associated with that commission's cost of things like that as well. So nothing's really changed here and there nobody should read into the you know the even down margin on the historical year changing customer again we're exiting year at the same exit rate. We had always planned to do.

Okay. Fair enough and then it's probably for Tim your growth in major accounts or the number of major accounts of the quarter was pretty impressive relative to last years number. Any sense on the products of those customers are purchasing then ask question more reflective of are the new acquisitions last two or three that you're making impacting that growth in major accounts wins or those ones really more reflective of the product platform that you had say prior to the beginning of the year?

Yes, I think Scott, good question I think it's a combination. So we have seen some large deals in our historical core offering. But our latest offerings as an example if you look at the mobile messaging space we've done some nice large deals there certainly the acquisition of waterfall as even more capabilities particularly in retail where as before and we were more strong in the non-profit and media space it opened up a new vertical for us which is nice. And certainly as our brand continues to get more and more well known through the results we're delivering. We're seeing more customers approach us with RFPs and the like which is great. So we've seen it there RightAnswers is really interesting as well it definitely has a pipeline of larger deals. And we'll talk more about that in the second half of the year some of those go through the pipeline but we see a lot of interest with larger companies as they're trying to surface knowledge within their organizations and get that to the front line people as efficiently as possible. And RightAnswers provides an excellent solution for that. We certainly aggressively outreach as part of our integration program to the RightAnswer customers to let them know the Upland story and how the UplandOne operating platform can add a level of enterprise capability. 24/7 support professional services and the like and that was well received. And then for deals in the pipeline making sure they understand what the Upland value proposition is along with the fantastic technology the RightAnswers offers. So the net out it's a combination but we like the trends as well and again that continue to focus on our customer base 2,500 customers that we can go in and sell additional seats to as well as additional products is that continues to be an opportunity right in front of us along with selling our Premier Success offerings they certainly added to the quarter as well.

Great. That’s all I have. Thanks for taking my questions.

Your next question comes from Jeff Van Rhee with Craig-Hallum. Your line is open.

Great. Thank you. Just couple for me tonight. With respect to the dollar renewal sort of the trend of customer expansions, net promoter score, CSAT, any of the renewal metrics I think you give at least one or two of them annually, maybe even just anecdotally what your sense is how things trended this quarter?

Yes. Jeff, I'll take that. It’s Tim here. So we as you mentioned continue to focus on net promoter score and not just the metric, but also the feedback that comes with it and really tailor our focused efforts on the product, service and support to ensure we both address any of the negatives, but also double down on the things that delight our customers. So very positive, very healthy in that regard. We talk about the net DRR trends on an annual basis. They can be choppy from quarter to quarter, so renewals are on track and that gets us our growth DRR and then expansion added on top of that gets us our net. So the trends look decent in those areas. It's one of these continuous improvement areas where we're pleased, but never satisfied and so we're going to continue to drive our focus there and continue to try and focus on our existing customer base and making them as successful as possible.

Got it. And with respect to besides the sales team and how Waterfall might affect that and then along those lines, just as you're getting more the major wins and expansions, are you noticing any changes or planning any changes in terms of the selling motion or the communication motions if you will?

Yes. In terms of sale capacity, certainly when we purchase a company it comes with an existing sales force and so getting them on boarded and making sure that the communications occur with the customers are is super important. This can be opportunistic in terms of where we support the sales force we've added in Europe which is great and we're seeing some results from that and particularly in Rightanswers. And with Waterfall an excellent offering and excellent pipeline, some really strong sales people there. And once they're integrated in, we do look at it like we look at any of our businesses in terms of productivity of our marketing and selling effort. In some cases we might adjust to more of an inside model, in some cases we’ll keep the field capacity in place and anticipate growth. And if it stay, if it comes through then will retain it the sales capacity for whatever reason it doesn't then we’ll either cross train and try and get it on other products and really try and utilize the talent that we're acquiring. They typically have built strong customer relationships and understand how to sell the product and we want to carry that momentum through. So that's a lot easier than launching a recruiting effort to hire and recruit new sales people not that we won't necessarily do that, but when we acquire a company that knows how to sell existing product, it is easier to get them productive or keep them productive certainly from a return on investment perspective. So that's how we look at that.

Got it. One last for me then just to kind of an open ended pipeline question with respect to the characteristics of the pipe and how they look at this point versus say 90 days ago, what's changed, obviously we're looking at seemingly more, and in particular large deals. But anything else that stands out in the size scope quantity, organic verticals, think of a lot of ways to slice it, but I leave it you. Is there anything in there that particular stands out versus 90 days ago?

I'm just pleased with the continued growth of the pipeline both in terms of expansion deals, but also as Bhavan asked with the cross sell and the value proposition around that. In terms of verticals, we are seeing an interest in the government vertical which is great as well as in the media non-profit. The RightAnswers it's actually across the vertical in that particular case, so that's not really distinguished in that way, it's more of a broad based offering. So I would say continued improvement in the pipeline. We're obviously continuing to hone our marketing efforts. As we've talked about in the past, our marketing efforts are really focused on that existing customer base and cultivating it and activating it. So no spray and pray marketing out there required and we’ll continue those efforts to drive that. Certainly, we’re promoting the Premier Success offering, Premier Success program more aggressively, trying to incorporate that both into new deals as well as when we do a renewal with the customer and we see results from that as well. So I would say overall positive trends on the pipeline.

Got it. Very nice quarter, thank guys.

Your next question comes from Brian Peterson with Raymond James. Your line is open.

Hi gentlemen. Thanks for taking the question and congrats on another strong quarter. So I don't know who wants to take this one, but I just wanted to understand the mechanics of accretion for some of these deals, obviously margins have some up and now we're hitting that high 20s, low 30% level. So as we think about incremental contributions for M&A, as they ramp towards corporate average margins. Does that take longer because it's a higher bar or because of the UplandOne platform, has that become so efficient, where that process still continues even as we reach higher margins?

Yes, this is Jack. I'll take that one. So if you look at what we're currently running at now, I’ll take a look at a Q4 2017 sort of exit contribution margins from our products, running on average about 50%. And today if you look at Q3, you've got shared service costs. Those are centralized costs that are shared across all the products running at about 17%. So that results in the midpoint adjust EBITDA guidance of 33% on a corporate level. With each new acquisition we had, we are driving through the UplandOne platform toward those 50% contribution margins. We make it 40% at first, but its scales pretty quickly up to 50%. So that means that each new acquisition we're able to amortize or spread our shared service costs over a large your revenue base and a larger contribution margin base and through that process that will drive EBITDA – corporate EBITDA margins up through the 40%, which is our long-term target. Is that answered your question?

Yes, that's a great answer. I appreciate that Jack. Maybe one for you Mike, I know there's been a lot of M&A activity, with any help in kind of understanding the revenue mix on a pro forma basis even high level, if I had to think about the three product families, how does that look to that?

The revenue mix is really – I would look that perpetual license revenue as I mentioned in my commentary earlier in Q2 being outsized. So we did have some pull-through of perpetual license revenue here in Q2 that probably not going repeat, could repeat in any number of quarters in the future. But we don't want to model to that, right. So getting back to the sort of right sized percentages, recurring revenue, and sort of the 87%, 88% range professional services and sort of the 8% of total revenue mix and then perpetual being sort of that remaining sliver of 4% maybe 5% being on the quarter, right. So that's really how it should be modeled and relatively consistent as we've been doing, but we're going to have these pops like we've seen in Q2, hopefully will see some more pots in perpetual license revenue.

No, I guess Mike I was looking maybe more from me, if we had a segment between Project and IT Management versus Workflow Automation versus Digital Engagement, any sense for how that business is split at current levels?

Well, it's roughly a third with each one of the product families. So we're very well diversified across all the families and diversified actually in the product family so much of the products that make up each one of those groups.

I would just jump in on that one. I would just say that we see equal opportunity for growth within each of those product families. So we talked about a long-term growth target and – this is not guidance now, but just in terms of our internal goals of the next three or four years to make this a $250 million business with north of $100 million of the EBITDA and again that's not guidance, no guarantees, but that’s the goal that we are striving towards and we see at this point the potential for doing that with the three products that we currently have. So we do see a growth opportunity and the potential of each of those to be $75 million to $100 million businesses or product groups. So feel very good about where we are the pipeline is sort of nicely divided among those three product families and they all offer we see great opportunity for growth.

Got it. Thanks guys.

Your last question comes from Terry Tillman with SunTrust Robinson. Your line is open.

Hey, good afternoon gentlemen. I'm not in Europe unfortunately I'm in Atlanta but no background noise but I do still have some questions even though some of them have - a lot of them answered. And actually I am putting on my thinking cap they talk about the rule of 40 which also includes cash flow as part of that. You guys now have the rule of 66, 33% growth and 33% EBITDA margin. So congrats on that for 3Q.

Thank you.

But my first question and I don't know if this is for Jack or Tim, but you know when I go back to look at your pie chart in terms of the addressable market rolling up all your products. Messaging is actually a small piece, but you know Tim you were talking about integrating some of these different product families together to me messaging whether it's waterfall or the other components you bought in the past. Messaging it seems like it could really have much more applicability and use cases well beyond just what initially they were doing as independent companies. So maybe you could talk about the ability to really grow the messaging part of your business related to integrating product familes.

Terry, it is a great observation I know I touched on RightAnswers as being horizontal but if you think about it mobile messaging really is horizontal in its relevance and to put a fine point on it we have this AccuRoute scanning software that also then allows you to assess if a document is of a confidential nature and route it appropriately or determine based on the content of what’s being scanned, if it should be stored off premises perhaps in our FileBound Workflow Automation offering. Well, obviously if there's something confidential that comes up the legal department will want to be notified pretty rapidly. And so what better way to do that for mobile messaging. So we're not doing any product launches or product announcements on this call, but that certainly something more investigating in terms of the relevance of that using that mobile messaging platform to deliver, not just alerts but interactive alerts to end customers who can then take action perhaps more quickly than otherwise. As I'm sure you're aware text messaging has tremendous open rates you can just think about it personally how many unread emails you have versus how many unread text messages. And people in general have virtually no unread text messages. So the open rate is huge and the response rate is great as well which is why we're seeing significant penetration in retail and other areas that are trying to drive behavior among consumers and the like. So we think mobile messaging has relevance across multiple products and we want to make that integration purposeful and how we do that. So that's an example of taking the technology asset that we have in our digital engagement space and implying that across the product families. I think the RightAnswers is similar in that…

And as a follow-up on the messaging side, maybe this is for you as well Tim. RCS, as we've been doing our research, some talk that that could be game changing for mobile commerce or mobile marketing, as it has a lot more innovation and a lot more opportunity for marketers and people selling. Could you talk about RCS? Could this be something that's material and a catalyst or is this just modestly incremental potentially?

It's a great question. I really don't know how it's going to play out. That in Facebook Messenger, obviously have enormous potential and could be disruptive to text messaging. However, when you have a mobile messaging platform, the whole reason will stay relevant, that equation is, company is going to want to run campaigns that span each of those vehicles of delivery. And so in a way we're indifferent, right. Today, text messaging is incredibly well adopted and accepted and if things stay in that direction that's fine, we're very successful in that model. If Facebook Messenger trends continue and RCS ramps as well, the networks well for us too. And if you think about managing the complexity of those three things, that's why you need a mobile messaging platform. So it actually makes our platform even more relevant and less likely that someone will try and either develop in-house or trying kind of wing it there. We did announce a little bit ago and a partnership with Twilio. And so we are leveraging some of their technology to enable our Facebook Messenger interface and that's been really, really well received and we're getting interested customers from them that we then pursue and close the deals with. So that will be an interesting one to watch, but yes, we're excited about the dynamics of this market and certainly excited to see entrance is big as Facebook and Google into this to stir the pot and allow marketers even more options to go after. I will tell you there is a lot of complexity and uncertainly in this space and it's unlikely that a marketing department that isn't focused on this sort of everyday is going to understand all the twists and turns and that's another thing we bring to bear is expertise and professional services around us to help navigate these waters, because they certainly aren't clear right now.

Got it, and then Mike just final question, just relates to and I apologize if I just missed this in the press release or in the prepared remarks. But how do we think about CapEx for the second half of the year and anything to think about next year, not necessarily formal guidance, but anything that would require a step up – I mean material step up? Thank you.

Yes, Terry, on CapEx really as we've talked about migrating to AWS, we're trying to minimize any investment in CapEx that that we make. We don't want to have to buy equipment anymore. So therefore those numbers have been small in recent quarters actually for a while now and they will continue to be small if and ultimately get down to barely showing up at all, so continued sort of downward trajectory on CapEx spanning quarter-to-quarter.

Great. Operator, any other questions? End of Q&A

There are no more questions at this time.

All right, well with that let me just thank everyone for their time this afternoon and we look forward to speaking with you again on the next quarterly conference call. So thank you very much.