Ladies and gentlemen, thank you for standing by, and welcome to the Upland Software Third Quarter 2017 Earnings Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions]. 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 webcast replay will be available on Upland's Investor Relations website at investor.uplandsoftware.com. By now, everyone should have access to the third quarter 2017 earnings release, which was distributed today at approximately 3:00 p.m. Central Time, 4:00 p.m. Eastern Time. If you've not yet received the release, it's available on the Investor Relations tab of Upland's website at investor.uplandsoftware.com. I would 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 and welcome to our Q3 2017 earnings call. Tim Mattox, our President and COO, and Mike Hill, our CFO, are with me. I'm going to summarize our results and some recent highlights. Mike will give us a more detailed look at the numbers. And then Tim will cover sales and operations highlights from the quarter. After that, as the operator referred to, we will open the call up for some questions. But before we get started, let me ask Mike to read the Safe Harbor statement. Mike?

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 are 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 the 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 as periodically updated as needed in our Quarterly Reports on Form 10-Q filed 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, November 9, 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 third 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.

Thanks Mike. I'd say five major headlines today. One, a record Q3, 36% revenue growth and an impressive continued ramp on adjusted EBITDA to 32% adjusted EBITDA margins in the third quarter. So we have now met or beat guidance in each of the 13 consecutive quarters since going public. We also had continued execution on the M&A front this quarter with a strategic and accretive acquisition of Waterfall. So that brings the total number of strategic and accretive acquisitions this year to three. And we'll talk about the pipeline, but we feel great about it. We are raising our full-year 2017 guidance and setting up for a record Q4 with 35% revenue growth and 35% adjusted EBITDA margins. That's at the mid-point. And again, that EBITDA margin is on the way to our long-term goal of 40%. And we're loaded for bear on M&A with our financing activity this summer having raised $43 million in a follow-on equity offering and expanded our acquisition credit facility to $200 million. A few other notes. With this quarter's results, Upland has now achieved a greater than $100 million annualized revenue run rate for the first time. We had strong new and expansion sales bookings, which Tim will discuss in just a few minutes. Again, I mentioned our 13th consecutive quarter of meeting or beating guidance. For the full-year, again record guidance at the mid-point, $96.3 million in total revenues with 28% growth in recurring revenues for the year, 29.7% adjusted EBITDA for the year, but again, exiting at a higher adjusted EBITDA run rate in Q4. Three great acquisitions this year; Omtool, which has now been renamed AccuRoute, that was in January, part of the workflow automation product family; Waterfall, part of the mobile messaging digital engagement product family; and RightAnswers in…

Thank you, Jack. Today I'll cover, as Jack just said, I'll cover the financial results for the third quarter and our outlook for the fourth quarter and full-year 2017. Total revenue for the third quarter was $26.1 million, representing growth of 36%. Recurring revenues from subscription and support grew 36% year-over-year to $23.2 million. Professional services revenue was $2 million for the quarter, a 9% year-over-year increase. And perpetual license revenue was $900,000 for the third quarter for an increase of 158% year-over-year. Moving down the P&L to gross margins. Overall gross margin was 65% during the third quarter and our product gross margin remained strong at 68% or 72% when you add back the depreciation of equipment and amortization of intangible assets. Professional services gross margin was 33% during the third quarter, which is a bit below our target of 40%, and that was as a result of the newly acquired businesses entering the mix. And we expect to bring those newly acquired PSO teams into model over the coming quarters. Turning to our operating expenses, research and development expense net of refundable Canadian tax credits was $3.9 million for the third quarter, representing 15% of total revenue. Sales and marketing expense was $4.3 million, representing 16% of total revenue for the third quarter. G&A expense was $5.1 million in the third quarter, representing 19% of revenue. However, excluding non-cash stock compensation for the third quarter, G&A expense was $3.6 million or 14% of total revenue. Acquisition-related expenses were $4.4 million in the third quarter, representing -- or resulting in our -- from our recent significant acquisition activity. Operating loss was $2.3 million in the third quarter compared to a loss of $1.3 million for the same period in 2016. GAAP net loss was $3.6 million or a loss…

Thanks, Mike, and good afternoon, everyone. I'm going to cover our sales, product, and operating areas. Our Q3 performance demonstrates that our enterprise customers continue to achieve greater success and improved business results by relying on our portfolio of leading products. We continue to focus on expanding relationships with existing customers and achieved strong results in Q3. We expanded relationships with 173 existing customers in the quarter, including 23 major expansions where we expanded the business by over $25,000 in annual recurring revenue. Furthermore, 26 of our expanding customers increased their annual recurring revenue by 25% or more. So good results on that front. To give you a flavor of some of that business, some examples of major renewals and expansions include a national health and well-being firm as well as a national mortgage resource platform, who expanded their commitments to our mobile messaging platform for over $175,000 and over $130,000 per year respectively. A global leader in the automotive industry expanded its commitment to our project and portfolio management solution by over $125,000 per year for a total commitment of close to $400,000 in annual recurring revenue. A global integrator of IT science and engineering solutions expanded its commitment to our knowledge management platform to over $90,000 per year. A regional pharmaceutical platform and solutions provider re-committed to our secure document process automation platform for over $75,000 per year. In addition, 168 other customers expanded to almost $1.6 million per year in aggregate. And while our focus is primarily on expanding existing customer relationships, our efforts to acquire new customers resulted in 94 new customers for Upland, 14 of which were major accounts where we secured over $25,000 in annual recurring revenue per account. We saw a particular success growing from our recently acquired knowledge management platform business. For…

Great. Thank you, Tim. And at this point, Operator, let's go ahead and open the call up for questions.

Your first question comes from the line of Bhavan Suri.

Hey, guys. You know me, okay?

Yes.

Great. Followed through you Mike, Jack, and Tim, congrats nice sort of numbers there. I just wanted to follow-up, Tim, you've been talking about sort of the growth in existing customers and the cross-sell that's improving; the expansion with 173 customers, it was 153 last quarter, certainly a testament to that execution. I guess I'm wondering if you were to try and think about how to break that down, a lot of that is sort of the UplandOne platform but you've also added a couple sales people. I think not a tremendous amount, but if you were to credit that or think about how or what's driving that, would it be the sales people adds, the platform? How should we think about that split and how that might look like as you look at sort of the expansion and cross-sell?

Sure. It's a good question. Yes, in terms of the breakdown of that, I think I would attribute the bulk of it to the UplandOne platform and included with that is an aggressive customer outreach. The larger customers are receiving calls from an assigned senior executive twice a year. And those aren't sales calls. Those are more relationship calls to check in and make sure they're getting far and above the value they're expecting from the current offering they have. Now as that relationship develops, it's natural to bring in other products and other elements into the discussion. And so we're seeing some pipeline activity related to that. The cross-sell, which is some of that coming from that, it's not material to our bookings today. But the pipeline looks decent. We continue to expect it to improve. A couple of our more recent acquisitions with RightAnswers and then the formation of Upland Mobile Messaging with Waterfall added in, those are broadly applicable to the Upland installed base. So we think we'll some increases along those dimensions. And we're also exploring, now that we've got the product families with more relevant value props and integrations, we're looking at some product bundling concepts that will hit in 2018.

Great. That's helpful. And then maybe one for Jack and Mr. Hill there. But if you look at the guidance, you're exiting 35% EBITDA margin 2017, or say 22%, I think, roughly last year. You're obviously impressive. But as we think about the 40% long-term EBITDA margin goal, I guess structurally is there any reason why you couldn't exceed that? Or is that just sort of right now a line in the sand that's sort of we'll see what happens when we get there kind of idea? Thank you.

Thanks, Bhavan. No, there's nothing structural that says we couldn't exceed that, but right now that's the long-term goal and what we're moving towards. And we will, as you say, evaluate when we get there in terms where we go from there.

Great. Thanks guys. Appreciate the color and congrats again.

Thank you.

Your next question comes from the line of Scott Berg.

Hi, everyone. Two quick questions for me. Congrats on a good quarter. I guess first of all, I don't know if it's for Tim or Mike or even Jack, you beat EBITDA nicely in the quarter. Fourth quarter numbers are going up a little bit. Trying to understand what's driving that specifically in the period. Is it just the recent acquisitions are integrating more quickly than expected? Or is there something else in the operations that's become maybe slightly more valuable or more material than expected?

So, thank you, Scott, and I would say that we're just seeing continued strength from the UplandOne operating platform. Tim mentioned this earlier, but our degree of conviction and ability to bring new acquisitions in model has grown. And in addition to that, we're just seeing the effectiveness of the model in terms of customer satisfaction. We were just looking at some data on the customer support area the other day. And customer sat rates massive improvement, delivering that quality of support at a percentage spend now that's significantly lower than what it was just 18 months ago. So it's, in area-by-area throughout the model, we're seeing that kind of improvement and that's what's driving that marginal upside.

Got it. That's helpful. And then my second question, Jack, is you talked about deal sizes seem to be moving up, still below your $25 million top end of the revenue range. As you move up, say, from a $5 million or $10 million company to a $20 million to $25 million company, are you seeing any differences in valuations that you may have to pay for those transactions? Historically, we'll see, as companies get a little bit larger, they do support a little bit higher valuations, but not certain if you're seeing that at all.

We have said pretty consistently that -- very consistently, since the IPO, right that we'll pay between three and eight times pro forma adjusted EBITDA. And we have really averaged towards the lower end of that range, more in the five to six times area. And we're not seeing anything now that causes us to look at this any differently. So, and part of the benefit there for us is that as the UplandOne operating platform has continued to gain strength, our conviction in our ability to restructure these businesses and position them for sustainable and profitable growth has increased. And so that helps keep our EBITDA multiples paid at the lower end of our published range.

Got it. That's all I have at the moment. Thanks for answering the questions.

Thanks, Scott.

Your next question comes from the line of Jeff Van Rhee.

Great, thanks. Thanks guys. A couple for me.

Hey, Jeff.

Hey, thanks. So just a few for me. On the AWS, first of all, the migration from owned co-lo to AWS it sounded like, I think, you commented project progressing on plan. Is that with respect to costs as well? I know as you get further into it, you get a little better idea of what it looks like to get over there and operate. Any surprises pro or con with AWS thus far?

Yes. It's Tim here, Jeff. Thanks for the question. Yes, I would say some surprises on the positive end of things, both in terms of incremental cost opportunities as well as in terms of user experience, both in terms of performance, some of the security features we're able to take advantage of as well. So we're taking a thoughtful measured march here. What we don't want to do is disrupt the customer experience. But in the products that we have moved over, we've seen performance improvements as well as better than projected cost improvements. I think as we continue to do this, we'll invest time in optimization of the AWS instances that we have. And the pricing models continue to change and we'll optimize around that as well. So we're happy with the initial experience and are continuing on our forced march in this area.

Yes. And with respect to the three kind of core product segments, if you will, any variance from trend for any of the three with respect to where you saw either an increase in momentum or a decrease in momentum? A little more down in the weeds with respect to maybe which product segments are showing the most strength if you're able.

Sure. So from a current quarter perspective, we certainly saw momentum in the knowledge management area, which actually spans two product families. We have within that offering an IT support usage case that helps companies provide more efficient IT support internally and some companies use that to provide that externally. And that really sits in our project and IT management space, that usage case. And then also the product is used to support call centers. And that's more in the digital engagement mode where some of the other offerings there are relevant in that context as well. And we've seen interest in knowledge management in both those dimensions. So that's helped for sure. Certainly in workflow automation, as we've got both capture, routing as well as structured workflow, we're seeing good take rates there and good interest and pipeline. So I'd say fairly good across the board. I will also say that some of our larger deals come from our mobile messaging area. We've got some good both nonprofit customers there as well as those now in the retail space, courtesy of Waterfall. And we continue to rationalize those platforms to pull out the best-of-breed features and deliver even more value to our customers there. So hopefully that gives you some more flavor.

It does. Thank you. And one last from me then. I guess, guys, as you look at the expectations with respect to the pace of acquisitions, I think you've previously commented you were hoping to have another completed before year-end. Just any update on your thinking along those lines? And then with respect to 2018, understanding maybe a little early to get too precise in terms of looking at 2018, but just a crude sense of the pace that you think you're capable of onboarding, the pace that you think the pipeline of interesting opportunities might support. Just sort of set the table for us in terms of the pace of activity we might be looking at both for the remainder of this year and as we get into 2018.

I would say that our pipeline is robust, really never been stronger. We've got more conviction around our ability to onboard these products and rapidly restructure them for profitable, sustainable growth. And of course, that means highly accretive acquisitions. And we've got the resources to execute with the new credit facility expansion and the equity raise. So we feel very good about the outlook for M&A. I think operationally, doing three to four acquisitions a year definitely doable, don't see any issues there. And we are excited about the outlook as we look out here over the next period of time going into 2018.

And just with respect to the one that you would -- were hoping to land yet in 2017, does that still -- has anything changed with respect to that specific expectation?

No. We continue to push forward. With M&A, you can never guarantee timing, but we would like to get one more acquisition done this year. But you can't specify timing around M&A. So we will continue to push forward and maintain discipline and look at opportunities. But as I say, we feel really good about the pipeline and where we stand.

Got it. Okay, great. Thanks guys.

Thank you.

Your next question comes from the line of Richard Davis.

Hey, guys. So first off, you guys should be happy because the M&A deals you're doing -- you're right in the right sweet spot because all the PE guys that I talk to are bemoaning they have to pay 2X, 10 times EBITDA, so good work on your part there. That's a good spot to be. Second thing is more kind of on the soft side of the equation because everyone has asked all the hard data questions. So I'm a salesman for your firm. It's awesome. I mean it's kind of like at Thanksgiving and more food keeps coming on the plate all the time. So how do you kind of make sure that your salesmen ingest and understand the products that you're adding? So what's the training process there? How do you make sure that I don't get overwhelmed? And then second, more broadly, I guess, Jack would just be how -- you've acquired a bunch of companies. How do you create kind of a holistic corporate culture and how do you think about that? So kind of more tactical and then more strategic. Thanks.

Sure. I think around the sales side, grouping the products into three product families, workflow automation, digital engagement, project and IT management, grouped around common economic buyers, is key, and then cross-train sales folks within those product families. One of the things that we've talked about is looking at discounted product bundles, looking at enterprise license agreements, and we are experimenting with different approaches as well as with our Platinum support to drive the synergies and cross-sell. And as we've talked about, our strong revenue outlook assumes really no cross-sell, right. It assumes a continuation of the model to-date, which has been an expansion-focused model. We are laying the predicate with the common UI/UX, single sign-on, the Upland Integration Manager for data exchange, and for additional cross-sell. And I will say this; as we continue to add products, right, 3 products now in each family, Tim mentioned RightAnswers earlier, some real interest from customers in the RightAnswers product offering. So we're starting to see now, as our product families grow, a greater opportunity for cross-sell. So that's the first piece. In terms of the second piece in maintaining a holistic business, it really comes down to the Upland One operating platform and our intense focus on 100% customer success. And so our belief is that you focus on your existing customers. You communicate and over-communicate with them. You have honest dialogue. You address their concerns. You have senior executives reaching out. You have account managers reaching out to administrator level folks on product. You process that feedback through a net promoter score, virtuous cycle. You invest in standardization and efficiency and scalable platforms across all the products. That's absolutely key, right? So we're constantly looking to minimize exception handling and to build standardized procedures that can provide great customer satisfaction and also be delivered efficiently, again, whether you're talking about support, product management, development, back office, you name it. That's what we're thinking about every day. Customer satisfaction, bringing up those net promoter scores and continuing to refine and strengthen the UplandOne platform; that's what the culture of the business is built around. And I will say there has been a real build, and I give Tim a ton of credit for this, in the esprit de corps of the organization around the concept of UplandOne building 100% customer success focused culture as really the better way to run a railroad, at least for a large percentage of software products that are out there. Maybe not for all of them, but that we believe there's a large segment of the cloud software market for which this model is the best model. And at moments like that, we have those discussions and you can get very excited about the future growth potential of what we've got here, so.

That's very helpful. Thank you.

Thank you.

Your next question comes from the line of Brian Peterson.

Hey, guys. Thanks for taking my question. So maybe a follow-up to Richard's question. So just the expansion is pretty robust so I want to understand what's going on with those dynamics. So as you acquire more companies, do you see a lot more customer success managers coming onboard? And is there any way that you can comment on the proficiency or the efficiency of the customer success managers you have as they become a lot more familiar with the products you've acquired?

Yes. It's a good question, Brian. And we have a lot of metrics around that area. As Jack alluded to, we also have an incredibly strong culture around the customer themselves. And so there's a bit of a self-selection because sometimes you run into folks, usually not in the customer success manager area, but in other areas where maybe customer isn't at the top of the queue for them. And those folks will self-select out or we'll remove them. And we really retain the people who have the customer as the center of why they come to work every day. And so in the CSM area, absolutely. It's a -- we tend to focus on making sure that the number of accounts the CSM has, that the metrics they're judged upon with respect to net promoter score, renewal rates, expansion, and cross-sell, that they're able to surface are ones that work and what's in the way of them doing that in a really good way. The other thing, too, back to the point around how we ramp sales people, when a sales person comes on or when we buy a company and they have sales people, it's not just what else goes in the existing rep's bag, but those new sales reps that are coming from that company, now they have a whole new base of customers, the Upland installed base, to then sell their product into. And the CSMs as well as the executives that do the executive outreach that I alluded to before, they become the gateway into those customers. And so they're playing a very important role introducing both at sometimes the executive level as well as at the lower level gatekeeper level, those products in and getting those relationships started. So that's really exciting for a new sales rep or a sales rep from an acquired company coming in and how they can really supercharge their pipeline right out of the gate. So, yes, in the CSM area, just to finish the thought there, we integrate those folks in. We make sure that they're clear on the different communication points. We remove a lot of adminstrivia off of their plates. So we do centralized order and renewal, centralized invoicing, centralized collections, all the just stuff that in a smaller company sometimes gets heaped on those folks. So we're able to then have them spend more time on customer resolution, bringing up that NPS, getting the executives prepared for their calls and driving home actions that we need to do even more business with those customers. So that's how we approach that area.

Got it. That's good color, Tim. And maybe for Jack or Mike, obviously the pace of synergy we've seen in the numbers. That's really picked up. I'm just curious with the three deals that you guys have closed so far this year, would you say that most of the operational synergies have been recognized at this point? Or are there still some benefits that we should see in the fourth quarter and in 2018? Great job guys.

Well, I would say that we feel good about all three acquisitions, well-integrated and ramping to 50% contribution margin target, so all is proceeding as planned there.

Yes, Brian. This is Mike. I would just say that what we expect to do is immediately restructure these businesses to the 40% contribution margin and then we work over time to manage them up to 50%. So yes, the three deals that we've done this year we've already quickly done that first phase to 40% and now we're in the process of working on the phase to 50%. So all is on plan and, yes, there is probably incremental improvements from here that will take longer to squeeze out as we continue to implement the platform.

Thank you.

Your next question comes from the line of Richard Baldry.

So looking into the model a little bit, the interest expense line seemed a little high in the quarter so curious if there's any one-time impacts in there. And then in terms of the integration side, the recurring cost side in the past two quarters has come up as you've put your acquisitions in. But you'd held it awfully steady last year as you were doing your acquisitions. So is that one of the sort of areas that's a little slower to take out the costs and one of the lines that we'd probably see a bit more downward trajectory over the near-term as you squeeze those last costs out? Thanks.

Yes. Hey, Richard. This is Mike. So on interest expense, yes, as we have done these acquisitions this year we expanded our credit facility. Here in Q3 we actually took down $20 million more in the credit facility to the gross debt now outstanding of $95 million. We've got $52 million of cash on hand, so net debt now of around $45 million or so. So yes, interest expenses have been coming up a little bit as a result of that. Although leverage overall is still very conservative relative to our EBITDA run rate, which is now above $36 million annualized run rate a year on that sort of $45 million of net debt. So we feel like even though interest expense is coming up, we feel like the debt levels are well under control. We've actually got more firepower for more M&A with our credit facility. On the topic of M&A transaction restructuring costs, yes, those came in at a pretty good clip here this quarter. But keep in mind we have been doing a lot of M&A this year. Three deals this year including an acquisition here, a good-sized acquisition here, in Q3. That $4.4 million on the P&L also included $1 million worth of future lease commitments that we took a charge for, most of that being non-cash out of that million. So we did have some outsized sort of restructuring and transaction costs here. But really that's good news because that means we're getting on with the M&A. That line item, assuming we don't do more M&A, will obviously go down quickly in future quarters. But then again, to the extent that we do more M&A, obviously we'll still have some of that coming through as we do more transactions. So hopefully that makes sense.

Thanks.

Thank you.

And your final question of Eric Reinert.

Hey, guys. Thanks for taking the question. Nice job on the quarter and the progression with the EBITDA margin. But as you guys progress moving onto the AWS platform, how does the product margin look over the long-term? Or more so, how does it look when you get to that 40% long-term EBITDA margin?

So your question was on gross margins, product gross margins?

Yes, that's right. Yes.

Yes. So as we've talked about, the migration to AWS, the efficiency there, we'll still have a little bit of headwind on gross margins as we continue to migrate and complete the migration to AWS in 2018. But we feel like long-term models that the gross margins can come up still a couple of hundred basis points overall, which will be part of the scaled improvement as we get to 40%. So these things are really going to come, these sort of scale improvements will come obviously with M&A, probably getting to 40% overall EBITDA margin at total revenue of $150 million to $200 million of revenue. And we will see those scale improvements up and down the P&L, a little bit there with cost of revenue and then of course in the other operating expenses as well.

Okay, great. And then my other question would be as you look at the acquisition pipeline, what are does the balance look like in terms of opportunities across your three product families? And could we expect to see something outside of those three product families in terms of acquisitions?

Yes. Eric, this is Mike again. So this year we've done an acquisition in each one of the product families. So it's been evenly distributed so far this year. Going forward, obviously it's impossible to predict, but we see the acquisitions coming still in those three product families. We don't anticipate doing an acquisition in a new product family or starting a new product family. We feel like we can grow the business to $250 million of revenue or more just staying in these three areas, these three product family areas. And we'll see. But we expect it to be fairly evenly spread.

Got it. Thanks guys.

Thank you.

And at this time, we have no additional questions.

Great. Well, thank you for your time this afternoon. And we look forward to getting back together for the year-end call, the call for the full-year 2017 results, and look forward to a strong Q4. So again, on behalf of Mike and Tim, I want to thank you all for joining us this afternoon. Thanks a lot and have a great night.

This concludes today's conference call. You may now disconnect.