Ladies and gentlemen, thank you for standing by, and welcome to the Upland Software Fourth Quarter and Full Year 2017 Earnings Call. [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 telephone replay and a webcast replay will be available on Upland's Investor Relations website at investor.uplandsoftware.com. By now, everyone should have access to the fourth quarter and full year 2017 earnings release, which was distributed today at approximately 4:00 p.m. 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 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. Welcome to our Q4 earnings call. With me this afternoon are Tim Mattox, our President and COO; and Mike Hill, our CFO. So on the call, I'm going to summarize our results and talk about some recent highlights. Following that, Mike will provide a more detailed look at the Q4 numbers and share with you our guidance for the first quarter and full year of 2018. We will then open up the call for Q&A. Tim, of course, will cover sales and operations highlights as he always does. So obviously, very happy to be on the call this afternoon. Very strong quarter, great finish to the year, and look forward to getting into it. But before we do, Mike will read our safe harbor statement.

Thank you, Jack, and good afternoon, everyone. 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 risks, assumptions and uncertainties that could cause our actual results to differ materially. We caution you to consider our discussion of risk factors and other uncertainties that could cause our 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 as periodically updated as needed in our quarterly reports on Form 10-Q 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, March 8, 2018. 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 financial measures that, when used in combination with GAAP results, provide Upland management with additional analytical tools to understand its operations. Upland has provided reconciliations of non-GAAP measures to the most comparable GAAP measures in our press release announcing our fourth quarter and full year 2017 results, which is available on the Investor Relations section of our website at investor.uplandsoftware.com. 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. So major headlines. Q4 was an incredibly strong close to what was an outstanding year. We had a record 44% revenue growth in Q4. This was our 14th consecutive quarter of meeting or beating guidance. So that's every single quarter since going public we have met or beat guidance. Last year, when you look at it, a 1,300 basis point expansion in adjusted EBITDA margins from 22% in Q4 2016 to 35% in the fourth quarter of 2017. And again, that's on the way to our long-term adjusted EBITDA margin target of 40%. And we did it while maintaining positive organic growth in reported revenues and a 93% net dollar retention rate. We added, in 2017, over 525 new customers organically, including 52 major accounts added organically. Note that we now have over 4000 customers and 450,000 users, and we've updated now the boilerplate in our releases in the website to reflect that. So just by way of background, of those 4000 customers, right, 4,000 customers, 450,000 users -- of the 4,000 customers, 900 are what we call major accounts, which we define as having more than $25,000 per year in recurring revenue. The average of those major accounts in terms of annual recurring revenue is approximately $100,000 per year. And those major accounts combined account for over 80% of our recurring revenue. So great distribution of revenue, strength in strategic accounts and well positioned for future growth. In 2017, we made four strategic acquisitions, all of which were accretive to adjusted EBITDA on a per-share basis, Omtool, RightAnswers, Waterfall and Qvidian. So acquisitions across all three product families, are all great product fits and, and as I said, all accretive. Our acquisition pipeline remains robust, and we have access to the capital resources we need to continue…

Thank you, Jack. Today, I'll cover the financial results for the fourth quarter and our outlook for the first quarter and full year 2018. Total revenue for the fourth quarter was $27.8 million, representing growth of 44%. Recurring revenues from subscription and support grew 45% year-over-year to $24.8 million. Professional services revenue was $2 million for the quarter, a 15% year-over-year increase. Perpetual license revenue was $1.1 million for the fourth quarter for an increase of 94% year-over-year. Moving down the P&L to gross margins. Overall gross margin was 66% during the fourth quarter, and our product gross margins remained strong at 68% or 74% when adding back depreciation of equipment and the amortization of acquired intangible assets. So 74% cash gross margins, as we call them. Professional services gross margin was 34% during the fourth quarter, which is a bit below our target 40% as a result of newly acquired businesses entering the mix. And we expect to bring these newly acquired PSO teams into model over the coming quarters. Turning to our operating expenses. Research and development expense, net of refundable tax credits, was $4.1 million for the fourth quarter, representing 15% of total revenue. Sales and marketing expense was $3.8 million, representing 14% of total revenue for the fourth quarter. General and administrative expense was $5.7 million in the fourth quarter, representing 21% of revenue. However, excluding noncash stock compensation for the fourth quarter, G&A expense was $4.0 million or 14% of total revenue. Acquisition-related expenses were $4.7 million in the fourth quarter, resulting from our recent significant acquisition activity. Operating loss was $2.4 million in the fourth quarter compared to a loss of $0.6 million for the same period in 2016 as a result of the additional acquisitions in 2017 and a related onetime acquisition transaction…

Thanks, Mike, and good afternoon, everyone. I'm going to review our Q4 results across sales, product and operating areas as well as full year results. In Q4, we achieved incremental growth in both the number of existing customers who expanded their relationships with us and in the number of new customers for Upland. This performance is a result of our consistent and ongoing commitment to 100% customer success, which we define as every customer realizing the full value that they expect from our software products. As you may recall, twice a year, we ask our customers for feedback on how well we deliver on this commitment using the Net Promoter Score, or NPS, methodology. And I'm delighted to announce that the scores for our Q4 survey increased and put us squarely in the strong end of the range for leading enterprise software companies. In addition, we measure our performance relative to net dollar retention rate, or NDRR, and report on this annually. For 2017, our NDRR was 93%, as Jack mentioned earlier, which is in line with our expectations. And while we're pleased to have maintained NDRR in the mid-90s year-to-year, we're not satisfied, and we maintain our goal to consistently drive higher NDRR. Returning to Q4 specifically. This loyalty translated into business as we expanded relationships with 227 existing customers in Q4, including 21 major expansions, over $25,000 in annual recurring revenue. In addition, 30 of our expanding customers increased their annual recurring revenue by 25% or more. Examples of major renewals and expansions include a global IT service provider who expanded its commitment to our RFP and sales proposal automation platform by over $130,000 per year; a national labor management trust fund who expanded its commitment to our mobile messaging platform by over $110,000 per year and who…

Thanks, Tim. At this time we're ready to open the call up for Q&A.

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

Do you hear me okay?

Yes.

Maybe this is for Jack and for Tim here. A couple of questions. You had really good customer expansion. And I guess, I'd love to understand a little more the trends you're seeing in like total products per customer as that involves cross-sell, when you think about existing subscriptions within a group or is it moving to multiple departments? How are you thinking through that from a single product perspective and then sort of a cross-sell? So I guess the cadence of how a customer expands, it will be great to understand a little bit more of.

Sure. This is Jack. The emphasis in terms of our numbers remains on expansion, selling more of the same product that got us in the door. That's what the numbers are based on. We don't need cross-sell to make our numbers there icing on the cake. That said, we've laid the predicate, we think, for more cross-sell in a number of ways. What we've done around single sign-on, around unified user interface, around the Upland Integration Manager for data exchange amongst the products and the way that we have grouped the products around common economic buyers and the way that now, with these additional acquisitions, we're increasing our product offerings for those economic buyers, thus increasing the prospect of cross-sell velocity. So we feel good about all of that, and we are beginning to make a little bit more investment in sales, again, while we continue to expand with scale our adjusted EBITDA margins. But we will hold on to more of the sales capacity on the next few acquisitions we've done like we did with Qvidian, where we kept the sales force and then we haven't really done prior to that. So again, laying the groundwork for it, it's icing on the cake in terms of the numbers. But I think we're making a lot of the right moves to set up for that. And let me let Tim offer his perspective.

Yes, Bhavan. Jack hit the main points there. The only thing I would add with respect to expansion is in 2017, we really did in earnest, launched our Premier Success program, which is the Platinum and Gold offerings of enhanced services to deliver even more value to customers. So we get some nice expansion from those offerings, and I touched on one example of a customer doing that earlier. Also, with cross-sell, we are looking at ways to introduce the products more naturally into the environment. Jack touched on some of the benefits of buying multiple products from Upland. We announced this past year Upland Analytics, which is a reporting engine that will be shared across products that's based on our Upland ComSci ITFM analytical engine. And we think that will also help deliver more value for folks operating with multiple products. They'll also be able to connect to other third-party sources of data to do reporting and analytics in those environments as well. So those will help contribute. I would also say that a couple of our more recent acquisitions have fairly broad applicability across the customer base. So if you look at bids and proposals, automating that as a need across a number of companies, is very relevant to introduce, as well as both knowledge management and then our mobile messaging area, which we've owned for longer. So we have really three products that generate fairly good interest there, and we're looking to activate that pipeline more than we have in the past. Hope that helps.

That's very helpful. And the business proposal, it's interesting because the other side of it is guys like Salesforce acquired Steelbrick CPQ, which is Configure Price Quote, in response to business proposals. So it feels like there's a ton of automation to be done there. So that definitely looks interesting. I guess, just a couple a bit, we talked about expansions. You've also seen a really healthy pick-up in new customers for pretty much every quarter this year, including this one. So just some sense of what you're seeing there. Is it the vertical? And the question is who are you displacing? Is there a specific guy you're displacing in the three sort of steel pipes and steel pipes is not the word, the three kind of -- they're not vertical -- the three horizontal areas you play in -- three markets you play in. Who are you displacing? And sort of how is that playing out? So is any verticals that are sort of driving the new customers and then who's the displacement?

Sure. I would offer, in terms of Q4, the top verticals for us were really finance, insurance and real estate, membership organizations, so sometimes, you have NGOs or the like, and then manufacturing. So we saw a lot of activity in those three verticals. And sometimes, it's replacing an incumbent who's fallen down. Sometimes, it is automation of what was being done manually. And sometimes, it's introducing a new capability that an organization's never really availed themselves of, and you find out in the mobile messaging area in particular. So it is a mixed bag in terms of what's occurring there. But we are able to introduce the products successfully. Again, we don't emphasize new customer acquisition, but we're able to get that principally through referrals and from former supporters or supporters who've left their company, they go to a new company. They know what we can do for them and our commitment to their success, and they bring us in, and they look for us actively to help them in what they're doing. So that's where we really source a lot of that. We are experimenting with marketing motions with an eye towards how we can efficiently generate pipeline. But a lot of it really rests on our existing customers and as they go to new companies and tell their friends about what we're doing.

Got it. And then one final one from me. I'll move for Mike, so sorry you can't just sit in there. Mike, net dollar retention rates came down a couple hundred basis points for the year. Am I missing something? Or is that, A, just mathematically right? And then is that because of some of the new product units are weeding out some customers? Just help me understand the dynamics there.

Yes, I think really, it's pretty simple. We've always talked about mid-90%. So the 93% is still in the mid-90s there. And anything over 90%, we feel like it's very, very healthy. So we feel like we're performing well there, and we're happy about that.

Your next question comes from the line of Jeff Van Rhee of Craig-Hallum Capital.

So several for me. Just you touched on the sales or just an update because you did comment that you have kept a few more heads than normal. Where do you stand now? And how do you think about '18? Is that likely to be a trend you continue with upcoming acquisitions? Is that the start of a pattern, if you will? And then second for me, on the net promoter, just a little more color. You take these measurements. You just sort of said you're in this leadership quadrant. But I'm more curious on just what the magnitude of the directional improvements, a little more clarity on what that trajectory line looks like if we don't have an absolute measure.

Yes. In terms of the first part of the question, sales headcount now in terms of field salespeople, enterprise field salespeople, is still under 10, but it's up from really what was just 1 or 2 heads at the beginning of last summer, up to now, the high single digits, and we'll continue to grow that. That doesn't include our inside capacity and -- actually, correction on that. Total field headcount now, just over 10, so low double digits. But that doesn't include our inside sales motion, doesn't include our account managers. In terms of NPS scores, let me let Tim address it. And one other point. Yes, we will be on future acquisitions holding on to more of the sales capacity because with the UplandOne model really starting to operate at scale, we are able to hold on to that additional sales capacity while still hitting our contribution margin goals for the acquired product. So that's a very positive development. And so yes, look for us to do more of that going forward. On the NPS part, Tim can address your question.

Yes, Jeff, on Net Promoter Score, and it really -- it goes beyond the score. It's really the feedback you get from the score itself. So for those of you who are on the phone who aren't familiar with it, it's a very simple question, which is would you recommend Upland to your friends and colleagues? Scale of 0 to 10, 9s and 10s are promoters. That means they're delighted with what you're doing. Zero through six are detractors. They really don't like what you're doing. And so the zero would actively advocate against you in the marketplace. And 7 and 8s are neutral, if you will. So you take the number of promoters, subtract the number of detractors and divide by the total number of respondents, that gets you your Net Promoter Score. And I'll tell you, there's lots of ways to perfume the pig in this thing. You'll do the survey in such a way that leads the witness, and we've really taken the purest approach in this and using Fred Reichheld's strict methodology that came out of Bain's. So as we've done that, we're able to compare across industries and those that use common methodology, that's the beauty of using sort of this spartan approach. And we've been trending up. And we organized our activities around that, the feedback we receive from that survey. We certainly take input into our product roadmaps, that's very important. We take input into something as mundane as invoicing and collections that have our folks interacting with us on that dimension and really trying to chip away at the things that are upsetting customers as well as doubling down on those that delight customers. And to me, the absolute number doesn't matter quite as much as both the trend as well as the feedback and the processes in place that reinforce that continuous improvement culture that we have here at Upland. So we use that to further improve our UplandOne operating platform and, frankly, weed out activities that don't matter to our customers. So that's how we use it, and you'll hear more about that in the future, typically, without referring to NPS, but more around operations improvements that we're working on.

Okay. And I guess, just the last for me. Just an update, organic in the quarter and then maybe, more importantly, Jack, to your prior comment, if at this point, obviously, you've just made tremendous leaps here in the last couple of years in the margins and as you close in on that target model and are able to keep more sales resources, how does that impact organic? How does it impact directionally your thinking about organic? So maybe just that sort of basket of questions, if you would.

Sure. If you look at organic for last year, recurring revenue growth was about 2% reported revenues. So in the positive. We've always talked about looking at the business as a flat to 5% organic grower and targeting 40% adjusted EBITDA margins and scale. We remain committed to that. We're making incremental investments to get there. And so that is the plan and the course that we're on. And but I would just say, as a matter of reality, that we don't need organic growth to hit our numbers. And we look at the value creation model that we think can result in a substantially higher stock price than we enjoy today, we get to that $250 million, $100 million of EBITDA in, let's say, in three years or 2 to 3 years with 24 million shares and a few hundred million of debt. You do the math on that, and that's the stock, it's at a much higher price than it is now. We can do that without organic growth. Organic growth is icing on the cake. But we're making the investments in a number of different ways, and we'll continue to press forward on that.

Your next question comes from the line of Richard Davis of Canaccord.

One question on like the sales motion. So if I'm a salesperson for you guys, the good news is I get kind of regular new products to sell. But you and I both know every multiproduct company has to kind of modulate and encourage and compensate sales to sell the whole suite, right, because if it's Mr. Davis, I'm lazy, I just want to sell one thing. How do you think about kind of getting your sales teams inside or outside to kind of broadly sell or cross-sell? How does that work? And then just basically, because I'm just trying to think about how you get economies of scale on that expense line item.

Sure, Richard. Tim here. And certainly, it's a huge challenge if you cram a lot of products into a rep's bag. So the approach we're taking is really to have a rep on an account or an account manager, we call it customer success manager, existing customers identify an opportunity. We're really not looking for them to push that deal through the pipeline but more hand it over to an expert in that product area who can qualify and advance of all much more efficiently and effectively. So we aren't really trying to educate and math the entire sales force to sell the entire portfolio. As I've said, there are some products that are related. They'll have the same buying centers. They'll be easy to train reps up on, and we'll take advantage of that opportunity. But our model is more to identify the opportunity and hand that lead over to the rep who's trained and the best way to execute on that.

Got it. And then something I know you guys are excited about spending more for audits, but with regard to 606, where are you guys in that process? Because we know what good value you get out of spending that money.

Richard, it's Mike. Yes, for 606, really, there's going to be no material impact on our revenue recognition. So business as usual there. Nothing to note. Now we will get a benefit from the deferral of sales commissions, so those direct and incremental costs associated with new sales. So there'll always be a little bit of cost deferral benefit there starting 2018. So a little bit positive in terms of new accounting regs and that's the impact on us.

Your next question comes from the line of Brian Peterson of Raymond James.

This is Vince Celentano on for Brian. So we've seen some macro dynamics related to interest rates, tax reform. Just curious if you can give us an update on the demand environment across product categories and how that's changed over the last few months.

Yes. In terms of pipeline for us, I mean, as Jack alluded to, we are beneficiaries of the law of small numbers because the macro doesn't necessarily affect us. Obviously, when companies have more money to spend, that's a good thing. They're not cutting budgets. They're just maintaining and possibly expanding them. So at least, from that perspective, we get a little bit of a tailwind from that. But our businesses are of the size where the macro environment affects us in that dramatic space. Michael, if you want to comment on interest rates, your view on that?

Yes. Just you're Asking about customer demand, but just bringing up the new tax law for us. It's not expected to impact us on the tax side. Cash tax is still $1.5 million to $2 million a year, and I guess, that's it.

Got it. And then can you just remind us on your dry powder and your comfort level in terms of leverage to potentially tackle more M&A?

Yes, so dry powder -- again, this is Mike. So our leverage ratio to net debt versus EBITDA is about 2.1x right now. Our existing credit facility allows us to go up to 4.5x leverage. And we feel pretty confident with that amount of leverage, given our predictable recurring revenue and cash flows. So the point being that we do have a lot of open dry powder, and we anticipate expanding our credit facility here as we go as a result of that leverage to further fuel our M&A growth.

Your next question comes from the line of Eric Lemus of SunTrust.

You talked about the AWS transition for the remaining products in 2018. Are you able to give us a little more color on the timing of that transition? Is that going to be gradually throughout the year or more of a first half or second half? And then for Mike, when these products are transitioned over as far as the benefit to the model, is that an immediate benefit or should we think about that as more of a lag time for the benefit of those transitions?

Yes. So we expect to complete the transitions by the end of Q3 of 2018. Now that's our goal. So we hope to have a little bit of gross margin improvement in Q4. Now of course, if we continue to do future acquisitions and we have those migrations that, that would happen as a result of -- future acquired businesses are in data centers and we want to migrate them, then it'll be an ongoing type of thing. But right now, the existing business, it's a Q3 type of completion with a little bit of margin improvement in Q4. I'm talking 50 to possibly 100 basis points.

AWS gives us great improvements in terms of scalability, in terms of performance, in terms of security, in terms of operational simplicity, in terms of taking the CapEx out of the equation. And so looked at holistically, a very significant move. And I'm thrilled that we've got 9 of 14 products over there already. We've got an action plan to migrate the remaining five, and it's part of the entire UplandOne initiative, and it's been a great success today.

Great. And Jack, you actually gave a little bit more color as far as the major accounts, the average contract value. Can you talk about how that number has trended over time?

Yes. Our definition has stayed consistent. And that average revenue of $100,000, plus or minus, has also stayed relatively consistent. Now I will tell you, and this sort of harkens back to some of the earlier questions, our average product per major account it's probably 1.1. So we have a huge opportunity to increase revenue for major accounts, not just through Platinum, and Tim talked about expansion, that Tim described, but also through cross-sell. Again, it's not baked into the numbers. It's icing on the cake. But I think we've laid the predicate for it, and so it will be exciting to see how that can unfold over the next few years.

There are no further questions. I will turn the call back over to the presenters.

Great. Well, thank you for that. We appreciate your time this afternoon and look forward to seeing you again on our next call so thank you, and good afternoon.