Ladies and gentlemen, thank you for standing by and welcome to the Upland Software second quarter 2018 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 for twelve months on Upland's Investor Relations website at investor.uplandsoftware.com. By now, everyone should have access to the second quarter 2018 earnings release, which was distributed today at approximately 3:00 p.m. Central Time, 4:00 p.m. Eastern Time. If you have 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. Good afternoon everyone. Welcome to our second quarter 2018 earnings call. With me on the call today are Tim Mattox, our President and COO and Mike Hill, our CFO. I am going to summarize our results on the front end of the call. Following that, Mike will provide a more detailed look at the numbers and our guidance for the third quarter and full year. And then Tim will cover sales and operations highlights. After that, we will open the call up for questions. But before we get started, Mike will read the Safe Harbor statement. Mike?

Thank you Jack and good afternoon everyone. 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 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 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, August 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 second quarter 2018 results, which is available on the Investor Relations section of our website at investor.uplandsoftware.com. Please note that we are unable to reconcile any forward-looking non-GAAP financial measures to their directly comparable GAAP financial measures because the information which is needed to complete a reconciliation is unavailable at this time without unreasonable effort. To learn more about our outreach plans, please feel free to contact us at investor-relations@uplandsoftware.com. And with that, I will turn the call back over to Jack.

Thanks Mike. So a great quarter, record quarter with strong revenue growth, including strong organic growth in reported recurring revenues, record EBITDA, a great acquisition and strong forward guidance. So let's unpack that a little bit. We had 70% growth in recurring revenues in the second quarter. Our recurring revenues broke through $130 million annualized for the first time and of course that strong base of recurring revenue continues to grow total revenues, obviously broke through $140 million. And as our guidance indicates they are moving upward toward $150 million as we move through the year. Record adjusted EBITDA with an annualized run rate of over $50 million in the second quarter. So $12.5 million in the second quarter and hitting that $50 million mark in terms of annualized adjusted EBITDA run rate for the first time, so a significant milestone there. This is the 16th straight quarter of meeting or beating guidance. So that's every quarter since going public, showing the predictability and sustainability of our model. We had a host of new product innovations which we will talk about. We had a strong growth in organic growth in recurring revenues at 6% in the second quarter. So we had 6% organic in the first quarter and here we are at 6% organic in the second quarter. The reason for that strong organic growth really is the ability to execute on a number of different fronts. We have got some growth from our products from some great acquisitions we made. We are keeping more sales headcount. We are managing churn well. We are seeing some pricing strength. We are executing against platinum support. But as we said in the first quarter, we have had some good compares. We have strong go-lives. So we are not ready to declare 6%…

Thank you Jack. Today I will cover the financial results, as Jack just said, for the second quarter and our outlook for the third quarter and full year 2018. Total revenue for the second quarter was $35.9 million, representing growth of 54%, which includes InterFAX for the full quarter, but excludes our RO Innovation since we acquired our RO at the very end of the second quarter. Recurring revenues from subscription and support grew 71% year-over-year to $33.2 million for the quarter, which includes additional revenue recognized in the quarter as a result of the completion of new customer implementations where previously revenue was deferred and now we get to recognize it. Those are the go-lives that Jack was talking about. Professional services revenue was $2.1 million for the quarter, a 1% year-over-year decrease. Perpetual license revenue was $0.7 million for the second quarter for a decrease of 61% year-over-year. Moving down the P&L to gross margins. Overall gross margin was 70% during the second quarter and our product gross margin remained strong at 72%, or 75% when you add back depreciation of equipment and amortization of acquired intangible assets, which we refer to as cash gross margins. We reached our goal of 40% gross margins for professional services. Turning to our operating expenses. Research and development expense, net of refundable Canadian tax credits, was $5.1 million for the second quarter, representing 14% of total revenue. Sales and marketing expense was $5.2 million, representing 15% of total revenue for the second quarter. General and administrative expense was $8.5 million in the second quarter representing 24% of revenue. Excluding non-cash stock compensation for the second quarter, G&A expense was $5.2 million or 14% of total revenue. Acquisition related expenses were $3.1 million in the second quarter, resulting from our recent significant…

Thanks Mike and good afternoon everyone. As Jack mentioned, I am going to take you through our Q2 results across our sales, product and operating areas. As we have said before, the UplandOne operating platform along with our commitment to 100% customer success forms the foundation the Upland model. This allows us to consistently drive greater success and improved business outcomes for our enterprise customers. Q2 was no exception. We achieved incremental growth in the number of both new and expansion customers. From a sales perspective, we expanded relationships with 217 existing customers in Q2, including 20 major expansions, which we define as over $25,000 in annual recurring revenue. In addition, 46 of our expanding customers increased their annual recurring revenue by 25% or more. Performance in our mobile messaging platform was particularly strong. We had two expansions of greater than a $250,000 in annual recurring revenue in Q2. One was a leading credit card issuer. Another one was an advertising agency. In addition, a research hospital and an apparel retailer and a nonprofit rights advocacy group, each expanded by more than $50,000 in annual recurring revenue. Our knowledge management platform also performed well. Notably, a global Internet firm as well as a European IT services firm each expanded their commitments by greater than $60,000 in annual recurring revenue. And a global medical device manufacturer expanded its commitment to our project and portfolio management solution by over $190,000 per year. In aggregate, 207 other customers expanded commitments by more than $1.2 million per year of annual recurring revenue. Our efforts to drive organic growth also resulted in 127 new customers for Upland, 17 of which were major accounts, which we define as greater than or equal to $25,000 in annual recurring revenue. For example, a global heavy equipment manufacturer committed…

Thanks Tim. So let's go ahead now and open the call up for questions.

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

Hi gents. Congratulations and thanks for taking my question. I wanted to touch on maybe first with Tim here. You have seen some really nice business here on the initiatives around cross-sell and expansions. For example, the highlights this quarter or last quarter or previous quarters have been great. I guess, as you think about that cross-sell success, that expansion success, all of it, so just what is driving that success? Are there sort of other common characteristics about the customers? Are you doing something different targeting to make sure the trend continues? Just talk to us a little bit more about what's happening there? Because this is now sort of, you guys have been pretty conservative saying, okay, don't take it as a trend, but it feels like, it's becoming a pretty common trend.

Yes. I appreciate the question, Bhavan and consistent with your Q1 question on cross-sell. I think what we are seeing is really an opportunity to take advantage of the strong net promoter scores and customer loyalty we are building up to introduce relevant offerings to customers. I do think we are still early days in this. And even though we like the trends with respect to pipeline and all, in terms of its impact on our business, we are still in the early innings here. So pattern recognition on this, certainly the most recent companies we purchased seem to have a lot of interest and relevance, whether it's knowledge management with our RightAnswers offering or even the automated bids and proposals with Qvidian. So we are seeing increased activity there,, at least in the early stages of the pipeline. We will have to see how that plays out to see how big of an impact that will have. But we are seeing receptiveness to, at least, hearing in the message right now. And as Jack alluded to, we are investing in this and we are putting more on marketing and focus around it and with the belief that it will pay off in the future. And we will just continue to let you know how we are doing on it.

Thanks Tim. And that's cross-sell. But you are obviously seeing a similar trend, even stronger, on expansion. So just maybe same question, but tied to sort of the expansion piece? Sort of obviously, yes, the product is great, the customers are happy, high NPS score driving it a bit. So as you really think about it, it's something we have seen that we haven't seen, gosh, let's say, with PowerSteering or Tenrox at the same scale two or three years ago? So I guess, is there something new you are doing? Obviously new products help, but from an expansion perspective sort of what's driving that?

Sure. So the next level of detail on that, we have been instrumenting the products to look at usage in a more detailed basis and therefore targeting customers that have spiked their usage. That's been helpful in terms of honing in on opportunity. Certainly, just organizationally focusing on it and making it a priority has been helpful. As you know, you can focus on a myriad of things, but if you can net it down to just a select few, you can have more impact. And our customer success management team is very good, very adept and useful way for us to have the dialogue around this area. And as we talked about before, we segment how we handle it with the customer success managers being able to handle smaller deals and the larger deals being handed off to our growing enterprise account executives. And that seems to be a good formula for deepening relationship and making that happen. We also have enhanced our customer communication program, particularly with our largest customers. We have alluded to this in prior calls, but we now have it fully in place where we have an executive outreach program where an Upland executive is speaking with a customer executive twice a year out of the cycle of renewals or any kind of deal going on, just to hear how we are adding value, anything in the way of us adding even more value and just hearing about the business goals of that executive. And that I think uncovers more opportunity, both in cross-sell and expansions and feeds that top of funnel activity. Just a little more color on how expansion is helping.

That's really helpful. And then one quick one for Mike. Through I do miss hearing from Jack. On gross margins, they increased pretty significantly 71.7%, Q1 to Q2, just the dynamic at play here? So was it Qvidian or InterFAX, just high gross margin, sort of what's driving that? Thank you.

Yes. Bhavan. Thanks for the question. It's the change. Most of it's the change in the mix of the companies that we are adding through the M&A. So InterFAX coming on and so I think it's really just a change in the mix. It's not necessarily the AWS improvement yet because we are still doing the double bubble on that. We will still expect to see a 50 basis point improvement or so in Q4 once we get through with the double bubble costs of the lift and shift migration to AWS there as well. So that's really the story.

Got it. Thanks guys. And congratulations. Thanks for taking my question.

Thank you.

Your next question comes from Scott Berg from Needham.

Hi everyone. Congrats on a great quarter and thanks for taking my questions. Just I had two. And my first one is follow-up to Bhavan's question around general margin leverage. As you get to your $250 million, at least, shorter term goal and the 40%-plus EBITDA margins that are associated with that revenue goal, how much of that margin expansion comes from the gross margin line do you think versus leveraging incrementally operating expenses?

Scott, it's Mike. I will take one. Thanks for the question. Yes, most of it's going to come from leverage of the shared service organization as we scale, as we talked about, to the $250 million-plus of annualized revenue to get to that 40% adjusted EBITDA margin target for the whole company. So yes, most of those costs are in OpEx as opposed to direct cost of revenue. And so that's going to be the answer.

Helpful. Just to know after the big move this quarter, is that viewpoint might be a little bit different, but helpful there. And then Jack, a follow-up to a couple of the comments that you made around managing churn well and pricing strength. Are you seeing any changes to churn from a positive perspective, obviously, that number is going down, I think your comment may indicate that? And from a pricing strength, any color there in terms of what that strength looks like? I don't know if it's a percentage or maybe less discounting involved? Anything there would be helpful. Thank you.

Sure. What I love about the Upland model is that it's not a one-trick pony, right. We are making forward progress in a number of different areas. And when we talk about our plan around incremental organic growth, right, we are talking about four or five or six different areas where we think there is 50 to 150 basis points of potential incremental growth. And the base for that really is what Tim alluded to earlier. The work that we have been doing around 100% customer success, the impact that that had on our net promoter scores, the positive impact that that has had and that's really setting the table for us for all of the opportunities that we see around expansion, around stronger renewal rates, around the early inning success that we are starting to see on cross-sell, around our ability to upsell platinum support. In addition to that, as we continue to scale the business and the platform, we have introduced more systemic uniform price increases which again early stages here. It's only been probably 130 or 140 days now. We are just really through a month cycle, you know full cycle, renewals cycle on this and we are seeing some good results on that. And that was really a function of getting the systems in place so that we could implement those uniform price increases, which are modest but again added to all of the other arrows in our quiver that I just went through, have contributed to some of the strength we are seeing an organic growth. Again, in addition to the compare and in addition to some of the go-lives that Mike referred to. So there you go.

Super helpful. Thanks again and congrats on a great quarter.

Thank you.

Your next question comes from Jeff Van Rhee from Craig-Hallum.

Hi guys. This is actually Austin, on for Jeff. Just one question on the sales org. Could give a little bit more color around the size and the structure of the sales force right now? Just field direct or telesales or other?

Sure. So I think the biggest piece of news there is that we have brought onboard a head of sales in the last quarter, a quarter plus, which we did not have or not had a head of sales for the quite a period of time here. And I think it really was the right time to do it. We were on a journey. We talked about Upland as a four chapter story with M&A for critical mass being chapter one, getting that uniform operating platform in place being chapter two, margin expansion being chapter three and of course we have gone from 0% EBITDA margin, 2% or 3% anyway in the first quarter of 2015 to 35% in the current quarter on the way to our long-term goal of 40%. And as Mike alluded to, the journey from 35% to 40% is more about G&A leverage than anything else. So that gives us the ability to begin peeking around the corner toward organic growth and obviously looking at our marketing and sales investment is a key part of that. So spending roughly 14% to 15% of revenue on sales and marketing but delivering a very efficient way with a combination of inside sales and field sales as well as strong channel and some OEM relationships. And so the biggest sort of difference here is on the field side, where that number is now in the mid-teens and where we have a professional head of sales in there. And again I don't even know that you are fully, I know in fact we are not really seeing the full impact of that yet because we are still on a ramp-up mode on it. And we talked about the fact that by the end of this year we want to see that sales headcount in the 20-plus range and that most of that growth will come through retaining sales forces on future acquisitions, which continues to be the case, right. But we have also made some organic hires in the sales and we have upgraded the quality of our sales force. So even where headcount hasn't changed, we have brought in better people. And frankly, the success the company has had, the strength of our product array has put us in a much, much better position. We are bigger and we are stronger and so we are able to attract even better people. So that's the story there.

Okay. That's it for me. Thanks.

Your next question comes from Brian Peterson from Raymond James.

Hi gentlemen. Thanks for taking the question. So I wanted to hit on the strong expansion activity. So you referenced around 200 customer expansions reached over the last three quarters. Is there any way to quantify what the split is between upsell versus cross-sell and how that's trended over the last few quarters?

Yes. I would say that the vast majority of the activity to-date is upsell as opposed to cross-sell. And they are better than a half-dozen good cross-sells and some of them were purposeful and some of them just came from the fact that we had more than one channel into a given customer account. But this is still today principally an upsell model, which is good actually, because the cross-sell piece of it, as we have talked about, is icing on the cake, right. We don't need it to make our numbers, but it is upside. So that's the way I would characterized it.

And Jack, maybe as a follow-up on that. As we think about, as you phrased it peeking around the corner towards organic growth, do you think as we come around the corner, is upsell going to be the first wave of that? Or do you guys actually think there is a sales team in place now to go and kind of attack the new logos?

No. I think it's all of those things. So if were starting from a baseline organic growth of last year, for example of maybe 2% and we talked about the various contributors to incremental organic growth, clearly the sales force is probably the biggest of the opportunities because we were just understaffed on field sales. So adding that head of sales, holding on to the sales forces of the acquired businesses, there is an opportunity there of between 50 and probably 200 basis points, right. Incremental gross dollar renewal rate is probably another 50 to 150 basis points. Platinum upsell, pricing strength, again another 50 to 150 basis points. And then cross-sell, I would put in the same category. Now if you added all that up, it takes you to a higher organic growth rate than we are experiencing currently. But we are not going to execute perfectly against that, right, few ever do. So that's why we remain sort of conservative in our outlook here with the flat to 5%, but we continue to execute. And by the way, again, setting the predicate not only in terms of customer satisfaction through our customer support and customer outreach that Tim mentioned earlier, but also investing in these products because we have got a very efficient R&D engine. That 15% investment that we are making in terms of R&D expense as a percentage of revenue is able to drive real innovation. And now we are seeing opportunities, as Tim mentioned earlier, to combine products, to put relevant bundles together like we have done with for example, the knowledge management product being integrated into a number of other products like our PSA solution and what we are doing with Upland Analytics, taking the ComSci analytics engine and employing that across multiple products now. So it's a multipronged approach which I like because to me, you can just continue to just day in and day drive incremental growth, but you are putting all your eggs in one basket.

Great. Thanks Jack.

Your next question comes from Terry Tillman from SunTrust.

Hi guys. This is Eric Lemus, on for Terry. Nice job on the quarter. I wanted to touch on guidance for a second on the top line. It's been a little over a month when you guys updated guidance following the RO Innovation acquisition and guidance on the top line went up pretty significantly. Is there anything that you saw within that month timeframe, whether it be early success in the third quarter or just a better pipeline that caused you to raise the guidance? If you could just unpack that for us, that would be great.

Yes. Eric, this is Mike. Really, the things we have been talking about, the expansions, the bookings, is what really is coming through. The company is performing. Things are happening. And there is a whole bunch of sort of smaller pieces that end up contributing to that incremental guidance increase. But the good news is, it's sort of spread all over the company, the different product lines and so forth. So there is not really a fundamental, hey, this is the big reason why. It's very nicely diversified. So is that makes sense, that's really mostly what we can say.

Okay. Thanks Mike. And then looking in the area of sales enablement, we have been doing a fair amount of research in this area and it seems like to be a pretty good growth area in the market at this point. So is there any thought in the you guys are leaning as far as putting more resources specifically towards sales enablement? And then also how do you guys view the competitive environment for sales enablement?

So I would say it's an area of interest. And so we have a pipeline of opportunities in that area. But you know us, right. We have got a multi-filtered approach when it comes to M&A. So we want a strategic fit, but we also have to have the financial criteria. We have got to have sticky products with high net dollar retention rates. We need high cash gross margins. We want the right kind of Fortune 2000 customer base. We want the right sales efficiency in the business so that we can drive positive organic growth within the construct of our model. And we want to be buying within that five to six to seven, maybe, times pro forma EBITDA multiple that we talked about. So we are interested in it. And we have some pipeline opportunities there but we will continue to exercise the same discipline that we always have. But I am pleased to hear that you are seeing the same opportunities in that sub-segment that we are. And then just more broadly, since we haven't really talked about it as much, we are seeing a very strong M&A pipeline. It's been now, I think, six deals in the last six quarters. And while we never guarantee timing on M&A, the pipeline is robust. We see nice sized opportunities in there. And as Mike mentioned in his remarks earlier, we are in great shape from a resources standpoint in terms of cash on hand and access to credit facilities as well as operationally to integrate these products. So we feel very good about that as well.

Okay. Great. Thanks.

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

Okay. Well, again, thank you all for your time this afternoon on behalf of myself and Mike and Tim. We appreciate the interest and we will see you next quarter. So thank you.