Thank you for standing by, and welcome to the Upland Software Second Quarter 2025 Earnings Call. [Operator Instructions] The conference call will be recorded and simultaneously webcast at investor.uplandsoftware.com, and a replay will be available there for 12 months. By now, everyone should have access to the second quarter 2025 earnings release, which was distributed today at 8:05 a.m. Central Time. If you've not received the release, it's available on Upland's website. I'd now like to turn the call over to Jack McDonald, Chairman and CEO of Upland Software. Please go ahead, sir.

Thank you, and welcome to our Q2 2025 earnings call. I'm joined by Mike Hill, our CFO. On today's call, I will start with a Q2 review. And following that, Mike will provide some detail on the Q2 numbers and our guidance, and then we'll open it up for Q&A. But before we get started, Mike will read the safe harbor statement.

All right. Thank you, Jack. During today's call, we will include statements that are considered forward-looking within the meanings of the securities laws. A detailed discussion of the risks and uncertainties associated with such statements is contained in our periodic reports 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. We do not intend or undertake any duty to release publicly any updates or revisions to any forward-looking statements. 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 financial results, which are available on the Investor Relations section of our website. 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. And with that, I'll turn the call back over to Jack.

All right. Thanks, Mike. Here's the headlines. In Q2, we beat our revenue and adjusted EBITDA guidance midpoint. Significantly, we returned to positive core organic growth. So we're starting to see the benefits of our focused growth strategy zeroing in on markets where we've got the strongest competitive advantage, higher margins and largest growth opportunities. Now as a part of that, we have divested a number of assets over the last year, 18 months. And so if you look at our year-over-year declines in total and recurring revenue, those declines were primarily due to the divestitures that we've completed to streamline and to focus our business. But the growth rate of our retained core assets has turned positive. So that's a meaningful milestone for the business. Q2 2025 adjusted EBITDA of $13.6 million resulted in adjusted EBITDA margin of 25%. Now that's a 500 basis point increase over our adjusted EBITDA margin of 20% in Q2 of 2024. So as we have divested assets as a part of our growth strategy and focused our business, we have divested our lowest margin assets, and now we're starting to see adjusted EBITDA margins come up as a result, and Mike will talk about this in the guidance, but we see adjusted EBITDA margins moving to north of 30% in Q3. Free cash flow for the second quarter remained strong at $2.7 million, and that was burdened by about $7 million of onetime divestiture-related expenses. Those onetime divestiture-related expenses were mostly related to the termination of a legacy vendor outsourcing contract for R&D that we no longer needed now with the streamlined business and our India center of excellence being fully up and running. Terminating that contract cost us a little cash upfront, but it is one of the factors that is driving…

All right. Thank you, Jack. I think Jack covered most of the points on the financials for the quarter, so I'll just make a few additional comments here. For the Q2 income statement, revenues were as expected when taking into consideration our recent divestitures. Q2 gross margins increased from Q1 as expected as a result of higher margins realized on our ongoing product lines. Our adjusted EBITDA and EBITDA margin came in as expected with our adjusted EBITDA margin of 25%, up from 20% from the second quarter of 2024. We see adjusted EBITDA margin expanding to over 30% in the second half of 2025 for full year adjusted EBITDA margin of around 27%. For cash flow for the second quarter of 2025, GAAP operating cash flow was $3.3 million and free cash flow was $2.7 million. Our Q2 operating and free cash flow included around $7 million of onetime divestiture-related expenses without which our GAAP operating and our free cash flow would have been greater. In addition, we had some onetime leasehold improvements, capital expenditures during Q2 as a result of our corporate headquarters office move, and we expect the CapEx to reduce back down to normal levels here in Q3 and going forward. Our full year 2025 target free cash flow is around $20 million. On the balance sheet, at the end of Q2, we had outstanding net debt of approximately $217 million, factoring in the approximately $41 million of cash on our balance sheet. At the end of Q2, our gross debt was approximately $258 million. As mentioned earlier, we successfully refinanced all of our outstanding debt on July 25. In connection with this refinancing, we paid down an additional $18 million of outstanding debt. So after this refinancing, our total outstanding debt is $240 million compared…

All right. Thanks, Mike. So that really concludes the call, the prepared comments. If there are any questions, we'd be happy to take them.

[Operator Instructions] And your first question comes from the line of Scott Berg with Needham.

Both of them, I guess, kind of surround the refinancing in the quarter, and then I've got probably one quick one on the core business. On the refinance, I guess, first of all, why is private credit the right option versus maybe the other facilities that were out there? And then as you think about excess cash flow over the next, I don't know, a couple of years, do you save and reserve those for M&A? Or is the plan to probably use those to further pay down the debt?

Yes. So Scott, let me take that first one. So regarding private credit, our previous credit facility was a Term Loan B financing. And given that we've paid down so much debt, again, paid down $242 million of debt since the beginning of last year, this current term facility at $240 million, it's just really below the size range for the TLB market -- credit market. So it made sense for us to move to private credit, and we're excited and feel great about our new partnership here with Sound Point.

And Scott, there was -- I think a second part of your question on capital allocation. And cash flow is going to be directed toward deleveraging. We don't anticipate M&A at this point.

Okay. Fair enough. And then I guess my follow-up question is on the core business here going forward. You're projecting 3% growth in the second half, which obviously is great news. But how do we think about maybe the products or part of the portfolio that is selling well today in this macro. You guys have obviously made a lot of changes in the product and the go-to-market. But what's been most exciting that you're kind of looking at in the second half?

We've streamlined our business around knowledge and content management, and we are AI enabling our portfolio. And we are seeing opportunities in large enterprises as our products become an integral part of larger enterprise LLM implementations. So we're seeing headless knowledge management opportunities for products like Upland RightAnswers. Upland BA Insight provides core connectors to enterprise data systems, which are a necessary part of large enterprise AI implementations. We're also seeing demand for upgrades for our RFP automation product, Qvidian, with our new AI assist capability. So we think AI can be a tailwind for the business, both in terms of a number of our products playing key roles as enabling technologies for larger enterprise AI implementations and the fact that we are improving and innovating our products across the board with AI, creating upsell and expansion opportunities within the existing customer base.

And your next question comes from the line of DJ Hynes with Canaccord.

Scott hit on a couple of the topics I was going to ask about, but I want to just put a finer point on your comments around M&A. It was unclear to me if that was a near-term comment or if we look out a year from now, kind of dust has settled on the divestitures, the business is obviously in a much better spot, organically growing, nicely profitable. Is there a future in which you resume M&A activity? Or is this going to be kind of a perpetually organic growth story?

I think it's a near-term comment. I think we are focused on driving organic growth, AI enabling the portfolio and continuing to delever here over the next year. But as you say, when the dust settles from all of that, if we see attractive opportunities, then we would look at them together with our capital partners. And it is possible that we could look at M&A. I don't see it for this year, but as you say, it's possible a year or so out once the dust settles.

Yes. Okay. Makes sense. And then, Jack, I'd love to just kind of hear broadly how you feel about the demand environment, kind of what you're seeing from a pipeline build perspective with some of the marketing enhancements you've made to the business?

Demand environment seems fine. As I say, we, I think, positioned the product so that AI can be a tailwind for us. We continue an investment in Demand Gen, and we are seeing increasing -- if you look at the business over the last 5 quarters, increases in marketing sourced bookings, so both our outbound and inbound efforts. We've recently rolled out intent data to supplement the books of business that our outbound SDRs are using. And so we are optimistic about the potential for that new technology to increase our pipeline generation. So that's the basic picture as we stand here today.

Yes. That's great. Well, congrats on all the progress. Clearly, a cleaner and better picture emerging here.

[Operator Instructions] And your next question comes from the line of Jeffrey Van Rhee with Craig-Hallum Capital Group.

A couple for you, Mike, and then one for you, Jack. Just Mike, on the free cash flow, I think the previous guide had been $15 million, so you're bumping it up here. Just walk me through what drove the change, kind of what were the puts and takes that impacted that number?

Yes, Jeff, no problem. Yes. So we had a little bit less divestiture-related expenses than we were previously forecasting, one. Two is we did sell our swaps here in Q3. And so we got a little bit more cash on the sale of those swaps in conjunction with the refi. And then three is that the cash taxes that we were investing to be around $10 million this year are probably going to be less than $9 million as a result of the new tax legislation in the new bill. So anyway, 3 sort of reasons why we were able to go ahead and raise the free cash flow outlook this year.

Great. That's helpful. And then on the sequentials, I know you were running off the tail of the divested revenue, I believe, in Q2. How much of the revenue in Q2? What was the divested -- how do I frame that? What was the revenue from those businesses that have been divested in Q2?

It was about $4 million, $5 million there, Jeff.

Okay. Got it. Helpful. And then, Jack, just curious, back to the prior question, kind of the sales org and maybe just a little more thoughts expansion around what's working, what's not, puts and takes on the sales organization, opportunities to further enhance top line organic growth? Is it really centered around, as you were talking about top of funnel sort of sales process optimization execution? Where does product innovation fall in the sort of the priority list of opportunities to accelerate top line growth? Just ultimately, what's going to drive that top line growth acceleration?

Yes. So we've done a ton of work over the past year, 18 months to AI enable the product portfolio, particularly those key growth products that we think are going to drive organic growth for us going forward. So I think from a product perspective, we're in pretty good shape. Now look, obviously, we're constantly innovating and moving the portfolio forward. But as it relates to near-term core organic growth, I think we've got a competitive set of products with which we can win in the marketplace and the actions we've taken to streamline and focus the business further support that. In terms of where we need to execute and frankly, where we can execute better, again, on pipeline generation, we've made big progress, and we're seeing that in increases in marketing sourced bookings. But frankly, I think we could be doing better on our outbound efforts. So our inbound efforts are good. All the investments we made around SEO optimization and online presence helping that. I think continuing to fine-tune our outbound lead gen efforts using intent data, I think, will be important for us. Around sales execution, the theme over the last 6 months, 9 months has been hiring in more domain expert sellers. And so we've added a significant number of new salespeople that have come out of direct competitors with a number of years of experience under their belt and really invigorating the sales force with that kind of domain expert talent. So that would be my answer.

[Audio Gap] Jack McDonald's for any closing remarks. Jack?

Okay. Thank you very much for your questions, and we look forward to seeing you on our next earnings call. Thanks very much.

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