Participants

Jack Mcdonald; Chairman of the Board, Chief Executive Officer; Upland Software Inc

Mike Hill; Chief Financial Officer; Upland Software Inc

David Hynes; Analyst; Canaccord Genuity LLC

Jeff Van Rhee; Analyst; Craig Hallum

Alex Sklar; Analyst; Raymond James & Associates, Inc.

Presentation

Operator

Thank you for standing by and welcome to the Upland Software fourth-quarter 2024 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 fourth-quarter 2024 earnings release, which was distributed today at 9:05 AM, Eastern Time. If you have not received the release, it's available on Upland's website.
I would now like to turn the call over to Jack McDonald, Chairman and CEO of Upland Software. Please go ahead, sir.

Jack Mcdonald

All right. Well thank you and welcome to our Q4 2024 earnings call. I'm joined today by Mike Hill, our CFO. I'll start the call with some review of Q4, and Mike's going to provide some additional detail on those numbers. And he'll also go through our guidance for Q1 and for the full year 2025. After that, we'll open the call up for Q&A, but before we get started, Mike will read the Safe Harbor statement.

Mike Hill

All right. Thank you, Jack. During today's call, we will include statements that based on our views and assumptions as of today, that are considered forward-looking within the meanings of the securities laws. A detailed discussion of risks and uncertainties associated with such statements is contained in our periodic reports filed with the SEC. We do not intend to 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. Please see our earnings release for information on the non-GAAP financial measures that we will discuss on this call. Our earnings release also contains reconciliations of these non-GAAP measures to their most comparable GAAP financial measures except for any forward-looking non-GAAP financial measures because the information needed to complete a reconciliation is unavailable at this time without unreasonable effort.
With that, I'll turn the call back over to Jack.

Jack Mcdonald

All right. Thanks, Mike. So the headlines, we had a good Q4. We beat on recurring revenue, and we met our adjusted EBITDA guidance midpoint. Our core organic growth in Q4 was flat, but we are seeing some positive growth momentum, and we are guiding to 2.5% core organic growth here in 2025. In addition to that, adjusted EBITDA margins are increasing in 2025 by 400 basis points. So we're seeing some progress both in terms of growth and in terms of margins.
Our net dollar retention rate was 96% at the end of 2024, an improvement from 95% in the prior year, and we're targeting continued improvement for 2025. Q4 adjusted EBITDA was $14.9 million, which was up sequentially from Q3 and continued our growth in each quarter in 2024.
Q4 free cash flow came in stronger than expected at $9 million, which brought our full year 2024 free cash flow to $23.4 million. We welcomed 110 new customers to Upland in Q4, which includes 21 new major customers, and we expanded relationships with 291 existing customers, including 42 major expansions.
On the product front in Q4, I'd note that we earned 76 badges in the G2 Winter 2025 market reports, which was up from the prior year. RightAnswers and Panviva continued to earn many badges. BA Insight and Qvidian also received notable recognitions along with other Upland AI-powered solutions.
Upland InterFAX has expanded its partnership with Konica Minolta Business Solutions, which is a global leader in workplace technology, and the strengthened partnership positions InterFAX as a go-to cloud fax solution for Konica Minolta's extensive multi-channel customer base across North America.
Upland was also recognized in the IDC MarketScape Worldwide Digital Fax 2024 Vendor Assessment and also was named in the IDC Market Glance: Knowledge Management report in the fourth quarter. Upland is dedicated to delivering AI-enabled solutions to improve knowledge sharing and improve business outcomes.
Subsequent to year end, we divested two non-strategic underperforming product lines. Those divestitures lowered our 2025 revenue guide by about $18 million but had no adjusted EBITDA impact. So these were not products that were generating margin for us.
These divestitures further simplify and focus our business on our best growth products. They reduce our execution risk and improve our core organic growth rate. With the proceeds from those sales, as well as free cash flow and cash on hand, we pay down debt by $33 million to date here in 2025. Now that's in addition to $189 million in debt paydowns that we made in 2024.
Mike will talk about this in more detail with the guidance, but our 2025 outlook at the midpoint equates to approximately 2.5% core organic growth, and we are targeting higher looking to exit 2025 closer to mid-single digits core organic growth. It's a good turnaround, the 2.5% is, from our 2024 average quarterly growth rate of negative 1%.
So 350-basis-point improvement and as I mentioned earlier, our adjusted EBITDA margins are also moving up in 2025. So they'll be going from 20% adjusted EBITDA margins in 2024 to 24% adjusted EBITDA margins in 2025.
So we've made an important turn in the business. Core organic growth rate turning positive, retention rates improving, adjusted EBITDA and adjusted EBITDA margins are growing. So with that, let me turn the call back over to Mike.

Mike Hill

Well, thank you, Jack. I think Jack covered most of the points on the financials in the quarter. So I'll just make a few points, additional comments here. For the Q4 income statement, revenues were generally as expected and gross margins stayed constant for the quarter.
Adjusted EBITDA margin improved to 22% in Q4, up from 19% in Q4 of 2023. As you can see, adjusted EBITDA grew sequentially across 2024, starting with $13.1 million in Q1, $13.6 million in Q2, $14 million in Q3, and as Jack said, $14.9 million in Q4.
For the fourth quarter of 2024, GAAP operating cash flow was $9.3 million and free cash flow was $9 million, bringing our full-year 2024 free cash flow to $23.4 million. Now, as a reminder, our GAAP operating cash flow and free cash flow in the prior year, 2023, was benefited by the $20.5 million one-time cash gain from the sale of half of our interest rate swaps. Now, I also note that we are targeting full-year 2025 free cash flow in the range of $20 million to $25 million.
On the balance sheet, after about $33 million of additional pay downs year-to-date in 2025, our gross debt currently sits at about $261 million, almost all of which is hedged to effectively lock the interest rate at 5.4%. Cash flow permitting, we plan to continue paying down debt by up to $2 million per month.
As we discussed on past calls, our outlook for 2025 continues to reflect the previously announced runoff of Sunset Assets revenue, causing our top line to continue to decline. That said, our core organic revenue growth outlook is projected to improve to approximately 2.5% growth in 2025.
As mentioned, subsequent to year end, we divested two small non-strategic product lines. These divestitures lowered our 2024 guide by approximately $18 million but are projected to have no material impact on our 2025 adjusted EBITDA.
For the quarter ending March 31, 2025, we expect reported total revenue to be between $59 million and $65 million, including subscription and support revenue between $56.4 million and $61.4 million for a decline in total revenue of 12% of the midpoint from the quarter ended March 31, 2024.
First quarter of 2025 adjusted EBITDA is expected to be between $11.2 million and 14.2 million for an adjusted EBITDA margin of 20% at the midpoint. This adjusted EBITDA guidance at the midpoint is a decrease of 3% from the quarter ended March 31, 2024. Now, I will note that the first calendar quarter of the year is always more heavily burdened by US payroll taxes compared to quarters later in the calendar year, as well as this first quarter of 2025 was burdened additionally by continued costs related to those divested assets where those costs would have been removed earlier had we not divested them.
For the full year ending December 31, 2025, we expect reported total revenue to be between $231.5 million and $255.5 million, including subscription and support revenue between $218 million and $238 million for a decline in total revenue of 11% at the midpoint for the year ended December 31, 2024. This guidance at the midpoint reflects core organic revenue growth of 2.5% for 2025.
Full-year 2025 adjusted EBITDA is expected to be between $53.5 million and $65.5 million for an adjusted EBITDA margin of 24% of the midpoint. The adjusted EBITDA guide at the midpoint is an increase of 7% from the year ended December 31, 2024. And with that, I'll turn the call back over to Jack.

Jack Mcdonald

All right. Thanks, Mike. We are now ready to open the call up for Q&A.

Question and Answer Session

Operator

(Operator Instructions) David Hynes, Canaccord.

David Hynes

Hey guys, nice to see the improving organic growth outlook. Good work there. Jack, it looks like the two products we're getting the most accolades are RightAnswers and BA Insight. Obviously, knowledge management and enterprise search are pretty foundational to any AI strategy, which makes me think there may be an underappreciated AI story at Upland. Can you just talk a little bit about that and maybe highlight some of the key use cases you're seeing?

Jack Mcdonald

Yeah, absolutely. So over the past couple of years, we invested in building a center of excellence in India, and we have used that development capacity, as well as the rest of our both domestic and international teams, to make a significant investment in products. And we have AI-enabled 80% of our core content and knowledge management product portfolio.
So, if you look at products like BA Insight, we see a very attractive -- there's always been a strong enterprise search use case for BA Insight, which is now AI-enabled. But BA Insight itself is an AI-enablement platform that connects enterprise LLMs to proprietary enterprise data sources because that platform, BAI, has over 90 enterprise connectors that solve the last mile problem for enterprises that are looking to implement enterprise AI strategy. So a lot of excitement there around AI.
Panviva. We recently announced Panviva Sidekick, which is an AI-driven agent assistant, which helps contact center agents deliver real-time contextual knowledge to customer service reps. Qvidian. We have rolled out AI Assist, which is an AI-powered tool for automating RFP and proposal responses, and that integrates with both OpenAI and with IBM Watson. And we're starting to see, as you look at it, some pretty substantial sales opportunities around those products.
So, in Q4, for example, for Qvidian, for that AI Assist product, we had a $500,000 ARR sale to a major technology company, rolling that out as their of record knowledge management and RFP proposal automation platform. So really starting to see some traction there. And of course, RightAnswers as well with our integration with OpenAI's Chat GPT to enhance search and automate content creation and streamline customer content.
So seeing it across the board, we believe it's going to be the foundation for our growth. Obviously the 2.5% is the beginning. We're looking to go a lot higher than that through time, but I think you're spot on. Our AI strategy is going to be central to getting our growth rate up over the next couple three years.

David Hynes

Yeah. Perfect. That's helpful color. Mike, maybe a follow up for you. Just where are we in the asset unwind strategy? Like how much recurring revenue do you think there still is left to come out of the model? And then maybe a follow up to that, like the $18 million that was divested this year, like what were the net proceeds to Upland for those businesses?

Mike Hill

Yeah, the sale prices were about $10 million, and as far as the decline in the Sunset Asset revenues, we went from about $32 million last year in 2024, it'll be about $14 million this year in 2025. And then looking at 2026, it's probably down to around $6 million or so.

David Hynes

Okay. All right. Perfect. Awesome. All right, I'll hop back in the queue. Thank you guys.

Operator

Jeff Van Rhee, Craig Hallum.

Jeff Van Rhee

Mike, just to follow up on that last one, just to be clear, you said $10 million for the businesses. That's $10 million in total, not $10 million per?

Jack Mcdonald

Correct.

Jeff Van Rhee

Okay. Got it. So high level just maybe check on the -- they see, $150 million preferred that they did in July of '22. A lot of the skill sets that they were bringing were around sales. I know you focused a lot on that. Obviously, your guide is suggesting you're getting some traction. Just love maybe a brief fly by, very brief history lesson on what's going on with go-to market; where we were, where we are, what you think we're going to do this year?

Jack Mcdonald

Yeah, so, right, I think the finger roll on that would be, what have we done since the HGGC investment. So, one, we've sold our Sunset non-core products, right, to further focus our product portfolio. As I mentioned a minute ago, we've built out that efficient India-based software development function.
And we have made a significant investment in products both in terms of performance capabilities and cloud ops, as well as I mentioned, incorporating AI into 80% of our content and knowledge management products, 60% of our digital marketing products. Significantly, we've built a modern demand gen, a modern digital marketing function to generate demand and build sales pipeline.
We've upgraded our sales talent. And particularly at the front line where it matters the most, by hiring more domain expert account execs. Important as we look to bring these new AI-enabled products to market.
So I would say those are the headlines, Jeff. As a result of all that, as I say, core organic growth rate, net renewal rates are improving. We're seeing also some expansion in margins. And the other thing we've done with cash flow and the benefit of those, of that capital raise is we've paid down $261 million of debt since the HGGC investment.

Jeff Van Rhee

And on the debt, how do you think about timing? I mean, obviously it sounds like you're going to chip away. I think you said maybe up to $2 million a month. And then in what, '26, latter '26, I remember August, you've got the debt coming due. So obviously, presumably, you end up with a higher rate and maybe you delay the renewal. Just how do you think about the timing of taking out the existing debt?

Jack Mcdonald

Yeah, I mean you hit it. We've got a very attractive lock rate with our swaps under this facility, so we're not in a huge rush because we're enjoying that cash flow and using it to pay down principal. We'll look to get the debt [refied] towards the second half of this year. And rates will be a little bit higher, but we'll also be looking at a lower principal amount, so that'll be somewhat offset by the lower principal amount.

Jeff Van Rhee

Yeah, got it. And maybe one last in terms of the guide for Q1 $59 million to $65 million on the revenues, particularly wide range given this this late in the quarter. I mean, maybe you have something to do with the divestor's? Not sure, just the width of the guide and thoughts why so wide.

Mike Hill

Yeah, Jeff, we've kept it fairly consistent on the width of the guidance range and it's a little bit late in the quarter, but we've still got perpetual license revenue and professional services revenue that's sometimes lumpy. So we're just keeping it consistent with that wider range.

Jeff Van Rhee

Yeah, okay. I think that's it for me. Appreciate it. Thanks guys.

Operator

Alex Sklar, Raymond James.

Alex Sklar

Michael or Jack, just wanted to go into some of the nice major account expansion that you had this quarter. So a couple questions here on core net dollar retention improving. Just some more color on what you saw on some of the different components that built up to that blended 96% number. How was gross retention versus expansion and then even with expansion, any help between pricing versus some of the cross sell up so?

Jack Mcdonald

Yeah, so I think the key story on the net dollar retention rate improvement has been an improvement in gross dollar retention rate, which has really been driven by the investments we've made in product and the divestitures, and focusing our product portfolio on our strongest products, which have the best renewal rates. Our goal, as we look out into 2025, is to get that net dollar retention rate closer to 98% as we exit 2025.

Alex Sklar

Okay. Great. And then, Mike, maybe one for you (technical difficulty) are you going to add on there, I apologize.

Jack Mcdonald

I was going to say in terms of the expansion amounts in there, our core motion there is really pure expansion, growing seats, growing users. But we are seeing now with the AI-enabled products like Qvidian AI Assist, the opportunity to go back into a substantial customer base and upsell AI capabilities. So as we look in the 2025, looking to see some additional upsell opportunities driven by AI.

Alex Sklar

Okay. Perfect. FX, 30% of revenue outside the US, I know some of that's in the Sunset Asset, but that 2.5% core growth, is that a constant currency figure? Is that all in? Any help on how much FX is impacting the outlook?

Mike Hill

Yeah, I don't think there's much of an FX impact there, Alex, so yeah.

Alex Sklar

Okay. Great. Thank you both.

Operator

That concludes our question-and-answer session. I will now turn the call back over to Jack McDonald for closing remarks. Please go ahead.

Jack Mcdonald

All right. Thank you and we look forward to seeing you on our next earnings call.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.