Upland Software, Inc. Aktie

Thank you for standing by, and welcome to the Outland Software Fourth Quarter 202 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 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 our planned website. I'd now like to turn the call over to Jack McDonald, Chairman and CEO of Upland Software. Please go ahead, sir.

All right. Thank you, and welcome to our Q4 2025 earnings call. I'm joined today by Mike Hill, our CFO. On today's call, I'll start with a Q4 review. And following that, Mike will provide some detail on the Q4 numbers and our guidance. We'll then open the call up for Q&A. But before we get started, Mike will read the statement Mike.

Yes. 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 unavailable at this time without unreasonable effort. And with that, I'll turn the call back over to Jack.

All right. Thanks, Mike. The headlines in revenue, adjusted EBITDA and margins came in roughly as expected. Our Q4 core organic growth rate was flat due to a tough compare to Q4 2024. And which contains some lumpy additional usage volume revenue.

As we said on previous calls, our core organic growth rate will bounce around a bit from quarter-to-quarter. The general trend has been improving. Growth rates were negative 2% 3 years ago, negative 1% 2 years ago, roughly 1% positive last year, and we're targeting 1% to 2% this year. So a generally improving trend. Annual net dollar retention rate was 96% in 2025, consistent with the prior year. Q4 2025 adjusted EBITDA of $15.3 million resulted in an adjusted EBITDA margin of 31%.

Free cash flow for Q4 was $7.2 million stronger than expected due to successful collection efforts, which brought our full year 2025 free cash flow to $24.4 million. exceeding our $20 million target. We welcomed 110 new customers to Upland in Q4, including 15 new major customers.

We also expanded relationships with 199 existing customers, 27 of which were major expansions. These new and expanded relationships continue to be spread across our AI powered product portfolio. On the product front in Q4, I'd note that, we continue to perform well based on insights from customers as evidenced by earning 49 batches in G2's Winter 2026 market reports, highlighting consistent value and customer adiation for our products.

Upland was recognized as a major player in the IDC MarketScape worldwide general purpose knowledge discovery Software 2025 vendor assessment, which was published in November of 2025. And Upland believes its recognition in this report highlights the value of our AI-powered knowledge management solution up and right answers, which is driving scalable, smarter support for enterprise contact centers and help desks. Upland was recognized in the Gartner Market Guide for RFP response management applications, which was published in October of 2025.

And we believe our inclusion in that report showcases the impact of our AI-powered RFP response and proactive sales proposal creation software [indiscernible]. So our Q4 results support and illustrate improvements that we made in the business. Adjusted EBITDA margins expanded from 2024 and the first half of 2025 again, up to north of 30% in the fourth quarter. We continue to see healthy cash flow.

We are targeting continued strong cash flow in the $20 million range. for the year. And other important news, last week, we announced the fact that Sean Daniel is going to be joining Upland as our new CEO. I will be transitioning to Chairman as a part of that.

And just super happy to announce this news. Sean has a deep familiarity with our business and our operating model, and our customers and our products having been with Upland from 2013 to 2020 and previously serving as our CTO, but also serving in senior general management roles across simian chunk of our product portfolio.

Significantly, Sean brings highly relevant experience, particularly around AI initiatives that are focused on enterprise knowledge and content and data and welcome folks to take a look at some of the materials that Sean has published over the last few years on AI and the importance of solid knowledge and content and data foundations as a prerequisite for a successful enterprise AI implementations.

Sean's vision really centers on reinforcing Upland's role in enabling organizations to convert that knowledge and content and data into trusted operational intelligence to support AI and agent-driven operating models, which is obviously where the market is going.

Upland already has meaningful capabilities aligned with this vision. And Sean's priority moving forward is going to be to sharpen that execution and translate those capabilities into measurable customer and shareholder value. So Sean will be joining us. We'll be on, I think, our next call, and then we'll be running the calls going forward. But you'll have an opportunity to hear directly from Sean, his vision and for the business going forward and just super happy to welcome Sean back to Upland and to support him in executing his vision and looking forward to that. So with that, I am going to turn the call back over to Mike.

All right. Thanks, Jack. I think Jack covered most of the main points in the financials for the quarter, but I'll just take a few -- make a few additional comments here.

For the Q4 income statement, revenues were as expected when taking into consideration our divestitures in Q1 and Q2 of 2025, Q4 gross margin continued to represent an increase from earlier in 2025 as expected. As a result of the higher margins realized on our ongoing product lines.

Our adjusted EBITDA and adjusted EBITDA margin came in as expected with our adjusted EBITDA margin of 31%, up from 22% and in the quarter, fourth quarter of 2024. So a big improvement there. For the fourth quarter GAAP operating cash flow was $7.3 million, and free cash flow was $7.2 million, making our free cash flow for the full year 2025 of $24.4 million. that exceeded our target free cash flow of $20 million. On the balance sheet, at the end of Q4, we had outstanding net debt of approximately $209 million factoring in the approximate $29 million of cash on our balance sheet.

And at year-end, our net debt leverage was 3.6x trailing adjusted EBITDA, which was -- which came in better than our target. Guidance for the quarter ending March 31, 2026, we expect reported total revenue to be between $47 million and $50 million, including subscription and support revenue between $44.8 million and $47.3 million for a decline in total revenue of 24% at the midpoint from the quarter ended March 31, 2025.

Just a reminder, this year-over-year decline is primarily due to the divestitures completed in Q1 and Q2 of 2025. First quarter 2020 adjusted EBITDA is expected to be between $11.9 million and $13.4 million which at the midpoint is a decline of 3% from the quarter ended March 31, 2025.

First quarter 2020 adjusted EBITDA margin is expected to be 26% at the midpoint, which is a 500 basis point increase from the 21% adjusted EBITDA margin in the year ago quarter. For the full year ending December 31, 2026, we expect reported total revenue to be between $194.2 million and $206.2 million, including subscription and support revenue between $183.6 million and $193.7 million for a decline in total revenue of 8% at the midpoint from the year ended December 31, 2025.

This year-over-year decline, as I mentioned earlier, is primarily due to divestitures that we completed in Q1 and Q2 of 2025. Full year 2026 adjusted EBITDA is expected to be between $52.6 million and $58.6 million, which at the midpoint is a decline of 4% from the year ended December 31, 2025.

And full year 2026 adjusted EBITDA margin is expected to be 28% at the midpoint, which is a 100 basis point increase from the 27% adjusted EBITDA margin that we had for 2025. And so to recap, we continue -- our product portfolio is now much more focused on -- around the KCM market knowledge and content management market.

As Jack mentioned, our core organic growth rate is in a positive multiyear uptrend from negative 2% 3 year ago to negative 1% 2 years ago to roughly positive 1% last year in 2025, and we are targeting 1% to 2% positive here for 2026. The big new customer wins during 2025 has validated our product market fit in several key markets, and those major wins validated our product AI strategies. Our adjusted EBITDA margin is significant -- is a significant multiyear expansion trend with adjusted EBITDA margins expanding from 20% in 2024 and to 27% last year in 25 to our guidance midpoint of 28% here this year in 2026.

And cash flow, as we've mentioned, remained strong as we generated over $24 million of free cash flow in 2025, and we're targeting around $20 million of free cash flow here this year in 2026. I will note that we beat our 2025 free cash flow target by over $4 million, really due to early receivables collections, which would have otherwise occurred in 2026.

So without those early collections, our 2026 free cash flow target would have actually been higher. All right. And with that, I'll turn the call back to Jack.

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

[Operator Instructions] Your first question comes from the line of DJ Hynes with Canaccord Genuity.

Jack can get you on the transition. I know you're still going to be -- remain involved in the business, but I appreciate all the help over the years. Maybe we can just start on the customer metrics a bit. So look, new customer adds flat year-over-year, majors were down, expansions down year-over-year.

It's just -- it's hard to put context around those metrics, given the business is different than it was a year ago with the divestitures. So just -- like how would you characterize sales execution in the quarter?

Do you have comparable metrics for continuing ops? And I guess, most importantly, like what's the pipeline look like going into 2016? Any color there would be helpful. .

Yes. We had a stronger Q3 in terms of winning sizable major deals. I would say that when we look at the pipe, so a little bit disappointed in bookings performance.

But the pipeline for this year looks decent, particularly around some of the core knowledge management growth products where we are starting to build a healthier pipeline of larger deals. But we've got to execute against it. And yes, the Q4 numbers could have come in a little bit better than they did.

Yes. Okay. And then, Mike, for you, just -- so EBITDA margins north of 31% in the last couple of quarters, obviously shows the earnings power of kind of the new leaner Upland.

I look at the guide for 28% margins, it's obviously a bit of a step down from where the business has been running the last couple of quarters. Can you just talk about what's contemplating that guide and why we'd see a step-down in margins from where the business has been running? .

Yes, DJ. So as you may remember, typically, our EBITDA margins through the course of the calendar year, we tend to exit the year at the highest margins, and we start the year at the lowest margins, things like calendar based to payroll taxes kind of take a bigger hit in Q1 and Q2.

So that -- we've always had sort of a tilted, if you will, calendar year ramp up. And so that's mainly what we're seeing here this year again.

Your next question comes from the line of Scott Berg with Needham & Company.

I hope you can hear me okay. It's quite windy warming. Two questions. First of all, Jack, why step down now? Why the change kind of leadership today, in particular, I didn't know if there's anything that drove it to change specifically? Or was it just trying to get maybe relaxed on the beach a little bit.

Well, I would say the principal reason is that the business has changed, right? At one point, we were really about growth through acquisitions. And now the focus is really more on operations and advancing our AI-enabled product portfolio. And Sean is a product-centric and AI-focused CEO. .

And so I think he's the right person for the job. He knows our products and our markets and our customers. And so from an operating perspective, I think that's the kind of executive we need driving the business.

Got it. Understood. And then I know you all have made significant changes to your go-to-market kind of strategy in the last couple of years and we call the divestitures and whatnot.

What do you think you are with those changes? Are we to '19, your infill execution mode? Is there any more of that to still some of the changes that need to be unveiled. Just help us understand what's everything that's going on as you enter '26 is just the right, I guess, right horsepower properly framed to really drive the growth in you all are seeing.

Yes. I mean one of the things I wanted to get done before doing this transition was taking really the first phase of streamlining the business, and obviously, we sold a number of assets. We've got debt refinanced.

So really wanted to sort of clear the decks on that and hand over a business that is on firmer footing. It will be interesting to see what the next few years bring with AI and its impact on enterprise SaaS.

I think we've got some products that can do well in this environment. We've got some other products that are going to face some headwinds. But I like Sean's vision, which I think aligns closely with what Dan Doman has been driving in the business and doing a great job on. And so I think we've got a core set of products that can do well in this environment. I think there's obviously execution that needs to happen, and we're here to support those guys.

Your last question comes from the line of Jeff Van Rhee with Craig-Hallum.

Got a couple. First, maybe, Jack, just trying to maybe get a brief refresher on what the revenue mix is now in terms of the core capabilities. How would you bucket the revenue streams by the focus of the underlying software, the underlying capability?

Well, Jeff, this is Mike. So roughly 2/3 to 3/4 of our revenue, maybe even a little bit more than that as I think about it, is really our growth products versus our specialized markets products. So -- and those growth products, most of those are AI-enabled. So really, the vast majority of our products are in this sort of knowledge and content management market area and using the AI wins as a tailwind as opposed to a headwind.

Yes. Got it. And Jack, when you look at AI, you mentioned it, I mean, obviously, it's front and center for all SaaS companies right now, trying to figure out winners and losers.

At a high level, when you're looking at the SaaS landscape, and obviously, we can compare to you own. But when you look at the SaaS landscape, what models do you think are defensible and what do you think will ultimately get consumed by AI?

Well, I think the products that we have that are systems of record I think, are going to have the strongest moat. And there are opportunities there to become a key part and to be a key part of larger enterprise AI implementations Also, the products that we have that form an enabling layer of infrastructure that intelligence layer that Sean calls it. So you think about products like BA I. And so I look back over the past year, and it's funny, Jeff, because on the one hand, it's been a tougher market environment because of AI. But on the other hand, we landed over the past 12 months, some of the biggest bookings we've had in the past few years.

When you look at major hospitality companies that are doing 40 million customer touches a year and spending big on genic AI implementations and then bringing in products like Upland RightAnswers because they need a trusted, auditable, governable knowledge layer to train that AI on so that you get the kind of output that you need.

So that's one example of some of the work we've done with major consulting firms around global enterprise AI-driven portals for customers and for internal use. Aome of the bigger sales we've had to make your hyperscalers for their own internal use and then some of the partnerships that we've now got underway in the market with some of the brand name hyperscalers to bring the capabilities of products like Upland RightAnswers and BA I into their customer base.

So it's sort of a tale of markets in that regard. So I think those products that can get positioned is enabling tech or systems of record or -- and in some cases, systems a process will be defensible and others will not be.

That concludes our Q&A session. I will now turn the call back over to Jack McDonald.

All right. Thank you so much, and we will see you on our next earnings call.

Ladies and gentlemen, that does conclude our conference call. Thank you all for joining, and you may now disconnect. Everyone, have a great day.

Thank you for standing by, and welcome to the Upland Software Third 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 third 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 Q3 2025 earnings call. I'm joined today by Mike Hill, our CFO. On today's call, I will start with our Q3 review. And following that, Mike is going to provide some detail on the numbers and guidance. After that, we'll open up for Q&A. But before we get started, Mike, could you read the safe harbor statement, please?

You bet, 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.

With that, I'll turn the call back over to Jack.

All right. Thanks, Mike. So the headlines in Q3, we beat our revenue guidance midpoint, and we met our adjusted EBITDA guidance midpoint. Our Q3 core organic growth rate was 3%. Q3 adjusted EBITDA was $16 million, which resulted in adjusted EBITDA margin of 32% and free cash flow for the quarter was $6.7 million.

We welcomed 97 new customers in the quarter, including 14 major customers. We also expanded relationships with 168 existing customers, 13 of which were major expansions. The new and expanded relationships continue to be spread across our AI-powered product portfolio.

As we announced previously, in Q3, we successfully refinanced our debt, which moved the maturity of the debt out 6 years to July of 2031. We also added a $30 million revolver. So it really puts us in a place with well-restructured debt and ample liquidity. Our net debt leverage is now down to 3.8x, and we are on track to achieving our net leverage goal of 3.7x by the end of the year. And we plan, of course, to use our ongoing free cash flow generation to continue to delever our balance sheet in 2026 and beyond.

On the product front, in Q3, we earned 49 badges in G2's Fall 2025 market reports, reflecting strong momentum across our portfolio. I'd note that Upland RightAnswers and Upland BA Insight are now available in the AWS Marketplace with BA Insight featured in the new AI Agents and Tools category. This expanded presence makes it easier for customers to discover and purchase and deploy these AI solutions, simplifying the purchasing process and accelerating enterprise AI adoption.

We were also recognized in Forrester's Customer Service Solutions Landscape, their Q3 2025 report. That study highlights leading vendors who are advancing customer service operations, and we believe that our inclusion reflects the impact of products like Upland RightAnswers in helping companies resolve issues faster, improving agent productivity and delivering more consistent, high-quality customer support and of course, positioning products like Upland RightAnswers as a key enabling technology in these broader Agentic AI customer service deployments.

And again, across the product suite, we continue to deliver innovation that boosts productivity, data intelligence and customer outcomes. InterFAX added AI features to improve the discovery of fax content. Adestra rolled out enhanced bot-click detection and a Raiser's Edge NXT integration and Second Street introduced a QR code generator to extend its competitions platform.

On the sales -- on the bookings side, we also closed a number of attractive deals this quarter, but 2 new major AI deals that I would highlight. The first was a $2 million multiyear agreement with a Fortune 100 tech company, which adopted RightAnswers as the foundation for an intelligent generative answer engine for all employees, integrating AWS Bedrock AI and S3 to reduce support costs and drive self-service.

Another one I'd highlight is a $1 million multiyear deal with a global pharmaceutical company that selected our AWS Bedrock-powered BA Insight platform to replace a legacy enterprise search system, thereby cutting cost and improving search accuracy and governance. And again, these are the results of the work we've done over the past couple of years in AI enabling the portfolio, and we're seeing some of our products really getting slotted in as enabling tech for these broader enterprise AI implementations. So we see that as something to really look at in terms of whether the plan is working. And again, these are early green shoots, but meaningful ones.

So in summary, our Q3 results -- reported results support and illustrate the dramatic improvements we've made in the business. We've streamlined our product portfolio with a focus on markets where we can drive growth and profitability. We're generating positive core organic growth. And now look, quarterly results will fluctuate as they have in the past, but the long-term trend reflects progress. As I've described, we're seeing big new customer wins, validating our product market fit and validating our AI product strategies. Now we just need to continue to stack these wins going forward.

Our adjusted EBITDA margins have dramatically expanded. We continue to see strong free cash flow. Mike is going to talk a little bit more about this, but with a target of around $20 million this year and increasing next year. And again, we've strengthened our balance sheet by paying down debt, extending the maturity of our debt by 6 years, lowering our debt leverage and with forecasted continuing deleveraging. And again, we've boosted our liquidity with the new revolver. So with that, I'm going to turn the call back over to Mike.

All right. Thank you, Jack. And I think Jack covered a lot of these points on the financials for the quarter, so I'll just make a few additional comments here. On the income statement for Q3, revenues were as expected when taking into consideration our recent divestitures. Q3 gross margins increased from Q2 as expected as a result of the higher margins realized in our ongoing product lines.

Our adjusted EBITDA and adjusted EBITDA margin came in as expected with our adjusted EBITDA margin of 32%, up from 21% from the third quarter of 2024. And we still expect full year adjusted EBITDA margin of around 27%. For the third quarter of '25, GAAP operating cash flow was $6.9 million. And as Jack mentioned, free cash flow was $6.7 million. Our full year 2025 target free cash flow remains at around $20 million. And on our balance sheet at the end of Q3, we had outstanding net debt of approximately $217 million, factoring in approximately $23 million of cash on our balance sheet, which is about a 3.8x net debt leverage ratio to trailing adjusted EBITDA, and we're on track to hit our target of 3.7x net debt leverage by year-end.

For guidance, for the quarter ended December 31, 2025, we expect reported total revenue to be between $46.4 million and $52.4 million, including subscription and support revenue between $44.1 million and $49.1 million, for a decline in total revenue of 27% at the midpoint from the quarter ended December 31, 2024, this year-over-year decline is primarily due to the divestitures completed earlier this year.

Fourth quarter 2025 adjusted EBITDA is expected to be between $13.8 million and $16.8 million, which at the midpoint is a 3% increase as compared to the quarter ended December 31, 2024. Fourth quarter adjusted EBITDA margin is expected to be 31% at the midpoint, which is a 900 basis point increase from the 22% adjusted EBITDA margin for the quarter ended December 31, 2024.

For the full year ending December 31, '25, we expect reported total revenue to be between $214 million and $220 million, including subscription and support revenue between $202.5 million and $207.5 million for a decline in total revenue of 21% at the midpoint from the year ended December 31, 2024. This year-over-year decline, as I mentioned, is primarily due to the divestitures completed earlier this year.

Full year 2025 adjusted EBITDA is expected to be between $56.5 million and $59.5 million, which at the midpoint is an increase of 4% from the year ended December 31, 2024. Full year adjusted EBITDA margin is expected to be 27% at the midpoint, which is a 700 basis point increase from the 20% adjusted EBITDA margin for 2024.

Now additionally, I'll note that we lowered the midpoint for our full year 2025 total revenue and adjusted EBITDA guidance ranges by $800,000, primarily as a result of lower forecasted perpetual license revenue, but I'll point out that the midpoint of our subscription support revenue guidance range remains unchanged.

So to recap, our product portfolio is now much more focused around the KCM market. Our core organic growth rate is in a positive multiyear uptrend from negative 2% 2 years ago to negative 1% last year to now around positive 1% this year, and we are targeting 3% next year and 5% plus thereafter. Big new customer wins have validated our product market fit in several key markets, and those major wins have validated our product AI strategy.

Our adjusted EBITDA margin is in a significant multiyear expansion trend to over 30% here in Q3, noting that our margins are always highest in the back half of each calendar year. And when we zoom out, we see adjusted EBITDA margins expanding further from 20% last year in 2024 to our guidance midpoint this year of 27% to a target of 29% plus next year, a target of 31% plus in 2027 and then, of course, our long-term operating model target of 32%.

Cash flows remain strong as we continue to target around $20 million of free cash flow this year, as I mentioned, and we're targeting an increase of about 10% next year, so targeting around $22 million of free cash flow next year. We have significantly strengthened our balance sheet, improved our liquidity, paying down $242 million of debt since the beginning of last year, refinanced our debt, extended the maturity by 6 years out to July 2031, added $30 million undrawn revolver, providing us with ample liquidity, and we are forecasting continued deleveraging with our free cash flow generation.

So with that, I'll pass the call back to Jack.

All right. Thank you, Mike. Let's open the call up now for Q&A.

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

I guess, I got a couple. You guys had a much better core organic growth quarter here, as you called out. I think Jack mentioned targeting 3% next year, 5% next year. Maybe it was Mike, I apologize, I didn't write down who it was. But tell me 1 quarter is never quite a trend. I guess what are you seeing in the current sales pipelines and the opportunities that you're working that gives you confidence that those targets look reasonable to achieve over the next year or 2?

Yes, I think you're right. One quarter doesn't make a trend. And of course, as I indicated, things will bounce around quarter-to-quarter. But as Mike pointed out, the long-term trend is positive, right? In '23, we were negative 2%, in '24, negative 1%. For full year '25, looking at positive 1% and then again, targeting 3% for full year '26. So I think the overall trend is good.

The green shoots that we're seeing that give us confidence in that outlook are some of the larger deals I talked about. For a number of years, we were not getting those larger deals. And now with the work that's been done to AI-enable the product portfolio and to position some of our core knowledge and content management products as key parts of enabling tech and these broader enterprise AI implementations and driving partnerships with some of the biggest players in the market, the Microsoft and Amazons of the world.

We're starting to see some of these in Google. We're starting to see some of these larger opportunities. So I mentioned a $2 million multiyear deal for a Fortune 100 tech company, a $1 million multiyear deal for a major pharmaceutical company. It's the opportunities in the pipeline for those larger deals that give us optimism as we go into next year.

Helpful there. And then I guess I wanted to ask a clarification on the fourth quarter guidance, Mike, you mentioned license revenue is going to be down about $800,000 in the quarter than prior expectations. Is that a deal that just flipped subscription and you won't take the revenue in the quarter? Or is that something that moved out? Just maybe help understand what that movement is relating to.

Yes. Most of that $800,000 is a perpetual license revenue that we had originally projected, forecasted that doesn't look like it's going to happen. So that's just pure license revenue, Scott. Now there's a small bit of professional services revenue as well that won't show up either to kind of combine to make that $800,000. And of course, that falls to the bottom line on EBITDA. So that's why subscription support revenue guidance at midpoint remains the same.

Helpful, Mike. And I'll just sneak one last one in here is on the quarter. Any change to gross revenue retention trends or maybe net that helped drive the 3% growth number?

We -- so we don't report on net dollar retention rates during the year. That's a year-end metric. We did see -- excluding the divestitures, that was 99% at the end of last year, at the end of 2024. And we're targeting to remain in the upper 90% here this year. So I think those trends are sort of intact and consistent.

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

Congrats on a nice quarter. It seems like pretty down the middle print. Good to see the improving growth in margins. And Jack or Mike, I appreciate your comments. Jack, maybe just one for you. As you look at the opportunity and think about the growth matrix going forward, how much should come from installed base versus net new? And I guess the follow-up to that is like does the presence of a couple of these key products in the AWS Marketplace help with either of those efforts more than the other?

So in terms of growth from the installed base versus net new, if you look at our net dollar retention rates over the past few years, they've trended up from low to mid-90s to upper 90s. And so that's providing a solid foundation for growth. And now we just need to stack some of these growth deals with new customers on top of that to get to growth targets. And so as we look at where that's going to come from, it's really around our knowledge and content management product portfolio, which is roughly 75% of our revenue and products like the ones we've talked about, RightAnswers, BA Insight, Panviva, Qvidian, InterFAX and others will play a key part in that.

And then a follow-up just on AWS, the marketplace. Like is that a tool that's more powerful for making it easier for existing customers to buy more? Or is it like a discoverability that may help with landing new customers?

Yes, it's a little bit of both. And so it's positive on both fronts there. And then there are broader partnerships, right, with some of these major players whereas folks are going in and doing these agentic enterprise AI implementations, having a knowledge solution that is auditable and reliable and not prone to hallucination is key. So some of these sort of headless knowledge management opportunities where we are part of a broader enterprise AI implementation. I think that's going to be a promising area for us over the next couple of years here.

And our last question comes from the line of Jeff Van Rhee with Craig-Hallum.

Jack, on the sales and sales execution, you guys are constantly trying to refine the process. Just maybe spend a second there, what's working, what's not? How are you tweaking the process at this point?

I think what's working is upgrading the sales force, bringing in more expert domain sellers on the field side. What's working is the SEO strategy that we began rolling out a few years ago. So we're getting higher quality leads into the hands of those salespeople and our SDR team has been doing a nice job there. What's working in early stages, but we're starting to see some promising results from is the use of intent data from platforms like 6sense to refine our outbound motions.

And frankly, it impacts our inbound motions as well to really focus in on prospects that are in the market actively looking for solutions. I'd say what's working is the investments that we're starting to make in channel and specifically in working more closely with larger partners like Amazon and Google and Microsoft to play our role in some of these larger enterprise AI implementations.

So I think those are all green shoots on the demand gen and sales side. It's not going to be perfect every quarter, and we've got sales cycles to deal with and all of that. So as I mentioned before, it will bounce around quarter-to-quarter. But I think the long-term trend here, as we talked about, is positive.

And maybe just a similar question on the development side. Obviously, with the remaining portfolio trying to drive up those retention numbers, you want to stay on the leading edge of innovation. How do you feel about the pace of new product introductions? Kind of any call-outs there in terms of trend that gives you some measurables around how quickly you're innovating versus maybe what you were a year or 2 ago?

Yes. It's a dramatic improvement. It really started with the center of excellence in India as a core for our development effort. Obviously, our development efforts are broader than that. We've got onshore teams as well as offshore teams in India and elsewhere. But the work that's been done across the board in terms of solidifying the foundations, increasing uptime and availability and reliability of the products, in terms of introducing AI into the product portfolio and smartly and efficiently AI enabling these products where it makes sense.

In terms of the partnership with product management to make sure we're prioritizing the right items in the road map to meet the demands, both of existing customers and of new prospects. It's been a steady improvement over the past 3 or 4 years, like Dan Doman and his team. Dan is our Chief Product and Operating Officer and his team, a tremendous amount of credit there.

And it's been steady progress, one foot in front of the other. And now we look back on what's been done over the past 3 or 4 years, and it's really starting to bear fruit. And we're seeing it, frankly, again, in getting a shot at these larger deals and starting again to land these million-dollar deals, multimillion dollar, multiyear deals, which we frankly hadn't seen for a while. So yes, that's the picture there.

Good. And maybe last, if I could sneak, the last one in here on the perpetual reduction. Was that presumably as a new customer? And is that an instance where that revenue is gone or just pushed out? If it's gone, was it a competitive deal you just lost? If so, why? I know that's maybe 5 questions, but if you can tackle that, that would be great.

Jeff, yes, it wasn't just one customer. It was just the perpetual license revenue. We typically have a Q4 uptick. We just didn't see it this year. And it's really -- it's not some big story or some big target that went away. So it's just a little bit less on the perp license side.

That concludes the question-and-answer session. I would like to turn the call back over to Jack McDonald for closing remarks.

Okay. Well, thank you so much. We look forward to seeing you on the next earnings call.

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

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 the improvement in our go-forward margins that I just referenced here in Q2 and Q3 and going forward.

We welcomed 100 new customers to Upland in the second quarter, including 12 new major customers. We also expanded relationships with 263 existing customers, 28 of which were major expansions. These new and expanded relationships continue to be well distributed across our AI-powered product portfolio. So it's been a good first half 2025 with increased core organic growth and adjusted EBITDA margin expansion. And as I say, we expect these trends to continue and accelerate through the second half of 2025.

On the product front in Q2, I'd note that we earned 68 badges in G2's Summer 2025 reports, reflecting strong performance across the product portfolio. Our AI-powered knowledge management solutions, Upland Panviva and Upland RightAnswers continued to receive multiple badges. Upland BA Insight, our AI enablement solution increased its recognition this quarter, while Upland Qvidian, our AI-powered RFP response software, also maintained strong momentum in the reports.

Upland continues to drive innovation across the portfolio with recent product enhancements. Upland InterFAX accelerated a major release focused on new PCI compliance efforts, while Upland Panviva unveiled enhancements, including Digital Orchestrator and integration with Microsoft Copilot Studio. Upland Adestra introduced AI-powered subject line updates, launched integrations with Salesforce and Shopify, and is seeing strong momentum with Adestra Audiences. Meanwhile, Upland InGenius' integration with ServiceNow launched and Upland RO Innovation announced two new AI enhancements for sales win content generation and summarization. So AI enablement, AI innovation across the product portfolio.

We're proud to be included in the 2025 Gartner Market Guide for Customer Service Knowledge Management Systems. We believe that Upland’s continued recognition in this guide underscores our commitment to delivering AI-driven knowledge management solutions that empower customer service teams with fast, accurate information to improve customer experiences.

Subsequent to the end of Q2, we successfully completed the refinancing of our debt, extending the maturity to July of 2031. We had significant interest from multiple high-quality lenders, and we are pleased to be partnered with private credit direct lender, Sound Point Capital Management. After extensive lender due diligence, Sound Point validated our AI-focused products. And as a part of that refinancing transaction, we paid down an additional $18 million of debt principal and established a new $30 million revolving credit facility, further strengthening our balance sheet, enhancing liquidity and supporting our growth strategy.

So to recap, we've made some dramatic improvements in the business over the past 12 to 18 months. We have streamlined our product portfolio with a focus on markets where we can drive consistent growth and higher margins and profitability. We are AI enabling our product portfolio. Our adjusted EBITDA margins are expanding dramatically. We have turned the corner here in Q2 and are generating positive core organic growth. And we've strengthened our balance sheet by paying down $242 (sic) [ $240 ] million of debt since the beginning of last year and now extending the maturity of our debt by 6 years through our refinancing, and we continue to lower our debt leverage and again, see that deleveraging continuing into the future, and we have boosted our liquidity with our new revolver. So with that, I am going to turn the call back over to Mike.

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 to the $294 million as of the end of last year, December 31, 2024.

And now our net leverage after the refinancing is about 3.9x. Our cash balance after the refinancing is approximately $26 million. Given the normal puts and takes of collections and payables during the remainder of Q3, we're projecting our cash balance at the end of Q3 to be around $18 million. The cash balance plus our new $30 million undrawn revolver gives us ample liquidity.

Now for guidance. Our core organic growth outlook is projected to improve to approximately 3% in the second half of 2025. That growth rate assumes that we continue to have no macro disruptions from the tariffs. For the quarter ending September 30, 2025, we expect reported total revenue to be between $46.8 million and $52.8 million, including subscription and support revenue between $44.6 million and $49.6 million for a decline in total revenue of 25% at the midpoint from the quarter ended September 30, 2024. Now this year-over-year decline is primarily due to divestitures completed to streamline and focus our business.

Third quarter 2025 adjusted EBITDA is expected to be between $14.5 million and $17.5 million, which at the midpoint is a 14% increase as compared to the quarter ended September 30, 2024. Third quarter 2025 adjusted EBITDA margin is expected to be 32% at the midpoint, which is an 1,100 basis point increase from the 21% adjusted EBITDA margin for the quarter ended September 30, 2024.

For the full year ending December 31, 2025, we expect reported total revenue to be between $211.8 million and $223.8 million, including subscription and support revenue between $200 million and $210 million, for a decline in total revenue of 21% at the midpoint from the year ended December 31, 2024. Now again, this year-over-year decline is primarily due to the divestitures completed to streamline and focus our business.

Full year 2025 adjusted EBITDA is expected to be between $55.8 million and $61.8 million, which at the midpoint is an increase of 6% from last year. Full year adjusted EBITDA margin is expected to be 27% at the midpoint, which is a 700 basis point increase from the 20% adjusted EBITDA margin again for last year. Additionally, I will note that we did lower the midpoint of our full year 2025 total revenue and adjusted EBITDA guidance ranges by $700,000 as a result -- really as a result of just lower forecasted professional services revenue. So the midpoint of our subscription and support revenue guidance range remains unchanged. And with that, I'll pass the call back to Jack.

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.