Upland Software, Inc.
Q2 2021 Earnings Call Transcript

Published: 4 Aug 2021

[Operator:]

Thank you for standing by, and welcome to the Upland Software Second Quarter 2021 Earnings Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. The instructions will be given at that time. 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 2021 earnings release, which was distributed today at 4

[Jack McDonald:]

Thank you, and welcome to our Q2 2021 earnings call. I'm joined today by Rod Favaron, our President; and Mike Hill, our CFO. On today's call, I'll start with some opening comments on our Q2 results. Then Rod is going to provide some color around customers and also around product developments. And following that, Mike will provide some insights on the Q2 numbers and on our guidance. After that, we'll open the call up for Q&A. But before we get started, Mike could you go ahead and read the safe harbor statement.

[Mike Hill:]

Thank you, Jack, and good afternoon, everyone. During today's call, we will include statements that are considered forward-looking within the meanings of the securities laws. These statements are subject to risks, assumptions and uncertainties that could cause our actual results to differ materially. A detailed discussion of these risks and uncertainties are contained in our Annual Report on Form 10-K, as periodically updated 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. 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 second quarter 2021 results, which is available on the Investor Relations section of our website. Please note that we're 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.

[Jack McDonald:]

All right. Thanks Mike. So in the second quarter, we continued executing on our acquisition playbook. We completed another strategic and accretive acquisition Panviva, which is a cloud-based knowledge management solution, and that expands our product library within the knowledge management market giving our customers a new way to drive contact center productivity, particularly in regulated industries, such as utilities, healthcare and financial services. And I'll note, we did that, we completed that acquisition while posting strong free cash flow of $10.6 million and that's after acquisition expenses. And so that's over $22 million of free cash flow for the first half of 2021, again, after acquisition expenses. So this makes three acquisitions for us completed thus far in 2021. And while there can't be any guarantees, I think we are well on our way to making 2021 a strong year for acquisitions. Our pipeline of acquisitions is robust and we are active in the market for additional opportunities. In terms of Q2 results, we had 7% total revenue growth as expected, adjusted EBITDA came in at 31% and of course, reflecting our continuing go-to-market investments. Q2 free cash flow, as I just mentioned, $10.6 million, $22 million for the first half of the year. Minus 2% organic growth, but again, if you exclude the political messaging revenue from last year, our organic growth is positive 4% in line with what we expected. Now, we are clearly lapping some tough revenue growth compares right now, given last year spike and political messaging revenue as well as the impact of COVID, including the fact that we shut down acquisitions for most of 2020, so that impacts our total growth rate here in 2021. But that said, as we move through this and we look out over the next several years, I really like the way this business sets up. We have got a powerful cloud software library, a proven operating platform, we have got a strong base of over 1,700 enterprise customers over 10,000 customers total, but 1,700 enterprise customers. And we've got an equity compounder financial model. So beginning in 2022 and over those next several years, this is a business that can reasonably target total revenue growth of 15% per year, that's organic plus acquisitions at 15% per year. And importantly achieved that growth on a sustainable and self-funded basis and generate positive free cash flow as we go and that's financed out of internally generated cash flow, cash on hand in our debt facility with no further dependence on the equity capital markets. In addition to that, now that we suggested structural go-to-market investment we've made with some of the new leadership team, the new sales and marketing, service and product team members, we are set up nicely over the next several years for strong and expanding adjusted EBITDA margins as we take those margins from 32% toward our long-term goal of 40%. So with that background, let me turn the call over to Rod for some insights on customers and product developments. Rod?

[Rod Favaron:]

Thanks, Jack. Good afternoon, everyone. On the customer front, in the second quarter, we expanded relationships with 311 of our existing customers. It was a strong expansion quarter. 51 of those remains were expansions. We also welcome the 133 new customers to Upland during the quarter, including 32 new major customers. I'd like to talk about a couple of those major expansion and cross-sell stories just to add some color to how things played out during the quarter. Let me start with Gannett. I think we all know Gannett, a major player in the media and publishing space and in Upland, top 25 customer. They expanded their existing relationship to multiple products within our customer experience library, signed a multi-year expansion, really focused on helping them achieve their revenue and growth goals. So very exciting deal for us. Another Upland top 25 customer and the largest SaaS player in the world significantly expanded their relationship with Upland through four products within our enterprise sales and marketing library. In this case, they doubled down with their current spend on our content marketing products specifically. I've been doing this for 25-plus years. And when I see a big customer like this, if he was the undisputed leader in what they do, doubled down on our sales enablement products to seven figure plus levels, it helps validate the competitiveness of our products. The scale of the cross-sell opportunity we have in front of us and frankly, how we at Upland are beginning to position ourselves as a trusted partner to global enterprises, really bringing last mile solutions to big problems. And finally, last quarter, we mentioned our deal with HP to resell the Upland Document Workflow Cloud. I'm excited to announce this is now rolled out to the market with first wins closed in the books and pipeline building. We have a lot of excitement about this relationship going into 2022. Switching to the products front, we had a good quarter for new product releases. We also welcome Dan Doman as our new Chief Product Officer. Dan will own the overall product strategy for our library of products. He will focus on our R&D focus, staffing, strategy all while working closely with our M&A teams and our go-to-market teams. With that, I'm going to turn the call back to Mike.

[Mike Hill:]

Well, thank you, Rod. I'll cover the financial highlights for the second quarter and our outlook for the third quarter and full-year 2021. On the income statement, total revenue for the second quarter was $76.3 million representing growth of 7%. Recurring revenue from subscription and support grew 7% year-over-year to $72.4 million. Professional services revenue was $3.4 million for the quarter, a 10% year-over-year increase. Overall gross margin was 67% during the second quarter and our product gross margin remains strong at 68% or 72% when adding back depreciation, amortization, which we refer to as cash gross margin. Operating expenses, excluding acquisition-related expenses, depreciation, amortization and stock comp were $31.6 million for the second quarter or 41% of total revenue, all generally as expected. Also, acquisition-related expenses were approximately $5.5 million in the second quarter, which were about as expected after some puts and takes. Without additional acquisitions this year, we currently estimate acquisition-related expenses to be around $4 million for Q3 and around $3 million for Q4. For each acquisition, total acquisition-related expenses are generally 50% to 60% of the acquired annual revenue run rate and it varies from acquisition-to-acquisition, depending upon uncontrollable factors such as size and location. Generally, for each acquisition, 45% to 50% of these transaction and transformation expenses are included within the – incurred within the first three months and then taper down rapidly until the transformation is complete by each acquisitions first anniversary. Our second quarter 2021 adjusted EBITDA was $23.7 million or 31% of total revenue consistent with $23.7 million or 33% of total revenue for the second quarter of 2020. As expected, adjusted EBITDA margin was lower due to our increased go-to-market investments compared to last year. We still expect adjusted EBITDA margin for 2021 as a whole to be around 32% as implied by the midpoint of our guidance and we expect to exit 2021 with Q4 at around 33% to 34%. On cash flow for the second quarter of 2021 here GAAP operating cash flow was $10.8 million and free cash flow was $10.6 million even with $5.5 million of acquisition-related expenses in the quarter. We also had some positive changes in some of the working capital accounts like collections on accounts receivable. With over $22 million of free cash flow year-to-date through Q2, we continue to anticipate full-year 2021 free cash flow of over $30 million and possibly over $40 million, depending upon the size and timing of future acquisitions and the corresponding acquisition-related expenses associated with those. So we are generating substantial GAAP operating cash flow and free cash flow even after acquisition-related expenses. This ongoing free cash flow generation in addition to our existing liquidity of $236.5 million comprised of approximately $176.5 million of cash on our balance sheet as of June 30, 2021, and our $60 million undrawn revolver. This ongoing cash flow generation existing available liquidity and expanding our credit facility while maintaining our net debt leverage of up to a maximum of around 4x should allow for self-sustained growth without dependency on the equity capital markets. I should note that our net debt leverage is currently around 3.6x based on the midpoint of our 2021 adjusted EBITDA guidance. As of June 30, 2021, we had outstanding net debt of approximately $354 million after factoring in the cash on our balance sheet. I will note that principal payments on our term debt are 1% per year or about $5.4 million per year, and with the remaining balance maturing in August of 2026. The interest rate on our outstanding term debt is locked at 5.4%, making our annual cash interest payments approximately $30 million at our current debt level. Additionally, I will point out that our term debt has no financial covenants on current borrowings. With regard to income taxes, Upland currently has approximately $356 million of total tax net operating loss carryforwards. And of these, we estimate approximately $216 million will be available for utilization prior to expiration. I will note that we still expect around $5 million per year of cash taxes. For guidance, for the quarter ending September 30, 2021, Upland expects reported total revenue to be between $75.4 million and $79.4 million, including subscription and support revenue between $72.2 million and $75.8 million for growth and recurring revenue of 4% at the midpoint over the quarter ended September 30, 2020. Third quarter 2021 adjusted EBITDA is expected to be between $23.9 million and $25.9 million for an adjusted EBITDA margin of 32% at the midpoint. This adjusted EBITDA guide at the midpoint is in line with the quarter ended September 30, 2020. For the full-year ending December 31, 2021, Upland expects reported total revenue to be between $300.8 million and $312.8 million, including subscription and support revenue between $287.1 million and $297.1 million for growth in recurring revenue of 5% at the midpoint over the year ended December 31, 2020. Full-year 2021 adjusted EBITDA is expected to be between $94.8 million and $100.8 million for an adjusted EBITDA margin of 32% at the midpoint. This adjusted EBITDA guide at the midpoint is a reduction of 2% over the year ended December 31, 2020, reflecting our incremental investments in our go-to-market activities. And with that, I'll pass the call back to Jack.

[Jack McDonald:]

Great. Thanks, Mike. Operator, we are now ready to open the call up for Q&A.

[Operator:]

We will now begin the question-and-answer session. Our first question comes from Bhavan Suri with William Blair. Please go ahead.

[Bhavan Suri:]

Hey, gents. Thanks for taking my question. Ex the political messaging that was pretty solid organic growth, so congrats on that. Jack for you initially, just a little more about how sales restructuring has been progressing given we're halfway through the year and kind of what sort of milestones should we look for by the end of 2021 sort of think that how that’s playing out?

[Jack McDonald:]

Well, look, I talked about this before and there are a series of milestones we look at, right. The first was getting the team in place, which was done on a really lightening fast basis, when you consider that Rod joined early last year and was able to have the full team in place by the end of last year. And then we started to see a different level of hygiene around the process and really building a true go-to-market culture within Upland, and adding capacities, like centralized lead generation, adding the global account managers. And we're seeing the impacts of that already in terms of opportunities within accounts. So I'll let Rod kind of comment more on this, but just one point before that. When I look at this business over the next several years, I think about Upland as an equity compounder, and this is a business that can grow 15% total growth a year, right? And that's going to be a mix of acquisition growth and M&A, and again can do it on a sustainable basis on a self-funded basis, while generating positive free cash flow material, positive free cash flow, and while putting up expanding adjusted EBITDA margins here as we move from the low-30s where we are today up toward our long-term goal of 40%. So Rod is bringing that strength around go-to-market. It's beyond just the sales and marketing piece, right? Because he is making changes in customer success, making changes on the whole product side of the business and building a stronger platform that will continue to bolt acquisitions on top of, and I think the combination of that and that total 15% growth to me is the number to look at as we move out over the next several years.

[Rod Favaron:]

Yes. Just to add to that. I think what – to Jack’s point, the progress we measure internally is a combination of capability and outcomes, right? So we've spent the last five quarters swapping out a bunch of leadership, putting in new systems, putting in new process, changing how we sell. The early indications of that are in the area of conversion. In other words, the pipeline we had a year-ago. How well are we converting that? And how clean was that? And we've learned how to convert it better. We have better – stronger salespeople, better methodology. So you start with converting what you have and then you started shifting to making sure you're bringing in the kind of pipeline you can win. And so that's what the SDR team and the marketing teams have been doing. And all the early indicators that the SDR team, which is our lead qualification team has steadily created really good pipeline in the first six months of the year for not a very big team. And so I'm encouraged by that. And we're seeing that pipeline converts already in some cases, which is encouraging. The challenge is to try and describe to you guys at an operating level, we are so much better, I think, than we were five quarters ago, just in talent and process, discipline and the quality of our data, how we're presenting our products, how we're pricing business, those types of things. But as we said earlier in the call, we're coming off of that compare, which will be very difficult to see the outcome of this work from a growth perspective until we kind of . And so really my answer is just rest assured that what we are doing right now, I think it's just making this company so much better, and frankly setting us up for the next five to 10 years of compounding growth. And turning back on the M&A again to, we really didn't do any of that last year. We did at early, early, early 2020, and turning that back on and executing that and having a team that is going to market and integrating acquisitions at the same time, much more capable, much cleaner. Our deals are getting tucked in quicker, less angst on the acquisition. So I mean, I'll just leave you there, inside a lot of really good operating improvements, which you will see over time, which is very hard to visualize given the compare. I think that's the trick.

[Bhavan Suri:]

I appreciate the color. I think if you start-off with those operating improvements and you say, okay, they'll play out first. I think you said two, three, four quarters even given the compare, we'll see how they go. And so I appreciate the color. I guess to add to that, one of the things I've always asked Jack and the team over the years has been the ability to cross-sell and you've come in and sort of said, okay, we're going to start focusing on some of the cross-sell. You made some really interesting acquisitions. Those actually fit really well with cross-sell. And so we'd love to get an update on how that motion is going. And to put a fine point on maybe a little bit. So obviously that ultimately plays into net dollar retention rates and your existing base starts buying more, maybe help us think through sort of, hey, how the cross-sells going in, and maybe you or Mike or Jack talk about how that plays into the net dollar retention rate over time? Thank you.

[Rod Favaron:]

Jack, would you like me to start?

[Jack McDonald:]

Yes, I know. Please do.

[Rod Favaron:]

Yes. So that's a great question. The color on cross-sell is that we really started – we created our cross-sell as a unique pipeline in the third quarter of last year. We got all the integrations tucked in, got the systems tide it up and we really started tracking cross-sale as a unique pipeline. And from Q3 to Q2 of this year, four quarters in a row, our cross-sell bookings grew every quarter. They're not a high percentage of our overall sales, but every quarter they get better. The pipeline grows, the deals grow. A couple of the deals I mentioned earlier in the update were both cross-sell deals. One was an expansion and some cross-sell and the other one was a cross-sell. And so that’s the most healthy cross-sell quarter we've had in Q2. Now that's not to say where we need to be, but if I drew the line, I like the slope. So I’ll get to go to leave that there. So from a cross-sell perspective, a lot of progress. And if your point is, it's perfect, right. I will say we've got the organization focused on what I'll call net ARR, net dollar retention obviously with the year-over-year measurement is kind of harder for the individual sales guy or customer success manager to see. But what they can see is we're selling this much and we're churning this much in a given quarter. And so we've reoriented the entire business around, frankly, the net ARR output of given quarter, which is exactly what drives organic growth the following year. And so that's another sort of behavior change, operating change that we've put in. And so look, you've got it. We are spending. I'm probably spending more time on the churn part of that net ARR conversation, frankly, than I am on the new dollar part, just because the new dollar parts up and running the teams there. And now we're focusing on, hey, what do we need to be doing different with our products to improve our retention rates. Where do we need to be doing differently in pricing and organizational structure, optimizing who's got commercial skills, who doesn't. So we're really looking at the org to tighten up how we're doing retention, which is a huge capability that, if you go – I mean, we go back 24 months, this company wasn't anywhere near this big. We didn't have anywhere near this many products to renew and getting the org oriented and ready to deal with the next 20 acquisitions and be incapable of managing those customer bases is a big part of another thing we're working on right now. We've accomplished a lot and we have a lot to do, so we live and die every day inside the business on a net ARR metric for a given quarter and that's essentially what everybody's compensation is aligned on.

[Bhavan Suri:]

That was really helpful. I really appreciate that. Thank you. Those are my question guys. Appreciate it.

[Operator:]

The next question comes from Brent Thill with Jefferies. Please go ahead.

[Luv Sodha:]

Hello, everyone. This is Luv Sodha on for Brent Thill. I wanted to follow-up on the question that Bhavan asked about – along the lines of the sales investment that you've been making for the better part of the year, I guess how should we think of organic growth as a component to that 15% revenue growth target that you made out Jack? Should we expect this to be a step function higher than in the mid single-digit growth that you've been delivering thus far?

[Jack McDonald:]

I think, Luv in the near go in here, I wouldn't change the outlook that we've had historically. We've always talked about targeting mid-single digits and guiding more conservatively than that to low-single digits. And so I'm not ready to change that. So the total 15% growth, we can get that done on a self-funded basis, on a sustainable basis at those organic growth levels. Now there is some optionality in there that organic growth could go higher as we move and that will be upside. But that's where I come out on that.

[Luv Sodha:]

Got it. And I guess as we head into the back half of the year, obviously, you have the total compares given the maximum related spend. Maybe for Mike, could you share a little bit how you think about guidance, but more specifically like how we should be positioning in our models and any insights that you could share unconditional?

[Mike Hill:]

Yes, Luv. Mike here. So last year, the political revenue of course ramped up during the course of the calendar year quarter-to-quarter as we got closer and closer to the election in Q4. We talked about 2 million of election revenue in Q1 last year. That was not in this year's Q1. Now we've got about 3.5 million in Q2, that was in Q2 last year that's not in this Q2 and then of course ramps to higher levels in Q3 and Q4 last year. So again, that's what we're talking about that we're going to have to lap those. We will continue just like we did in today's 10-Q filing and the next Qs, and then the 10-K. We will format those out to show the breakout of the political revenue. So I think that's it. I think it's just the trend. You can see it coming. We know the trend from year, and of course, we'll continue to back that out to try to give disclosure and visibility into the impact for this year. But we've got our guidance numbers out there for this year, as you can see and that should, as Jack said, just sort of carries through.

[Luv Sodha:]

Got it. One last one, if I may, for Rod. Just great to see the momentum on the existing accounts and the expense within the existing accounts. Could you maybe give us some more light as to which – I guess which parts of the portfolio saw most traction with and where is the most opportunity in terms of the cross-sell motion? Thank you.

[Rod Favaron:]

Yes. That's a great question. I didn't mention this customer. I can't say their name, but it's just another major tech company. This is illustrative of strong product group for us, obviously in our sales enablement group. This organization purchased our Altify sales enablement suite, and they're rolling it out to 1,200 salespeople, their entire sales organization. So when a company like that, that sits a sales methodology on you. It's a pretty strategic deal. That part, I mean, we have strengths in every business unit and frankly in each of our – each of sort of the library areas of the business, where we saw good cross-sell and good expansion. Obviously, expansion for us is a lifeblood. I mean, I mentioned earlier, we track our cross-sell pipeline. We also track expansion separately and we track obviously new logo. We track all three because they convert at different rates. So it'd be running different campaigns and programs. And all three, I would say expansion is reasonably healthy and we're making a lot more progress there of kind of same-store sales of getting existing customers with existing product to expand. And that's obviously the lifeblood of any software business. And I mentioned earlier the growth in the cross-sell success, and that leaves us with new logo, which frankly is the longest sales cycle pipe, right. You don't have an existing relationship or an existing contract. It's a net new conversation that you're winning from scratch and you're putting in contracts and those things take longer. And so we run that as a sort of another parallel pipeline. In all three – we've optimized investment for all three. We weren't doing this, I would say two years ago. And we sort of optimize the marketing investment across those three pipelines to drive the most sales. And I think it's working pretty well. Again, the global account team has been in place an average of about nine months. They now know their cohort groups. So those folks manage our top 175 customers vertically oriented those global account managers. And their statistics from Q2 was very encouraging. They were – if I looked at the whole company relative to net ARR, how much more did we sell than we lost? So to speak, if we look at that cohort group substantially better than the overall company as a whole. So we know that applying these types of resources into our biggest customers is going to have a great outcome. And we just got early evidence a couple quarters into those folks being in their seat that they're already impacting it. So we've just got to keep doing what we're doing. And sometimes we're going to have a year like 2020, where we had an overall growth rate based on our 2019 acquisitions and some tailwind with the elections. And sometimes we're going to have year like 2021, which we're talking about today where we didn't acquire a lot last year and we're dealing with some lap numbers from the election. So as Jack said at the very beginning, I think the most important data point here is this is a 15% grower forever. And that's honestly why I'm here. I'm obviously here to generate organic growth, but we're here to sort of compound this business over the next five and 10 years and create that value.

[Luv Sodha:]

Perfect. Appreciate the color. Thank you.

[Operator:]

The next question comes from Scott Berg with Needham. Please go ahead.

[Michael Rackers:]

Hi. This is Michael Rackers. I'm on for Scott Berg. Thanks for taking my question. Just have one quick one for you. But now that you've had Panviva for a little over a month now, is the trajectory of that acquisition comparable to other acquisitions that you've done, or have you found anything unique that would require a different timeframe? And can you just kind of give us some color around that?

[Jack McDonald:]

Sure. So Panviva was a great add to our software library. And we've seen a lot of opportunity in the knowledge management space. And of course, we've got a strong – we had a strong offering pre-Panviva with right answers, which is more about enterprise search, right, where you've got a search bar and you're tapping a federated group of databases and a contact center agent is doing that and getting the right answer at the right time. Here with Panviva, you've got a structure where it's one database and really the lens – core lens of the product is around workflow. And so you're walking, contact agents through a specified workflow in order to provide a consistency in service and support delivery in. And today, especially rate promotes faster onboarding of contact center agents, which is a critical item for our customers given the labor environment that we're in. And also has a particular area of strength in regulated industries, healthcare utilities, financial services. So we really like the way Panviva fits into our existing software library. The early indications on the integration process, which obviously is a pretty well baked process for Upland 28-plus acquisitions has been going very well. And I would also say – and again, these are early kind of signs, but some of the early signs on the sales side there are also positive. And just to kind of reinforce or comment on something Rod said a moment ago, which I think is so on target and so important. A lot of the positive changes that Rod and the team are bringing to the table make us a better buyer of businesses. So our ability – and I think it was pretty well developed even before, but it's better now our ability to tear these businesses apart in diligence and to understand how we're going to integrate them and sort of hit the ground running on the go-to-market side, it was a level up from where it was before. And again, these changes to me are what support that total growth rate of 15% over the next several years and over the long-term as we scale the business.

[Michael Rackers:]

Great. Thank you so much. That's all for me.

[Jack McDonald:]

Thank you.

[Operator:]

Our next question comes from Terry Tillman with Truist. Please go ahead.

[Joseph Meares:]

Hey, guys. This is Joe Meares on for Terry. I think I missed these numbers that you mentioned a few minutes ago. But I think the last time we spoke, you said you had nine across eight verticals. Is that still the same number? I guess is the question. And then are you thinking about increasing investments in GAMs? I know it's a more recent move for you guys. I'm just wondering if you're planning on loading up since it sounds like you've been very productive so far.

[Jack McDonald:]

Great. Rod, do you want to talk a little bit about that?

[Rod Favaron:]

Sure. Yes. Those numbers are the same. I would probably not use the term GAM only because the people – that the spec we use to hire that team very senior, these are the kind of people who could work at Salesforce among their biggest accounts, kind of that that's the spec. The next set of hires will be focused on sort of those next level down customers. So the customers are generally a little bit smaller. So I think what's more important to think, I would think of it this way, rather than thinking about us, adding GAMs, think about us adding more salespeople who own an entire account. So we're kind of a tricky business in that we have 30 products and a sales person. It's very hard to sell 30 products. Don’t know how to sell 30 products. So we've been working on our product expertise and product specialists. We call them solutions consultants in that capacity, so that more of our sellers can represent all of Upland to a given customer. And that is another big key to unlocking cross-sell long-term because you have a more strategic account plan for that customer. I'll give you an example. We've got a – we’re a Salesforce customer, and we have a sales guy at Salesforce who represents all of the products that Salesforce has to Upland. He doesn't know them all in detail. But he learns what we're up to and he'll bring to bear the product experts. So we want to learn about data ROM, or we want to learn about Tableau or MuleSoft, right, he has access to the specialist. That’s a long answer to a short question. But where we'll head there is more sales people that own entire accounts and more product specialists, who sort of sit behind them and are available when the conversation goes to the third or fourth level. And that's sort of an important evolution. That's going to take us time because every 90 days we buy another company that has another team that only knows one product. So that is going to be a way of life as we move forward.

[Joseph Meares:]

Got it. That was really a helpful answer. I appreciate it. And then just as a follow-up around acquisitions, we've been doing a lot of work on the CDP space. And I know BlueVenn is like a smaller acquisition. Are you seeing anything out of that asset so far?

[Jack McDonald:]

Yes. I mean, the integration has gone well. We are very excited about BlueVenn because what it represents in terms of bringing together the existing CXM assets that we had in SMS messaging and in-app and push notification and in email and in customer sentiment. So thus far the integration there has been proceeding just as planned. And again, on Rod's point, as he builds out that account focused selling ability, that means in every acquisition we do, Upland acquires business we can now take that product and put it into the sales bags, if you will, of our account-based salespeople. You start to really see leverage on that with acquisitions. It helps us create even more efficient businesses post acquisition, right. It's one more chapter in that integration playbook that enables us to reduce unnecessary costs and get more operating leverage. So again, to me, it supports that 15% total growth target and it supports that expanding EBITDA and free cash flow margin as we go.

[Joseph Meares:]

Awesome. Thank you. I got another one, but I’ll jump back in the queue.

[Operator:]

Our next question comes from Jeff Van Rhee with Craig-Hallum. Please go ahead.

[Aaron Spychalla:]

Hey guys. This is Aaron on for Jeff. Just one quick one for me. Rod you mentioned churn and the efforts you guys are taking there as far as retention goes. Just curious to get a little more color around what you're seeing right now as far as churn is concerned, what's working as far as the retention is going and kind of how does that compare over the last couple of quarters to year?

[Rod Favaron:]

Yes. I think, I mean, obviously we reported it at the end of last year that we did have a little more churn than we historically had and it was primarily COVID-related. Customers decided to pause projects or pause activities. I will say, as we got into the new year, we've seen improvement across the board. More improvement in our big global accounts, but improvement across the board and better churn – less churn to be clear.

[Aaron Spychalla:]

Perfect. Thanks. That's it for me.

[Operator:]

The next question comes from David Hynes with Canaccord. Please go ahead.

[Luke Hannan:]

Hey, guys. This is Luke on for DJ. So I think you hinted at this earlier, but maybe you can put just a finer point on it for me. I'm curious with the heightened focus on cross-sell. Are you looking at M&A through a lens that incorporates more thought around product and go-to-market synergy?

[Jack McDonald:]

Thanks, Luke. So yes, look, I think it's – Upland’s reset point of scale where I like it because in a way it becomes a simpler business. We're building this cloud software library. We've got this platform in place that is supporting 1,700 enterprise customers globally, 10,000 typical customers is delivering high customer satisfaction and also high and expanding margins, and we've married that to an equity compounder model. And so the piece to me that we needed to build on was distribution. And as we put that account-based selling in place exactly the point that Rod is making on this call, it's just kind of help us to bring more of those products in and its cross-sell. And obviously, we've done some nice clustering. I think, of our acquisitions. If you look at what we've done over the past four years, I mean, I think the story kind of tells itself around that focus on cross-sell, whether it's the suites we built in CXM in document and workflow automation, in enterprise sales enablement, as well as in project and IT management. But you see it particularly in those first three that we've really built some cohesive offerings there. And we were mentioning earlier in the call, some of these major SaaS leaders with expertise in the sales domain moving toward multiple product implementations and seven figure kind of annual recurring revenue numbers are growing, I think that says something about the work we've done in bringing these products together. So we'll keep that focus and we'll continue to build out that account-based sales capacity with an eye towards increasing velocity around both expansion enterprise license agreements in cross-sells as we go.

[Luke Hannan:]

Got it. That's really helpful. Maybe just as a follow-up. How are you guys thinking about deal sizes as your business continues to scale, which is to say, should investors expect larger deals for the volume of deals to increase over time?

[Jack McDonald:]

What we're really focused on right now to be plain about it, right. It's 15% total growth. That means – and doing it on a self-funded sustainable basis while continuing to generate materially positive operating cash flow and free cash flow. And that means we'll be doing $40 million, $45 million, $50 million a year of acquired revenue, and that could grow a little bit as we scale. And so that's going to set up, call it three or four acquisitions a year within our size category, which is this $5 million to $25 million. To me, that's the part of the market that we can really be dominant in, where we can have pole position on acquisitions. We haven't really talked in this call yet about our pipeline, but very strong. Again, if you look at where we were a few years ago, we’re having a fighter away into sales processes that we're now invited into. And again, in our sales category where we really have pole position because we've got a unique value proposition for these buyers – for these sellers, I should say. As being a buyer, that's got fair transparent pricing that brings speed and certainty to the process. And then also is the best home for the product and the customers and a subset of their high performing people. So I think we just keep executing. That's the good part here. In order to create the kind of growth we're talking about and the kind of shareholder value we're talking about over the next several years, we don't have to do anything new. Rod is going to continue with what he's doing on the product and go-to-market side. And on the M&A side, we just got to continue one foot in front of the other, bringing in these great cloud digital transformation tools that big corporate customers love and we have a big pipeline of deals to execute against.

[Luke Hannan:]

Very helpful. Thank you.

[Operator:]

The next question comes from Alex Sklar with Raymond James. Please go ahead.

[Alexander Sklar:]

Thank you. Jack or Rod, I know most of the business is U.S.-based today, but the number of your acquisitions like Panviva do have international exposure. I'm just curious if you could talk about the international enterprise opportunity kind of broadly. How does the coverage of international accounts look today and how does the product suite kind of positioned outside of the U.S.?

[Jack McDonald:]

Yes. So Mike, rough split on U.S., rest of world revenue today?

[Mike Hill:]

70% U.S., 30% rest of world.

[Jack McDonald:]

Right. And that rest of world, right, the bulk of that EMEA?

[Mike Hill:]

It is. UK, Europe is about 17%, 18%; 5% in Canada, and then the rest is rest of world.

[Jack McDonald:]

All right. So just with that background, we see attractive opportunities for obviously growth in U.S. and some of these acquisitions that we've made like Panviva are based outside of the U.S., but almost half of their sales in the U.S. and the fastest growing part of their business in the U.S. And those are acquisitions where we can help to accelerate that process by again tapping into this account-based sales organization that Rod and the team are building. I know there's also some interesting stuff underway on the marketing side and on the lead gen side internationally. And so I'm going to turn it to Rod to give his views and thoughts around that.

[Rod Favaron:]

Yes. I think you mentioned most of Panviva’s revenue. I think a little bit more and half in the U.S. So what's interesting is we have serviced the rest of the world out of, frankly, the UK and the U.S. and Canada for the life of the company. And I think five years ago, people probably would've thought that it was weird, but today I think that's a strength because being able to do a deal – I was on a call earlier with a big Swiss company. We're doing that deal from the sellers in the Eastern U.S. for us and the customer is cool. So we're going to focus on frankly staffing in the U.S. and the UK from a go-to-market perspective. And Jack alluded to the fact that our next step with our lead gen SDR team is, is to put a team on the ground in the UK for time zone coverage and language coverage on the continent. So I think more and more it's completely acceptable and it would not be somewhere at all, frankly, to start building sales offices everywhere around the world. So we're not going to do that. We're going to take advantage of just how work has become remote and that's how we’ll go to market.

[Alexander Sklar:]

Okay. Great color. Mike, one for you on the free cash flow conversion. Another really impressive quarter. I think you're tracking well above that kind of 55% normalized EBITDA to free cash flow if you look back over the 12 months and despite doing those three deals a year-to-date, so I'm just curious if there's any color on what's driving that success in the working capital side, and if it's sustainable at all, or if there's some timing benefits there that are occurring?

[Mike Hill:]

Yes. For the most, it is sustainable like we've talked about, so year-to-date almost $23 million so far free cash flow, operating cash flow this year at two quarters. So very comfortable, confident that we're going to get to at least $30 million on the year here, 2021, and potentially get to $40 million again, depending on future acquisitions and the restructure costs that come with us. So we expect to be sort of sustainable in this, call it around $30 million to $40 million, around $40 million as we grow, we're going to add more cash flow. And so for me, as I look at it, I'm kind of looking at a $40 million a year and then growing with scale. We're at almost a $100 million of EBITDA now. So that's the way to think about it. So that's with full load of acquisition-related expenses coming through as we're active doing acquisitions right now. The 50% to 60% conversion is going to be pre-acquisition costs, right. And all that still consistent and in fact, we're doing a little bit better. So timing wise, timing differences, it was – I think the working capital changes in Q2 were about a $1 million net positive, so that didn't help us that much here in Q2 as we printed the $10.8 million of operating cash flow. So anyway, it's strong and expect it to continue.

[Alexander Sklar:]

Got it. Yes, I was picking up on like out of the 60-plus percent conversion over the last 12 months. That was kind of the delta I was asking for, but that's helpful color. Thank you.

[Mike Hill:]

Sure.

[Operator:]

And our last question is a follow-up from Truist. Go ahead, sir.

[Joseph Meares:]

Hey, guys. My question was actually around SGX as well. When you initially gave the $30 million – at least $30 million, possibly $40 million in free cash flow for the year, there were number baked into the first half. It seems like you're tracking ahead of where you'd probably expect it to be, but I'm just trying to see if there's any guidepost there internally?

[Jack McDonald:]

Yes. There is timing differences from quarter-to-quarter, so it's always hard to have specific milestones. We wanted to do $10 million a quarter. But again, you can’t get too specific. You kind of have to look at the year in total or trailing 12 to kind of get a clear picture as the timing differences work their way out of the mix. So yes, I do feel like we're a little bit ahead of the conservative sort of $30 million that we started with a year, which makes me feel good that we're going to at least get to the $30 million and hopefully $40 million as we complete the year.

[Joseph Meares:]

Appreciate it. Thanks guys.

[Operator:]

This concludes our question-and-answer session. I’d like to turn the conference back over to Jack McDonald for any closing remarks.

[Jack McDonald:]

Great. Well, thank you all for joining us today and we look forward to seeing you on the next earnings call.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.