Upland Software, Inc.
Q3 2021 Earnings Call Transcript

Published: 3 Nov 2021

[Operator:]

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

[Jack McDonald:]

Thank you and welcome to our Q3 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 Q3 results, then Rod will provide some color around sales and customers and product developments. And following that, Mike will provide some insights on the Q3 numbers and our guidance. We will then open the call up for Q&A. But before we get started Mike will read the safe harbor statement.

[Mike Hill:]

Thank you, Jack. During today's call, we will include statements that are considered forward-looking within the meanings of 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 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 dates 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 third 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. With that I'll turn the call back over to Jack.

[Jack McDonald:]

Thanks Mike. So, in terms of headlines, this was a mixed quarter. We had strong adjusted EBITDA and our free cash flow is on track, but we had a lower than expected messaging volumes, which resulted in our revenue being within our guidance range, but below the midpoint. We are lowering our Q4 guidance revenue guidance by $3.9 million to reflect our reduced outlook on messaging volumes and also to reflect the fact that we didn't see the uptick in new logo bookings and net dollar retention rate that we had expected in the third quarter. The COVID impacts on the business of the last 18 months are now fully reflected in our Q4 outlook for $75 million quarterly revenue run rate and we will grow from that run rate as we move into and through 2022 because we see signs of real improvement in net dollar retention rate as we move through next year. Finally, our M&A outlook remains unchanged and we are targeting $40 million to $50 million of acquired revenues between now and the end of 2022. So, let me dig in now a little bit on the third quarter. Revenue in the third quarter came in at $1.3 million below the midpoint of our guidance range and the biggest factor driving this change was lower than expected variable text and e-mail messaging volumes from our progressive advocacy organization customers. These accounts have not churned, but they reduced their messaging volumes in the third quarter. Now, that means their message volumes and the associated revenue could bounce back up at any time, but to be conservative, we're going to assume that they do not and adjust our outlook. Organic growth in recurring revenues in the third quarter, ex-political was flat. And for the full year 2021, we expect it to be 2%. Adjusted EBITDA came in at $25 million, above the midpoint of our guidance range. GAAP operating cash flow was $5.3 million in the third quarter. Free cash flow was $4.9 million in the third quarter, giving us roughly $28 million in free cash flow year-to-date. So we are on path and on track to hit our $30 million to $40 million of free cash flow for full year 2021 as we've talked about and that is after acquisition expenses. While we had some good expansion bookings in Q3, we didn't see the uptick in new logo bookings that we expected. Rod is going to talk about this in more detail in terms of what we're seeing, but I'll note that the Q4 early bookings indicators are better than Q3 and notwithstanding that, we're going to adjust our bookings outlook to reflect the slower pace of expected improvement and to add additional conservatism until we see sustained improvement in new logo bookings. On renewals and expansions, you'll recall that using our UplandOne playbook, we drove our net dollar retention rate up from 90% in 2015 to 97% in 2019. In 2020, the first year of the pandemic, our net dollar retention rate declined to 94%. Today our net dollar retention rate is solid in the low to mid-90s. But frankly, it's not where we want it to be. The good news is that our focus throughout this year on securing multiyear customer renewals and expansions means that a higher percentage of our revenue is now contracted through 2022, all the way through next year. So that should structurally support improved and stronger net dollar retention rates next year. Again, as I noted earlier, the impacts of the last 18 months are now fully reflected in this Q4 outlook for $75 million quarterly revenue run rate. And we're going to grow from that run rate, because as I say, we see real structural signs of improvement in net dollar retention rate as we move through 2022. And of course on top of that between now and the end of next year we're targeting to add another $40 million to $50 million in acquired revenues. Look we saw two-plus years ago the opportunity to build out a real go-to-market and product organization. Rod joined us 18 months ago. And even in the face of the complexities of the lockdown, he was able to hire our new go-to-market team by the end of 2020 and to complete key additions to the product team by the middle of this year of 2021. We are still in the early stages of executing this mission but I remain as excited about the opportunity today, as I was two years ago. As we move through this and look out over the next five years, we continue to be excited about our business and the opportunity for growth and value creation. We have a powerful cloud software library, a proven operating platform, a strong base of over 1700 enterprise customers and an equity compounder financial model. Over the next five-year period, this is a business that can reasonably target total revenue growth of 15% per year from the current run rate, organic plus acquisitions. And importantly, do it on a self-funded, sustainable basis and generate positive free cash flow as we go. And with that, I'm going to turn the call over to Rod.

[Rod Favaron:]

Thank you, Jack. Good afternoon, everyone. As a reminder, this year 2021 is our first full year in the new go-to-market model. The team has adjusted well to this model. And as Jack shared expansion sales were good. Cross-sell continues to improve, but new logo sales haven't ramped to expectations. Let's talk a bit about the new logo side of the business. The new logo sales challenge in Q3 was primarily due to a softness in new pipeline created during the second half of last year. That said for Q3 we closed 109 new customers with 27 of those being major customers. If you will recall during second half of last year, we were making a lot of changes. We were consolidating our digital presence, changing our marketing pipeline motion. We hired our sales development team and we were in the process of shifting from our historical blend of a lot of in-person event marketing to digital marketing, while simultaneously obviously the world was in lockdown. As we move into 2021, we completed that shift to a 100% digital then the new sales development team started in January and the result this year is we have a 25% quarterly improvement in new pipeline generation as compared to the second half of last year. We did anticipate the second half of '20 pipeline impacting the second half 2021 sales. But frankly we thought lift off energy coming out of the pandemic would enable us to overcome this through quicker pipeline conversion levels, but that did not happen in Q3. Our outlook -- and switching gears to revenue retention. Our outlook shows net dollar retention improving. Throughout '22 as Jack mentioned as it should begin marching back up into the mid to high 90s. Our team has had success during 2021 securing a bunch of large multiyear renewals and expansions. As an example, we secured multiple 6-figure long-term renewals and expansions with major global financial services firms. Within the financial services industry there's a growing interest in our knowledge, management product library to help drive facilitate more effective compliance-led knowledge sharing due to the ever-increasing and evolving global regulations. Another example is on our Altify product line where we are having success renewing 6- and 7-figure customers on long-term contracts this year. Altify is a great example of the difference in committed revenue from 2021 to '22. For example Altify has nearly 2/3 of its customers renewing this year in 2021 which compares to about 1/3 of its customer base renewing next year in '22. We will see the benefits of these successes in '22 as a higher percentage of our total ARR is contracted through next year as compared to this year on long-term contracts which has a structural effect on net retention and would positively impact that. I want to credit our team for this progress from our support team to our customer success R&D and sales teams. In marketing, we continue to test and improve our lead gen programs and focus our individual product marketing plans to just be more efficient and driving new leads. We have also adjusted how we onboard acquisitions to better preserve top of funnel history and momentum. And our new SCR team which we've mentioned a couple of times has produced 50% of our year-to-date new pipeline with good conversion metrics. So excited about the progress of that team. Switching to the product front. Along with our normal new release cadence we introduced a brand-new product from Upland. This product Altify Sales Reference Manager is a new product built natively on Salesforce and integrated into our Altify sales suite. It's a next-generation complement to our RO innovation product. These two products both solve the challenge of managing customer references, but appeal to different use cases. Our older product RO supports a centralized hub and sales reference model while the new Altify sales reference manager is a modern decentralized peer-to-peer model built natively on Salesforce. This new product is a great example of Upland innovating in our wheelhouse where we have deep category domain knowledge and it unlocks an adjacent revenue opportunity. In addition to that product our ingenious product became one of the first service club voice for partner to let on the integrator is available on the Salesforce app exchange helping customers maintain their existing telecom investment and infrastructure investment, while taking advantage of the new service cloud voice environment within Salesforce. With that I will turn the call over to Mike.

[Mike Hill:]

Thank you Rod. I'll cover the financial highlights for the third quarter and our outlook for the fourth quarter and full year 2021. First on the income statement. Total revenue for the third quarter was $76.1 million representing growth of 3%. Recurring revenue from subscription and support grew 2% year-over-year to $72.3 million. Professional services revenue was $3.1 million for the quarter, a 12% year-over-year increase. Overall gross margin was 67% during the third quarter and our product gross margin remained strong at 69%, or 73% when adding back depreciation and amortization, which we refer to as cash gross margin. Operating expenses; excluding acquisition-related expenses, depreciation amortization and stock comp; were $31 million for the third quarter or 41% of total revenue, all generally as expected. Also, acquisition-related expenses were approximately $3.7 million in the third 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 the fourth quarter. For each acquisition, total acquisition-related expenses are generally 50% to 60% of acquired annual revenue run rate and varies from acquisition to acquisition, depending on uncontrollable factors such as size and location. Generally, for each acquisition 45% to 50% of these transaction and transformation expenses are incurred within the first three months and then tapered down rapidly until the transformation is complete by each acquisition's first anniversary. Our third quarter 2021 adjusted EBITDA was $25 million or 33% of total revenue, consistent with $25 million or 34% of total revenue for the third quarter of 2020. As expected, adjusted EBITDA margin for this quarter was lower than the year ago quarter 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% and we expect to exit 2021 with Q4 at about 32%, as implied by the midpoint of our guidance. Now, on to cash flow. For the third quarter 2021, GAAP operating cash flow was $5.3 million and free cash flow was $4.9 million, even with $3.7 million of acquisition-related expenses in the quarter and some negative temporary timing differences in our working capital accounts, temporarily pulling down operating and free cash flow by some $6 million or so in the quarter. With approximately $28 million of free cash flow year-to-date through Q3, we continue to anticipate full year 2021 free cash flow well over $30 million and possibly closer to $40 million, depending upon the size and timing of future acquisition-related expenses. So we are generating substantial GAAP operating and free cash flow even after acquisition-related expenses. On the balance sheet, this ongoing free cash flow generation in addition to our existing liquidity of approximately $240 million comprised of approximately $180 million of cash on our balance sheet as of September 30, 2021, and our $60 million undrawn revolver. This ongoing cash flow generation, existing available liquidity and expanding our credit facility, while maintaining net debt leverage up to a maximum of around 4 times, should allow for self-sustained growth without dependency on the equity capital markets. I should note that our net debt leverage is currently at around 3.6, based on the midpoint of our 2021 adjusted EBITDA guide. As of September 30, 2021, we had outstanding net debt of approximately $350 million after factoring in cash on our balance sheet. I will note that the principal payments on our term debt are 1% per year or about $5.4 million per year, 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 NOL carryforwards and of these we estimate that 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 December 31, 2021, Upland expects reported total revenue to be between $73.2 million and $77.2 million, including subscription and support revenue between $70.2 million and $73.8 million for a decline in recurring revenue of 4% at the midpoint over the quarter ended December 31, 2020. Fourth quarter 2021 adjusted EBITDA is expected to be between $23.4 million and $25.4 million for an adjusted EBITDA margin of 32% at the midpoint. This adjusted EBITDA guide at the midpoint is a decline of 8% from the quarter ended December 31, 2020. And by way of comparison Q4, 2020, had $6.6 million of political messaging revenue, which will not repeat in Q4 of 2021. For the full year ending December 31, 2021, Upland expects reported total revenue to be between $299.5 million and $303.5 million, including subscription and support revenue between $285.5 million and $289.1 million for growth in recurring revenue of 4% at the midpoint over the year -- over 2020. For year 2021 adjusted EBITDA, we expect between $95 million and $97 million for an adjusted EBITDA margin of 32% at the midpoint. This adjusted EBITDA guide at the midpoint is a reduction of 4% over the year ended December 31, 2020. By way of comparison we had -- 2020 had $18.2 million of political messaging revenue, which will not repeat in 2021. And with that, I'll pass the call back to Jack.

[Jack McDonald:]

Thank you Mike. We are now ready to open the call up for questions.

[Operator:]

Thank you. The first question is with Bhavan Suri with William Blair. Please proceed.

[Bhavan Suri:]

Hey gents, can you hear me okay?

[Jack McDonald:]

Yes.

[Bhavan Suri:]

Great. So, obviously, a mixed quarter here. Let's walk through a couple of things just to understand how things played out. I guess, maybe let's start off at a high level. Help us think through visibility. I think Rod said, pipeline wasn't built in Q3, Q4 of last year, which is 12 months ago. And we're talking about 15% type of growth. Help us think through visibility and confidence in the pipeline given that pipeline didn't convert in the past? Just help us think through like what's different now versus a year ago? Rod has been there since early last 2020. And so just help us think through those pieces together might have changed from six months into robbing there versus 18 months in robbing there and the understanding that you have more confidence or more visibility or more control over that pipeline?

[Jack McDonald:]

Yeah. So let me start on that and then Rod can pick it up. The point that Rod was making is that, we had some ramp-up in pipeline creation in the second half of last year right? We were putting new processes in place to generate that pipeline and we're doing so amidst the lockdown. So on top of everything else we had to move from a hybrid in-person and digital lead gen effort to a totally digital lead gen efforts. So given our sales cycles, we knew that that softness was going to impact potentially bookings generated in the second half of this year. However, our assumption was that the energy if you will, lift off energy coming out of the pandemic would enable us to execute with a higher percentage of conversion right that the pipeline conversion will be a little bit higher. And we're not talking about huge numbers here but that uptick that we expected in Q3 didn't happen in Q3. And now we see some positive signs in Q4. But in order to be conservative, we're going to take down our outlook a little bit until we see a sustained improvement in new bookings. So that was one piece of it. The other piece of it Bhavan was on the messaging side of the business where we saw lower volumes in variable e-mail and text messaging in Q3. And those -- we saw it among a specific cohort of customers. Those customers haven't churned. In fact we've had renewals among that cohort of customers and those revenues could bounce back at any point. But in order to be conservative we're taking down our forecast on those variable revenues for the fourth quarter.

[Bhavan Suri:]

Got you, got you. And I mean on the political messaging side and the messing side we've seen that even Twilio's growth rate decelerated. I think that is understandable. I think the question really is if you saw that happening earlier, should you -- should we have seen that either in guidance or should the uptick in conversions should we have been more -- it is what it is. I guess Jack let's play a different scenario back which is organic growth and accelerating organic growth and bringing in a sales team is something that you and I talked about many years ago and you chose the smart and wise move which is we're not going to spend 20% of revenue on sales and marketing 30%. And we're going to do this very focused 3% to 5% organic growth, drive EBITDA and grow a business, and you've executed a strategy really well. Do you feel that the change that you've made has played out? Has it not played out? Is it -- it's obviously not put out vis-a-vis expectations, but do you think that maybe the old strategy is a better strategy help us think through strategically as you think about managing this business you and team have executed amazingly well, but the organic growth was never a big driver. And you focused on that in the last let's just say whatever 18, 24 months, how do you think about that strategy? Do you still feel confident in that strategy? Do you still feel like that's still the right approach, or do you think maybe we should just maybe take the foot off the pedal a little bit and maybe refocus on our old strategy? Help us think through how you balance that out? How you and Rod are talking about that?

[Jack McDonald:]

Well, look I've seen this movie before with my last company Perficient and you were very familiar with that. That was a stock that was at $0.37 in early 2000s. And is it $120 a share today in the first 10 years of that business, we used acquisitions and strong financial management to grow that business from essentially nothing to $250 million in revenue. In the last decade, the team has taken that business and turned it into one of the global leaders in solutions consulting. And I see a similar kind of transition here at Upland. And so saw that opportunity a couple of years ago to bring in the kind of leadership that could build out our sales and go-to-market and product organizations and position Upland for that next decade of growth. And so I'm as excited about that mission and opportunity as I've ever been. To your point, to keep things in perspective, we've taken spending on sales and marketing from 15% of revenue to 18% of revenue. So, it's not like we've gone to a 40% of revenue spend on sales and marketing. I believe that at that level of spend, we've got a more repeatable, more scalable value-building engine. And as I've been saying I think that can support a total growth rate target of 15% a year. The organic part of that is going to be somewhere between 2% and 5%. In some years, it will be higher. In some years, it will be lower. In fact in some years, it could go above 5%, right? It depends on individual timing factors there. But in general, it's a target 15% growth rate with low to mid-single-digit organic with EBITDA margins here in the low 30s that we see moving up toward a target range of 40% through time at scale call that roughly twice the size we are today. And of course, significantly we can do that under our own steam. We have no dependence on the equity capital markets. We can finance $40 million to $50 million a year of M&A from internally generated cash flow and our debt facilities and our cash on hand. So, we're committed to building long-term value. The decisions we made about bringing in Rod and the team I think were the right ones and has happened with Perficient, I think the same thing is going to happen here. We're going to create value through time. So, no big pivot off of this. We are staying the course against the plan we put in place two years ago.

[Bhavan Suri:]

That's helpful. Really, really helpful. Thank you. One last one for me maybe for you and for Rod. Are you seeing any changes competitively in the field? Are others getting more aggressive on pricing or offerings or freemium, or is there any difference you've seen in let's say, 12, 18, 24 months, especially for COVID in the competitive environment? Love to get a sense, because even if you pick some of the steel pipes, there's plenty of competitors in each one some of our point solutions, but I'd love to see if you're hearing anything different or changes in that environment that may be impactful or not but love to get some sense of that.

[Rod Favaron:]

Yes. So I'll take that. Yes, so that's a great question. I think that – I mean obviously as you know, we have a pretty diverse set of products and each of those products has maybe a small set of competitors. So I don't think we've had any what I'll call material or meaningful competitive change, as I look across the products. On a positive side, we mentioned earlier some of the connections with Salesforce, which is one of our biggest partners. And with HP, which we didn't talk about on this call, we've really gotten a lot closer to a couple of the big platform players with the set of our products which we think pays dividends in 2022 and 2023 as we look forward. So I don't think there's been material changes competitively, minor things here and there but nothing that would have a sort of a forward-looking material impact on the business. I will say just to add to the confidence level, I think that the way Jack and Mike and I look at this business, we have made a lot of changes over the last 18 months in the way we organize, the way we structure, the way we go to market, having the games in place and their focus and having more of a named account motion, the way we're doing marketing, which – some of which was necessitated by the fact that we couldn't do marketing the old way, right? So we have to go to this full digital model. In spite of what you're reading today and the questions you're asking today, I think the confidence level in the design of this organization and the people we put in place and the motions we put in place is very high. So I think that to Jack's earlier point staying the course on this mission this is absolutely the right structure to go run this business on as we forward look.

[Jack McDonald:]

Yes. I mean we've built a platform here that has scaled now to $300 million of revenue, that's got a strong library of products. It's a real – an incredibly strong enterprise customer base. So this is a real company, generating value. And I love the changes we've made and I think I know they're going to pay off through time as we go. Again, within a set of sober realistic expectations, I've never said, this is going to become a 20% organic grower. We're talking about 15% total growth. We're talking about locking in low to mid-single-digits. And as we've said, there's some optionality that it could be higher. But in terms of the core rate around which you underwrite an investment in this business, it's that 15% total target with low to mid-single-digit organic.

[Bhavan Suri:]

Yes. No I think that's fair. I'll say this from having over to you a long time. I appreciate the candor,. the frankness and the honesty. You've never said 20% organic growth and I appreciate that. I think let's let it play out for the long-term. Thank you for taking my questions. And again, I said for the candor and the frankness. Thanks, gentlemen. Appreciate it.

[Jack McDonald:]

Thanks, Bhavan.

[Operator:]

The next question is from Brent Thill with Jefferies.

[Jack McDonald:]

Hello?

[Operator:]

Mr. Thill. Your line is open.

[Jack McDonald:]

Okay. Operator, why don’t we move to the next questioner. We'll circle back around.

[Operator:]

Certainly. The next question is from Scott Berg with Needham. Please proceed.

[Scott Berg:]

Hi, everyone. Thanks for taking my question here. Jack I guess, I have to start with – I don't know, if you or Rod want to take this. But we've seen demand recover in most of the broader software space, especially enterprise applications over the last year. And while everyone is not firing on full cylinders mentioned are pretty healthy in the environment. I guess can you help us understand – I get the messaging part utilization, let's move that aside. But on the new customer acquisition component, what's not kind of picking up in your business? Is it clearly just kind of the air pocket around kind of change in sales philosophy last year driving some of this, or is there maybe a change around some of the demand or interest in the type of applications in the Upland portfolio today?

[Rod Favaron:]

Yes, I think -- this is Rod. I'll start there. I think, as you described that the air pocket is an interesting way to think about it. Certainly, the pipeline creation nine to 12 months ago is having an impact. And I think the other part of this business are -- we've been cross-training the sales guys for the last few quarters. Many of them sold one product when we got this process started and now they're selling multiple products. And so they're going through a learning curve and that's progressing well. I would say that it's more the air pocket. And then, the other comment I'll add is, that our global account team now has generally been in their accounts for three quarters some for four quarters. And the relationships and the depth and kind of what we're starting to see with those -- with our top accounts as we talk about Q4 and seeing a little bit better early indicators for Q4 on the sales side, a lot of that's being driven by that team having time in their accounts to go build that pipeline up within those accounts. And so that motion has taken time to pay off, because it takes a while to build a net new enterprise pipeline from scratch in those accounts. So I would say it's a combination of those things, but I don't think there's something here that's competitive or sort of systemic. I think it's more of the bubble we're going through from the back half of last year from a pipeline perspective.

[Scott Berg:]

Got it. Helpful, Rod. And then from a follow-up perspective, Mike, it looks like you wrote off about $10 million in goodwill in the quarter. Can you help us understand what that might be related to?

[Mike Hill:]

Yes. Scott, there was no write-offs. We did have some adjustments in purchase accounting, which is always the case as we finalize the numbers. So any adjustments were just related to adjustments on this year's acquisitions.

[Scott Berg:]

Got it. Helpful. That’s all the questions I have. Thanks for taking them.

[Jack McDonald:]

Thanks, Scott.

[Operator:]

The next question is from Terry Tillman with Truist. Please proceed.

[Connor Passarella:]

Hey. Good afternoon, guys. This is Connor Passarella on for Terry. Thanks for taking my questions. To start, so with the issues that were mentioned around new logo and expansion sales, is that going to give more of a slowdown on the speed to which you'll make acquisitions in order to kind of fix the sales execution?

[Jack McDonald:]

No. We are remaining on the same pace we've been on which is $40 million to $50 million a year of acquired revenue. And that's the pace at which we can execute against that plan and do it on a self-funded sustainable basis, where we are funding the acquisition purchase price out of internally generated cash flow and cash on hand in our debt facilities, while keeping leverage moderate at 3 to 4 times net. So no change in the pace of M&A.

[Rod Favaron:]

And just to clarify one thing. I think your question you said, I think you put new bookings -- new logo bookings and expansion together in that question. I do want to point out that expansion bookings met expectations and have consistently been strong, which I think is a -- at the end of the day this business is healthy if our base is healthy, as we put together growth go-to-market motions. And the way our existing customer base is continuing to buy new products from us or to buy more of the same product from us is encouraging. So just to reflect that back our expansion bookings were strong.

[Jack McDonald:]

I think one other point, Jack here, that I would add there is just the work that the team did this year as we got those global account managers in place, locking in -- as well as our customer success teams, locking in more multi-year renewals, so that the amount of revenue that we have up for renewal in 2022 is substantially lower than it was in 2021. And that that is going to structurally support higher net dollar retention rates moving back, as Rod said earlier, into the mid-90s or better. And that's a key health indicator of the business, right? So I think that's a very favorable trend due to the work that got done throughout this year and driving those multi-year renewals.

[Rod Favaron:]

Yeah. And to get that done, we -- our games did focus a reasonable amount of their energy on retention and multiyear retention as opposed to some maybe net new adds or expansion adds. And so that may have had a little bit of a capacity impact as we went through this year, because we did focus on. We had a lot of really big deals for renewal. And these guys did a great job of getting into those major accounts and getting multiyear deals in place, which will again help us as we move forward. And in order to sell a customer more, you have to make sure what they already have is working well and they're retained and they have a multiyear commitment. And then it's time to start selling them more. So that's the global account team spent, I would say a little bit more of their time in 2021 than we probably anticipated doing that, but it's going to pay off for us long-term.

[Connor Passarella:]

Okay. That's really helpful. Thanks guys. And then just one quick follow-up from me. In terms of cross-selling, I know you guys mentioned that there's been some training salespeople that are now selling multiple products. Where are you seeing the biggest opportunities in terms of cross-sell right now? Thank you guys.

[Rod Favaron:]

Yeah. I think it's with -- our products are oriented to different sets of buyers and where we have the best conversion success, it's where you have a buyer that owns for example one of our e-mail products and wants to buy our CDP or one of our mobile vesting products or our mobile app analytics products. So where we have focused that cross-sell motion is in adjacent value-added products around that buyer, around a common buyer. And that's how we trained the sales team. We're not really talking about year-over-year, but I will say substantially improved cross-sell year-over-year, 20% to 21% year-to-date. Again coming off a relatively small base because it wasn't something we were terribly focused on earlier. But encouraging signs on cross-sell early look at Q4 is good too. So that's going to -- we're just going to continue to get better at that. And as we integrate more of our products, we don't integrate all of our products together but the product we announced in this release our sales reference manager product that is natively integrated with our Altify suite, which really gives us five products plus our ingenious products, six products that are native Salesforce platform products. And then we have multiple others integrated into the Salesforce app exchange. So we're approaching six, seven, eight products around that platform that's another way that we cross-sell, right? We target with that partner those accounts and go in there. In some cases those are multiple buyers. But the anchor there is the Salesforce platform, which is where we get a lot of our leverage. And again so those motions are – they’re going along. And over time, it will have a much bigger impact on our overall sales, but nice year-over-year growth, certainly faster growing than the other bookings categories if you will. And so we expect that to impact as we move forward.

[Connor Passarella:]

Great. Thank you guys.

[Rod Favaron:]

Thank you.

[Operator:]

Thank you, Mr. Connor. The next question is from Brent Thill with Jefferies. Please proceed.

[Brent Thill:]

Thanks. I want to make sure we understand the backdrop of what's happening. If you take the overall software environment, it's very robust. You're adding sales reps. You had the lack of organic growth. It's been three quarters of not really hitting where the street numbers are at. I'm curious, investors are trying to put this together what's going on? Is this just simply a pocket on the go-to-market? Is there something from the technology side that's not resonating well? Something is not adding up over the last three quarters and I think everyone is just trying to better understand really what's happening?

[Jack McDonald:]

Yeah. Thank you for the question. So in terms of hitting our guidance, we've done that. And again even in this quarter we're within our guidance range, but we're about $1.3 million below the midpoint of that range. So in terms of the credit that we're somehow not hitting numbers on a regular basis that's just -- I'm not seeing that piece of it. We did assume some improvement in the level of new logo bookings here in the third quarter and that was our expectation based on when we laid some of these investments in and just the sort of shape of the recovery that we saw. And so, we didn't hit those new logo bookings numbers in Q4. They were trending the right way earlier this year, but that inflection didn't happen in Q3. Now as I say the early indicators on Q4 look good. But once bitten twice shy, we're going to take our outlook down until we see a sustained improvement in those new logo bookings. So -- and then the messaging piece I mean we've never had sort of a misstep on that before. Here in Q3 we did have some lower messaging volumes which really was -- that's what drove the miss to the midpoint. That was 100% of what drove the miss to the midpoint in the third quarter. We had a couple of million dollars less text and e-mail messaging revenue than anticipated and that was partially offset by some goodness in some other parts of the business and that's the $1.3 million miss to the midpoint. But any of the softness in new logo bookings is just a forward phenomenon as it relates to revenue. So none of that drove the Q3 number. And I would say look, I think we've taken the outlook down to a conservative level. As I say we're seeing some positive signs in Q4 -- early indicators on Q4 bookings. Clearly as it relates to net dollar retention rate, I think we're set for some structural improvement as we move into next year because of all the multiyear renewals we were able to execute. And the thesis here is better than intact right? I remain excited about where we're going and the M&A opportunity. And so, we'll just continue to execute through this.

[Brent Thill:]

And Jack what's driving that message volume lower? I mean we're in a digital disruption environment. It seems like the trend is going the other way but you're not seeing that. What's causing that? Is that just the political hangover still or is it -- what's causing that?

[Jack McDonald:]

It's a great question and it really can't -- yes. No I think it's a great question. And it really came from one customer cohort principally. The principal driver of that was among our customers that are progressive advocacy organizations. We have quite a few of them on that platform. Now we had some big renewals from those customers in the third quarter, but there's always a small piece of revenue that is overage right? That is variable usage above the minimums. And in the text and e-mail business it had been running at about $4 million a quarter pretty consistently. And this quarter it came in at $2 million. And again the shortfall was all among those that was -- it really driven principally by that cohort of customers progressive advocacy group. So again, we've had renewals from those big customers. Those volumes could bounce back at any point. But in order to be conservative, we've taken the outlook down for that text and e-mail variable messaging revenue to $2 million a quarter. So, we've taken it from $4 million a quarter to $2 million a quarter. So it's a small portion of our revenues on a percentage basis and we think that that's a conservative outlook. And we're doing that so that any surprise in the future is hopefully to the upside on those volumes.

[Rod Favaron:]

Yes. And just to sort of building on that the contracted revenue for that cohort group what didn't change. As a matter of fact many of them actually renewed during the quarter for their contracted commitment exactly that this is on top of contracted revenue for that cohort group. And we are staying very close to those customers operationally. Sometimes they run more campaigns than others. And in this case, we didn't see them running less campaigns in Q3 than they did. And so -- but again the base of that business -- the contracted base of that business is solid. This is kind of an over and above uncontracted overage and usage revenue.

[Brent Thill:]

Great. And then just last question just on the go-to-market. I think in Q1 you said you had 15 sales development reps and nine GMs in Q1. Can you give us an update are you expanding that? Are you keeping that stable to get those reps productive? Just help us better understand the shape of that?

[Rod Favaron:]

Yes. So, no, we are not expanding. We are really holding sales headcount flat as we grow into and get this team trained and retooled and aimed and more account oriented. So, we haven't added capacity from a sales perspective this year.

[Brent Thill:]

Great. Thanks for the color.

[Operator:]

Thank you, Mr. Thill. The next question is with Jeff van Rhee with Craig-Hallum. Please proceed.

[Aaron Spychalla:]

Hey guys. It's Aaron on for Jeff. Just first question just curious to get a little bit more color around the messaging volume. So, you mentioned obviously that cohort and I think I caught they're running less campaigns. Is there a particular driver of that, or anything you're seeing? Is it just bad luck? What's going on there?

[Jack McDonald:]

So, again, the principal driver that we saw was lower variable messaging volumes among our progressive advocacy organization customers. And again just to size this, prior to this quarter, we were looking at roughly $4 million a quarter in variable messaging revenue from all customers not just progressive advocacy organization customers, but all customers. And so we've taken that down to $2 million a quarter, which we think is a conservative number. And I'm sure some of this depends on political environment and obviously, that's a fluid environment even as recently as this election yesterday. So, maybe we'll see increased volumes here. Again, as Rod indicated, we saw some meaningful renewals in this customer group in the third quarter. So, it's not like these customers have gone away. We're staying close to them and working with them and that revenue could bounce back at any point, but we're going to take the outlook down to be conservative.

[Rod Favaron:]

But to be clear there wasn't -- there's no systemic product issues. There's no -- the customers didn't go away. They just didn't spend at an over level like they had historically in numerous quarters. So, when will they get back into that we'll see. But we -- but what we don't want to do is count on that until we see it again.

[Aaron Spychalla:]

Got you. That's helpful. And then obviously you've mentioned you've been really clear about not seeing any churn in that part of the business on the messaging side. But anything else unusual in any other parts of the business as far as churn is concerned?

[Mike Hill:]

No. So, again, we took our net dollar retention rates from 90% back in 2015 and 97% in 2019. In 2020, the first year of the pandemic, those retention rates fell to 94%. And this year 2021 has been a troughing process, right where we have sort of found bottom on that net dollar retention rate. We are -- again we're in this sort of low to mid-90s range but frankly 100 basis points lower than where we expected to be at this point. That said, as Rod mentioned earlier, we've done a lot of work this year on locking in multiyear renewals. And so that if you look at the amount of revenue that we have up for renewal next year, that's not pre-renewed, right, under a multiyear deal. It's substantially less revenue up for renewal. So, that should structurally support an increase in net dollar retention rate as we move through next year because we've already contracted a higher percentage of that revenue. Effectively, we've already renewed that revenue for next year. And so that's the basis for Rod's statement that we start marching back up in the mid- to high 90s. So we feel good about that as we go forward.

[Rod Favaron:]

Yes. And I think really to get that done, we added or changed a little bit the way our customer success managers were running the accounts, as really retrain them on some commercial capabilities that – to make them better and stronger from a commercial perspective, we've made sure the games were focused on their accounts happiness and those types of things. And I think that that is really starting to pay off. And I think that as we as Jack said, both in the way – this is just part of that go-to-market is everything that touches our customers. And we've put in so many better, stronger, faster processes that that's having an impact as well as Jack put it in we're – these customers are committing to longer-term deals, which I think is a great vote of confidence in their relationship with us and their confidence in the products. So anecdotally, I really like that. And then the byproduct is we have this – we have less up for renewal next year. So we anticipate the net dollar retention rate climbing back up steadily as we move through 2022. And with the team continuing to be focused with the new processes we're running and how they're focused on, the multiyear commitments and expansion continues to be okay, and good and strong. All those things together, I think it just gives us a really solid base of net dollar retention moving forward. So we're sort of happy with that.

[:]

Got you. That’s helpful. That’s just for me.

[Operator:]

Thank you. The next question is from with DJ Hynes with Canaccord. Please proceed.

[DJ Hynes:]

Hey, guys. So Jack, look, very clear on the strategy. I get the new logo commentary. I get the messaging headwinds. I want to dig in a little bit on that last question around some of the churn dynamics. I mean you've talked about strong expansion bookings but lower net revenue retention, right? I think that implicitly means there's some heightened gross churn somewhere in the business. Is that all the messaging business? Like does the variable overage piece that you discussed impact net revenue retention?

[Jack McDonald:]

No. No that's – it does. And again I want to say that the net dollar retention rate, which as you know we report annually, right? And again 97% in 2019, 94% in 2020. And here we are in 2021 in that same sort of low 90s range, right and sort of 100 basis points below where we'd like to be. So we may wind up reporting 93% plus or minus for this year exact numbers to be determined based on Q4 but that's sort of where we are. So it's about 100 basis points lower than we would like it to be overall. But again, trending up structurally, because we've locked in a lot of big renewals this year under multiyear deals. And thus more of our revenue as we move into last year is contracted through the full year. And so structurally, we're going to see some improvement in net dollar retention rate.

[DJ Hynes:]

Okay. So not miles feeling good that it gets better next year. Go ahead.

[Jack McDonald:]

Sorry. I was just saying yes, about 100 basis points off where we want to be not miles off. But look, we're not happy with it. And we – again, I think we've locked in an upward trend here with the work we've done on multiyear renewals.

[DJ Hynes:]

Yes. Rod, how much of your expansion activity happens at the time of renewal?

[Rod Favaron:]

A lot. I don't have the actual number off the top of my head, but it's fairly more than half.

[DJ Hynes:]

Okay. I guess that – I mean if we're locking customers into longer contract, we have less renewal activity next year, does that mean we have fewer shots on goal to drive expansion?

[Rod Favaron:]

Yes I think – I'm not sure how I would draw that math out. But I think we – a lot of them are done – more than half were done in renewal and – but it depends. I mean we have customers, who we do expand and add a division or a group or users or another country or if a house of brands and other brand as they go. And so for sure -- so could -- I don't think that's going to have a major impact on expansion next year. But yeah more than 50% happen renewal time.

[DJ Hynes:]

Okay. And then last one for me. Brent had asked about growing the sales organization, how much have you grown the sales organization in your 18 months at the firm? I know you said no growth this year, but just curious in the totality of your time there?

[Rod Favaron:]

Yeah. So you can really think of this in three pieces. We've acquired a couple of companies. So in those cases we pick up salespeople. We added the global account managers from scratch. So that's kind of the eight or nine guys in that group. And we built the lead sales development team, which between the happy hours and a couple of leaders there's -- I think there's 18 or 19 or 20 people in that group total. So we have gone from 60 to 80s in headcount starting almost two years.

[DJ Hynes:]

Got it, okay. Thank you for all the color.

[Rod Favaron:]

Thank you.

[Operator:]

Thank you, Mr. Hynes. The last question is from Alex Sklar with Raymond James. Please proceed.

[Unidentified Analyst:]

Hi. Thanks for taking the questions. This is John on for Alex. Just a quick one for me for Jack or Rod. I know retention has been a big focus here and you have a lot of multiyear renewals here that you've been mentioning on call that should help as we look towards next year. But curious to hear more broadly if you can give any more commentary on or any commonality you're seeing surrounding these renewals? I know you mentioned financial services and knowledge management product library there. But any additional color there would be great. Thanks.

[Jack McDonald:]

Yeah. Look let me just start on that one and then pass it to Rod. I think what I've seen in the business in the 18 months since Rod got here is building on the foundation we had in place to create a real platform and strengthening those major customer relationships, focusing in on those major and diamond accounts and really doing a deeper level of enterprise selling and engagement. And again I think we're -- we have to take -- keep in mind the fact that that happened during some significant crosscurrents in the economy. But I think we're seeing some positive signs on that in terms of the retention setup that we've got as we move into next year. And again we saw Q3 as an inflection point, but we still believe that inflection point is going to happen. And again we see some early positive signs on Q4. And I think we're on the right course in terms of where we're taking that. Rod what would you add?

[Rod Favaron:]

I'll just add one thing to that, which we haven't really talked about yet, which I think is long term really critical here. We brought in some company level product leadership back in the second quarter and this team's remit is to make sure we're really optimizing what we're spending on all of our products. We have a lot of products in a lot of different markets. Those markets -- some markets are more dynamic than others relative to product demands. And I think one of the things where we're getting better at every day I think we were good at it. I think we had a lot of -- we had our products funded in the right way. I don't want to give a sense that we didn't. But what I will say is that with this more portfolio view of our products because customers ultimately renew products that are successful and adding a bit more of a portfolio view to how we invest in each product from an R&D perspective, it's just making it smarter. And so not every product renews at the exact same rate, some have more opportunities than others. And so really getting our R&D investments optimized another long-term thing we started in the second quarter this year, which I think just bears fruit long-term, just adding to our confidence level in the model and what we're doing and our ability to continue to take these products to market for the next decade or two, which is what the focus is. So that -- hopefully that helps.

[Unidentified Analyst:]

Thank you.

[Operator:]

Thank you, Mr. Sklar. I will now pass the conference over to Jack for any closing remarks.

[Jack McDonald:]

Okay. Well, thank you all for your time and we look forward to seeing you on the next earnings call. Thank you.

[Operator:]

That concludes the conference call. Enjoy the rest of your day.