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Upland Software Inc (NASDAQ:UPLD)
Q2 2019 Earnings Call
Aug 7, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Upland Software Second Quarter 2019 Financial Results. [Operator Instructions] The conference call will be simultaneously webcasted on Upland's Investor Relations website, which can be accessed at investor.uplandsoftware.com. As a reminder, this conference call is being recorded.

Following the completion of the conference call, a webcast replay will be available for 12 months on Upland's Investor Relations website at investor.uplandsoftware.com. By now, everyone should have access to the second quarter 2019 earnings release, which was distributed today at approximately 3 o'clock p.m. Central, 4 o'clock p.m. Eastern Time. If you have not received the release, it's available on the Investor Relations tab of Upland's website at investor.uplandsoftware.com.

I would now like to turn the conference over to our host, Mr. Jack McDonald, Chairman and CEO of Upland Software. Please go ahead, sir.

Jack McDonald -- Chairman and Chief Executive Officer

Thank you, and good afternoon, everyone, and welcome to our second quarter 2019 earnings call. I'm joined today by Tim Mattox, our President and COO; and Mike Hill, our CFO. On today's call, I will start by summarizing our results and some recent highlights. Following that, Mike will provide a more detailed look at the numbers and share with you our guidance for Q3 and the full-year 2019, and then Tim Mattox will cover sales and operations highlights from the second quarter. After that, we'll open the call up for Q&A. But before we get started, Mike Hill will read the safe harbor statement. Mike?

Mike Hill -- Chief Financial Officer

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. In addition, we may make additional forward-looking statements in response to your questions. These statements are subject to risks, assumptions and uncertainties that could cause our actual results to differ materially. We caution you to consider our discussion of risk factors and other uncertainties that could cause actual results to differ materially from those in the forward-looking statements contained in the press release and in this conference call.

A detailed discussion of such risks and uncertainties are contained in our annual report on Form 10-K, as periodically updated, as needed 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, August 7, 2019.

We do not intend or undertake any duty to release publicly any updates or revisions to any forward-looking statements whether as a result of new information, future events or otherwise. 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 2019 results, which is available on the Investor Relations section of our website at investor.uplandsoftware.com. 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.

To learn more about our outreach plans, please feel free to contact us at investor-relations@uplandsoftware.com. And with that, I'll turn the call back over to Jack.

Jack McDonald -- Chairman and Chief Executive Officer

Thank you, Mike. Wow. So, really a major milestone quarter for Upland, phenomenal results, 47% growth in both total and recurring revenues. We beat the top of our guidance range, beat the top of the range on both revenue and adjusted EBITDA. This is the 20th straight quarter of Upland meeting or beating guidance, that's every quarter since going public. For the first time, we exceeded a $200 million annualized revenue run rate, it's actually closer to $220 million pro forma for the acquisition of Kapost.

We closed two accretive, immediately accretive and strategic acquisitions that continue to build out our powerful CXM and sales enablement solution suites and that bring the total revenue run rate acquired so far this year to $26 million. We strengthened our acquisition war chest in two ways. First, a successful $159 million public equity offering about $151 million net. And then just this week, we closed a successful $410 million credit financing. And I would note that that financing brings a host of benefits that Mike will talk about, but we lowered our effective interest rate to 5.4%, so a meaningful reduction there.

Also, lowered our annual principal repayments to 1%. That's kind of term loan B facility. It's a seven-year term and your principal amortization for the first six years is 1% a year. It's a very attractive financing. We continue to maintain a very modest leverage as we see it, but this facility gives us room to grow as does that equity offering. So a host of product enhancement releases on the organic side, and we also saw a very strong new customer acquisition and expansion bookings.

Organic growth came in at 5%, so right on target in the mid-single digits, which was beautiful. Our acquisition pipeline is robust. We really have never had a pipeline stronger than it is today. Our war chest has been reloaded through that equity offering and the new credit facility. And our ability to successfully integrate acquired products onto the UplandOne platform has never been stronger. So as our raised guidance suggest, we are looking forward to a strong second half of 2019.

So with that, I'm going to turn the call back over to Mike to give you a more detailed look at the Q2 numbers and also share our guidance for Q3 and the full year -- our raised guidance for Q3 and the full year. Mike?

Mike Hill -- Chief Financial Officer

Well, thank you, Jack. So yes, covering the second quarter, and then I'll go into guidance. Total revenue for the second quarter was $53 million, representing growth of 47%. Recurring revenues from subscription and support grew 47% as well year-over-year to $48.7 million. Professional services revenue was $3.7 million for the quarter, a 77% year-over-year increase. Perpetual license revenue was $0.6 million for the second quarter or a decrease of 16% year-over-year. Moving down the P&L to gross margins. Overall gross margin was 69% during the second quarter and our product gross margin remained strong at 70%, or 74% when adding back depreciation of equipment, amortization of acquired intangible assets, which we refer to as cash gross margins. Our professional services gross margin was 47%. Although we don't believe that 47% is sustainable, then our PSO margin should migrate back down to our 40% steady state target.

Turning to our operating expenses. Research and development expense net of refundable Canadian tax credits was $6.9 million for the second quarter, representing 13% of total revenue for the quarter. Sales and marketing expense was $8 million, representing 15% of total revenue for the second quarter. General and administrative expense was $12 million in the second quarter, representing 23% of total revenue. However, excluding non-cash stock compensation expense, G&A expense was $6.5 million or 12% of total revenue.

Acquisition-related expenses were $9.3 million in the second quarter, representing -- resulting from our recent significant acquisition activity with two acquisitions during the quarter on top of the restructuring costs for our two international acquisitions closed in the fourth quarter. Acquisition-related expenses taper off to zero during the four quarters following any given acquisition, unless or until we have additional acquisition activity. Operating loss was $5.5 million in the second quarter compared to a loss of $0.7 million for the same period in 2018.

GAAP net loss was $5.4 million or a loss of $0.24 per share compared to GAAP net loss of $5.2 million or a loss of $0.26 per share in the second quarter of 2018. Non-GAAP net income was $17.9 million, or $0.76 per share in the second quarter of 2019 compared to non-GAAP net income of $7.5 million or $0.36 per share in the second quarter of 2018. Our second quarter 2019 adjusted EBITDA was $19.1 million, or 36%, of total revenue, up 52% compared to $12.5 million or 35% of total revenue for the same period last year.

Now on to our balance sheet statement of cash flows. We ended the second quarter with $108.4 million in cash, which was benefited by our successful follow-on equity offering that Jack talked about, adding approximately $151.1 million of cash net of offering costs to our balance sheet, some of which was used for our Kapost acquisition in the quarter. Cash flows provided by operating activities were $0.5 million for the second quarter, which would have been much higher without one-time acquisition-related expenses and approximately $1.6 million of acquisition earn-out payments made in the quarter. We consider these acquisition-related uses of operating cash as essentially portions of acquisition capital, which are being paid out of our own organically generated free cash flow. Furthermore, Upland is cash efficient when looking at income taxes and capital expenditures. Cash taxes for the second quarter 2019 were $0.9 million compared to cash taxes of $0.8 million in the second quarter of 2018.

Upland currently has approximately $155 million of usable tax NOLs, which is comprised of $135 million of usable U.S. federal tax NOLs in the U.S. and $20 million of U.K. tax NOLs. We expect to continue to pay around $4 million per year in cash taxes, mostly in the form of Canada revenue agency taxes, Ireland income taxes, and some U.S. state income taxes. As of June 30, 2019, we had approximately $309 million of gross debt outstanding making net debt approximately $201 million after factoring in the $108 million of cash on our balance sheet.

Announced yesterday, we closed a new term loan B credit facility, which included a new $350 million term loan, paying off our existing credit facility and adding over 300 -- over $33 million of additional cash to our balance sheet. This brings our cash balance to approximately $141 million and our gross debt outstanding to $350 million applying net debt at approximately $209 million or a net leverage ratio of approximately 2.6 times based on our current $81 million annual run rate adjusted EBITDA. This new term loan B facility matures in August 2026 and structurally reduces our annual principal payments to 1% per year as Jack mentioned.

This new term loan B facility is expandable subject to the terms in the credit agreement, so the facility can grow as we grow. Additionally, we have a new $60 million revolving credit facility, which remains undrawn at present and matures in August of 2024. These new credit facilities reduce our interest rate to LIBOR plus 375 basis points and we have entered into an interest rate hedge instrument for the full amount and duration of the term loan B facility, which effectively lowers our net interest rates to a fixed rate of approximately 5.4% through maturity.

So the existing cash on our balance sheet plus credit capital from these new credit facilities, plus our own growing free cash flow generation, all provides the funding to fuel our continued acquisitive growth well into the future.

Now for guidance. For the quarter ending September 30, 2019, we expect reported total revenue to be between $53.5 million and $55.5 million, including subscription and support revenue between $49.8 million and $51.4 million for growth in recurring revenue of 49% at the midpoint over the quarter ended September 30, 2018. Third quarter 2019 adjusted EBITDA is expected to be between $19.8 million and $20.8 million for an adjusted EBITDA margin of roughly 37% at the midpoint, representing growth of 55% at the midpoint of the quarter ended September 30, 2018.

For full year ended December 31, 2019, we expect reported total revenue to be between $209.9 million and $213.9 million, including subscription and support revenue between $195.4 million and $198.6 million for growth in recurring revenue of 44% at the midpoint over the year ended December 31, 2018. Full-year 2019 adjusted EBITDA is expected to be between $77.2 million and $79.2 million for an adjusted EBITDA margin of 37% at the midpoint, representing growth of 47% at the midpoint over the year ended December 31, 2018.

Now with that, I'll turn the call over to Tim Mattox, our President and COO.

Tim Mattox -- President and Chief Operating Officer

Thanks, Mike, and good afternoon, everyone. Today, I'll review the Q2 results across sales, product and operating areas. With respect to sales, Q2 was a very strong bookings quarter, as Jack alluded to. We welcomed 150 new customers to Upland in Q2 and these new customers committed on averaging much higher annual recurring revenue. We also saw a record 38 new major customers, which was 10 more than in Q1, and each of those customers committed over $25,000 in annual recurring revenue.

Indeed several new customers committed over $250,000 in annual recurring revenue including a global supplier of high-tech polymer materials, who committed to our Enterprise Sales Enablement Solution Suite as well as a national media and entertainment company and a social advocacy organization, who each committed to our Customer Experience Management Solution Suite. 147 other new customers committed over $3 million in total annual recurring revenue spend with Upland.

With respect to our existing customers, Q2 was also a very strong quarter. You saw a record 243 customers expand the relationship with Upland. We also saw a record 48 customers with major expansions of at least $25,000 in annual recurring revenue, that was twice as many as we saw on Q1. Among our larger expansion customers averaging $200,000 or more in annual recurring -- in additional annual recurring revenue were a global financial services firm, which expanded its commitment to our Enterprise Knowledge Management Solution Suite, a multi-national IT service and consulting company, which expanded its commitment to our Customer Experience Management Solution Suite, and a global publishing company which expanded its commitment to our Enterprise Sales Enablement Solution Suite.

240 other existing customers expanded their commitments by more than $4 million in aggregate annual recurring revenue in the quarter, so very strong. On the product front, we also continued to invest in our customer-driven innovation through efficient high-quality internal development. We announced several product releases in Q2, including major releases for our Knowledge Management, Enterprise Sales Enablement and Document Lifecycle Automation solution suites. Each of these releases enhance usability, functionality and performance for our customers.

We also released 20 feature packs based on input directly from our customers about ways we could improve the efficiency of their processes such as the integration between PowerSteering, our flagship project and portfolio management solution, and Microsoft Teams, adding robust collaboration capabilities to our enterprise-grade PPM solution. On the Q1 earnings call, I discussed our April acquisition of PostUp, which added sophisticated email and audience development solutions targeting the media and publishing verticals, which was added to our Customer Experience Management Solution Suite.

Our integration efforts are progressing nicely there and these results are happening today. In May, we announced our acquisition of Kapost, a leading content operations platform provider for sales and marketing. As many of you know, Upland's product strategy is to complement internally developed customer-driven product innovation, the strategically relevant acquisition activity. By acquiring Kapost, we added a cloud-based marketing content operations platform with built-in artificial intelligence, advanced analytics and a robust set of APIs to our Upland's Enterprise Sales Enablement Solution Suite. Entire Upland team could not be more excited about Kapost and we are investing aggressively to ensure that every Kapost customer benefits from Upland's greater financial scale, operational capabilities through UplandOne as well as our commitment to 100% customer success.

Turning to operations. We continued to invest in and improve the UplandOne platform, which forms the foundation of our 100% customer success commitment and puts customers at the center of everything we do. We fully integrated Rant & Rave into UplandOne. As a reminder, Rant & Rave is an important element of Upland's Customer Experience Management Solution and is a leading provider of cloud-based customer engagement solutions in the U.K. Now Rant & Rave can scalably serve U.S. customers, which is already contributing to the results I discussed earlier. And we are introducing U.S. products into international markets by building pipeline for Upland Mobile Messaging into the U.K. and the European continent.

To further improve our integration execution, we migrated to a robust project and portfolio management tool, PowerSteering. This was from a spreadsheet-based approach. Our integration teams are now enjoying the improved collaboration, visibility and reporting that PowerSteering provides. We expanded the comprehensiveness and completeness of our Upland integration playbook by augmenting chapters on pre-close contract review and post-close implementation of Upland's Premier Success plans, which allow us to take the experience of newly acquired customers to even greater levels of satisfaction and loyalty. Our investments to streamline back-office operations are also paying dividends as we're seeing record efficiency levels across the entire quote-to-cash cycle.

And finally, we reinforced our already-strong senior leadership team by adding a senior executive, highly experienced in enterprise SaaS, to lead our global professional services organization and to further support sustained and consistent bookings growth.

In summary, the solid results of our newly acquired companies, along with the consistent performance of our existing businesses, support our strong guidance and future performance.

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

Jack McDonald -- Chairman and Chief Executive Officer

Thank you, Tim. So at this point, operator, we are ready to open the call up for Q&A.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Bhavan Suri with William Blair.

Bhavan Suri -- William Blair -- Analyst

Hey guys. Thanks for taking my question and really nice job there. I guess, I wanted to touch first on the ability to integrate. Jack, you touched on that a little bit, and Tim, you referenced UplandOne. But as you start making more and more acquisitions given the scale you've gotten to sustain some of the growth, I guess just some color on to your ability now to integrate them, sort of put the teams together faster. Have you seen some efficiencies in there? And what color can you give us on sort of the ability to do that, I guess, more frequently? Thank you.

Jack McDonald -- Chairman and Chief Executive Officer

Yes, we have seen efficiencies, and thanks for the question, Bhavan. We continue to improve UplandOne every day as well as our integration capability. We talk about targeting $25 million to $50 million a year of acquired revenue. We've already got $26 million done here at the midpoint of the year, and are gunning for the high end of that range. Of course, there are never guarantees on M&A, but that is the goal. And that's essentially four deals. And as we talked about, we want to increase our ability over the next two to three years to do five to six transactions a year.

So already in our numbers and in our budgets, we are laying in the infrastructure to do that, both on the deal-sourcing and deal-making side, but we'll also be doing it with our integration teams and our operating teams.

So we feel great about our ability to attack this consolidation opportunity. Our position in the market is stronger than it's ever been now, 20-some-odd deals into this. Our access to capital is greater than it's ever been. Our ability to successfully integrate these deals is stronger than it's ever been. And so we look forward to going after that and to increasing our capacity to profitably and on an accretive basis, increase the acquisition activity. Thank you.

Bhavan Suri -- William Blair -- Analyst

Got it. And that was really helpful. And then, I guess, we touched on the M&A side, but now let's touch on the organic side. I mean the numbers on expansions, even the new customer logo adds, were all very, very impressive. Two questions. One, Tim -- and maybe, Tim, I guess, you had a slight shift to keeping more salespeople, but what else is driving the growth?

Are we starting to see the synergies across cross-sell yet? I know I always ask that question, and you guys always dodge it a little bit. I'd love to understand if you're seeing that change at all. And I guess the second to that question is, as you look at sort of all those pieces, do you think you continue to double down on the let's grow sales a little more than we had maybe two years ago to continue to drive sort of more organic cross-sell? How should we think about those things playing out? Thank you.

Tim Mattox -- President and Chief Operating Officer

I'm sorry, go ahead, Jack.

Jack McDonald -- Chairman and Chief Executive Officer

Yes. Tim, why don't you take the first half of that one, and then I'll talk a little bit about sales investment?

Tim Mattox -- President and Chief Operating Officer

Sure. So yes, Bhavan, you're anything if not consistent on the cross-sell question. And as you saw in prior quarter or two, we announced a new go-to-market motion around solutions, where we've strategically grouped our products. We've integrated them in a purposeful basis where it makes sense, obviously, the common UI, common analytics around Upland Analytics. That go-to-market motion is certainly helping. I would say early innings in terms of what we're doing there, but we are introducing more products to customers. And this solution sale is actually enabling us to introduce multiple products, but more as features than sole, separate additional product sales. So, we're learning. We're learning which ones resonate, which ones we're going to double down on, we're seeing interest from the existing base and expanded capabilities, and we'll continue to be aggressive about introducing that in. And I think you'll probably hear our terminology change less from cross-sell and more into solution sale.

So that's how we'll talk about it. And you -- and even here in the customer examples I gave you, some of the solution suites that already did contribute to significant bookings for the quarter. These solutions are also helping to inform our M&A activity as well as continue to acquire strategically.

Jack McDonald -- Chairman and Chief Executive Officer

So to add to that in terms of sales investment, we've got a very efficient sales motion right now. We're paying about $1 in sales and marketing expense roughly for every $1 of ARR bookings. And of course, when you look at average duration of customer relationships, which we publish for ASC 606 purposes, it's six year or so, it's a very strong LTV-to-cap ratio up there with the best of them. So we will continue to invest in sales and marketing, consistent with getting that kind of return and also consistent with an upwardly ramping EBITDA margin to 40% at scale.

We're defining scale at $300 million of revenue. Above that, EBITDA margin wants to go a little higher, but we will take any of that overage and reinvest it in additional sales and marketing to support organic growth. So that is the plan.

Bhavan Suri -- William Blair -- Analyst

Awesome. That's very helpful. One quick last one for Mike. I now you guys don't provide an RPO metric, but in ARR actually you normalized a lot of things, but you did talk about a really strong bookings quarter. And so I was wondering if you're willing to give a little color about the delta between bookings and billings and sort of what those -- what that might look like or if there was a delta, so we can understand sort of what's been invoiced and sort of what the winds were vis-a-vis the invoicing? Any color would be helpful. Thank you guys.

Mike Hill -- Chief Financial Officer

Yes, Bhavan, this is Mike. Thanks for the question. Yes, we don't disclose bookings and we've got quite a mix of different billing cadences among all of our products, some monthly, some quarterly, a little over half of them annually. So just from what's useful, we really don't get into that type of disclosure for specific bookings.

Bhavan Suri -- William Blair -- Analyst

All right. Thank you, Mike. I had to ask. Thank you all for taking my question. Congrats.

Mike Hill -- Chief Financial Officer

Thank you, Bhavan.

Operator

Your next question comes from the line of John DiFucci with Jefferies.

John DiFucci -- Jefferies -- Analyst

Thanks for taking my question. First question is for Tim and it's kind of follows up on Bhavan's first question I think. And when we look at the major account expansion this quarter, it accelerated materially, and you've talked a little bit about that in your prepared remarks. But can you give us a little bit more color about what's happening there? Is it due to the two acquisitions you did this quarter? Did that have something, some effect on that? Or was it something on the demand side? Or any effects from the things that you may be doing to drive demand? I mean, all three of those probably had an impact, but if you can give us a little bit more color on that, that'd be helpful.

Tim Mattox -- President and Chief Operating Officer

Sure. Thanks for the question, John. Yes, you're right. There were multiple factors in play there. Certainly, the new products are very well received. However, our older products that we've owned for a while also performed strongly. So I think that brings in the other elements that are helping to drive that, which is we very purposely engage and focus on our existing customer base, deepen that relationship, we use the net promoter score methodology to drive for 100% customer success to orient the Company.

And once we establish that with a customer, then they're receptive, both that find additional seats of the same product, then as we touched on earlier, looking at other products, typically in that same solution set. We also have some enhanced service offerings called our Premier Success program, Platinum and Gold. That certainly helps us well in terms of bringing up our annual recurring revenue with each of those customers. So a very strong focus on it, it's an efficient focus, as Jack alluded to in terms of generation of incremental revenue, and we think that those three elements will continue to contribute.

John DiFucci -- Jefferies -- Analyst

Okay, great. So I shouldn't be thinking that these acquisitions you just acquired a bunch of large customers that really made that accelerate way beyond what we've been seeing?

Tim Mattox -- President and Chief Operating Officer

No. We don't count the customers that we acquire that come with the company we buy. We start to count them in our metrics once we owned them for a quarter. And then in terms of organic growth, we don't count them until we've owned the asset for 12 months. We try and take a conservative approach at looking at it, if that helps to clarify.

John DiFucci -- Jefferies -- Analyst

Yes, it does. Thank you. Much appreciate that. And I guess, Jack, so I looked at some of your acquisitions over time and more recently, especially you mentioned Kapost. It was a little bit higher multiple on recurring revenue, which is where we really focus. Still a very attractive multiple I think anyway. But it's a little higher than it's been. And I'm just curious if you're seeing any increased competition out there in M&A? Or were there just characteristics of Kapost that would require a higher recurring revenue multiple? I don't know, maybe there's more larger enterprises that are in that customer base, or -- just a question around that, the multiples you're paying.

Jack McDonald -- Chairman and Chief Executive Officer

Yes, thanks. Thank you, John. To us multiple that's most important is the multiple of adjusted EBITDA and that's proforma EBITDA, the EBITDA that we're going to be able to get out of the business within 90 days post acquisition. And so if you look at Kapost, PostUp, you're seeing acquisitions that are roughly 6 times, 6.5 times EBITDA, that's against a stock Upland that's trading at north of 15 times.

And so you've got a great EBITDA multiple arbitrage there, highly accretive deals. And also on a cash basis, we look at cash-based IRRs where we're nicely jumping over a 20% IRR hurdle rate. In addition to those financial returns on the deals, we are building out our solution suite with every acquisition. And I think this is important and it goes to your earlier question.

It's hard in the early going to be a disciplined buyer and also to build strong adjacency of products that are going into common buying centers in the enterprise such that you can begin to build a stronger strategic solutions provider relationship with your enterprise customers and also ultimately drive solution sales and cross sales. But we're starting to hit that critical mass point now where we're seeing in our Sales Enablement Suite, particularly in our CXM suite, and you're going to see with the next few acquisitions some activity in some of the other suites as well, where we're really trying to now starting to lay in the third product, the fourth product where you're starting to see real adjacency.

To that, we add the upcoming Upland WorkCenter, which will be our unified desktop that enables customers to consume functionality for multiple products in one streamlined desktop. So some very, I think, exciting trends coming together being driven by M&A and innovation through acquisition as we like to call it, that I think are going to put us in a very strong place over the next few years.

John DiFucci -- Jefferies -- Analyst

All makes sense, Jack. Appreciate answering the questions and a nice job. Thanks.

Jack McDonald -- Chairman and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Richard Davis with Canaccord Genuity.

Richard Davis -- Canaccord Genuity -- Analyst

Hey, thanks. See you guys here tomorrow. But, quick question for you, as you kind of build this platform out, how do you think about dropping in and adjusting and augmenting your sales go-to motion and your kind of sales talent, right? Because early on, I might have been selling smaller deals on a kind of point solution basis and now I'm starting to sell, as you point out, solutions and things like that. You may not be quite at the full ELA level, but you're getting close. So, how do you prepare for that? How do you think about it? And how should we think about it as outsiders? Thanks.

Jack McDonald -- Chairman and Chief Executive Officer

Well, I'd say, you're keying in on a very important point, because we're assembling a very strong complement year of solution suites, and we are constantly upgrading our go-to-market around that. So as I've said many times to investors, when it comes to the acquisition side, when it comes to repositioning products for margin generation, when it comes to existing customer success, Upland, I think, is really executing beautifully. We know we have opportunity around marketing and sales. And so, consistent with what I said earlier, we're going to continue to invest in those areas, we're going to continue to bring on more senior talent.

We're holding on to the best talent out of the acquisitions we do. We're starting to cluster those sales forces more around solution suites. And we're going to continue to invest in bringing on the organic side senior sales leadership to drive that forward. So a lot of work to be done there. The good news is we haven't baked -- we've essentially baked the cost of those investments into our model, but we haven't assumed anything in terms of material goodness from them. So I like the way that's positioned. And when as and if those investments generate return, it will be icing on the cake to the numbers.

Richard Davis -- Canaccord Genuity -- Analyst

Perfect. Thank you so much.

Jack McDonald -- Chairman and Chief Executive Officer

Thank you.

Operator

Your next question comes from Jeff Van Rhee with Craig-Hallum.

Jeff Van Rhee -- Craig-Hallum -- Analyst

Great, thanks. Congratulations guys, looks great here. A number for me, just a follow-up on the last few on sales. Just maybe, Jack, a little more clarification around where are you now with quota reps? And then what has been the mix of the incremental reps, namely how many are coming in organic versus being inherited? And then I have one more in that area, but I'll pause there for that one.

Jack McDonald -- Chairman and Chief Executive Officer

Yes. So, it's still in that roughly 60 heads, that's excluding account management and some of the CSM folks and so -- and of that, it's still roughly half between field and inside sales. And in terms of where the bulk of the headcount is coming, it has been principally by retaining productive sales people at the acquisitions that we do. But we've also had some room in the budget and we're starting to add some additional heads now organically. But on a sort of trailing 12 or 18 kind of basis, really, 80% of that new sales headcount addition has come through acquisition, and about 20% organic. Those are rough numbers but to give you just a sense of magnitude.

Jeff Van Rhee -- Craig-Hallum -- Analyst

Very helpful. How do you think about channels and partners? Any goals in terms of channel and partner influence going forward?

Jack McDonald -- Chairman and Chief Executive Officer

Well, we've got multiple go-to markets and this growing field motion and of course, inside sales, and we've got our Workflow Automation products, a very healthy channel and also, very strong OEM relationships with some major technology providers. So it's a multi-channel sort of go-to-market. As you scale, developing relationships with some of the bigger SIs becomes more relevant, that's something that we are looking at as an area of some additional investment as we scale our sales team generally. Nothing material going out there as of yet, but it is something that's being considered.

Jeff Van Rhee -- Craig-Hallum -- Analyst

Great. And then I guess just one last one for me on the professional services side, obviously, you're bringing in some talent, had some good new movement there at least in terms of variance [Indecipherable] in the quarter. Just how do you think about that over the next few years and I don't know, growth percent of revenue? Just a little better sense of what you have in mind with the professional services side?

Jack McDonald -- Chairman and Chief Executive Officer

Yes. So a couple of things. One as Mike pointed out, we don't expect to run 47% gross margin on professional services on an ongoing basis, right? Our target 40% is beautiful. Very different, right, than most companies out there where you see folks running professional services at far lower gross margins, sometimes with negative gross margins using them as subsidized product sales, which based on our heritage and professional services, we just could never do.

Tim alluded earlier to the solution suite selling motion. And as we bring those solutions suites to market, professional services plays a very important role, a glue in bringing these individual cloud products together into solution suites, before during and after the time when we bring up WorkCenter to market. So that was one of the reasons why we invested in additional leadership in the professional services area that scaled SaaS experience. And so, it will continue to be very important. In terms of percentage of revenue, I don't know that we're going to see any kind of drastic change. You could see a few hundred basis points here or there, but there's not a plan to dramatically change the mix. I like, we all do having a revenue mix that's 90% contractually recurring, but again, it could be marginally higher as we do more of the higher-end professional services work associated with bringing these products together into solutions suites.

Jeff Van Rhee -- Craig-Hallum -- Analyst

Got it. Okay. Sounds good. Thanks a lot.

Jack McDonald -- Chairman and Chief Executive Officer

Thank you.

Operator

And your next question is from Scott Berg with Needham.

Josh Reilly -- Needham -- Analyst

Hey guys, this is Josh on for Scott. Nice job on the quarter. How should we think about the organic growth rate of CXM versus the other solution suites and how could this be impacted -- impact the consolidated organic growth rate for the Company as CX becomes bigger within the overall mix?

Jack McDonald -- Chairman and Chief Executive Officer

Well, obviously we're managing a portfolio of products and we've seen some good organic growth out of CXM, and we're adding products through acquisition that have targeted organic growth rates of 10% to 15%. Of course, once we restructure them, that those growth rates will come down a bit. But, the goal is for those growth rates to be accretive to what we have today. So we're very pleased with the organic growth rate. This quarter our targets remain what they have been, which is, we will target mid-single-digit organic growth that's 4% to 6%, 3% to 7%. We will continue to guide more conservatively than that. We will continue to say to investors on these calls and in individual meetings we have that you should underwrite the investment at flat to five and anything better than that will be a bonus.

Josh Reilly -- Needham -- Analyst

Okay, great. And then what's the initial feedback from customers in the U.S. to Rant & Rave and then vice versa for Upland Mobile Messaging in the U.K.? It seems like this is a strong combination of products.

Jack McDonald -- Chairman and Chief Executive Officer

It really is a strong combination and we had a couple of interesting opportunities. Tim, do you want to take a moment? I know we're not going to give a client name, but I think you know the one I'm speaking of where we're able to bring it over -- bring Rant & Rave over and sort of the reception we've got in that account.

Tim Mattox -- President and Chief Operating Officer

Yes, absolutely. So, yes, Josh, you hit on a really important focus area for us. And so we're using the existing channels here in the U.S. to introduce Rant & Rave and obviously, we're going to go after our existing install base to do that. But we're also in, this particular case, at a very strong and large customer in the U.K., had a big presence in the U.S. in the theater area. And they had gotten significant results in terms of operating their individual businesses and setting up competitions between managers and the like and Rant & Rave was providing them real-time feedback, customer sentiment analysis through a natural language capabilities.

And when we talked about the capabilities of UplandOne and what that was going to do in terms of offering Rant & Rave in the U.S., the mothership in the U.K. said, well, this is great we need to bring you guys into the U.S., and actually in this particular case, the customer did a lot of the selling. We were obviously there to help enable them to have all the facts right and build out the implementation plan in the professional services as Jack alluded to. But that was a very powerful interaction that just underscored the success that we can have bringing that product over to the U.S. So we're going to continue to focus on that.

And then the flip is true as well, where we have a number of highly satisfied customers of Rant & Rave in the U.K. and now we're bringing other products, whether it's our Mobile Messaging, our robust email platform, Adestra which is already in the U.K., but we're introducing that product into Rant & Rave customers and seen a lot of interest there too. The other product that starts to have relevance in this area as well is our Knowledge Management Solution, and that is also getting some interest from Rant & Rave customers as well as the flip.

So hopefully, that gives you a little bit of color. We're seeing more opportunities in the pipeline, we're going to learn more in terms of what resonates, but some of these initial successes have been really encouraging.

Josh Reilly -- Needham -- Analyst

Great. Thanks guys.

Jack McDonald -- Chairman and Chief Executive Officer

Thank you.

Operator

Your next question is from Brian Peterson with Raymond James.

Brian Peterson -- Raymond James -- Analyst

Hi gentlemen, and congrats on the quarter. So just one question from me. So, Jack, I think you mentioned that a lot of your acquisitions, that's where you're really kind of keeping or investing in some of this sales capacity. I'm curious, is there anything different about your recent acquisitions in terms of the growth profile versus what we've seen historically? And with some more, I guess sales and marketing resources with those companies, should we expect that organic growth profiles to accelerate as they kind of anniversary from the acquisition-related contribution? Thanks guys.

Jack McDonald -- Chairman and Chief Executive Officer

So yes, thank you for that question. So, starting a couple of years ago, we really started to look more closely at organic growth of acquired products. Earlier in our history, we were more on a scale and margin march, and now we've turned our attention more to organic growth. So again, we'd like to see 10% to 15%, organic growth pre-acquisition. Now remember, these companies are losing money before we buy them and repositioning them has an impact on that. And so the goal is to maintain an organic growth rate in the 5% to 10% range post that restructuring.

Now as we move these products into solution suites to suite cluster, as we continue to upgrade sales talent, as we continue to gain scale in the market, increase NPS scores, increase retention rates, all of that could have a beneficial impact on organic growth. But that said, as always, the target for organic growth is mid-single digits. We will guide more conservatively than that. And I really don't want to be forecasting anything on anniversaries that's going to cause people to bake in a different set of expectations there.

There is so much value creation opportunity that we have in front of us in the next two, three, four or five years. We've taken this business from nothing a few years ago to a $220 million annual run rate. The deal flow that we've gotten in front of us, the resources that we have now, financial, operating, human to onboard these businesses, to reposition them for sustainable growth, to deliver value to customers, because customers want this. I look out three, four years from now and see a business that's $500 million in revenue run rate again with M&A, that's M&A dependent, $200 million of EBITDA, generating tremendous per-share value, tremendous upside from here.

We get there if we're at 5% organic, 3%, 7%. So the value creation is massive. We understand the benefit of keeping the nose of the airplane pointing up, but we also understand the benefit of keeping expectations in check, so that we can deliver consistent value through time.

Brian Peterson -- Raymond James -- Analyst

Thank you.

Operator

Your next question is from Richard Baldry with Roth Capital.

Richard Baldry -- Roth Capital -- Analyst

Thanks. Sort of curious, your early thoughts on the international acquisition front, given the experience you've had sort of perceived value of targets over there, the differences in integration, whether it helps you to open up new geographies as a more incremental TAM opportunity for the broader business. So, do you think that's a trend we could see continue or is it harder to source the deal? So maybe once in a while, but not anything that we should be kind of focused on.

Jack McDonald -- Chairman and Chief Executive Officer

So a great question, one that we discussed internally. Yes, we will do more acquisitions in Europe, but we have done three in the last 18 months or so. So, we are consolidating those together. That's going very well. And we've got a strong base which we needed in Europe. And I wanted to do this at the right time. And we said, Richard, from the early days that let's get to $150 million revenue run rate before we do anything in Europe. And we do it, let's do it in a meaningful way so that we can create a real European base of operations, not only for the products we acquired but so that we can bring all of our products there.

And we've done that. So I feel very good about where we are with respect to that. We'll digest that. Now we've got a ton of pipeline in the U.S. and Canada that we're going to attack, again, never any guarantees on M&A and pipeline can go one way or another. But we see a very, very strong pipeline. And then beginning again as we get into 2020, we'll start looking at acquisitions in Europe.

Richard Baldry -- Roth Capital -- Analyst

And then I'll join the chorus field sort of beating on the question of organic growth. Let me ask it different way. When you can get $1 of ARR for $1 of spend, you step back a bit, it feels like you're buying revenue for one times revenue or paying one times revenue for organic growth, which is arguably more attractive even than the inorganic growth. So how do you balance that? How do you think about going into quarter where it maybe you think you've got some upside versus expectations? Would it make sense to spend that away into faster organic growth? Or is the expansion of EBITDA so much more important to the ability to raise incremental capital that it doesn't make sense to do that short-term? Thanks.

Jack McDonald -- Chairman and Chief Executive Officer

Thank you. Another great question. So again, our philosophy is we will continue to invest in sales and sales enablement consistent with two things, right? First, that $1 for $1, so that efficient growth index, $1 of sales and marketing spend for $1 of ARR bookings, that's a blend of new and expansion. But in addition, an upwardly ramping EBITDA margin from where we are now to 40% at scale, so let's assume $300 million per scale and then above that margin wants to go a little bit higher, EBITDA margin does, but we will then redirect that overage back into additional sales and marketing to support organic growth. It should generate a little bit of a growth dividend above $300 million. So that is the plan.

Richard Baldry -- Roth Capital -- Analyst

Great. Thanks.

Operator

Your final question comes from the line of Eric Lemus with SunTrust Robinson.

Eric Lemus -- SunTrust Robinson -- Analyst

Thanks guys for taking the questions and nice job in the quarter, and also congrats on enhancing the balance sheet. I guess on that topic, you have a lot more cash in your availability cash for potentially larger acquisitions or larger or more volume of acquisitions any year. So kind of thinking about that, I assume that you probably get pulled into conversations with larger size -- potentially larger size deals. So is there any change in thought around making acquisitions larger than historically made in the past or any change in the volume of deals per year?

Jack McDonald -- Chairman and Chief Executive Officer

So, a great question. So from day one, when we -- this thing was just on a sheet of paper as a plan, we said $5 million to $25 million, and that's really where we want to play. So the targets we go after $5 million to 25 million of revenue and these are businesses growing at roughly 10% to 15% organic. We think we can really own a big chunk of that segment of the market. Our average acquisition is trended up a couple million bucks a year and we'll probably continue to do that. But look, we also see interesting $7 million, $8 million, $9 million tuck-ins, right? $6 million, $8 million, $9 million tuck-ins as we build out these solutions suite. So there'll still be some of those in there. But you're right, we now have the financial wherewithal if there's a $25 million of business, something at the top end of our range, we can execute against that.

So a long-winded way of saying $5 million to $25 million remains the target range. I think you'll continue to see the average deal size increase a couple of million bucks a year. And in terms of number of deals, I think for now or in that four-year range, again, no guarantees, but that's the target. But when we've talked about this, we want to increase that to five to six over the next two to three years. So we are laying in the infrastructure now to do that both in terms of opportunity generation, deal makers and integration team and operating teams in order to support a larger volume.

Again, not larger, we're going to do 10 a year or 20 a year, nothing like that, but that we would take it up to five to six over a two or three year period. We want to be responsible. We want to be building a company that's going to generate real value through time and we don't need to go any faster than that.

Eric Lemus -- SunTrust Robinson -- Analyst

Okay. Thank you.

Operator

And there are no further questions at this time. Your closing comments, please.

Jack McDonald -- Chairman and Chief Executive Officer

Great. All right. Well, thank you everyone for joining us for today's call and we look forward to seeing you on the Q3 call. And again, thank you and good afternoon.

Operator

[Operator Closing Remarks].

Duration: 57 minutes

Call participants:

Jack McDonald -- Chairman and Chief Executive Officer

Mike Hill -- Chief Financial Officer

Tim Mattox -- President and Chief Operating Officer

Bhavan Suri -- William Blair -- Analyst

John DiFucci -- Jefferies -- Analyst

Richard Davis -- Canaccord Genuity -- Analyst

Jeff Van Rhee -- Craig-Hallum -- Analyst

Josh Reilly -- Needham -- Analyst

Brian Peterson -- Raymond James -- Analyst

Richard Baldry -- Roth Capital -- Analyst

Eric Lemus -- SunTrust Robinson -- Analyst

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