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Upland Software Inc (NASDAQ:UPLD)
Q4 2019 Earnings Call
Feb 26, 2020, 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 Fourth Quarter Financial Results. [Operator Instructions] The conference call will be simultaneously webcast on Upland's Investor Relations website and can be accessed at investor.uplandsoftware.com. 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 be accessing the fourth quarter earnings release, which was distributed today at approximately three p.m. Central Time or four p.m. Eastern Time. If you've not received the release, it's available on the Investor Relations tab of Upland's website at investor.uplandsoftware.com.

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

John T. McDonald -- Chief Executive Officer and Chairman of the Board

Thank you, and good afternoon, and welcome to our Q4 2019 earnings call. I'm joined today by Tim Mattox, our President and Chief Operating Officer; and Mike Hill, our CFO. I'll start by summarizing results and some recent highlights. Following that, Mike will give you a more detailed look at the numbers and share our guidance for the first quarter and the full year 2020. And then Tim will cover sales and operations highlights from the fourth quarter.

After that, we'll open the call up for Q&A. But before we get started, Mike 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, February 26, 2020.

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 fourth quarter and full year 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.

John T. McDonald -- Chief Executive Officer and Chairman of the Board

Thanks, Mike. Q4 was a strong finish to an outstanding year. We had 46% total revenue growth, 49% growth in adjusted EBITDA, so a very strong Q4. We posted net dollar retention rate at 97%. So more proof that UplandOne continues to drive customer loyalty. Our Q4 organic growth in reported recurring revenues came in on target at 5%. For the full year 2019, organic growth was 7%. So both within our target range of mid-single digits, read that 4% to 6%, 3% to 7%, that target range that we consistently talk about. We had a host of product innovations in Q4 as we combine focused in-house R&D with our innovation through acquisition program of building out our enterprise clouds into end-to-end category winners. And we'll be covering some of those R&D innovations in greater detail in Tim's section of the call. We had record expansion and new bookings in the fourth quarter. And I want to note, it's still early in our cross-sell journey. And obviously, our new go-to-market team and the four clouds and the innovation there are going to help with that. But without ringing the bell too loudly, I'd note that we had some material cross-sell success in the fourth quarter. Tim will talk more about it in a couple of minutes. But we saw a strong uptick in cross-sell activity, including some pretty major deals.

So our largest was a global communications and media company that committed to a significant knowledge management offering to drive call center efficiency. And that company was already a large and happy customer for our customer sentiment cloud offering. So again, it's early days, but we're beginning to see some traction there, some increasing traction there. We had a record year on the M&A front. For the full year, we completed a total of five acquisitions, five acquisitions that added $67 million in total annualized pro forma revenues and $30 million in annualized adjusted EBITDA when fully in model. We paid an average price of 3.3 total revenue, so 3.3 times total revenues. Now again, that excludes the typical 0.5 turn of revenues of restructuring costs. And the average adjusted EBITDA multiple paid on a pro forma basis was 7.4 times. So these are highly accretive acquisitions and increasingly strategic. We are building out our clouds like never before to really create end-to-end category winners. The degree of targeting now around specific capabilities that we want to add in order to create end-to-end category cloud solutions is greater than it's ever been. And I would note that our pipeline of these targeted acquisitions and our pipeline in general is stronger than it's ever been, and our position in the marketplace as a dependable and trustworthy buyer has never been better. A couple of updates that occurred subsequent to year-end. We closed the acquisition of Localytics, which has been announced, and also announced a major initiative to create true distribution, true enterprise sales distribution for Upland's cloud solutions with a new go-to-market leadership team led by software industry veteran Rod Favaron, who came in as President and Chief Commercial Officer, and also including new marketing, customer success and global account sales leadership. So we are happy to welcome Rod. He was on our Board for five years. So he is very familiar with our model.

Rod and his team, which has worked together before at both Spredfast and Lombardi, have a successful track record of scaling high-growth enterprise software organizations. Rod will be reporting to me and will be working alongside Tim Mattox, our President and Chief Operating Officer. Looking now to our guidance for 2020. As our strong guidance indicates, we are positioned for a great 2020 with four compelling enterprise clouds, proven new go-to-market leadership and a robust acquisition pipeline. I would note that Upland's 2020 guidance also reflects increased investment in go-to-market initiatives, including the addition of the new go-to-market leadership team. But in addition to that, planned hires in global account sales and additional marketing and related program spending. Even with these incremental investments, Upland's 2020 guidance reflects a 24% increase in adjusted EBITDA in 2020 over 2019, while maintaining level adjusted EBITDA margins in 2020 at 37%, and with no change to Upland's goal of achieving 40% adjusted EBITDA margins at $500 million in annual revenue run rate. Now I've seen it before, we've built this before, you get to a point in a business of critical mass in people and process and products and customers and access to capital and access to deal flow, where you start to see powerful network effects. Every acquisition adds scale, strengthens product clouds, adds major customers, adds product solutions, which we can then pump through our growing enterprise sales force to our over 9,000 customers and our more than 1,500 major accounts. It is a beautiful model, and we are just getting started. So we couldn't be more excited about 2020 and the road beyond.

With that, I'm going to turn the call over to Mike, who will take you through the Q4 numbers and guidance. Mike?

Mike Hill -- Chief Financial Officer

Thank you, Jack. As Jack just said, I'll take you through the financial results for the fourth quarter of 2019 and our outlook for the first quarter and full year 2020. Total revenue for the fourth quarter was $66.1 million, representing growth of 46% over the fourth quarter of 2018 as recurring revenue from subscription and support grew 41% year-over-year to $59.1 million. Professional services revenue was $3.4 million for the quarter, a 26% year-over-year increase. Perpetual license revenue was $3.5 million for the fourth quarter or an increase of 421% year-over-year. Moving down the P&L to gross margins. Overall gross margin was 68% during the fourth quarter, and our product gross margin remained strong at 70% or 74% when adding back depreciation of equipment and amortization of acquired intangible assets, which we refer to as cash gross margins. Our professional services gross margin was 36%. And turning to our operating expenses, research and development expense, net of refundable Canadian tax credits, was $8.5 million for the fourth quarter, representing 13% of total revenue in the fourth quarter. Sales and marketing expense was $11.5 million, representing 17% of total revenue in the fourth quarter. General and administrative expense was $13.8 million for the fourth quarter, representing 21% of total revenue. However, excluding noncash stock compensation expense, G&A expense was $8.2 million or 12% of total revenue in the quarter. Acquisition-related expenses were $15.2 million for the fourth quarter, resulting from our recent significant acquisition activity with two acquisitions closing during the quarter and one acquisition closing immediately prior to the start of the fourth quarter.

In fact, during the period from December 2018 through December 2019, we closed actually six acquisitions, so capturing Adestra in there right at the end of 2018, representing combined annual revenue run rate of $85 million acquired. All of those acquisitions, all six acquisitions contributed to the acquisition-related expenses here in Q4 of 2019. This represents an unusually high pace of acquisition activity that we really don't believe will be sustained as we continue to target $40 million to $60 million of aggregate acquired revenue run rate per year going forward. Remember, when we do an acquisition, we have temporary acquisition, transaction and transformation-related expenses, which generally amount to about 0.5 turn of acquired revenue annualized run rate. When looking at an acquisition investment, we view these costs as part of the overall cost of the acquisition. But from a GAAP accounting perspective, these costs are considered opex. Like other acquisitive companies out there, we back them out when calculating adjusted EBITDA. But of course, they also impact operating cash flow. These expenses typically break down as follows: about 1/4 of them are initial transaction-related expenses such as banker fees, legal and professional fees, insurance costs and deal bonuses. And then about half of the costs are people related, such as severance and compensation for transitional personnel. And the final quarter of these costs are non-people-related costs, such as office lease terminations and vendor cancellations. For each individual acquisition, we tend to recognize 40% to 50% of these acquisition-related expenses in our P&L during the first three months post-acquisition. Then they fade down quarterly and are always done by the first anniversary of the acquisition. Said another way, if we cease doing acquisitions today, then these costs would dramatically decrease in the future quarters and would go away completely within a year.

Operating loss was $12.5 million in the fourth quarter compared to a loss of $4.8 million in the same period in 2018. GAAP net loss was $19.9 million or a loss of $0.80 per share compared to GAAP net income of $1.8 million or a gain of $0.09 per share in the fourth quarter of 2018. Non-GAAP net income was $17.1 million or $0.67 per share in the fourth quarter of 2019 compared to a non-GAAP net income of $12.3 million or $0.58 per share in the fourth quarter of 2018. Our fourth quarter 2019 adjusted EBITDA was $25 million or 38% of total revenue, up 49% compared to $16.7 million or 37% of total revenue for 2018 Q4 2018. Now on to our balance sheet and statement of cash flows. We ended the fourth quarter with $175 million in cash. For the year ending December 31, 2019, operating cash flow was $12.1 million, which implies operating cash flow for Q4 of $7 million. However, included in our annual operating cash flow were most of the acquisition-related expenses in the year of $39.7 million. Also included in our annual operating cash flow was a onetime nonrecurring $1.7 million interest payment to settle up our old credit facility and a onetime acquisition earn-out payment of $1.5 million. Normalizing operating cash flow for these adjusting items, 2019 adjusted operating cash flow would have been approximately $55 million or 67% of our reported $82.5 million of adjusted EBITDA. Although I will note that some of these acquisition-related expenses were accrued in 2019 and will be paid in future periods, so our normalized cash flow conversion rate from adjusted EBITDA is closer to 60%. Furthermore, Upland is cash-efficient when looking at income taxes and capital expenditures. Cash taxes for 2019 were $3.6 million compared to cash taxes of $3.3 million in 2018. Upland currently has approximately $276 million of tax total tax NOLs. And of these, approximately $180 million are usable, which is comprised of $156 million of U.S. federal tax NOLs and the remainder mostly in the U.K.

We expect to continue to pay around $4 million to $5 million per year in cash taxes, mostly in the form of Canada Revenue Agency income taxes, Ireland income taxes and some U.S. state income taxes. capex for 2019 were $1 million compared to capex of $0.9 million in 2018, and we generally expect about $1 million a year of capex. During the fourth quarter, we expanded our Term Loan B credit facility by $190 million and paid off our $60 million revolver, leaving it fully available now for future draws for M&A. As of December 31, 2019, we had approximately $539 million of gross debt outstanding, excluding the deferred debt offering costs, making net debt approximately $364 million, after factoring in the $175 million of cash on our balance sheet. We are reaffirming our recently announced Q1 and full year 2020 guidance. For the quarter ended March 31, 2020, Upland expects reported total revenue to be between $62.8 million and $65.8 million, including subscription and support revenue between $58.8 million and $61.2 million for growth in recurring revenue of 33% at the midpoint over the quarter ended March 31, 2019. For the first quarter of 2020, adjusted EBITDA is expected to be between $23.1 million and $24.5 million for an adjusted EBITDA margin of 37% at the midpoint, representing growth of 34% at the midpoint over the quarter ended March 31, 2019. For the full year ending December 31, 2020, Upland expects reported total revenue to be between $269.5 million and $281.5 million, including subscription and support revenue between $252.6 million and $262.2 million for growth in recurring revenue of 26% at the midpoint over the year ended December 31, 2019. Full year 2020 adjusted EBITDA is expected to be between $99.2 million and $104.8 million for an adjusted EBITDA margin of 37% at the midpoint, representing growth of 24% at the midpoint over the year ended December 31, 2019.

And 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. I'll give you a review of our sales, product and operating results for Q4. But before that, let me get started by highlighting some of our customer success metrics for the full year of 2019. As a reminder, Upland has an unwavering commitment to 100% customer success. We define that as every customer realizing the full value that they expect from our software products. We measure our performance against these commitments by surveying customers twice a year using the Net Promoter Score or NPS methodology. In both NPS surveys for 2019, customers continue to place Upland at the high end of the scale for leading enterprise software companies. And you see this customer feedback reflected in our net dollar retention rate, or NDRR, which we report annually. For 2019, our NDRR was 97%, consistent with both our expectations and our 2018 performance of 98%. We're pleased with these results and remain committed to driving NDRR even higher. Turning to our sales performance to Q4 specifically. We expanded our customer relationships significantly with 255 existing customers doing more business with us. 51 of those customers were major expansions or over 25,000 in ARR expansion or annual recurring revenue. Among the larger expanding customers were an EMEA-based supplier of home building and renovation industries, which expanded its commitment to our Customer Experience Management cloud. A manufacturer in the commercial and business aircraft industry also expanded significantly with us their commitment to our Project & IT Management cloud.

And a multinational telecommunications company expanded its commitment to our Enterprise Sales and Marketing cloud. 252 other existing customers expanded their commitments by more than $4.8 million in aggregate annual recurring revenue in Q4. Turning to new customer acquisition. We welcomed 145 new customers to Upland in Q4. Included in those customers are 44 major customers who each committed over $25,000 in new annual recurring revenue to Upland. Among our larger new customers were a North American insurer who committed to our Project & IT Management cloud and a global entertainment company who committed to our Customer Experience Management cloud. Another new customer, a communications and media company that Jack alluded to, committed to our Customer Experience Management cloud. And in addition to significant recurring revenue, this customer also contributed to the large perpetual license increase that Mike referenced. In all, 143 other new customers committed over $3.3 million in total annual recurring revenue spend with Upland in Q4. As Jack alluded to, we saw a strong uptick in our cross-sell activity. An additional example beyond the one that Jack referenced was a large financial services company, which committed to our Project & IT Management cloud after an exceptional experience with our knowledge management offering. We're going to continue with these efforts to drive more cross-sells in 2020 and we'll begin referring them more as solution selling as we leverage the positioning of our four enterprise clouds going forward.

On the product front, we continue to invest in customer-informed innovation through high-quality and efficient internal development. For example, within our CXM cloud, we added support for ServiceNow Agent Workspace, bringing efficiency to service desk agents at joint Upland and ServiceNow customers. In Q4, we also announced the acquisition of InGenius, a computer telephony integration solution for enterprise contact centers within the CXM cloud. That product integrates also with ServiceNow and with Salesforce.com, two systems of record within a lot of our customers. We continue to expand our offerings all into all stages and touch points within the customer journey. Staying with CXM for a bit here. After the end of Q4, on February 7, we announced the acquisition of Localytics, as Jack referred to, expanding our offering into the mobile application, personalization, analytics solution. This is another great step forward for us in providing rich experiences, personalization and real-time sentiment analysis across every digital channel, including text, mobile app, browser, wallet, voice and email. Moving to our enterprise sales and marketing cloud, we announced the acquisition of Altify, a customer revenue optimization solution. We acquired that company in Q4, and it is a critical component of our offering and is a great fit for companies working to optimize their sales processes or enterprise sales forces. We also completed a set of releases over the quarter to streamline our RFP automation workflows and improve overall performance, security and usability of our enterprise sales and marketing cloud. Within our Project & IT Management cloud, we continued on our mission to connect our offering to our key customer infrastructure within our customers. For example, in the fourth quarter, we integrated Google Cloud usage data into our ITSM offering and the cost management module that's part of our Project & IT Management cloud, adding to a similar existing integration for our AWS cloud data, enabling comparisons between the cloud and on-premise cost structures.

Within the Document Workflow cloud, we had an exciting new product announcement in the quarter, our Intelligent Capture product. This product offers an on-ramp to the cloud for organizations that require flexible deployment solutions for document workflow processes. We give them the flexibility to operate in multi-tenant cloud and on-premise or hybrid capture en route scenarios. And finally, we continue our investment in a core Upland platform component, Upland Analytics, and a new addition, Upland WorkCenter. We added Upland Analytics support to one additional product in Q4, bringing to seven the number of products supported by Upland Analytics. Our WorkCenter product, a central location for single sign-on and quick access to frequent actions or analytics went into limited release in Q4. And we are actively validating that direction with several key customers. So lots of exciting things on the product front. With respect to operations, we continue to invest in UplandOne, our unified operating platform and the foundation of our 100% customer success commitment. We implemented and internally developed solutions to streamline pricing, quote generation and approval processes, allowing us not only to respond to customers more quickly, but also to avoid incremental third-party licensing costs. We also completed the integration of CIMPL into UplandOne and continued to execute integration plans for our InGenius and Altify acquisitions. We will further evolve our integration playbook with respect to sales and marketing processes, improving our ability to drive lead generation and sales team coordination prior to full UplandOne integration. And finally, we continue to improve our performance and efficiency in our support, cloud operations and back office functions, which contribute to our high customer loyalty and customer success. In summary, our Q4 results highlight our strong finish to 2019 and our significant progress for the full year. We remain committed to taking 2020 to the next level.

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

John T. McDonald -- Chief Executive Officer and Chairman of the Board

Thank you, Tim. We're now ready to open the call up for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Brad from Credit Suisse. Your line is open.

Brad -- Credit Suisse -- Analyst

Tensioning in for Brad. Congrats on the strong end to the year. I guess this one's for Tim or Jack. A lot of excitement with Rod joining the team. Can you just give us a sense of the changes that he is expected to make whether it's in terms of sales headcount or program changes? And how should we think about the timing of these returns?

John T. McDonald -- Chief Executive Officer and Chairman of the Board

So the over the last three years, we began growing our sales headcount. And we've talked about this a number of times. If you go back for years, we were a negative 1% organic growth company with maybe 32% adjusted EBITDA margins. And when we did acquisitions, we would get rid of the sales team because up until that point, three years ago, we couldn't hold on to the sales team and make our margin targets. About three years ago, we realized we were getting enough efficiency in the model in the back office that we could afford to retain the productive salespeople, not all the marketing spend, but the productive salespeople. And over the past three years, we've gone from just a handful of salespeople to 80 or maybe a few more than 80 today. Happily, at the same time, we've taken our organic growth from flat or negative 1% to mid-single digits. And we've increased adjusted EBITDA margins from that 31%, 32% up to the 37% range. But in terms of where we stand today on the sales front, I'd like to say that as the sales force is concerned, we've got a field of soldiers, but not an army. We needed to bring in that officer corps to direct our sales team in a way that will drive more productivity. And so that's why we made the move to bring in Rod. And of course, he comes with a team that he's worked with before successfully at both Lombardi and at Spredfast. One exited to IBM, the other to Vista Equity. And so this is about that new leadership taking the $40-some-odd million that we currently spend, as Mike just pointed out, 17% of revenue on sales and marketing, and directing it more effectively. And this is the time for us to do it because now we've got that critical mass in large enterprise accounts.

And across these four clouds, we've got those adjacencies and products that can drive true cross-sell or solution selling, as Tim referred to earlier. So job one will be making this existing sales force, which today is principally product-oriented, making them more effective. Through time, we will evolve to more of an account-based marketing and sales model. Now we've got a lot of Fortune 2000 accounts where we've got multiple products in and revenues of millions of dollars, but we lack today an effective global account management program, where you've got one sales executive that is overseeing that account and helping to drive more value for the customer and seek more opportunities for Upland products. So a part of what this new team will do is begin to build out that global account management team, those global account sales executives. And the hiring of that initial team is reflected in our budgets for 2020 and is reflected in our 2020 guidance. And then over the next couple or three years, we will begin to migrate a larger share of our marketing and sales spend from product orientation to account-based orientation. In terms of when this will impact organic growth, look, we're going to maintain our conservative stance on that. I will tell you if this new flying formation doesn't increase organic growth, it's still a good idea because it is a more scalable, more efficient model that will enable us to do more acquisitions, to integrate them more quickly and, frankly, to achieve higher pro forma contribution margin on acquired products, because we will have sales distribution in place at the account level, where every new acquisition product goes into the kit bag, the sales bags of that global account management team. And imagine that we've gone from a start-up to a $275 million business with $100 million of EBITDA, created $1.5 billion of enterprise value and done it without effective front office distribution. If we can add front office distribution and the benefit could be significant in terms of, again, scalability of the model in terms of margin enhancement, and there could very well be a meaningful organic growth rate price. But I would say let's reserve judgment on that last point for now. We'll keep our conservative organic growth guidance, and we'll see what this new model brings as we move through 2020 and into 2021.

Brad -- Credit Suisse -- Analyst

Jack, that's very helpful and insightful. Just a quick follow-up for Mike. Mike, you guys have been fairly busy in terms of M&A from the second half of 2019 to early this quarter. Can you just provide some update on how some of the larger acquisitions have been performing and how are they going in terms of your the integrations?

Mike Hill -- Chief Financial Officer

So yes, all integrations are on schedule, on time, going great. We've been buying more thematic assets, growthier assets, and they've all been performing very well. So but yes, we've gotten into a period here where we've knocked off five acquisitions last year, six if you include Adestra at the end of 2018, as I mentioned. And everything we're very sort of proud of the performance, and we want to just kind of continue to the motions, landing these acquired businesses, getting them into model in the UplandOne platform, now standing up distribution so that we could keep those forward momentum growth characteristics impact as much as possible while still meeting our margin and cash flow targets.

Brad -- Credit Suisse -- Analyst

Great, thanks for taking my questions and congrats again.

Operator

Our next question comes from the line of Bhavan from William Blair. Your line is open.

Bhavan -- William Blair -- Analyst

Hi, everyone. This is Kamil Mielczarek on for Bhavan Suri. I just want to push on that last question a little more. You see, your organic revenue growth has been at 7% each in the last two years, and sales and marketing expense in this most recent quarter grew at the highest rate in, I think, something like six years, I think. Do you think organic growth could accelerate from the previous years? Or do you think it's likely to remain in this mid-single-digit range?

John T. McDonald -- Chief Executive Officer and Chairman of the Board

Well, again, we're putting in place investments to drive a structural increase in organic growth and to create more scalable sales distribution for our products. We're going to maintain our conservative outlook on organic growth. Our guidance reflects organic growth of low single digits. Our so read that 2% or 3%. Our target is higher than that. We target mid-single digits, read that 4% to 6%, 3% to 7%. And again, we'll see how this plays out. This is a long game. We've got a ton of value-creation opportunity here by executing against our consolidation play, where we are a differentiated buyer with an operating platform that is a real competitive advantage in terms of our ability to integrate these products, cheap margin and increase customer satisfaction and build long-term customer relationships. That's going to continue to be the primary driver of growth, but I do think there is more we can do on organic growth. Let's be sober about the outlook on it. Let's give this some time to work. And we will see the results from it. But again, that outlook for 2020 guidance reflects low single-digit organic growth. Our goal remains mid-single digits. So no change on those scores.

Bhavan -- William Blair -- Analyst

Okay. And just as a follow-up, your adjusted free cash flow margin hit a multiyear high in the quarter. What are your expectations for free cash flow generation over the next year? And what do you think free cash flow margin could be once you reach your longer-term target of $500 million revenue?

Mike Hill -- Chief Financial Officer

Yes. So as we've talked about, we've got a slide in our IR deck that talks about the conversion of adjusted EBITDA to free cash flow. And as I mentioned on the call earlier, expect about 60%. Now we did have a good cash flow quarter here in Q4. It was good to see. But those benefited by some timing differences in our favor here in Q4. Some of those things will normal out. So we had a 67% conversion to adjusted free cash flow, as I said, probably more normalized around 60%. So if you take our adjusted EBITDA run rate, the $102 million, you take cash taxes off of that, which is around $28 million a year; cash I'm sorry, cash interest, about $28 million a year; cash taxes, $4 million to $5 million a year; cash sales commissions that are deferred, around $5 million a year, $5 million to $7 million a year there; and about $1 million a year of capex, those are the main conversion items that will get you to about 60%. Now we talk about these onetime acquisition-related costs that's obviously contingent on the frequency and amount of acquisition activity we have. We've talked about targeting $40 million to $60 million of acquired revenue run rate per year. That's and we talked about those costs being about 0.5 turn of acquired revenue. So at $40 million acquired per year, that's $20 million in these costs. At $60 million, that's $30 million of these costs a year. That would be on our affect our operating cash flow and free cash flow. So let me know if that doesn't walk it for you.

Bhavan -- William Blair -- Analyst

Great, thank you.

Operator

Our next question comes from the line of Brent from Jeffries. Your line is open.

Brent -- Jeffries -- Analyst

Thank you. Just a couple of questions on the go-to-market great CD investments. I guess just from your perspective, kind of how do you expect the timing of those investments? And when do you expect them to take hold? And secondarily, when we've seen past changes like this historically in the industry, there has been some drag and disruption that filtered through. Are you anticipating any of that friction in the guide? Or are you just envisioning that it just this is going to be just much better? And there's really not going to be any friction during this transition?

John T. McDonald -- Chief Executive Officer and Chairman of the Board

I don't anticipate any friction during the transition. What we're doing is adding more senior experienced executives. Rod will be driving our go-to-market. Jim Rudden, who came out of Spredfast and Lombardi, brings a level of marketing and product management expertise that we haven't had in the company before. Virginia Miracle on the customer success side and Joseph Rodriguez, who will be growing the global account management team. Those are all additive. We're not going to be changing or reducing our existing sales motions. I think this team will be catalyzing that existing spend to make it more productive. Again, we don't want to raise any numbers right now because we're going to be conservative, and these things take time. But I don't anticipate any disruption from that. We also have in the budget the addition of that first team of global account managers. So again, they'll be out there ramping up. Their costs are in the model, but we're assuming no productivity from them in our outlook. So I think we've modeled this in a conservative way so that the additional cost associated with these initiatives is reflected in our guidance, but there is no incremental revenue from these investments reflected in our guidance. I think that's from an investor standpoint and in terms of how we're built as entrepreneurs and managers, that is the most conservative, best way to go, probably not what most people do. And but I think it's the better way to do it.

Brent -- Jeffries -- Analyst

Thanks you.

Operator

Our next questions come from the line of Jeff from Craig-Hallum. Your line is open.

Jeff -- Craig-Hallum -- Analyst

Pretty Thank you. Several from me guys. I wanted to start briefly with the on the revenue lines there. Obviously, a big license quarter. Talk about this customer that, I think, you said was a knowledge management add-on for call center efficiency. The obviously, the size is seemingly unusual, very unusual. So just talk how they came to that purchase. Were they an existing customer? Was everything else they have subscription, and this is the first license? Just put a little more color around that big license number.

Mike Hill -- Chief Financial Officer

Yes, Jeff, good question. They were a very satisfied and happy customer of our customer sentiment offering in one aspect of the business. So they are a large global company. And when they were looking for knowledge management, we're well-known in the knowledge-centric system or KCS area, and so we came up on their short list of companies. And when they saw that we were owned that offering was owned by Upland, and they knew that they were using us in another area, they talked with their colleagues as part of their evaluation process. Heard about our customer-centric approach, our defining the value that a customer receives in their terms and delivering on our commitments, and that gave them comfort such that when they saw the expertise in the knowledge management area, they wanted to go forward. Now this was interesting, too, in that the industry itself, it's a very somewhat small network of people. And so they talk to others within the industry that were buying this offering and heard fantastic recommendations from them as well. So this knowledge management area is super important for call center efficiency. And that, coupled with our InGenius acquisition for integrating the telephony systems to the cloud and then using this customer sentiment engine, provides really a great catalyst to improve the efficiency of call centers. So we're early days in that solution, but that's certainly going to be one of our solution-selling motions that Jim and the marketing team is going to target and go after. So I hope that hopefully, that gives you a little more color as to how that account evolved over time.

John T. McDonald -- Chief Executive Officer and Chairman of the Board

The other piece of color I'll provide on that is that there was both a large perpetual component to that sale. But in addition to that, a very significant ARR component. So there are both things, not just a big perpetual offering.

Mike Hill -- Chief Financial Officer

That's correct. And it's still a cloud offering and a cloud delivery recurring model.

Jeff -- Craig-Hallum -- Analyst

Okay. And then two more I've got here. On the WorkCenter product, you talked about kind of what your learnings are as you move toward a broader rollout. Just talk about your goals with that product and what you've learned so far and when we might see that fully available.

Mike Hill -- Chief Financial Officer

Sure. It's really a powerful concept as we bring different products, different features, if you will, for solutions and get exposure of those to customers. One of the ways we'll do that is through our marketing and selling efforts. But we felt like with the product itself, to provide this dashboard that showed real value-added metrics in a dynamic way would be a great way to introduce those features as well as make sure that the value of those features we're providing was being exposed to the customer. So that was really the premise of it, to bring it all together in the form of a dashboard, different personas, could be at the executive level, someone running a professional services organization, as an example, who wants to see the projects and where they are from a delivery perspective, the costs associated with those projects, the customer sentiment around those projects, the RFPs associated with new projects and new statements of work, customer references might be related to work that had been delivered. So bringing all of those things together, knowledge management, of course, the component as well, the idea was bring that to the forefront in terms of a dashboard, someone in that example running a professional services organization could leverage. Feedback has been very positive. We're early in the product cycle here, so we're learning a lot about that. But we're optimistic as we introduce it to more customers, both existing ones where we want to introduce the broader solution set to as well as the new opportunities to show this broader vision in each of these clouds.

John T. McDonald -- Chief Executive Officer and Chairman of the Board

What I would add to that, right, so Upland WorkCenter is a single pane of glass. And you're going to be able to use it to consume visualized analytics, take actions across multiple products at once, right? In a sense, it becomes this powerful window, and it is the manifestation of what we're building, end-to-end solutions in each of our clouds that are category killers. We've got it out now in beta in our professional services automation offering. We'll continue to run the traps on that through this year, and then we'll begin rolling it out in additional cloud solution suite. So that's the status in terms of rollout.

Jeff -- Craig-Hallum -- Analyst

Got it. Got it. Great. Great then. And then the last one here, Jack, just your thoughts with respect to the acquisition pipeline, specifically with respect to prices, your rumblings about pricing and price pressure in terms of expected multiples. People are asking, wondering if you're seeing the same. And then also, along that vein, just your latest thinking in terms of the appropriate levels, max levels that you would feel comfortable with on that debt-to-EBITDA range.

John T. McDonald -- Chief Executive Officer and Chairman of the Board

So in terms of acquisition multiples, no real changes. We noted last year, it was an average of 7.4 times adjusted pro forma EBITDA, 3.3 times revenue that's pre-restructuring expense. And we find in that range, we've got pole position and a lot of attractive thematic opportunities, right, because we're going after more thematic fits. So pipeline has never been stronger. Our position in the marketplace, never better. And we love where we're playing, this sub-$25 million, sub-20% organic growth market. So love it, and I think, if anything, you're going to see supply growing dramatically over the next few years as $100 billion, $150 billion plus of VC investment in cloud software companies begins to age out of portfolios. So I feel very, very good about that. In terms of leverage, as Mike and I have said many times in the past, the target is three to four times. We're willing to go higher than that transitionally as long as we have a path back down to it into the mid-4s range. Ultimately, this is a delevering model, given the fact that we're not going to chase inorganic growth. We're going to continue to target that $40 million to $60 million of M&A. We'll have some bigger years like last year, we'll have some smaller years. We're already off to a very strong start in 2020. So that's the take on that.

Jeff -- Craig-Hallum -- Analyst

Got. It Great, thanks.

John T. McDonald -- Chief Executive Officer and Chairman of the Board

Thank you.

Operator

Our next question comes from the line of Richard from Roth Capital. Your line is open.

Richard -- Roth Capital -- Analyst

Can you talk a little bit about the timing of the synergies you expect throughout 2020 with the deals that you've already put in? Would it be more first half weighted? Or do you think it kind of plays out throughout the year?

John T. McDonald -- Chief Executive Officer and Chairman of the Board

Well, in terms of the outlook on those acquisitions and how the costs get rationalized, we bring acquisitions into model within 90 to 120 days of acquisition. That's the target. There are some items that lag that a little bit, but that's been consistent throughout. And as Mike was pointing out earlier, in terms of how the restructuring expense burns down, it's over the first four quarters, typically, and this is an average, right, 40/30/20/10 in terms of the cost side. In terms of the product side and the go-to-market side, I will tell you, again, I don't want to raise expectations. We're going to maintain a conservative outlook because I do believe it will we're not going to see a miraculous change overnight. But we're having conversations today, day one on integration, about how we're going to bring products to market in a way that we weren't doing even six or 12 months ago. And so the degree of product fit that's required for us to bring a new product on board and the go-to-market that we anticipate, the cross-sell, the plus one motions that we want to activate day one, there's a different level of maturity around that go-to-market than we had even six or 12 months ago. So hopefully, we'll start to see a quicker realization of the go-to-market synergies from these acquisitions. Again, the cost synergies will play out as described.

Richard -- Roth Capital -- Analyst

And can you talk about sort of the puts and takes in your analysis when you're looking at acquisitions or your preferences for either the matching verticals you have, adding a strategic vertical, where you are geographically, even internationally? Because you've stuck your toe into that. Or even scale, how do you try to weed out which to go after first? How to prioritize them?

John T. McDonald -- Chief Executive Officer and Chairman of the Board

So first, we want to see a strong thematic fit. Is this going to build out one of our cloud solutions today? Is this something customers want to buy from us? We want adjacencies. If you look at what we just did with Localytics, most recent acquisition, we've already got a powerful CXM offering. And these CXM platforms are about orchestrating customer journeys, right? Our big customers who have B2C motions are engaging with their customers increasingly these days online in terms of discovery, in terms of nurturing, in terms of purchase and ultimately, advocacy. And they need to be able to have personalized our clients do, they need to be able to have personalized conversations with their customers at scale across multiple digital channels. So we already had a ton of strength in SMS, texting and RCS. Now added on to that earlier last year, email marketing automation. Added on to that, the feedback loop of customer sentiment analysis, added wallet and couponing capabilities. And then with Localytics, added in-app and push messaging, so that now you can cover the entire spectrum of channels as our customers our clients orchestrate those customer journeys on behalf of their consumers. So it's a much more purposeful perspective. And when you do that, your ability to take that in-app product and sell it to that Chief Marketing Officer at a Fortune 2000 company, who's already using our text-based products or email products, well, that's just a much easier proposition than selling something that's not adjacent.

And on top of that, we're doing clever integrations to bring these products together as part of our innovation through acquisition strategy. So we want thematic fit. We want sticky products, 90% plus net dollar retention rates, real software solutions, not bastardized managed services plays. So we want cash gross margins north of 70%. We want to see a Fortune 2000 customer base for at least 80% of the revenue because that's where our land-and-expand model works best. We want to see average major accounts, north of $25,000 ARR. And we like to see at least a handful of accounts in the $300,000, $400,000, $500,000 range in order to show the scalability of the product. And we like to see organic growth north of 15%. So those are the the geography is less important to us. We did want to create more of an international base, which we've done now across a few acquisitions. And but the geography is not the driver. So if we have those inputs, then we can bring that product on to our platform. We can be running it at 45% to 50% contribution margin. And hey, three years ago, we used to take the organic growth from 15% down to 0. Now we're taking it from 15% to 5%, because we're taking a kind of cost out of the business. The challenge for us is to take it from 15% to 10%, and that's why we're making the investments we're making in go-to-market and why we're clustering products, buying more thematically and buying higher growth.

Richard -- Roth Capital -- Analyst

All right, thanks.

Operator

Our next question comes from the line of Terry from SunTrust Robinson. Your line is open.

Terry -- SunTrust Robinson -- Analyst

I'll make it easy. I won't ask like two or three questions on this. I'll just ask one question, and it's related to one of your cloud product families around sales and marketing. As we're doing research and talking to lots of software companies, just in our day-to-day job, we hear sales enablement like every time. And they're talking about how they're doing more in sales enablement. So my question really relates to you've got a family of products in that area of sales and marketing. What are you seeing in terms of RFP activity and just strength around sales enablement in a lot of those products you have in that product family? And it's also interesting to me, you're talking about account-based marketing. That's another buzz word we hear a lot. So I'd love to I know we hear and we talk about CXM. But I would love to hear more about the vitality of sales and marketing as a growth engine, maybe even on the organic side.

Analyst

Yes. Thank you, Terry. We're incredibly excited about the opportunity there. It's interesting, in a way, the Altify acquisition was really the thing that brought back the entire cloud together. In a sense, we bought the ornaments before we bought the tree. We bought a first-rate RFP automation platform. We bought a first-rate customer reference management platform and a first-rate sales content creation, collaboration and distribution platform, all of which were serving large enterprise accounts, right, that have a principally B2B motion and a sophisticated, oftentimes regulated but not always, sales process. What we were missing was the tree to hang those ornaments on, and that's what Altify does. That was a fourth quarter acquisition. The category is called customer revenue optimization. And it's really about taking best practices from sales methodology, and you can choose your own sales methodology or it comes with a sales methodology embedded. And we used to have to rely on a consulting firm to come in and do this for you. They've actually cloudified, if you will, that intelligence into a software platform, which guides enterprise sales forces through the entire selling process with embedded intelligence that represents next best action at various nodes in the sales process. So you can imagine the logic here when next best action is to roll out customer references, and we've got that or next best action is about that RFP response preparation, and we've got that. And when you've got simply content that's been created on a collaboration platform that ensures compliance and integrity and you can use that to feed that sales engine, so this is an area. It is as robust a growth area for us, we believe, as CXM. And we view the two things together. They're really, in my sort of pea brain, they're both customer engagement. One is for clients of ours that have a principally B2C motion. The other is for clients that have a principally B2B motion. And as we've talked about, they together represent better than 2/3 of our total revenue. And they're an area of great focus for us in terms of future acquisitions and go-to-market.

Terry -- SunTrust Robinson -- Analyst

Thanks.

Operator

Our last question comes from the line of Brian from Raymond James. Your line is open.

Brian -- Raymond James -- Analyst

Great, thanks to This is Alex Sklar on for Brian. Jack, just a higher-level question here. But do you think your willingness to step up on the go-to-market investments has any ancillary positive impact on the desirability of Upland as a buyer for some of your pipeline M&A targets?

John T. McDonald -- Chief Executive Officer and Chairman of the Board

Yes. I think it does because particularly as you start looking at growth of your businesses, and that's what we call this, we want to see at least 15% organic growth in the targets. And these are well-positioned products, being able to make the point to that seller that not only will we be a great home for your product and a great home for your customers and a subset of your high-performing people, but that you now fit into a broader vision of how we're going to own a category, how we're going to build an end-to-end winner in a category. And this is how we're going to go to market together. And this is where we share accounts today, and these are the plus ones, as we call them, where we're going to take your product and sell it into ours and our product and sell it into yours. And it was something that was talked about before, but now it's being executed against on day one. That is invigorating and the level of enthusiasm that we just had a kickoff meeting for CXM, sales kick off meeting with the sales executives, customer success executives, solution consultants, and it was wonderful because the Localytics acquisition, which just closed, their team was here in Austin for that. And the degree of excitement from sitting and talking to those folks, when they see the bigger picture, and these are companies, like in the case of Localytics where they had email marketing automation and SMS, text-based delivery on their product road map. It's things that they were going to have to raise more money to go and try to build from scratch or partner on, and we bring that to the table immediately. So we're creating this whole product solution. We're leapfrogging competitors, we're shortening time to market. We're creating end-to-end solutions that can win, particularly as cloud moves to more of a suite-based or multi-solution deal. You don't want to be a single product provider, I don't think, in this market. It gives us price flexibility, and it gives us a wedge through which we can deliver tons of value to customers and build long-term profitable relationships. So it's a great question. It's a great insight. It is important.

Operator

No further questions. Presenters, please continue.

John T. McDonald -- Chief Executive Officer and Chairman of the Board

Great. All right. Well, thank you all for your time this afternoon, and we look forward to seeing you on our next earnings call. Thanks very much.

Operator

[Operator Closing Remarks]

Duration: 64 minutes

Call participants:

John T. McDonald -- Chief Executive Officer and Chairman of the Board

Mike Hill -- Chief Financial Officer

Tim Mattox -- President and Chief Operating Officer

Brad -- Credit Suisse -- Analyst

Bhavan -- William Blair -- Analyst

Brent -- Jeffries -- Analyst

Jeff -- Craig-Hallum -- Analyst

Richard -- Roth Capital -- Analyst

Terry -- SunTrust Robinson -- Analyst

Analyst

Brian -- Raymond James -- Analyst

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