Upland Software, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; compared with the corresponding 2019 periods. The company provides cloud-based enterprise work management software. All amounts below are U.S. dollars.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $74.2 million | $55.1 million | $213.5 million | $156.6 million |
| Gross profit / margin | $48.6 million / 66% | $38.4 million / 70% | $142.1 million / 67% | $108.5 million / 69% |
| Operating loss | $2.7 million | $3.7 million | $24.9 million | $11.8 million |
| Net loss | $11.3 million | $12.3 million | $45.6 million | $25.5 million |
| Adjusted EBITDA (non-GAAP) | $25.0 million | $20.7 million | $73.3 million | $57.5 million |
- Subscription and support revenue was $71.0 million in Q3 (up 39%) and $202.6 million year to date (up 40%); it represented 96% and 95% of revenue, respectively.
- Q3 diluted loss per share was $0.42 versus $0.50; nine-month loss per share was $1.77 versus $1.13.
- Operating cash flow was $14.2 million for the first nine months, versus $5.1 million. Investing used $68.7 million, primarily for the $67.7 million Localytics acquisition; financing provided $112.1 million, including $130.1 million of net equity-offering proceeds.
- Cash and equivalents were $233.0 million at September 30, up from $175.0 million at year-end. Working capital was a surplus of $178.8 million.
- Debt carrying value was $522.5 million before current maturities, with $534.6 million of principal outstanding; the $60 million revolver was undrawn and fully available. The term debt is hedged at a 5.4% fixed rate; the swaps were a $33.1 million liability. The company reported compliance with debt covenants.
Material changes and drivers
- Revenue rose 35% in Q3 and 36% year to date. Acquisitions not fully reflected in the comparison contributed $14.6 million and $49.8 million, respectively; organic revenue growth was 11% in Q3 and 7% year to date. Management attributed organic growth primarily to higher CXM usage by U.S. election-year campaigns.
- Gross margin fell to 66% in Q3 and 67% year to date, from 70% and 69%. Higher subscription delivery and messaging costs, including costs tied to increased campaign usage, contributed to the decline.
- Q3 operating loss narrowed, but nine-month operating and net losses increased. Nine-month interest expense rose 49% to $23.6 million, mainly reflecting higher acquisition-related borrowings. Higher amortization and stock-based compensation also weighed on reported results.
- Localytics, acquired in February 2020 for total consideration of $69.0 million, contributed approximately $11.8 million of revenue since acquisition. Its purchase-price allocation remained preliminary.
- The August 2020 offering issued 4.025 million shares and generated $130.1 million net proceeds. Common shares outstanding increased to 29.46 million from 25.25 million at December 2019.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided in the supplied filing text. Management said cash, operating cash flows, revolver availability and access to registered securities offerings should fund operations for at least 12 months and support potential acquisitions.
- COVID-19 had not materially adversely affected results through September, according to management, but the company reported effects on new bookings and churn and expected continued impact in Q4 2020. Reduced on-site professional services also contributed to lower organic services revenue. Further effects remained uncertain, including possible delayed customer spending or contract concessions.
- Acquisition activity was paused during Q2 and Q3 amid pandemic uncertainty. Management cautioned that acquisition-related expense reductions could level off or reverse as activity resumes. Q3 acquisition-related expense was $3.6 million, down 52% year over year; nine-month expense was $24.5 million, essentially unchanged.
- The company reported a material weakness in internal control over financial reporting related to annual income-tax accounting; disclosure controls were therefore deemed ineffective as of September 30. Management was adding tax and accounting resources and streamlining processes, and expected remediation before year-end annual controls.
- Other considerations include $234.5 million of remaining performance obligations, of which approximately 71% was expected to be recognized in the next 12 months; a $7.3 million 2020 software-services commitment to related-party DevFactory; and significant goodwill and acquired intangibles. Management identified no goodwill or intangible impairment in its pandemic-related qualitative review.
Key investor verification points
- Separate acquisition-driven growth from organic growth, and assess whether campaign-related CXM usage and bookings persist beyond the election period.
- Track subscription gross margin, messaging costs, customer churn and new bookings, particularly as COVID-19 effects evolve.
- Review cash generation against acquisition spending, debt and interest costs, the interest-rate swap liability, and the company’s reliance on equity issuance for growth funding.
- Confirm progress in remediating the income-tax control weakness and monitor the ERP implementation’s effect on financial reporting controls.
- Assess the final Localytics purchase-price allocation, goodwill and intangible-asset recoverability, and potential future acquisition and integration costs.