Upland Software, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Upland provides cloud-based enterprise work management software. Comparisons are against Q1 2019 unless otherwise stated. Amounts are in U.S. dollars.
Key financial results
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $68.0 million | $48.5 million | +40% |
| Subscription and support revenue | $63.9 million | $45.0 million | +42% |
| Gross profit / gross margin | $45.8 million / 67% | $33.7 million / 70% | Margin down 3 points |
| Operating loss / operating margin | $(15.3) million / (23)% | $(2.6) million / (5)% | Loss widened |
| Net loss | $(20.1) million | $(7.8) million | Loss widened |
| Diluted loss per share | $(0.81) | $(0.38) | Loss per share increased |
| Adjusted EBITDA (non-GAAP) | $24.6 million | $17.8 million | +38% |
| Cash from operating activities | $(5.3) million | $4.9 million | Declined |
Subscription and support represented 94% of revenue. Management attributed $18.2 million of the $19.5 million revenue increase to acquisitions not fully included in the prior-year comparison, net of purchase-accounting deferred-revenue discounts. Organic revenue increased 5%; organic subscription and support revenue increased 6%. Professional services rose 32% overall, but declined 4% organically. Perpetual license revenue declined 45%.
Financial position and cash flow
- Cash and cash equivalents were $98.7 million at March 31, 2020, down from $175.0 million at year-end 2019. Cash used in investing was $68.1 million, primarily the $67.7 million Localytics acquisition payment.
- Operating cash use was $5.3 million, compared with $4.9 million generated in Q1 2019. The filing cites working-capital outflows, partly offset by $9.9 million of higher deferred revenue.
- Debt outstanding was approximately $537.3 million; the $60 million revolving facility was undrawn and fully available. The term loans are effectively fixed at 5.4% through interest-rate swaps. The company reported covenant compliance.
- Working capital was a $35.6 million surplus, versus a $109.5 million deficit at December 31, 2019; current deferred revenue was $87.8 million. Management said cash, operating cash flows, available credit and other funding sources should cover needs for at least 12 months.
- Deferred revenue was $87.8 million current and $2.6 million noncurrent. Remaining performance obligations were approximately $245.5 million, with about 67% expected to be recognized over the next 12 months.
Material changes and unusual items
- Localytics was acquired on February 6, 2020 for total consideration of $69.0 million and contributed approximately $2.5 million in revenue after acquisition. Its purchase-price allocation remained preliminary.
- Operating expenses rose substantially, including acquisition-related expenses of $15.2 million versus $7.7 million. Q1 2020 acquisition-related costs included $11.9 million of transformation expenses and $3.3 million of transaction expenses; approximately $2.5 million related to accelerated rent from office closures.
- Stock-based compensation increased to $9.3 million from $4.6 million, including $7.8 million in general and administrative expense.
- A $31.4 million unrealized loss on interest-rate swaps was recorded in other comprehensive loss, not net loss. The swaps were a $29.0 million liability at quarter-end, compared with a $2.4 million asset at year-end 2019.
- Foreign currency translation and intercompany-loan effects also reduced comprehensive income. Total comprehensive loss was $62.3 million, versus $5.5 million in Q1 2019.
Outlook, risks and controls
- Management said COVID-19 had not materially adversely affected Q1 results, citing recurring revenue and limited exposure to some heavily affected industries. It nevertheless expected a moderate reduction in projected 2020 revenue; no specific revised revenue guidance was provided.
- The company converted its workforce to remote work and anticipated slowing acquisitions in Q2 and Q3 while assessing pandemic effects. Management warned that customers could delay or reduce technology spending, seek contract concessions, or affect retention and upselling; impacts could emerge in future periods.
- COVID-19 created uncertainty for estimates and potential impairment assessments. Management’s Q1 qualitative review identified no impairment of goodwill or intangible assets.
- Disclosure controls and procedures were deemed ineffective as of March 31, 2020 because of a material weakness in annual income-tax accounting. Management described remediation actions and expected completion before the 2020 annual controls, while stating the financial statements fairly presented the periods shown.
- The credit agreement restricts certain actions, including additional debt, acquisitions and distributions. A leverage covenant applies if at least 35% of the revolver is drawn at quarter-end; the filing reports the revolver was undrawn and covenants were met.
- Purchase commitments included approximately $10.8 million for hosting, technology and other services through 2024. The filing also identifies related-party development-service arrangements, including a 2020 commitment of $7.3 million to DevFactory.
Important facts for investors to verify
- How much of future growth is organic rather than acquisition-driven, and whether organic growth and margins recover.
- Whether COVID-19 results in the anticipated revenue moderation, customer concessions, or changes in retention and upselling.
- Cash generation, working-capital trends, and the capacity to service approximately $537 million of debt while continuing acquisitions.
- Integration and final purchase accounting for Localytics, and the level and duration of acquisition-related costs and amortization.
- Progress in remediating the income-tax control weakness and the effect of swap valuation changes on equity and future interest expense.