Upland Software, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Unaudited results are compared with the corresponding 2017 periods. Upland provides cloud-based enterprise work management software and continues to pursue growth through acquisitions.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $37.1 million | $26.1 million | $104.7 million | $70.1 million |
| Gross profit / margin | $25.1 million / 67% | $17.0 million / 65% | $71.1 million / 68% | $46.0 million / 66% |
| Operating income (loss) | $0.3 million | $(2.3) million | $(0.8) million | $(8.7) million |
| Net loss | $(4.3) million | $(3.5) million | $(12.6) million | $(14.9) million |
| Adjusted EBITDA, non-GAAP | $13.1 million | $8.3 million | $36.4 million | $20.6 million |
| Operating cash flow | Not separately provided | Not separately provided | $4.8 million | $5.8 million |
- Q3 revenue grew 42%; nine-month revenue grew 49%. Subscription and support accounted for 91% of revenue in both 2018 periods.
- Management attributed most reported revenue growth to acquisitions. It estimated organic revenue growth of 6% for Q3, but only 1% for the first nine months. Nine-month organic subscription and support revenue rose 3%; organic professional-services revenue fell 23%.
- Q3 operating income turned positive, but the company remained loss-making after interest and taxes. Nine-month net loss narrowed from 2017.
- Adjusted EBITDA is a non-GAAP measure; it excludes, among other items, stock compensation, acquisition costs, interest, taxes and acquired-revenue purchase-accounting adjustments.
Cash, liquidity and debt
- Cash and equivalents were $16.1 million at September 30, 2018, down from $22.3 million at December 31, 2017. Nine-month investing cash outflow was $48.5 million, principally $47.9 million for acquisitions; financing provided $37.5 million.
- Quarter-end debt principal was $160.9 million, compared with $113.8 million at year-end 2017. No revolver borrowings were outstanding; the company reported $40.0 million of available borrowings, excluding a $55.0 million uncommitted accordion.
- Working capital deficit was $27.1 million, including $43.6 million of current deferred revenue, which is expected to be recognized as revenue over time. The company reported $8.8 million of net interest expense for the first nine months.
- On October 3, after quarter-end, Upland acquired Rant & Rave for $58.5 million cash at closing plus a $6.5 million holdback. It amended and expanded its credit facility, drew $63.0 million of new term debt, and reported gross debt of $223.9 million and net debt of approximately $209 million afterward.
Changes, outlook and notable items
- 2018 acquisitions included Interfax and RO Innovation; the filing also discusses related Marketech assets. Management said acquisitions not fully reflected in the prior-year comparison contributed $9.6 million of Q3 revenue growth and $34.4 million of nine-month growth, after purchase-accounting deferred-revenue discounts.
- Acquisition activity raised amortization and interest costs. The company reported $8.7 million of acquisition-related expenses for the first nine months, down from $10.4 million in 2017.
- Upland adopted ASC 606 on January 1, 2018 using the modified retrospective method. It capitalizes qualifying sales commissions and amortizes them over the expected customer relationship period. The filing says the ongoing net-income impact is expected to be immaterial; adoption increased reported EPS by $0.03 for Q3 and $0.07 for the nine-month period.
- Approximately $94 million of subscription-contract remaining performance obligations were disclosed; about 76% is expected to be recognized over the next 15 months. No company-wide revenue, earnings or cash-flow guidance is provided in this filing.
- Management cited acquisition integration, customer retention and growth, competition, technology changes, international operations, financing access and covenant compliance among the risks. Credit-facility covenants restrict certain activities, and financial covenants were to become more restrictive beginning March 31, 2019. The debt is secured by substantially all company and guarantor assets, including intellectual property.
- The company reported effective disclosure controls as of September 30 and no current or pending litigation expected to materially affect its financial position or results. It has a $3.2 million 2018 software-development purchase commitment with DevFactory, an affiliate of an investor.
Most important facts for investors to verify
- How much future growth is organic versus acquired, particularly given modest nine-month organic revenue growth and declining organic professional-services revenue.
- Whether positive Adjusted EBITDA converts to sustained operating cash flow, considering nine-month operating cash flow of $4.8 million and acquisition-related cash needs.
- Debt levels, borrowing costs, covenant headroom and liquidity after the Rant & Rave acquisition and facility amendment.
- Integration results and final purchase-price allocations for acquisitions; several 2018 acquisition valuations were preliminary, and Rant & Rave accounting was not yet complete.
- The effects of rising amortization, stock-based compensation and interest expense on GAAP profitability; verify non-GAAP adjustments against the reported GAAP results.