Upland Software, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; quarterly figures below include the fourth quarter ended that date. Upland sells cloud-based enterprise work management software. Growth is driven primarily by acquisitions and recurring subscription revenue. The financial statements received an unqualified audit opinion.
Key financial results
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $149.9 million | $98.0 million |
| Subscription and support revenue | $136.6 million | $85.5 million |
| Gross profit / gross margin | $101.3 million / 68% | $64.3 million / 66% |
| Operating loss | $5.6 million | $11.1 million |
| Net loss | $10.8 million | $18.7 million |
| Adjusted EBITDA (non-GAAP) | $53.1 million | $30.3 million |
| Cash provided by operations | $7.3 million | $7.7 million |
| Cash and cash equivalents at year-end | $16.7 million | $22.3 million |
| Debt outstanding at year-end | $283.2 million | $113.8 million |
Revenue grew 53%; subscription and support revenue grew 60% and represented 91% of revenue. Management attributed the full $51.9 million increase in total revenue to acquisitions closed after January 11, 2017. Organic subscription and support revenue rose 3%; organic perpetual-license revenue fell 19%, and organic professional-services revenue fell 21%. Annual net dollar retention was 98%, versus 93% in 2017. Year-end annualized recurring revenue was $131.9 million, up from $106.1 million.
Fourth-quarter revenue was $45.2 million, compared with $27.8 million in Q4 2017. Q4 net income was $1.8 million, versus a $3.8 million net loss a year earlier; the 2018 result included a substantial income-tax benefit. Annual GAAP net loss narrowed, while interest expense increased to $13.3 million from $6.6 million, principally reflecting higher acquisition-related borrowing.
Liquidity, debt and cash flow
Operating cash flow was $7.3 million, while investing activities used $161.7 million, principally for $160.8 million of acquisitions. Financing activities provided $149.9 million, mainly from debt proceeds. Working capital was negative $40.4 million, including $57.6 million of current deferred revenue.
The amended Wells Fargo facility provided for up to $400 million, including $283.2 million of term debt outstanding, a $30 million delayed-draw term loan, a $30 million revolver and a $55 million uncommitted accordion. The company reported an effective interest rate of 6.4% at year-end and compliance with facility covenants. Debt matures August 2022, with $252.9 million of scheduled principal payments in 2022. Management stated available cash, operating cash flow, facility availability and securities-registration capacity were expected to fund operations for at least twelve months. The facility is secured by substantially all company assets and restricts, among other things, additional debt, acquisitions and dividends.
Material changes, outlook and risks
- Upland completed four 2018 acquisitions: Interfax, RO Innovation, Rant & Rave, and Adestra. Acquisitions increased goodwill to $225.3 million and net intangible assets to $179.6 million; management reported no goodwill or intangible impairment in 2018.
- Acquisition-related expense was $18.7 million, and depreciation and amortization rose to $14.3 million, primarily reflecting acquired businesses and intangible assets. Stock-based compensation was $14.1 million.
- The 2018 income-tax benefit was $9.8 million, principally reflecting release of valuation allowance, including $10.1 million associated with acquired domestic deferred tax liabilities. The company continued to report domestic operating losses and a valuation allowance against domestic deferred tax assets.
- Upland adopted ASC 606 in 2018. The filing says adoption increased reported revenue by approximately $0.2 million and EPS by $0.13; capitalizing eligible contract-acquisition commissions reduced reported sales and marketing expense by $2.4 million. Prior-year figures were not restated.
- Management intends to continue acquisitions, expand sales to existing customers, add new customers and grow internationally. It expected international revenue share to rise in 2019 following the Rant & Rave and Adestra acquisitions. No specific 2019 revenue or earnings guidance is provided in the filing.
- Key risks include acquisition integration and financing, high leverage and covenant restrictions, limited organic growth, customer renewals and downgrades, competition, cybersecurity and cloud-service availability, privacy regulation, foreign-exchange exposure, and reliance on key personnel. Net dollar retention below 100% indicates existing-customer recurring revenue contracted on a net basis, under the company’s definition.
- Unusual correction: After its March 7, 2019 results release, Upland reclassified $890,000 of acquisition stamp taxes from purchase consideration to acquisition expense. It revised Q4 acquisition expense to $10.0 million from $9.1 million, Q4 net income to $1.8 million from $2.7 million, and Q4 diluted EPS to $0.09 from $0.13. FY net loss became $10.8 million from $9.9 million, and FY loss per share became $0.54 from $0.50.
Most important facts for investors to verify
- How much future growth comes from organic customer expansion and renewals rather than acquired revenue; track retention, recurring revenue and organic subscription growth.
- Debt repayment capacity and covenant headroom, particularly against the large 2022 maturity and acquisition spending plans.
- Whether acquired businesses integrate as expected and whether goodwill and intangible assets remain recoverable.
- The sustainability of operating cash flow and Adjusted EBITDA relative to interest, acquisition costs, stock compensation and other cash requirements.
- The effects of the tax benefit, tax-attribute limitations and ASC 606 commission capitalization on comparability of reported earnings.
- Confirm the corrected acquisition-tax accounting against the original March 7 results release and subsequent filed financial statements.