Upland Software, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; unaudited. Comparisons are with the corresponding 2017 periods unless stated otherwise. Upland provides cloud-based enterprise work management software and pursues growth through acquisitions.
Financial performance
| Metric | Q2 2018 | Six months 2018 |
|---|---|---|
| Revenue | $35.9 million, up 54% | $67.6 million, up 53% |
| Gross profit / margin | $25.1 million / 70% | $46.1 million / 68% |
| Operating loss | $0.7 million | $1.2 million |
| Net loss | $5.2 million; $0.26 per share | $8.4 million; $0.42 per share |
| Adjusted EBITDA (non-GAAP) | $12.5 million; 35% margin | $23.3 million; 35% margin |
| Cash from operations | Not separately provided for the quarter | $3.7 million, versus $5.7 million |
Subscription and support generated 92% of Q2 revenue and 90% for the six-month period. Cash and equivalents were $19.0 million at June 30, compared with $22.3 million at December 31, 2017. Six-month investing cash use was $45.9 million, principally for acquisitions; financing provided $39.2 million. Cash declined $3.3 million during the six months.
Debt carrying value was $159.0 million, including current maturities and debt discount; principal outstanding was $161.9 million. The company had $40.0 million of available borrowing capacity under the delayed-draw term loan and revolver, with no amounts drawn on either. The $55.0 million accordion was uncommitted. Working capital was negative $27.8 million, including $44.4 million of current deferred revenue.
Changes versus prior periods
- Reported revenue growth was substantially acquisition-driven: acquisitions not fully included in the prior-year comparison contributed $13.2 million to Q2 growth and $22.9 million to six-month growth, net of purchase-accounting deferred-revenue discounts. Management reported organic revenue down 2% in Q2 and up 2% for the six months.
- Organic subscription and support revenue grew 6% in both comparisons. Organic perpetual-license revenue declined 61% in Q2 and 21% for the six months; organic professional-services revenue declined 30% and 25%, respectively.
- Gross margin improved to 70% from 66% in Q2 and to 68% from 66% for the six months. Net losses narrowed, while interest expense rose to $3.1 million in Q2 and $5.6 million for the six months, largely reflecting higher acquisition-related borrowing.
- Adjusted EBITDA increased from $6.8 million to $12.5 million in Q2 and from $12.3 million to $23.3 million for the six months. This non-GAAP measure excludes, among other items, acquisition expenses, stock compensation, interest, taxes, and amortization; it should be considered alongside GAAP results and cash flows.
- ASC 606 adoption on January 1, 2018 capitalized eligible sales commissions. Management said the ongoing net-income impact was expected to be immaterial; adoption increased reported EPS by $0.01 for Q2 and $0.04 for the six months versus the prior accounting method.
Outlook, commentary, risks and unusual items
- No numerical revenue, earnings, or cash-flow guidance is provided in this filing. As of June 30, remaining subscription-contract performance obligations were approximately $92.0 million; about 82% was expected to be recognized over the next 18 months.
- During the period Upland acquired Interfax for $40.0 million of consideration and acquired RO Innovation for approximately $14.3 million, including its holdback; it also purchased certain U.S. reseller assets for $2.0 million. Interfax contributed approximately $4.0 million of revenue after acquisition through June 30; RO Innovation contributed none through that date. Purchase-price allocations for these acquisitions remained preliminary.
- The March credit-facility amendment reduced the stated effective interest rate at amendment to approximately 6.15% from approximately 7.1%; average cash interest cost under the facility was 6.8% for the six months. Debt matures August 2022, with financial covenants becoming more restrictive starting March 31, 2019. The facility is secured by substantially all company assets, including intellectual property, and restricts certain business and financing activities.
- Key stated risks include acquisition integration and execution, customer retention and growth, profitability, financing access, competition, international expansion, technology and hosting reliability, privacy compliance, and foreign-exchange exposure. A hypothetical 10% exchange-rate change would have changed six-month revenue by $1.3 million. The company reported no current or pending litigation it expected to materially affect financial position or results.
- Tax accounting remained subject to estimates related to the Tax Act; management had not yet elected an accounting policy for GILTI. A July 31, 2018 credit-facility amendment, disclosed as a subsequent event, waived certain acquired subsidiaries’ Canadian-guarantor joinder requirement and clarified definitions.
- Management concluded disclosure controls and procedures were effective as of June 30, 2018.
Important facts for investors to verify
- How much reported growth is sustainable organically, given Q2 organic revenue contraction and acquisition-driven growth?
- Whether acquired businesses meet expectations and whether preliminary purchase-price allocations, earnouts, holdbacks, and integration costs change materially.
- Debt-service capacity and covenant headroom, especially as financial covenants tighten from March 2019; confirm the amount and terms of available borrowing capacity.
- Cash conversion and liquidity, including the working-capital deficit, lower operating cash generation, and dependence on advance subscription billings.
- The effect of acquired-intangible amortization, stock-based compensation, and continued acquisition costs on GAAP profitability and the comparability of Adjusted EBITDA.
- Updates to tax estimates, foreign-exchange exposure, and remaining performance obligations in subsequent filings.