Upland Software, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Unaudited results. Upland provides cloud-based enterprise work management software and grows in part through acquisitions.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $18.6M | $17.7M | $36.2M | $35.2M |
| Gross profit / margin | $11.8M / 64% | $11.1M / 63% | $22.6M / 62% | $22.0M / 62% |
| Operating loss | $(2.5)M | $(2.5)M | $(6.6)M | $(5.6)M |
| Net loss | $(3.6)M | $(3.3)M | $(9.2)M | $(7.1)M |
| Adjusted EBITDA, non-GAAP | $2.8M | $0.8M | $4.8M | $1.2M |
| Operating cash flow | Not separately presented for the quarter | $0.9M | $0.9M |
Q2 subscription and support revenue was $16.2M, up 16%; perpetual-license revenue was $0.5M, down 46%; and professional-services revenue was $1.9M, down 33%. Subscription and support made up 87% of revenue. For the first half, those categories were $31.5M (+11%), $0.8M (-53%) and $3.9M (-25%), respectively.
Cash and cash equivalents were $18.2M at June 30, versus $18.5M at year-end 2015. The company reported $38.8M of credit-facility borrowings outstanding and $5.0M of available borrowing capacity, compared with $24.4M outstanding and $20.0M available at year-end. The balance sheet reports $37.9M of notes payable, net of discounts. Current liabilities exceeded current assets by $8.6M, compared with a $1.0M working-capital surplus at year-end; current deferred revenue of $24.0M is a substantial component of current liabilities.
Material changes and operating drivers
- Reported revenue rose 5% in Q2 and 3% in the first half. Management attributed the increase to acquisitions, partly offset by the EPM Live divestiture and foreign exchange. Excluding acquisitions, divestiture and currency effects, management said organic revenue declined about 1% in both periods; organic subscription and support revenue grew about 2%.
- Revenue growth included acquired businesses, while EPM Live’s divestiture reduced revenue. The company completed acquisitions of a website analytics business, Hipcricket and Advanced Processing & Imaging (API). Acquired businesses contributed approximately $3.2M of Q2 revenue and $5.0M for the first half, after purchase-accounting deferred-revenue discounts.
- Gross margin was 64% in Q2, up one percentage point, and 62% for the first half, unchanged. First-half net loss widened by $2.1M, with higher depreciation and amortization, acquisition costs, interest and other expense among the drivers.
- First-half investing cash outflow was $13.1M, primarily reflecting $11.8M of net acquisition payments. Financing provided $11.6M, including new borrowings; cash declined $0.3M.
Outlook, risks and unusual items
- The filing gives no numerical revenue, earnings or cash-flow guidance. Management expects recurring product revenue to become a larger share than perpetual licenses and professional services, and intends to continue pursuing acquisitions. It also describes seasonal customer contracting patterns, including historically higher agreement activity in Q4.
- Acquisition-related expense was $3.8M in the first half, versus $0.9M a year earlier. The Hipcricket transaction involved issuing Upland shares and transferring EPM Live; the transfer generated a roughly $0.7M accounting loss. Website-analytics consideration includes potential earnouts and holdbacks; acquisition purchase-price allocations remained preliminary.
- The company’s credit facility is secured by substantially all assets, including intellectual property, and includes operating and financial covenants that may constrain acquisitions, financing and other activities. A covenant breach could trigger acceleration of debt or termination of borrowing commitments. Variable-rate debt exposes the company to interest-rate changes.
- Foreign exchange affected reported results; management estimated that a hypothetical 10% exchange-rate change would have changed first-half revenue by $1.1M. The company reported no hedging strategy. Other stated risks include profitability, customer retention, acquisition integration, competition, technology and service reliability.
- Management said litigation in the ordinary course was not expected to materially adversely affect financial position or results. The company also disclosed a $2.3M 2016 software-development purchase commitment, of which $1.1M had been incurred by June 30, and related-party purchases of software development and other services.
Important facts for investors to verify
- Reconcile the MD&A table’s first-half “net loss attributable to common shareholders” figure of $(13.664)M with the financial statements, which report net loss and net loss attributable to common shareholders of $(9.150)M.
- Review organic growth and the contribution from acquisitions, divestitures, deferred-revenue purchase accounting and currency translation; reported growth alone does not reflect underlying organic trends.
- Assess the increased debt, reduced borrowing availability, working-capital deficit and facility covenants, including the company’s capacity to fund operations and acquisition plans.
- Examine the contingent consideration, preliminary acquisition accounting and related-party aspects of the Hipcricket transaction and service arrangements.
- Compare non-GAAP Adjusted EBITDA with GAAP losses and operating cash flow, considering the add-backs and their limitations.