Upland Software, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods. Upland provides cloud-based business software. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $74.1 | $79.5 | $225.7 | $238.5 |
| Gross profit / margin | $51.2 / 69% | $53.8 / 68% | $153.0 / 68% | $161.5 / 68% |
| Operating loss | $(7.7) | $(0.6) | $(154.5) | $(26.2) |
| Net loss | $(8.7) | $(6.5) | $(163.9) | $(45.7) |
| Adjusted EBITDA (non-GAAP) | $16.2 | $24.9 | $50.4 | $72.8 |
- Q3 subscription and support revenue was $70.0 million, down 7%; it represented 94% of revenue. Perpetual license revenue was $1.5 million and professional services revenue was $2.7 million.
- For the first nine months, operating cash flow was $41.2 million, versus $24.1 million in 2022. Investing cash outflow was $1.0 million (versus $63.1 million, largely reflecting acquisitions in 2022); financing cash outflow was $48.7 million.
- Cash and equivalents were $239.6 million at September 30, 2023, compared with $248.7 million at year-end 2022. Working capital was $178.1 million. Management stated current cash, operating cash flows and available credit are expected to fund operations for at least 12 months.
- Term-loan borrowings were $483.4 million before debt discount, including $3.1 million of current maturities; $60 million of revolving credit remained available and undrawn. The company prepaid $35 million of term loans in August. No borrowings were outstanding on the revolver, and the company reported compliance with its debt covenants.
Material changes and unusual items
- Revenue declined 7% in Q3 and 5% for the nine-month period. Management attributed the declines primarily to lower sales focus and revenue from Sunset Assets, weaker other recurring revenue and variable overage charges, and lower license and services revenue. Q3 Core Organic Growth Rate, a company-defined non-GAAP measure, was negative 1.9%.
- Nine-month results included a $128.8 million goodwill impairment recorded in Q1 after a decline in the company’s stock price and market capitalization. This drove much of the increase in reported operating and net losses. Goodwill fell to $348.2 million from $477.0 million at year-end 2022.
- Amortization expense increased 40% for the first nine months, primarily due to changes in estimated useful lives of certain intangible assets. Net intangible assets were $195.7 million at September 30, down from $248.9 million at year-end.
- Q3 interest expense fell to $2.5 million from $7.4 million. The decrease included a $2.8 million benefit from releasing deferred swap gain following the loan prepayment and amortization of swap-sale gains, as well as higher interest income. The company sold $259.9 million of swap notional for $20.5 million cash proceeds; after the sale, about $259.9 million of term loans carried a 5.4% fixed rate, while the remaining principal had a floating rate of 9.2% at quarter-end.
- Preferred stock dividends and accretion attributable to common shareholders were $4.0 million for the nine months. Series A preferred stock had a $120.8 million liquidation preference, including accrued dividends, and a $17.50 conversion price.
- The company repurchased and retired 783,356 shares for $3.2 million under a $15 million authorization; $11.8 million remained as of September 30. On October 31, the board authorized a further $10 million increase.
Outlook, risks and contingencies
- No specific revenue, earnings or cash-flow guidance is provided in the supplied filing text. Management said liquidity should be sufficient for at least the next 12 months and may also support acquisitions. The company intends to pursue complementary acquisitions; it completed none in the first nine months of 2023.
- Remaining performance obligations were approximately $257.0 million; Upland expected to recognize about 69% over the following 12 months. This is a contracted-obligations disclosure, not revenue guidance.
- Interest-rate exposure remains material: most term debt was floating-rate after the swap sale. The filing estimates a hypothetical 100-basis-point change could have increased interest expense by $0.4 million for the nine-month period. The company also reports foreign-currency exposure and does not currently hedge it; a hypothetical 10% currency-rate change could have changed nine-month revenue by $5.7 million.
- The company reported approximately $147 million of U.S. net operating losses and other tax attributes as of March 31, 2023. Its Tax Benefit Preservation Plan seeks to reduce the risk of an ownership change that could limit their use, but may discourage or complicate some takeover or share-accumulation activity and cannot guarantee protection.
- Management said it did not expect ordinary-course litigation to have a material adverse effect. The filing identifies customary purchase commitments and possible acquisition indemnification or earnout matters, without stating a material quantified exposure.
Most important facts for investors to verify
- Whether recurring-revenue declines and negative core organic growth stabilize, including the effect of Sunset Assets and overage charges.
- How much of future reported losses and cash generation reflects non-cash impairment, amortization, and the one-time proceeds and accounting effects of the interest-rate swap sale.
- Debt repayment capacity and interest costs as the remaining floating-rate debt reprices; confirm the revolver availability and covenant position in later filings.
- The assumptions supporting goodwill valuation and useful lives of acquired intangible assets, and whether further impairment or amortization changes occur.
- The potential dilution and senior claims associated with Series A preferred stock, and the capital-allocation implications of the expanded share-repurchase authorization.