Upland Software, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparative period is Q1 2016. Upland provides cloud-based enterprise work management software and pursues growth through acquisitions. Financial amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $20.8 million | $17.6 million |
| Gross profit / margin | $13.7 million / 66% | $10.7 million / 61% |
| Operating loss | $3.6 million | $4.2 million |
| Net loss | $5.6 million | $5.6 million |
| Basic and diluted loss per share | $0.33 | $0.36 |
| Adjusted EBITDA (non-GAAP) | $5.5 million; 26% margin | $2.0 million; 11% margin |
| Cash from operating activities | $4.9 million | Cash used: $0.1 million |
- Revenue comprised $18.1 million subscription and support, $0.7 million perpetual licenses, and $1.9 million professional services. Subscription and support represented 87% of revenue.
- Cash and cash equivalents were $19.4 million at quarter-end, down from $28.8 million at December 31, 2016. Investing activities used $19.7 million, primarily for acquisitions; financing activities provided $5.4 million.
- At March 31, debt was approximately $58.6 million, with $10.0 million of revolving availability reported. Cash plus stated availability was approximately $29.4 million. Working capital was negative $7.4 million, including $26.3 million of current deferred revenue.
- Gross margin improved to 66% from 61%; net loss margin improved to approximately 27% from 32%.
Material changes and notable items
- Revenue increased 18% year over year. Management attributed $3.4 million of the increase, after purchase-accounting deferred-revenue discounts, to acquisitions; the EPM Live divestiture reduced revenue by $0.8 million. Organic revenue grew $0.6 million, or 4%.
- Operating loss narrowed by $0.5 million, while net loss was nearly unchanged. Higher interest expense reflected additional borrowing for Omtool; a larger income-tax provision also weighed on results.
- General and administrative expense increased 43% to $5.9 million, mainly reflecting higher non-cash stock compensation, which rose to $2.3 million from $0.7 million.
- Acquisition-related expense was $3.7 million, including a $1.1 million non-cash charge to write off the unused portion of Omtool’s inherited office lease. The company acquired Omtool in January for approximately $19.3 million net of cash acquired; it contributed approximately $2.0 million of revenue through quarter-end.
- In April, Upland acquired RightAnswers for $17.2 million cash net of cash acquired, plus a $2.5 million holdback and potential earn-outs. A $15.0 million additional term loan funded the acquisition.
Outlook, risks and other disclosures
- The filing provides no specific revenue, earnings, or cash-flow guidance. Management said it expects acquisitions to remain a primary investing activity and intends to pursue complementary businesses and products.
- Debt carries variable interest rates; cash interest averaged 5.8% in Q1. The credit facility matures November 15, 2021, includes financial and operating covenants, and restricts certain actions, including stock repurchases. Repurchases are subject to a $20.0 million minimum-liquidity requirement before and after the transaction.
- Management identifies risks including profitability, customer retention, acquisition integration, competition, financing, technology and service-provider reliability, international operations, and foreign exchange. A hypothetical 10% currency-rate movement would have changed Q1 revenue by $2.1 million; the company reported no hedging strategy.
- The company reported no current or pending material legal proceedings. Management concluded disclosure controls were effective as of March 31, 2017, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether organic growth continues to improve beyond the reported 4%, given that acquisitions drove most of reported revenue growth.
- Omtool and RightAnswers integration, acquired revenue contribution, and the effect of acquisition spending and earn-outs on cash and debt.
- Debt levels, variable-rate interest exposure, covenant compliance, and liquidity after the April acquisition and borrowing.
- The sustainability of improved gross and Adjusted EBITDA margins, including the effects of stock compensation and other excluded costs.
- Management’s ongoing revenue-recognition assessment ahead of adoption of the new revenue standard, planned for January 1, 2018.