Upland Software, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. The unaudited results are not necessarily indicative of full-year performance.
Business context
Upland provides cloud-based enterprise work management software, including project and IT financial management, workflow automation, and digital engagement applications. It reported more than 2,000 customers and 235,000 users. The company grows through direct and indirect sales, customer expansion, and acquisitions.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $17.6 million | $17.5 million |
| Gross profit / margin | $10.7 million / 61% | $10.9 million / 62% |
| Operating loss | $4.2 million | $3.1 million |
| Net loss | $5.6 million | $3.7 million |
| Net loss per diluted share | $0.36 | $0.25 |
| Adjusted EBITDA, non-GAAP | $2.0 million; 11% margin | $0.5 million; 3% margin |
| Cash from operating activities | $(0.1) million | $(0.4) million |
| Cash used in investing activities | $9.2 million | $3.0 million |
| Cash and cash equivalents, period end | $13.6 million | $26.6 million |
At March 31, 2016, reported notes payable were approximately $28.6 million net of unamortized discount; management reported $29.1 million of principal outstanding under the credit facility. The facility had $15.0 million of available borrowings, compared with $20.0 million at year-end 2015. The company reported a working-capital deficit of $11.7 million, including $21.5 million of current deferred revenue. Total liabilities were $74.9 million and stockholders’ equity was $61.6 million.
Changes versus prior year
- Revenue was nearly flat year over year. Acquisitions added $1.8 million, while the EPM Live divestiture reduced revenue by $1.2 million and foreign exchange reduced it by $0.5 million. Management said organic revenue was flat on a constant-currency basis.
- Subscription and support revenue increased 6% to $15.2 million, but management said organic subscription and support revenue was flat on a constant-currency basis. Perpetual license revenue fell 61% to $0.3 million; professional services revenue declined 16% to $2.0 million.
- Gross margin declined one percentage point. Acquisition-related expense rose to $2.4 million from $0.5 million, contributing to the larger GAAP operating and net losses. General and administrative expense decreased 19%, which the company attributed largely to operating efficiencies and lower litigation-related costs.
- Adjusted EBITDA increased to $2.0 million from $0.5 million. This non-GAAP measure excludes, among other items, acquisition-related expenses, depreciation and amortization, and interest and taxes; it should be considered alongside GAAP results and cash flow.
Acquisitions, outlook, and risks
- In January, Upland acquired a website analytics business for cash consideration and contingent consideration; it contributed approximately $0.7 million of revenue after acquisition. In March, Upland acquired Hipcricket, issuing one million shares and transferring its EPM Live product business. Hipcricket contributed approximately $0.4 million of post-acquisition revenue. Acquisition purchase-price allocations were preliminary.
- The Hipcricket transaction involved an affiliate of ESW Capital, an Upland shareholder. Upland recorded a $0.7 million loss on transferring EPM Live. The filing also reports a $6.6 million fair value for earnout liabilities, based on Level 3 estimates; actual contingent payments may differ.
- After quarter-end, on April 27, Upland acquired Advanced Processing & Imaging for $4.0 million in cash at closing, net of acquired cash, plus a $0.8 million holdback. The company said it financed the acquisition by drawing on its Wells Fargo facility.
- The filing provides no specific revenue, earnings, or cash-flow guidance. Management expects to continue pursuing acquisitions and notes that customer contracting is seasonally stronger in the fourth quarter; acquisitions can make seasonality less apparent.
- Risks highlighted include sustaining profitability, customer retention and growth, acquisition execution and integration, financing availability, competition, technology and data-center reliability, privacy compliance, foreign-exchange exposure, and compliance with credit-facility covenants. The facility is secured by substantially all assets, including intellectual property; covenant breaches could accelerate repayment and terminate further credit commitments.
- Other commitments include $2.3 million for software-development services in 2016, of which $0.6 million was incurred in Q1. Management said it did not expect ordinary-course litigation to have a material adverse effect. Disclosure controls and procedures were assessed as effective, with no material quarterly change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether reported revenue growth translates into sustained organic growth, given flat organic results and acquisition/divestiture and currency effects.
- Cash conversion and liquidity: operating cash flow was negative, cash declined by $4.9 million, and working capital was negative; assess the impact of deferred revenue and future acquisition spending.
- Debt capacity and covenant compliance, including post-quarter borrowing for the April acquisition and the difference between reported debt carrying value and principal outstanding.
- Acquisition integration, preliminary purchase-price allocations, contingent consideration estimates, and the related-party nature of the Hipcricket transaction.
- Whether improved Adjusted EBITDA is accompanied by progress in GAAP profitability and operating cash flow.