Upland Software, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual report, not a standalone fourth-quarter filing; unaudited Q4 figures are noted below. Upland provides cloud-based enterprise work management software and grows through customer expansion and acquisitions.
Financial performance and liquidity
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $69.9 million | $64.6 million | +8% |
| Subscription and support revenue | $57.2 million | $48.6 million | +18% |
| Professional services revenue | $9.9 million | $13.2 million | -25% |
| Gross profit / margin | $43.2 million / 62% | $41.5 million / 64% | Margin down 2 points |
| Operating loss | $(10.2) million | $(18.3) million | Loss narrowed |
| Net loss | $(13.7) million | $(20.1) million | Loss narrowed |
| Adjusted EBITDA (non-GAAP) | $4.1 million | $4.2 million | Approximately flat |
| Cash from operating activities | $(1.5) million | $1.2 million | Down $2.7 million |
| Cash and cash equivalents, year-end | $18.5 million | $31.0 million | Down $12.5 million |
- Subscription and support represented 82% of revenue, up from 75%; professional services fell to 14% from 21%. Perpetual license revenue was $2.8 million in both years.
- Management attributed the mix shift to a deliberate focus on recurring revenue and reduced emphasis on lower-margin professional services. The reported revenue increase included $11.2 million from 2014–2015 acquisitions; management said organic revenue declined 6% on a constant-currency basis.
- Annualized recurring revenue value was $58.9 million, up from $56.8 million. Annual net dollar retention fell to 90% from 96%.
- Year-end current assets were $35.0 million and current liabilities $34.0 million. Deferred revenue was $19.9 million.
- At year-end, $24.4 million was outstanding under the Wells Fargo facility, with no revolving borrowings; the filing reported $20.0 million of available borrowings. The facility is secured by substantially all assets, includes financial and operating covenants, and requires minimum liquidity of $10 million (reduced to $8 million once a specified Adjusted EBITDA threshold is met).
Fourth-quarter context
Unaudited Q4 2015 revenue was $17.6 million, compared with $16.5 million in Q4 2014. Q4 2015 net loss was $4.3 million, versus $2.7 million in Q4 2014. Q4 2015 operating loss was $2.8 million. The filing notes that quarterly results can fluctuate, including because of acquisition timing and seasonality.
Material changes, outlook, and risks
- Upland acquired Ultriva in November 2015 for stated total consideration of approximately $7.2 million; its post-acquisition revenue in 2015 was approximately $0.5 million. Management intended to continue pursuing acquisitions and expected integration efforts to affect costs over the following six to twelve months.
- Management expects recurring product revenue to represent a larger share of revenue and professional services a smaller share. It also expects fourth-quarter customer contracting seasonality to continue or possibly increase. The filing provides no numerical 2016 revenue or earnings guidance.
- In January and March 2016, after year-end, Upland completed acquisitions of a website analytics provider and Hipcricket, respectively. The Hipcricket transaction included one million Upland shares and transfer of the EPM Live product business; the filing said the accounting for the transaction was still being evaluated.
- FY2014 included a one-time, non-cash $11.2 million R&D charge related to issuing shares to a related-party technology-services provider. This materially affects comparison of reported R&D expense and losses across years. The provider also received $2.1 million for services in each of FY2013–FY2015, and the company disclosed a $2.3 million 2016 purchase commitment under the agreement.
- Key risks include persistent GAAP losses, negative operating cash flow in 2015, declining net retention, acquisition integration and financing needs, customer renewals and downgrades, competition, foreign-exchange exposure, and reliance on third-party data centers and software. A hypothetical 10% foreign-exchange movement would have changed FY2015 revenue by $1.3 million; Upland had not hedged currency exposure.
- Total contractual obligations were reported as $37.2 million, including debt, leases, and purchase commitments. Management reported no legal proceedings expected to have a material adverse effect. The independent auditor issued an unqualified opinion on the financial statements; management assessed internal controls as effective, but the auditor did not attest to internal-control effectiveness because of the company’s emerging-growth-company exemption.
Investor verification priorities
- Reconcile reported growth with the disclosed organic constant-currency decline and determine the contribution and performance of acquired businesses.
- Track renewals, downgrades, usage, and net dollar retention following the decline from 96% to 90%.
- Assess cash conversion, liquidity headroom, debt repayment requirements, and compliance with Wells Fargo covenants.
- Review the sustainability of margin and expense changes, including the FY2014 related-party charge and rising subscription delivery costs.
- Examine the terms, dilution, integration results, and accounting treatment of the 2016 acquisitions, particularly the related-party Hipcricket transaction.