Upland Software, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Upland provides cloud-based enterprise work management software and reported results on a consolidated basis. Unless otherwise stated, amounts are in U.S. dollars.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $76.1 million | $74.2 million | $226.3 million | $213.5 million |
| Gross profit / margin | $51.2 million / 67% | $48.6 million / 66% | $152.0 million / 67% | $142.1 million / 67% |
| Operating loss | $5.7 million | $2.7 million | $32.4 million | $24.9 million |
| Net loss | $11.0 million | $11.3 million | $50.7 million | $45.6 million |
| Adjusted EBITDA (non-GAAP) | $25.0 million | $25.0 million | $71.6 million | $73.3 million |
Q3 revenue increased 3% year over year; revenue for the first nine months increased 6%. Subscription and support generated 95% of revenue in both periods. Q3 diluted loss per share was $0.36 versus $0.42; the nine-month loss per share was $1.68 versus $1.77. Gross margin was stable to slightly higher, while operating losses widened as operating expenses increased. Interest expense was $8.0 million for Q3 and $23.7 million for the nine-month period.
Cash flow and liquidity: Operating cash flow was $28.6 million for the first nine months, compared with $14.2 million a year earlier. Investing used $93.4 million, principally for acquisitions; financing used $5.1 million. Cash fell $70.4 million from year-end 2020 to $179.6 million. Working capital surplus was $94.8 million, including $90.4 million of current deferred revenue.
At September 30, cash was $179.6 million and the $60 million revolver was undrawn and fully available. Term-loan principal was approximately $529.2 million; the balance-sheet carrying amount, net of unamortized discount and current maturities, was $515.958 million. The term loans are effectively fixed at 5.4% under swaps; the revolver rate remains floating. The company reported covenant compliance.
Material changes and key drivers
- Acquisitions not fully included in the prior-year comparison contributed $8.2 million to Q3 revenue growth and $20.3 million to nine-month growth, before purchase-accounting deferred-revenue discounts. Upland acquired Second Street, BlueVenn, and Panviva during 2021.
- Excluding acquisitions and divested or sunset assets, organic revenue decreased $6.0 million in Q3 and $6.4 million for the first nine months. Prior-year comparisons included U.S. election-campaign usage revenue of $6.0 million in Q3 and $11.6 million over nine months, which did not recur in 2021.
- Sales and marketing expense rose 22% in Q3 and 19% for the nine-month period, reflecting go-to-market investment and acquired-company costs. Nine-month general and administrative expense increased 20%, primarily from higher stock compensation and personnel costs. Total stock-based compensation was $43.4 million versus $31.3 million; this included $6.3 million of accelerated expense related to the former co-President and COO’s transition.
- Nine-month acquisition-related expense declined 23% to $18.8 million, despite higher transaction costs, as transformation costs fell. The period included a $3.5 million gain from remeasurement of acquisition earnout liabilities.
Outlook, risks, and unusual items
- The filing provides no specific revenue, earnings, or cash-flow guidance. Management said cash, operating cash flows, available credit, and securities-registration capacity should fund operations for at least the next 12 months, and it expects to pursue further acquisitions.
- Management said COVID-19 had affected new bookings and churn, with continued effects uncertain. The 2020 election-related revenue uplift was not expected to recur during the remainder of 2021. Management reported no specific COVID-related event requiring changes to asset or liability carrying values as of November 3, 2021.
- Foreign-exchange exposure is unhedged; a hypothetical 10% exchange-rate change could have changed nine-month revenue by $5.0 million. The company also identifies risks related to acquisition integration, customer retention, competition, technology, privacy, and key personnel.
- Acquisition accounting for the three 2021 deals remained preliminary, including tax-related allocations. Holdbacks and earnouts due in future periods included $10.9 million and $4.2 million, respectively. No material pending litigation was reported.
- The company had a $9.6 million 2021 software-development purchase commitment with DevFactory, a related party for part of the period; $7.2 million of services were purchased during the first nine months. Upland disclosed that DevFactory ceased to be a related party after ESW Capital’s ownership fell below 5% in July 2021.
Important facts for investors to verify
- Whether organic revenue trends, bookings, and churn improve once election-related comparisons and acquisition contributions are separated.
- Whether operating cash generation can support acquisition spending, debt service, and the company’s stated growth strategy.
- How acquisition integration, preliminary purchase accounting, earnouts, and acquired-asset amortization affect future margins and results.
- Whether elevated stock-based compensation and go-to-market spending translate into durable growth and improved GAAP profitability.
- Debt terms, interest-rate exposure on the revolver, covenant headroom, and the company’s stated liquidity outlook.