Upland Software, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise stated. Upland provides cloud-based enterprise work management software and has grown substantially through acquisitions.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $48.5 million | $31.6 million |
| Gross profit / margin | $33.7 million / 70% | $21.0 million / 66% |
| Operating loss | $2.6 million | $0.5 million |
| Net loss | $7.8 million; $0.38 per share | $3.2 million; $0.16 per share |
| Adjusted EBITDA (non-GAAP) | $17.8 million | $10.8 million |
| Operating cash flow | $4.9 million | $(0.5) million |
Subscription and support revenue was $45.0 million, 93% of total revenue; perpetual license revenue was $0.7 million and professional services revenue was $2.9 million. Interest expense was $5.1 million, up from $2.5 million. Acquisition-related expenses were $7.7 million, versus $3.1 million.
Material changes, liquidity and debt
- Revenue increased 53%, but management attributed $15.2 million of the increase to acquisitions not fully reflected in the prior-year comparison. Organic revenue growth was 5%; organic subscription and support revenue grew 10%, while perpetual license revenue declined 60% and professional services revenue was flat.
- Cash and cash equivalents were $14.0 million at March 31, compared with $16.7 million at year-end. The company had $281.4 million of gross term debt outstanding and $60.0 million of available borrowing capacity; no revolver borrowings were outstanding at quarter-end. The balance sheet reports notes payable net of discounts.
- Working capital was negative $45.6 million, including $57.0 million of current deferred revenue. Management said cash, operating cash flow, available credit and its securities registration capacity were expected to fund operations for at least the next 12 months.
- After quarter-end, Upland acquired Postup for $35.0 million cash. It drew $30.0 million of term debt and $10.0 million on its revolver; gross credit-facility debt rose to $321.4 million and net debt was approximately $307 million. The stated maximum interest rate was LIBOR plus 400 basis points, then approximately 6.5%.
- Remaining performance obligations were approximately $151.7 million; Upland expected to recognize about 69% over the next 12 months.
Outlook, risks and unusual items
- No specific financial guidance for future periods is provided in the filing. Management expects foreign revenue mix to continue increasing, partly because of the Rant & Rave and Adestra acquisitions, and intends to pursue further acquisitions.
- Management cited risks including acquisition integration and financing, customer retention and growth, competition and technology changes, reliance on third-party hosting, privacy compliance, and international and foreign-exchange exposure. The company reported compliance with its credit-facility covenants at March 31; the facility is secured by substantially all assets and includes restrictive covenants.
- Upland reported no current or pending litigation expected to materially affect its financial position or results. It had a $3.7 million remaining 2019 purchase obligation under its AWS commitment and a $4.9 million 2019 commitment for software development services with DevFactory, an affiliate of a non-management investor.
- The company adopted lease accounting on January 1, 2019, recognizing $4.6 million of operating lease right-of-use assets and approximately $5.1 million of lease liabilities at quarter-end, with no reported impact on beginning retained earnings, operating results or cash flows.
- Acquisition purchase-price allocations for Adestra and Rant & Rave remained preliminary. Q1 included a $0.5 million expense from remeasurement of contingent acquisition consideration and $7.7 million of acquisition-related operating expenses. Management reported disclosure controls were effective and no material 2019 changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether organic growth, especially subscription growth, persists as acquisition contributions and purchase-accounting effects change.
- Cash generation and liquidity after the Postup acquisition, including the increase in debt and interest burden.
- Progress integrating acquisitions, realizing expected benefits, and finalizing preliminary purchase accounting.
- Compliance with debt covenants and availability of borrowing capacity under the credit facility.
- Execution against remaining performance obligations and the effect of foreign exchange, hosting costs and related-party commitments.