Upland Software, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing; quarterly results are included for context. Upland sells cloud-based enterprise work management software across customer experience, sales and marketing, project and IT management, and document workflow.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Total revenue | $222.6 million | $149.9 million |
| Subscription and support revenue | $203.9 million | $136.6 million |
| Gross profit / gross margin | $153.5 million / 69% | $101.3 million / 68% |
| Operating loss | $24.3 million | $5.6 million |
| Net loss | $45.4 million; $1.96 per share | $10.8 million; $0.54 per share |
| Adjusted EBITDA (non-GAAP) | $82.5 million | $53.1 million |
| Cash from operating activities | $12.1 million | $7.3 million |
| Cash and cash equivalents at year-end | $175.0 million | $16.7 million |
| Debt principal outstanding | $538.7 million | $283.2 million |
- Revenue grew 49%; subscription and support revenue also grew 49%. Management attributed $65.6 million of the total revenue increase to acquisitions completed after January 1, 2018; organic revenue grew 7%.
- Subscription and support accounted for 92% of revenue, versus 91% in 2018. Gross margin improved about one percentage point, while the operating loss widened.
- Operating cash flow was positive but modest relative to the $45.4 million net loss. Investing activities used $217.8 million, primarily for acquisitions; financing activities provided $363.8 million.
- Working capital was a $109.5 million surplus, compared with a $40.4 million deficit in 2018. The company also had $60 million available under its revolving facility at year-end.
- Year-end debt included $538.7 million principal under the credit facility; the balance-sheet carrying value was $525.1 million after unamortized discount. Cash less principal debt was approximately $363.6 million net debt.
- Annualized recurring revenue value was $209.7 million, up from $131.9 million. Annual net dollar retention was 97%, down from 98%. Backlog was approximately $144.5 million; remaining performance obligations were $221.5 million, with about 66% expected to be recognized within 12 months.
Material changes and unusual items
- Upland completed five acquisitions in 2019—Postup, Kapost, Cimpl, InGenius and Altify—with aggregate consideration of approximately $228 million. Acquisition-related expenses rose to $39.7 million from $18.7 million, including $28.4 million of transformational costs and $11.3 million of transaction costs.
- Interest expense increased to $22.3 million from $13.3 million, reflecting higher borrowings. The company recorded a $2.3 million non-cash loss on extinguishment of debt when replacing its prior facility and a $2.0 million non-cash loss on divestiture of non-strategic assets.
- Upland issued 3.795 million shares in May 2019, raising net proceeds of approximately $151.1 million. The share issuance and acquisition financing expanded the capital base and debt materially.
- Goodwill rose to $346.1 million and net intangible assets to $282.7 million, largely reflecting acquisitions. Amortization expense is expected to remain significant; estimated 2020 amortization was $39.8 million.
Outlook, risks and contingencies
- The filing provides no specific numerical revenue or earnings guidance. Management said cash, operating cash flow, available credit and registered securities capacity were expected to fund operations for at least the next 12 months, and stated its intention to continue pursuing complementary acquisitions.
- The term loans are effectively fixed at 5.4% through interest-rate swaps; the undrawn $60 million revolver remains floating-rate. The credit facility is secured by substantially all assets and includes restrictive covenants. Upland reported compliance at year-end; a leverage covenant applies if revolver usage reaches the specified threshold.
- Key business risks include acquisition integration and financing, customer renewals and expansion, competition, service availability and cybersecurity, privacy regulation, international and foreign-exchange exposure, and substantial debt and interest obligations. The company does not expect to pay dividends for the foreseeable future.
- Control weakness: Management and Ernst & Young concluded internal control over financial reporting was ineffective at December 31, 2019 because of a material weakness in the operating effectiveness of controls over the income-tax provision review. The financial-statement audit opinion was unqualified, but the auditor issued an adverse opinion on internal control. Management planned additional tax and accounting resources and process changes, with remediation expected before the 2020 annual control testing. InGenius and Altify were excluded from the 2019 control assessment.
- No material pending legal proceedings were reported. Tax attributes include $275.7 million of net operating loss carryforwards; ownership-change limitations are expected to cause $87.4 million of U.S. federal NOLs and $3.5 million of tax credits to expire unused.
- After year-end, Upland completed its Localytics acquisition for $67.7 million cash plus a $345,000 holdback and contingent consideration of up to $1.0 million.
Important facts for investors to verify
- How much future growth is organic versus acquisition-driven, and whether 7% organic growth and 97% net retention can improve.
- Whether operating cash flow can grow sufficiently to support acquisition spending and service the $538.7 million debt principal, given the widening GAAP net loss and recurring interest costs.
- The assumptions and reconciliation underlying $82.5 million of Adjusted EBITDA, including its substantial exclusions for acquisition costs, stock compensation and amortization.
- Progress in remediating the income-tax control weakness and whether InGenius and Altify controls are incorporated into subsequent assessments.
- Acquisition integration outcomes, purchase-price allocation updates, and potential impairment exposure from $346.1 million of goodwill and $282.7 million of intangible assets.
- Debt covenant headroom, refinancing and repayment requirements, and the effects of future acquisitions or additional equity issuance on leverage and dilution.