Upland Software, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparative period is Q1 2017. Upland provides cloud-based enterprise work management software and grows through a combination of organic sales and acquisitions.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Total revenue | $31.6 million | $20.8 million; up 52% |
| Gross profit / margin | $21.0 million / 66% | $13.7 million / 66% |
| Operating loss | $0.5 million | $3.6 million loss |
| Net loss | $3.2 million; $0.16 per share | $5.6 million; $0.33 per share |
| Adjusted EBITDA (non-GAAP) | $10.8 million; 34% margin | $5.5 million; 26% margin |
| Operating cash flow | $(0.5) million | $4.9 million |
| Cash and cash equivalents | $32.5 million at quarter-end | $22.3 million at December 31, 2017 |
| Debt | $163.0 million principal outstanding | $113.8 million at December 31, 2017 |
Subscription and support generated $27.7 million, or 88% of revenue; perpetual licenses contributed $1.6 million and professional services $2.3 million. Working capital was negative $14.4 million, including $45.4 million of current deferred revenue. The company reported $40.0 million of available borrowings under its credit agreements, with no revolving borrowings outstanding.
Material changes and notable items
- Revenue rose 52%, but management attributed $9.7 million of the increase to acquisitions, net of purchase-accounting deferred-revenue discounts. Organic revenue growth was 6%; organic subscription and support revenue also grew 6%, while organic professional-services revenue declined 20%.
- Upland acquired Interfax Communications in March for $37.0 million cash at closing, net of cash acquired, plus a $5.0 million holdback payable over 18 months, subject to indemnification claims. The filing also identifies potential performance-based earnout payments. Interfax contributed no revenue between acquisition and quarter-end.
- Acquisition-related expenses were $3.1 million, down from $3.7 million. Interest expense increased to $2.5 million from $0.9 million, primarily reflecting debt incurred for acquisitions.
- Investing cash outflow was $34.7 million, principally for business combinations. Financing provided $45.7 million, including $49.4 million of net term-loan proceeds; cash increased $10.2 million during the quarter.
- Upland adopted ASC 606 using the modified retrospective method; prior-year figures were not restated. Adoption increased Q1 2018 perpetual-license revenue by $0.3 million and reduced sales and marketing expense by $0.2 million versus the former standard, increasing EPS by $0.03. The company capitalized and began amortizing eligible commissions.
Debt, outlook, and risks
The March 2018 credit amendment provided a fully drawn $163.0 million term loan, an undrawn $30.0 million delayed-draw term loan for acquisitions, a $10.0 million revolver, and a $55.0 million uncommitted accordion. The facility matures August 2, 2022. Management cited a current effective interest rate of approximately 6.15% after the amendment; reported average cash interest costs for Q1 were 7.1%. The debt is secured by substantially all borrower and guarantor assets and is subject to financial and operating covenants, with certain financial covenants becoming more restrictive beginning March 31, 2019.
The filing provides no specific financial guidance or quantified forward outlook. Management expects acquisitions to remain part of its growth strategy and says future capital needs depend on growth, investment, and acquisition activity. Risks include achieving sustainable profitability, integrating acquisitions, customer retention, competition, financing availability, covenant compliance, and foreign-exchange exposure. A hypothetical 10% currency-rate change would have changed Q1 revenue by $0.6 million. Management reported effective disclosure controls and no material pending litigation.
Important facts for investors to verify
- How much of future growth and profitability is attributable to acquired businesses versus organic performance, particularly given the stated 6% organic revenue growth.
- Interfax’s final purchase-price allocation, holdback and earnout obligations, integration progress, and contribution to results.
- Debt repayment capacity, covenant headroom, variable-rate exposure, and liquidity needs alongside the working-capital deficit and negative Q1 operating cash flow.
- The sustainability of Adjusted EBITDA improvement relative to GAAP losses, acquisition costs, interest expense, and cash generation.
- The effects of ASC 606 on comparability, commission amortization, and future reported results; management said the ongoing net-income impact was expected to be immaterial.