Upland Software, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Financial statements are unaudited. Upland provides cloud-based enterprise work management software and pursues growth through acquisitions.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $23.3 million | $18.6 million | $44.0 million | $36.2 million |
| Gross profit / margin | $15.3 million / 66% | $11.8 million / 64% | $29.0 million / 66% | $22.6 million / 62% |
| Operating loss | $(2.8) million | $(2.5) million | $(6.4) million | $(6.6) million |
| Net loss | $(5.8) million | $(3.6) million | $(11.4) million | $(9.2) million |
| Net loss per share, diluted | $(0.33) | $(0.22) | $(0.66) | $(0.58) |
| Adjusted EBITDA, non-GAAP | $6.8 million | $2.8 million | $12.3 million | $4.8 million |
- Subscription and support revenue was $19.4 million in Q2 and $37.5 million for the first half; it represented 83% and 85% of revenue, respectively.
- Six-month operating cash flow was $5.7 million, versus $0.9 million in 2016. Investing used $37.5 million, primarily for acquisitions; financing provided $60.2 million.
- At June 30, cash and cash equivalents were $57.4 million; working capital was $21.6 million, including $29.9 million of current deferred revenue. Debt borrowings were $72.7 million, with $10.0 million of revolving capacity reported available.
- The June public offering raised approximately $42.7 million net through issuance of 2.14 million shares. Shares outstanding at June 30 were 20.60 million.
Changes versus prior comparable periods
- Revenue rose 25% in Q2 and 22% in the first half. Management attributed most of the increase to acquisitions. After acquisition and purchase-accounting effects, organic revenue decreased 1% in Q2 and increased 2% in the first half.
- Gross margin improved by 2 percentage points in Q2 and 4 points for the first half. Adjusted EBITDA margin increased to 29% from 15% in Q2 and to 28% from 13% for the first half.
- Despite higher revenue and gross profit, GAAP net loss widened in both periods. Higher general and administrative costs included increased non-cash stock compensation; interest expense also increased with acquisition-related borrowing.
- First-half acquisition-related expenses were $6.0 million, compared with $3.8 million. Q2 and first-half results also included a $1.6 million loss on debt extinguishment related to a credit-facility amendment.
Outlook, risks and unusual items
- The filing provides no specific revenue, earnings, or cash-flow guidance. Management intends to pursue further acquisitions and identifies growth, integration, customer retention, competition, technology, and financing as risks.
- Omtool and RightAnswers were acquired in January and April 2017. Their purchase-price allocations were preliminary at June 30. In July, Upland acquired Waterfall for approximately $24.4 million cash net of acquired cash, plus a $1.5 million holdback and potential earnouts.
- An August 2, 2017 credit amendment expanded total facility capacity to $200 million, including a $95 million outstanding term loan, $40 million delayed-draw commitment, $10 million revolver, and $55 million uncommitted accordion. The amendment also increased permitted acquisition limits and extended maturity to August 2022.
- The credit facility is secured by substantially all company and guarantor assets, including intellectual property, and contains financial and operating covenants. A breach could trigger default and accelerate repayment. The company reported no current or pending material litigation.
- Management reported effective disclosure controls as of June 30 and no material change in internal control over financial reporting during the quarter. The company also disclosed foreign-exchange exposure and no hedging strategy.
Important facts for investors to verify
- Whether organic subscription growth strengthens beyond the modest rates reported, given acquisition-driven headline growth.
- How acquisition integration, earnouts, purchase-accounting adjustments, and subsequent Waterfall financing affect future margins, cash flow, and leverage.
- Current debt terms, covenant headroom, borrowing availability, and compliance after the August credit amendment.
- The extent to which elevated stock-based compensation and acquisition expenses recur, and how non-GAAP Adjusted EBITDA reconciles to GAAP losses and cash generation.
- Expected costs and operational effects of consolidating data centers and migrating infrastructure to AWS under the four-year $5.0 million agreement.