Upland Software, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. Although the request identifies 2016 Q4, this is an annual filing; selected fourth-quarter results are included below. Upland provides cloud-based enterprise work management software, selling primarily through subscriptions and pursuing growth through customer expansion and acquisitions.
Financial results and key metrics
| Metric | FY2016 | FY2015 |
|---|---|---|
| Total revenue | $74.8 million | $69.9 million |
| Subscription and support revenue | $65.6 million | $57.2 million |
| Gross profit / margin | $47.2 million / 63% | $43.2 million / 62% |
| Operating loss | $8.5 million | $10.2 million |
| Net loss | $13.5 million | $13.7 million |
| Adjusted EBITDA (non-GAAP) | $12.6 million | $4.1 million |
| Cash from operating activities | $3.9 million | $(1.5) million |
| Cash and cash equivalents at year-end | $28.8 million | $18.5 million |
| Debt outstanding at year-end | $49.4 million | $24.4 million |
- Revenue increased 7% year over year, but management attributed $11.7 million of the increase to 2015–2016 acquisitions. Organic revenue declined approximately 1% as reported and was approximately flat at constant currency.
- Subscription and support rose 15%, but acquisition contributions drove the increase; organic subscription and support grew 2% on a constant-currency basis. Its share of revenue rose to 88% from 82%.
- Professional services revenue fell 24% to $7.6 million, partly reflecting the strategy to emphasize recurring revenue and the divestiture of EPM Live. Perpetual license revenue decreased 41% to $1.7 million.
- Gross margin improved one percentage point. Operating loss narrowed, while net loss was broadly similar to 2015. Adjusted EBITDA increased substantially, but it is a non-GAAP measure and excludes, among other items, acquisition costs, stock compensation, interest, taxes, and amortization.
- Fourth-quarter revenue was $19.4 million versus $17.6 million in Q4 2015. Q4 net loss was $2.0 million versus $4.3 million a year earlier.
- Working capital was $7.6 million, including $23.6 million of current deferred revenue. Annualized recurring revenue value was $64.0 million, and annual net dollar retention was 95% versus 90% in 2015.
Changes, liquidity, and financing
- Operating cash flow improved to $3.9 million from cash use of $1.5 million; investing used $13.2 million, primarily for acquisitions. Financing provided $19.5 million, principally from new borrowing.
- In November 2016, Upland amended and expanded its secured Wells Fargo facility. The filing describes up to $90 million of facilities, including term loans, revolvers and an acquisition delayed-draw loan; $49.4 million was outstanding at year-end. The facility is secured by substantially all assets and matures in November 2021.
- The facility includes financial and operating covenants, with financial covenants becoming more restrictive beginning March 31, 2017. Dividends and stock repurchases are restricted, including a stated $20 million minimum liquidity condition for buybacks. The company reported $20 million of available borrowings at year-end, subject to facility terms.
- Contractual obligations totaled $58.7 million: $49.4 million debt, $3.6 million capital leases, $3.3 million operating leases, and $2.5 million of 2017 software-development purchase commitments.
Outlook, commentary, risks, and unusual items
- The filing does not provide specific numerical revenue, earnings, or cash-flow guidance. Management intends to continue acquiring complementary software businesses, expanding sales to existing and new customers, investing in products, and selectively pursuing international growth.
- Management warned that acquisitions can create integration costs and near-term cost-of-revenue impacts; it expects integration efforts to extend over the following six to twelve months. The January 2017 Omtool acquisition cost approximately $19.2 million net of acquired cash.
- Upland exchanged its EPM Live product business and approximately $5.7 million of stock for HipCricket in March 2016. HipCricket was owned by an affiliate of an Upland shareholder; the filing says Raymond James provided a fairness opinion. The EPM Live transfer resulted in a $0.7 million loss.
- Other notable items include $5.6 million of acquisition-related expense in 2016 and higher messaging and short-code costs. The company remains GAAP loss-making and had an accumulated deficit of $62.4 million.
- Principal risks include customer renewals, downgrades and limited cross-selling; competition and pricing pressure; acquisition financing and integration; data-center reliability, cybersecurity and privacy; foreign-exchange exposure; and compliance with debt covenants. A 10% currency-rate change was estimated to affect 2016 revenue by $2.1 million; the company reported no hedging strategy.
- Federal NOL carryforwards were approximately $83 million, but ownership-change rules may limit use; the filing estimates $16.2 million of NOLs and $0.8 million of research credits could expire unused. The company recorded a full valuation allowance against domestic net deferred tax assets, subject to stated exceptions.
- Management concluded disclosure controls and internal control over financial reporting were effective at year-end. The auditor audited the financial statements but did not attest to internal-control effectiveness under the emerging-growth-company exemption. No legal proceedings were identified as expected to have a material adverse effect.
Important facts for investors to verify
- How much future revenue growth is organic, given the reported organic decline and the acquisition contribution?
- Whether subscription growth and 95% net dollar retention improve, and whether customer downgrades or nonrenewals increase.
- Cash generation after acquisition spending, debt service, capital leases, and the $2.5 million related-party software-development commitment.
- Compliance with the Wells Fargo facility’s financial covenants as they tighten, and actual borrowing availability under its terms.
- Integration and performance of the 2016 acquisitions and Omtool, including acquisition-related costs, earnouts, and the preliminary API purchase-price allocation.
- The impact of messaging costs, foreign exchange, and the company’s migration of hosting infrastructure to AWS or an equivalent provider.