Business context and reporting period
Upland Software, Inc. provides cloud-based enterprise work management software. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods. The company grows partly through acquisitions and sells primarily subscription software and support.
Financial results and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $19.2m | $17.1m | $55.4m | $52.3m |
| Gross profit / margin | $12.4m / 65% | $10.7m / 62% | $35.0m / 63% | $32.7m / 62% |
| Operating loss | $1.3m | $1.8m | $7.9m | $7.4m |
| Net loss | $2.4m | $2.3m | $11.5m | $9.4m |
| Adjusted EBITDA (non-GAAP) | $3.6m | $1.1m | $8.4m | $2.3m |
| Cash from operations | Not provided quarterly | Not provided quarterly | $1.1m | $1.7m |
Subscription and support revenue was $17.0m in Q3, up 21%, and $48.5m year to date, up 14%. Professional services declined 23% in Q3 and 24% year to date; perpetual license revenue declined 39% and 50%, respectively. Subscription and support represented 89% of Q3 revenue and 88% year-to-date.
At September 30, cash and equivalents were $17.5m, versus $18.5m at year-end 2015. The company reported $38.3m outstanding under its Wells Fargo credit facility, $5.0m of available borrowings, and a $5.2m working capital deficit, including $23.1m of current deferred revenue. Nine-month investing cash use was $13.1m, principally for acquisitions; financing provided $10.8m. Debt fair value was estimated at $38.3m.
Material changes versus prior period
- Reported revenue increased 12% in Q3 and 6% year to date, but management attributed most growth to acquisitions. It said organic revenue rose 1% in Q3 and was flat year to date on a constant-currency basis.
- Management attributed year-to-date subscription growth chiefly to acquisitions; organic constant-currency subscription growth was 2%. The EPM Live product divestiture and currency effects reduced reported revenue.
- Q3 net loss was slightly larger year over year; the nine-month net loss also widened. Gross margin improved, while operating loss improved in Q3 but worsened year to date. Interest expense increased, reflecting higher acquisition-related borrowings.
- Upland acquired a website analytics business, Hipcricket, and Advanced Processing & Imaging in 2016. The Hipcricket transaction included transfer of EPM Live and a $0.7m loss. Acquisition-related expenses rose to $4.9m year to date from $1.1m.
Outlook, commentary, risks and unusual items
The filing provides no numerical revenue or earnings guidance. Management expects to continue pursuing complementary acquisitions, favors recurring-revenue contracts over perpetual licenses, and anticipates a greater product-revenue mix relative to professional services. It also notes seasonality, with more customer agreements typically signed in the fourth quarter.
Key risks include acquisition integration and financing, ability to achieve or sustain profitability, customer retention and growth, competition, reliance on third-party hosting, and foreign-exchange exposure. A hypothetical 10% currency-rate change would have changed nine-month revenue by $1.6m; the company reported no hedging. The credit facility is secured by substantially all assets, including intellectual property, and includes operating and financial covenants; breach could accelerate repayment and terminate further commitments.
Other items to note: contingent consideration associated with the website analytics acquisition was valued at $3.1m, with potential cash earnouts up to $5.0m; the company also issued $2.4m of contingent stock consideration. Purchase price allocations remained preliminary. The company disclosed related-party software development purchases of $1.7m for the nine months and a $2.3m 2016 commitment. Management said litigation was not expected to materially affect results and that disclosure controls were effective.
Important facts for investors to verify
- Whether organic subscription growth and overall performance improve, apart from acquisition contributions and divestiture effects.
- Cash generation, working-capital needs, and the effect of deferred revenue on liquidity; cash from operations was only $1.1m for the first nine months.
- Debt levels, remaining borrowing availability, facility covenants, and capacity to fund further acquisitions.
- Acquisition integration, final purchase-price allocations, earnout outcomes, and the sustainability of Adjusted EBITDA relative to GAAP losses and cash flow.
- Related-party transactions and the continuing technology-services commitment.