Upland Software, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Upland provides cloud-based business software. Unless noted otherwise, figures are in U.S. dollars; financial statement amounts are in millions.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $74.5 | $80.2 | $151.6 | $158.9 |
| Gross profit / margin | $50.3 / 68% | $53.7 / 67% | $101.8 / 67% | $107.6 / 68% |
| Operating loss | $(9.4) | $(10.9) | $(146.8) | $(25.7) |
| Net loss | $(15.1) | $(16.4) | $(155.2) | $(39.2) |
| Adjusted EBITDA (non-GAAP) | $16.6 | $24.5 | $34.2 | $48.0 |
- Q2 revenue declined 7%; subscription and support revenue fell 6% to $70.5 million and represented 95% of revenue. Professional services declined 18% to $2.8 million, and perpetual license revenue fell 33% to $1.3 million.
- Management reported Q2 Core Organic Growth Rate of negative 2.0%, a non-GAAP measure that excludes Sunset Assets and Overage Charges and adjusts for acquisitions and dispositions.
- Six-month operating loss includes a $128.8 million goodwill impairment. Excluding that impairment, the reported six-month operating result would still reflect operating losses and higher amortization; the filing does not present an adjusted GAAP operating result.
- Q2 basic and diluted loss per common share was $0.51, compared with $0.52 a year earlier. For the six months, it was $4.88 versus $1.25, including the impairment and preferred dividends in 2023.
Cash flow, debt and liquidity
- Cash and cash equivalents were $262.6 million at June 30, 2023, up from $248.7 million at December 31, 2022. Working capital was $187.1 million.
- For the six months, operating cash flow was $22.8 million, compared with $22.3 million. Investing cash outflow was $0.5 million, versus $62.7 million, primarily because there were no acquisitions in 2023. Financing cash outflow was $8.8 million.
- Outstanding credit-facility borrowings were $519.8 million; the $60 million revolver was undrawn and fully available. The company also disclosed $20.3 million of available term-loan capacity. The term loans mature in August 2026; the revolver matures in August 2024.
- Interest-rate swaps effectively fix the term-loan rate at 5.4%; the revolver remains floating-rate. Upland reported covenant compliance at quarter-end. Management stated that cash, operating cash flow and available credit should fund operations for at least the next 12 months.
Changes, outlook and notable items
- Revenue fell 5% in the first half. Management attributed the decrease primarily to reduced sales focus on Sunset Assets, lower perpetual-license and professional-services revenue, and foreign-exchange effects, partly offset by $2.4 million of revenue from acquisitions not fully included in the prior-year comparison.
- In its strategic review, Upland identified approximately $27.9 million of estimated 2023 annual revenue as Sunset Assets in late 2022; subsequent product reclassifications increased the estimated Sunset Assets revenue by a net $5.0 million. The company says these offerings are non-strategic and being sunset.
- The $128.8 million goodwill impairment followed a decline in Upland’s share price and market capitalization in Q1. The valuation used discounted cash flow and comparable-company methods, relying on forecasts and other significant assumptions. No goodwill impairment was recorded in Q2.
- Amortization rose 39% in the first half to $29.3 million. Management attributed the increase primarily to changes in estimated useful lives of certain intangible assets following product reviews.
- Upland made no acquisitions in the first half of 2023; management intends to pursue complementary acquisitions. No specific revenue or earnings guidance is provided in the supplied filing text.
- Series A preferred stock carries a 4.5% annually compounding dividend, accruing regardless of declaration, and a $17.50 conversion price. Accrued unpaid dividends were $4.5 million; the liquidation preference was $119.5 million at June 30. The preferred stock was equivalent to approximately 6.8 million common shares for diluted-share disclosure purposes, but was anti-dilutive during the loss period.
- The company adopted a Tax Benefit Preservation Plan intended to reduce the risk of a Section 382 ownership change that could limit use of tax attributes. It generally deters unapproved acquisitions of 4.9% or more of common stock and expires no later than May 1, 2024. Upland disclosed approximately $147 million of NOLs and other tax attributes as of March 31, 2023; their usability is not assured.
- Upland reported no current or pending legal proceedings expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether subscription-revenue trends and the negative 2% Core Organic Growth Rate stabilize, and how Sunset Asset classifications affect reported and core growth.
- The assumptions underlying the goodwill impairment and whether further share-price declines or operating changes could lead to additional impairment.
- Debt service, maturity and refinancing considerations, covenant terms, available borrowing capacity, and the effect of interest rates on the floating-rate revolver.
- The preferred stock’s accumulating dividend, liquidation rights and potential conversion dilution, alongside the tax-plan restrictions on share accumulation.
- Whether increased amortization from revised intangible-asset useful lives continues to weigh on GAAP results, and whether the stated liquidity outlook remains supported by operating cash flow.