Upland Software, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited results are compared with the corresponding 2018 periods. Upland provides cloud-based enterprise work management software and pursues growth through acquisitions.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $55.1 million | $37.1 million | $156.6 million | $104.7 million |
| Gross profit / margin | $38.4 million / 70% | $25.1 million / 67% | $108.5 million / 69% | $71.1 million / 68% |
| Operating loss | $3.7 million | $0.3 million operating income | $11.8 million | $0.8 million |
| Net loss | $12.3 million | $4.3 million | $25.5 million | $12.6 million |
| Net loss per share, diluted | $0.50 | $0.21 | $1.13 | $0.63 |
| Adjusted EBITDA, non-GAAP | $20.7 million | $13.1 million | $57.5 million | $36.4 million |
Subscription and support revenue was $51.1 million in Q3 and $144.8 million for the nine months, respectively 93% and 92% of total revenue. Management attributed about $16.2 million of the Q3 revenue increase and $47.3 million of the nine-month increase to acquisitions not fully reflected in the prior-year comparisons (after purchase-accounting deferred-revenue discounts). Reported organic revenue growth was 5% in both periods.
Cash flow and liquidity: Nine-month operating cash flow was $5.1 million, versus $4.8 million in 2018. Investing cash outflow was $106.9 million, primarily for acquisitions; financing cash inflow was $198.1 million. Cash at September 30 was $113.3 million, compared with $16.7 million at December 31, 2018. Working capital was positive $59.7 million, including $59.7 million of current deferred revenue.
Debt: At quarter-end, the company had a $350 million term loan outstanding and a fully available $60 million revolver; the balance sheet reported notes payable of $341.6 million net of discounts. The term loan matures in 2026 and is effectively fixed at 5.4% through an interest-rate swap. The revolver remains floating-rate. Debt is secured by substantially all company assets. Upland reported compliance with covenants at September 30.
Material changes and notable items
- Revenue increased 48% in Q3 and 50% for the nine months, largely reflecting acquisitions. Subscription and support revenue grew 51% and 53%; nine-month perpetual-license revenue declined 32%.
- Despite higher revenue and gross margins, GAAP losses widened. Acquisition-related expenses rose to $7.5 million in Q3 and $24.4 million for the nine months; depreciation and amortization also increased with acquired intangible assets.
- Interest expense rose to $5.5 million in Q3 and $15.9 million for the nine months, reflecting increased borrowing. The company also recorded a $2.3 million debt-extinguishment loss on write-off of prior facility financing costs.
- Upland completed Postup, Kapost and Cimpl acquisitions during 2019; their post-acquisition revenue through September was approximately $5.4 million, $4.5 million and $0.9 million, respectively. Purchase-price allocations for several acquisitions remained preliminary.
- In May, Upland issued 3.795 million shares at $42 per share, raising $151.1 million net of issuance costs. Shares outstanding rose to 25.3 million at September 30 from 21.5 million at year-end 2018.
Outlook, risks and contingencies
The filing provides no specific revenue or earnings guidance. Management said cash, operating cash flows, available credit and the ability to issue securities should fund operations for at least the next 12 months, and it expects to continue pursuing acquisitions. This outlook is subject to the risks described in the filing and is not a guarantee of results.
Subsequent to quarter-end, Upland acquired InGenius for $26.4 million cash plus a $3.0 million holdback. It also acquired Altify for $84 million cash, drawing $59 million on the revolver. Following Altify, the company reported approximately $409 million gross debt, $56 million cash and $353 million net debt. Upland also decided to divest or sunset certain non-strategic contracts and assets, which represented about 1% of September 30 assets.
Key risks include integrating acquisitions and realizing expected benefits, sustaining profitability and organic growth, managing debt and acquisition funding, retaining customers and key staff, competition and technology change, international and foreign-currency exposure, and reliance on third-party hosting providers. A hypothetical 10% currency-rate change would have changed nine-month revenue by $4.1 million. The company disclosed related-party spending on software development services, including a 2019 commitment to DevFactory. It reported no current or pending litigation expected to materially affect its financial position or results, and stated disclosure controls were effective.
Important facts for investors to verify
- How much reported growth is recurring organic growth versus acquired revenue, and whether organic growth improves.
- Whether acquisition integration costs, acquired-intangible amortization and stock-based compensation continue to weigh on GAAP profitability and cash generation.
- Post-Altify debt, cash, revolver availability, interest expense and covenant headroom; quarter-end liquidity figures predate the acquisition borrowing.
- Final purchase-price allocations, acquisition performance, earnout and seller obligations, and the expected impact of the sunset assets.
- Cash conversion relative to Adjusted EBITDA, including working-capital movements and the timing of customer billings and collections.