Upland Software, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Upland provides cloud-based enterprise work management software, with subscription and support generating most revenue. Figures below are in millions of dollars unless noted.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $71.3 | $53.0 | $139.3 | $101.5 |
| Gross profit / margin | $47.6 / 67% | $36.4 / 69% | $93.5 / 67% | $70.1 / 69% |
| Operating loss | $(6.9) | $(5.5) | $(22.3) | $(8.1) |
| Net loss | $(14.2) | $(5.4) | $(34.2) | $(13.2) |
| Net loss per diluted share | $(0.57) | $(0.24) | $(1.37) | $(0.61) |
| Adjusted EBITDA (non-GAAP) | $23.7 | $19.1 | $48.3 | $36.9 |
- Q2 revenue grew 35% year over year; subscription and support revenue increased 39%. For the first half, revenue grew 37% and subscription and support increased 40%. Management attributed most of the reported increase to acquisitions; organic revenue grew 5% in both comparisons.
- Subscription and support accounted for 95% of Q2 revenue, up from 92% a year earlier. Gross margin fell by 2 percentage points in both comparisons, partly reflecting higher subscription delivery and messaging costs.
- Cash and cash equivalents were $87.9 at June 30, down from $175.0 at December 31, 2019. First-half operating cash flow was $(4.5), versus $5.4 provided in the prior-year period. Investing cash outflow was $68.5, including $67.7 for the Localytics acquisition; financing cash outflow was $14.6.
- Debt principal was approximately $536.0; the balance sheet reported notes payable, net of discount, of $523.3. The $60.0 revolving facility was undrawn and fully available. Working capital surplus was $37.1, including $81.0 of current deferred revenue.
Material changes and notable items
- Localytics was acquired in February 2020 for total consideration of $69.0; it contributed approximately $7.1 of revenue from acquisition through June 30. The company reported $39.6 of goodwill acquired in business combinations during the first half.
- Interest expense increased 50% year over year to $7.9 in Q2 and $15.5 for the first half, primarily due to higher borrowings used to fund acquisitions. The term loans are hedged at a fixed 5.4%; their June 30 swap liability was $32.6. The associated fair-value loss contributed to first-half comprehensive loss of $78.7, versus $12.6 a year earlier.
- Acquisition-related expense was $20.9 for the first half, up 23%, including $2.8 of accelerated rent expense from acquired-office closures. General and administrative expense also rose, including higher stock compensation and costs related to implementation of a new ERP system.
- Management reported no goodwill or intangible-asset impairment identified in its COVID-19-related qualitative review.
Outlook, risks and controls
- The filing provides no numerical revenue or earnings guidance. Management said it expects COVID-19 to continue affecting new bookings and churn in the second half of 2020, while digital transformation demand may partly offset the impact. It anticipated slowing acquisition activity at least until Q4 and said acquisition-related costs should continue to decline.
- Management stated that cash, operating cash flows and available credit were expected to meet domestic and international working-capital needs for at least the next 12 months. This outlook is subject to uncertainty, including pandemic-related customer spending cuts, contract renegotiations, and retention and upsell risks.
- Upland was in compliance with credit-facility covenants at June 30. The facility is secured by substantially all assets; a leverage covenant applies if at least 35% of the revolver is drawn at quarter-end.
- Disclosure controls and procedures were deemed ineffective due to a previously identified material weakness in annual income-tax accounting. Management had begun remediation by adding tax and accounting resources and streamlining processes, and expected remediation before year-end 2020 annual controls. The new ERP system also presents implementation and control risks.
- Management reported no current or pending legal proceedings expected to have a material adverse effect. Remaining minimum purchase commitments were approximately $8.3 through 2024, in addition to a $3.7 DevFactory obligation through year-end 2020.
Important facts for investors to verify
- How much future growth is organic versus acquisition-driven, and whether bookings and churn weaken further due to COVID-19.
- Whether operating cash flow improves while funding debt service, acquisition integration and other commitments; monitor cash balances and revolver availability.
- Whether gross margin stabilizes and the company progresses toward GAAP profitability, given rising operating expenses, interest costs and amortization.
- Progress in remediating the income-tax accounting material weakness and maintaining controls following the ERP implementation.
- Final purchase-price allocations for Localytics and Altify, and the effects of acquisition integration, earnouts and goodwill/intangible balances.