Upland Software, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; unaudited. Upland provides cloud-based enterprise work management software. The company reported more than 2,500 customers and over 250,000 users.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $26.1m | $19.2m | $70.1m | $55.4m |
| Gross profit / margin | $17.0m / 65% | $12.4m / 65% | $46.0m / 66% | $35.0m / 63% |
| Operating loss | $(2.3)m | $(1.3)m | $(8.7)m | $(7.9)m |
| Net loss | $(3.5)m | $(2.4)m | $(14.9)m | $(11.5)m |
| Adjusted EBITDA, non-GAAP | $8.3m | $3.6m | $20.6m | $8.4m |
| Adjusted EBITDA margin | 32% | 19% | 29% | 15% |
Q3 subscription and support revenue was $23.2m, or 89% of revenue. Revenue increased 36% in Q3 and 27% year to date, but management attributed the growth primarily to acquisitions. On its stated basis, organic revenue declined 2% in Q3 and grew 1% in the first nine months. Nine-month subscription and support revenue grew 25%; professional services revenue increased 5%.
Operating cash flow was $5.8m for the first nine months, compared with $1.1m in 2016. Investing cash outflow was $61.6m, principally for acquisitions; financing inflow was $79.5m, including equity and debt proceeds. Cash increased to $53.0m from $28.8m at year-end 2016.
Financial position and material changes
- At September 30, 2017, total assets were $250.8m, including goodwill of $122.9m and net intangible assets of $47.5m. Total liabilities were $155.5m.
- Credit-facility principal outstanding was $94.4m; the balance-sheet carrying amount of notes payable was approximately $91.7m after unamortized discounts. Upland reported $50.0m of available delayed-draw and revolving commitments, with no amounts drawn on either at quarter-end.
- Working capital was negative $16.5m, including $31.8m of current deferred revenue. Deferred revenue is expected to be recognized as revenue under the company’s revenue-recognition policy.
- Three 2017 acquisitions—Omtool, RightAnswers, and Waterfall—accounted for much of the increase in goodwill and revenue. Acquisition-related expenses were $4.4m in Q3 and $10.4m year to date, versus $1.0m and $4.9m in the comparable periods.
- Upland raised $42.6m net in a June public stock offering, issuing approximately 2.14m shares. Shares outstanding increased to 20.76m at September 30, from 17.79m at December 31, 2016.
Outlook, risks, and unusual items
- The filing gives no specific revenue, earnings, or cash-flow guidance. Management intends to continue pursuing acquisitions and identifies acquisition integration and financing, customer retention, competition, innovation, and international expansion among relevant risks.
- The August 2017 credit amendment expanded acquisition financing capacity and reduced scheduled principal installments through June 2019. The facility matures August 2, 2022, bears variable interest, is secured by substantially all company and guarantor assets including intellectual property, and contains financial and operating covenants. Certain financial covenants become more restrictive starting March 31, 2018.
- Q3 interest expense was $2.3m, up from $0.7m, reflecting increased borrowings and costs associated with credit-facility amendments. The company also reversed an immaterial non-cash debt-extinguishment charge recorded in Q2 after determining the credit amendment should be accounted for as a modification. The presentation of this item should be read with the filing’s related note and comparative-period discussion.
- Management reported identifying and remediating a material weakness in the review control for complex, non-routine debt modifications. Management concluded disclosure controls were effective at a reasonable-assurance level at quarter-end. The 2017 acquisition purchase-price allocations remained preliminary.
- The company expects to adopt the new revenue standard on January 1, 2018 using the modified retrospective method. It anticipated a potential impact on accounting for contract-acquisition costs, but had not fully determined the impact on systems, processes, or financial statements.
- No current or pending material litigation was reported. Foreign-exchange exposure remains; the filing estimates a hypothetical 10% exchange-rate change would have changed nine-month revenue by $7.0m. Upland reported no hedging strategies.
Investor verification priorities
- Verify how much reported revenue growth reflects acquired businesses versus organic performance, particularly the Q3 organic decline.
- Review the debt balance, variable-rate exposure, covenant headroom and requirements, maturity schedule, and acquisition-funding commitments.
- Assess the recurring cash-generation picture alongside Adjusted EBITDA, including acquisition costs, stock compensation, interest, and working-capital movements.
- Track integration and final purchase accounting for the 2017 acquisitions, including earnouts and seller obligations.
- Confirm the effect of the revenue-standard adoption on contract-acquisition costs and whether the remediated debt-accounting control continues to operate effectively.