Upland Software, Inc. — Q3 2015 Form 10-Q
Business context and period. Upland provides cloud-based enterprise work management software. This unaudited report covers the three and nine months ended September 30, 2015; comparisons are with the same 2014 periods. Financial amounts below are in U.S. dollars unless noted.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $17.1m | $16.3m | $52.3m | $48.1m |
| Gross profit / margin | $10.7m / 62% | $10.5m / 64% | $32.7m / 62% | $31.0m / 64% |
| Operating loss | $1.8m | $1.7m | $7.4m | $14.8m |
| Net loss | $2.3m | $2.4m | $9.4m | $17.4m |
| Adjusted EBITDA (non-GAAP) | $1.1m | $0.5m | $2.1m | $3.2m |
Revenue mix. Q3 subscription and support revenue rose 14% to $14.1m, while professional services fell 20% to $2.4m and perpetual licenses fell 36% to $0.5m. For the first nine months, subscription and support increased 18% to $42.5m and professional services declined 25% to $7.6m. Subscription and support represented 81% of nine-month revenue, up from 75%.
Cash and debt. Cash and cash equivalents were $28.7m at September 30, versus $31.0m at December 31, 2014. Nine-month operating cash flow was positive $1.7m; investing cash flow was negative $3.5m and financing cash flow negative $0.2m. Working capital was a $10.3m surplus, including $18.7m of current deferred revenue. Management reported $24.7m of borrowings outstanding and $20.0m of available borrowing capacity under its credit arrangements. Balance-sheet notes payable totaled $24.1m net of discounts. The new Wells Fargo facility is secured by substantially all company assets and includes variable-rate debt.
Other metrics. Interest expense was $1.4m for the nine months, versus $1.2m a year earlier. The company reported a $1.2m foreign-currency translation loss in comprehensive loss for the nine months. Total assets were $121.0m and stockholders’ equity $62.8m at September 30.
Changes versus the prior period
- Nine-month reported revenue grew 9%, but management attributed growth to the late-2014 acquisitions; organic revenue declined 5% on a constant-currency basis. Currency translation reduced reported revenue by $2.2m, according to management.
- Q3 reported revenue grew 5%, while organic revenue declined 9% on a constant-currency basis. Management cited lower professional-services revenue as the primary reason.
- Management said constant-currency subscription and support revenue grew 23% for the nine months overall, but organic subscription and support revenue grew only 1%; Q3 organic subscription and support revenue declined 3%.
- Nine-month net loss improved by $8.0m year over year, primarily reflecting the absence of a $11.2m noncash stock-compensation charge recorded in 2014 in connection with a related-party services agreement. General and administrative expense increased 55% to $14.3m, including higher public-company-related costs and stock compensation.
- Gross margin decreased from 64% to 62% in both the quarter and nine-month comparison, as subscription cost of revenue rose.
Outlook, risks and unusual items
- The filing provides no specific revenue, earnings or cash-flow guidance. Management expects subscription revenue to remain a larger share of revenue and professional services and perpetual-license revenue to decline as percentages of revenue.
- Management intends to pursue acquisitions. Subsequent to quarter-end, on November 13, 2015, Upland acquired Ultriva for approximately $4.9m cash at closing, additional cash holdbacks and approximately 225,000 common shares, subject to the terms described in the filing.
- Key stated risks include achieving profitability, customer acquisition and retention, acquisition integration, competition and technological change, international operations and foreign exchange, third-party data-center reliability, and financing availability. Management estimated that a hypothetical 10% currency-rate change would have changed nine-month revenue by $1.0m; the company reported no hedging strategy.
- The credit facility imposes operating and financial covenants, limits certain activities, and is secured by substantially all assets, including intellectual property. A covenant breach could trigger acceleration of debt and termination of further credit commitments.
- Commitments include $2.1m for software-development services in 2015, of which $1.4m had been incurred by September 30. The filing says litigation in the ordinary course is not expected to materially affect financial position or results.
- Management reported effective disclosure controls as of September 30, 2015, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether organic recurring-revenue growth and customer expansion improve, given acquisition-driven reported growth and weak organic results in Q3.
- Whether the decline in professional-services revenue affects customer onboarding, retention, or future subscription growth.
- Cash conversion and liquidity, including deferred-revenue trends, working-capital needs, acquisition spending and remaining borrowing availability.
- Debt balances, variable interest costs, covenant compliance and the restrictions attached to the secured credit facility.
- Ultriva’s final purchase accounting, integration progress and contribution to revenue and cash flow.
- The sustainability of adjusted EBITDA; it is a non-GAAP measure and does not capture all cash requirements, including interest, taxes and contractual commitments.