Upland Software, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; filed August 14, 2015. The unaudited statements cover a cloud-based enterprise work management software provider. Comparisons are with the corresponding 2014 periods.
Financial results and liquidity
Amounts are in millions, except per-share data and margins.
| Metric | Q2 2015 | Q2 2014 | H1 2015 | H1 2014 |
|---|---|---|---|---|
| Total revenue | $17.7 | $16.2 | $35.2 | $31.8 |
| Subscription and support revenue | $14.0 | $11.8 | $28.3 | $23.5 |
| Professional services revenue | $2.8 | $3.7 | $5.2 | $7.2 |
| Gross profit / margin | $11.1 / 63% | $10.5 / 65% | $22.0 / 62% | $20.5 / 64% |
| Operating loss | $(2.5) | $(1.2) | $(5.6) | $(13.1) |
| Net loss | $(3.3) | $(2.4) | $(7.1) | $(15.0) |
| Net loss per common share | $(0.22) | $(0.80) | $(0.48) | $(4.92) |
| Adjusted EBITDA / margin | $0.7 / 4% | $1.0 / 6% | $1.0 / 3% | $2.6 / 8% |
- Revenue increased 9% in Q2 and 11% in H1. Subscription and support grew 19% and 20%, respectively; management attributed most of the increase to 2014 acquisitions. On a constant-currency basis, organic subscription and support revenue rose 2% in Q2 and 3% in H1.
- Professional services revenue declined 25% in Q2 and 28% in H1. Management attributed the organic decline to emphasizing expansion of recurring customer revenue over new-customer services projects. Organic total revenue declined 5% in Q2 and 3% in H1 on a constant-currency basis.
- Gross margin narrowed by 2 percentage points in both comparison periods. Higher subscription delivery costs contributed, while professional services costs fell alongside services revenue.
- Q2 operating and net losses increased year over year; H1 losses improved substantially. The H1 2014 comparison included an $11.2 million noncash related-party stock-compensation charge in research and development. Adjusted EBITDA is a company-defined non-GAAP measure and declined year over year in both periods.
- H1 operating cash flow was $0.9 million, compared with $0.3 million in H1 2014. Investing cash outflow was $3.5 million, including $2.8 million of acquisition-related payments, $0.4 million for customer relationships and $0.3 million for property and equipment. Cash declined $1.9 million to $29.1 million.
- At June 30, cash was $29.1 million and working capital surplus was $11.0 million, including $21.6 million of current deferred revenue. Management reported $19.9 million of available borrowing capacity and $25.1 million of credit-facility borrowings outstanding; balance-sheet debt carrying value was $24.5 million, including discounts.
Material changes, outlook and risks
- On May 14, 2015, Upland refinanced its prior Comerica arrangements with a five-year Wells Fargo-led facility described as up to $60 million. It includes term loans, revolving capacity, a delayed-draw acquisition loan, an uncommitted $15 million accordion and permission for up to $10 million in seller notes for acquisitions. The company reported $1.1 million of new facility financing costs and expensed $0.2 million of unamortized prior debt costs.
- The credit facility is secured by substantially all borrower and guarantor assets, including intellectual property. It imposes operating and financial covenants, including minimum liquidity requirements, and limits actions such as acquisitions, asset dispositions and stock repurchases. Management warned that covenant breaches could accelerate debt and end further credit availability. Variable interest rates and foreign-exchange movements also pose risks; a hypothetical 10% currency-rate change would have changed H1 revenue by $0.7 million. The company reported no hedging strategy.
- Management intends to pursue acquisitions and invest in product development and sales capacity. It expects perpetual-license revenue to decrease as a percentage of revenue; it offered no specific numerical earnings or revenue guidance in the provided filing text. Results may fluctuate, and interim results are not necessarily indicative of full-year performance.
- Other items include a $2.1 million 2015 software-development purchase commitment, of which $0.9 million was incurred in H1, and new or renewed office and equipment leases. Management did not expect existing litigation to have a material adverse effect. Disclosure controls were assessed as effective at June 30, 2015.
Important facts for investors to verify
- Whether recurring-revenue growth from acquisitions and customer expansion can persist, given organic total-revenue declines and lower professional-services revenue.
- Whether subscription gross margins and Adjusted EBITDA can recover after year-over-year margin and EBITDA declines.
- Exact borrowing availability and covenant headroom under the new facility, including liquidity tests and restrictions on acquisitions and repurchases.
- The integration, purchase-price allocation and performance of 2014 acquisitions, as well as the impact of foreign-currency movements.
- How the related-party software-development commitment, deferred revenue and other contractual commitments affect future cash generation.