Upland Software, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023, compared with the three months ended March 31, 2022. Upland provides cloud-based business software and reports as one operating segment.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $77.1 million | $78.7 million | Down 2% |
| Gross profit / margin | $51.5 million / 67% | $54.0 million / 69% | Margin down 2 percentage points |
| Operating loss | $137.4 million | $14.8 million | Worsened, mainly due to goodwill impairment |
| Net loss | $140.0 million | $22.8 million | Loss per share: $4.38 vs. $0.73 |
| Adjusted EBITDA, non-GAAP | $17.6 million | $23.4 million | Down 25% |
| Cash from operations | $15.8 million | $8.2 million | Up $7.6 million |
- Subscription and support revenue was $72.9 million, down 1%; perpetual license revenue was $1.6 million, down 12%; professional services revenue was $2.6 million, down 22%.
- Cash and cash equivalents were $257.7 million at March 31, 2023, including $53.5 million held by foreign subsidiaries. Working capital was $180.2 million.
- Borrowings under the credit facility were reported as $521.1 million; the balance sheet carried notes payable of $514.1 million after unamortized debt discounts. The $60 million revolver was undrawn and fully available. The term loan matures August 2026; the revolver matures August 2024.
- Upland reported $275.1 million of remaining performance obligations, with approximately 69% expected to be recognized over the next 12 months.
Material changes and unusual items
- A $128.8 million non-cash goodwill impairment, prompted by the continued decline in Upland’s share price and market capitalization, drove most of the increase in GAAP operating and net losses. The company used discounted cash flow and comparable-company valuation methods; no impairment of intangible assets was recorded.
- Revenue declined $1.7 million in subscription and support from sunset product offerings and contracts, partly offset by acquisition contribution and usage overage charges. Management reported that core organic subscription and support revenue grew $0.4 million at constant currency.
- Gross margin fell as subscription and support costs increased 6%, including personnel, carrier, hosting and amortization costs. Amortization expense rose 39% to $14.8 million.
- Acquisition-related expenses declined to $1.1 million from $10.4 million. There were no acquisitions in Q1 2023; the prior-year quarter included BA Insight and Objectif Lune acquisitions.
- Operating cash flow increased, with customer collections contributing a $7.0 million working-capital source. Cash increased $9.1 million during the quarter; investing outflows were limited to $0.2 million of equipment purchases.
Outlook, risks and contingencies
- Management stated that cash, operating cash flows and available credit are expected to be sufficient to fund operations for at least the next 12 months. The filing provides no specific revenue, earnings or margin guidance.
- Upland intends to continue pursuing acquisitions of complementary technologies and businesses, but made none during the quarter.
- The company was in compliance with credit-facility covenants. No financial covenant applies while less than 35% of the revolver is drawn at quarter-end; if that threshold is reached, a maximum 6.00-to-1.00 total leverage ratio applies. Substantially all assets secure the facility.
- Term-loan interest was effectively fixed at 5.4% through swaps; the revolver rate remains floating. Upland amended its credit agreement in February 2023 to replace LIBOR with SOFR, with no material reported financial-statement impact.
- Key risks include further goodwill impairment if the share price declines, inflation and foreign-exchange exposure, customer retention and growth, competition, and the company’s ability to sustain profitability. A hypothetical 10% foreign-exchange move could have changed quarterly revenue by $1.7 million; Upland said it had no currency hedges.
- Series A preferred stock carries a 4.5% cumulative annual dividend, increasing to 7% after seven years, and a $17.50 conversion price. The liquidation preference was $118.2 million at quarter-end; conversion could materially dilute common shareholders.
- On May 2, 2023, the board adopted a tax-benefit preservation rights plan intended to protect approximately $147 million of U.S. federal NOLs and other tax attributes. It generally deters unapproved acquisitions of 4.9% or more of the stock; it may also complicate or discourage takeover activity, and cannot ensure the tax attributes remain usable.
- The filing reports no current or pending litigation expected to have a material adverse effect. Management concluded disclosure controls were effective as of March 31, 2023.
Important facts for investors to verify
- Review the goodwill impairment valuation assumptions, including forecast cash flows, growth rates, discount rate and sensitivity to the share price.
- Track subscription revenue and customer trends separately for sunset assets, core organic business, acquisitions, overage charges and currency effects.
- Assess whether operating cash generation can support the debt burden, preferred dividends and investment needs; monitor scheduled debt repayment and covenant headroom.
- Evaluate the preferred stock’s accrued dividends, conversion and redemption terms, and potential dilution to common shareholders.
- Monitor the effect of the rights plan and any ownership change on the availability of NOLs and other tax attributes.