Upland Software, Inc. — Q2 2019 Form 10-Q
Business context and period: Upland provides cloud-based enterprise work management software, primarily through subscription and support contracts. This unaudited filing covers the three and six months ended June 30, 2019, compared with the same 2018 periods. Growth continued to be driven substantially by acquisitions, including Postup and Kapost, acquired during Q2.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $53.0 million | $35.9 million | $101.5 million | $67.6 million |
| Gross profit / margin | $36.4 million / 69% | $25.1 million / 70% | $70.1 million / 69% | $46.1 million / 68% |
| Operating loss | $5.5 million | $0.7 million | $8.1 million | $1.2 million |
| Net loss | $5.4 million | $5.2 million | $13.2 million | $8.4 million |
| Adjusted EBITDA (non-GAAP) | $19.1 million | $12.5 million | $36.9 million | $23.3 million |
| Operating cash flow | Not stated separately for the quarter | $5.4 million | $3.7 million |
- Q2 revenue increased 47%; first-half revenue increased 50%. Management attributed $15.2 million of the Q2 increase and $30.4 million of the first-half increase to acquisitions not fully reflected in the comparable periods. Organic revenue growth was 5% in Q2 and 6% for the first half.
- Subscription and support generated 92% of revenue in both periods. It rose 47% in Q2 and 54% for the first half; organic growth was 5% and 7%, respectively. Perpetual-license revenue declined 16% in Q2 and 47% for the first half.
- Gross margin was 69% in Q2, down from 70%; first-half margin improved to 69% from 68%. Operating loss widened as operating expenses rose, including acquisition-related costs of $9.3 million in Q2 and $17.0 million for the first half.
- Net loss per share was $0.24 in Q2 versus $0.26, and $0.61 for the first half versus $0.42. A $6.1 million Q2 tax benefit ($6.7 million first half) helped limit net loss; it primarily reflected deferred tax benefits, including a valuation-allowance release associated with acquisitions.
- First-half operating cash flow was $5.4 million. Investing cash outflow was $83.2 million, mainly for acquisitions; financing provided $168.6 million, including $151.5 million net proceeds from a May stock offering. Cash rose to $108.4 million from $16.7 million at year-end.
- At June 30, cash was $108.4 million; notes payable, net of discount, were $305.3 million. The company reported $30.0 million of available revolving capacity and a $49.5 million working-capital surplus, compared with a $40.4 million deficit at December 31. Deferred revenue accounted for $59.6 million of current liabilities.
Changes, outlook, and risks
- Upland completed the Postup acquisition on April 18 and Kapost acquisition on May 24. Their post-close revenue through June 30 was approximately $2.4 million and $1.4 million, respectively. Purchase-price allocations remained preliminary.
- The May public offering issued 3,795,000 shares at $42 per share, generating $151.1 million net of issuance costs and materially increasing cash and shareholders’ equity.
- After quarter-end, on August 6, 2019, Upland entered into a $350 million, seven-year senior secured term loan and an undrawn $60 million, five-year revolver, replacing its prior facility. A seven-year hedge effectively fixed the term-loan rate at 5.4%; the revolver remains floating-rate.
- Management said existing cash, operating cash flow, credit availability, and registered offering capacity were expected to fund operations for at least 12 months. It intended to continue acquisition-led growth. The filing provides no specific revenue or earnings guidance.
- Key stated risks include acquisition integration and financing, profitability, customer retention, competition and technological change, international and foreign-exchange exposure, third-party hosting reliability, privacy compliance, and attracting and retaining personnel. Management reported no material change to previously disclosed risk factors, no material pending litigation, and effective disclosure controls at June 30.
- Unusual items include elevated acquisition expenses, substantial acquired-intangible amortization, the acquisition-related tax benefit, and increased interest expense from acquisition financing. First-half interest expense was $10.4 million versus $5.6 million a year earlier.
Important facts for investors to verify
- How much future growth is organic versus acquisition-driven, and whether the modest organic subscription growth persists.
- Whether integration of Postup, Kapost, and prior acquisitions delivers expected benefits, and how preliminary purchase-price allocations may change.
- Debt terms, covenant headroom, cash interest burden, and the effects of the August refinancing and rate hedge.
- Cash conversion and acquisition funding needs, given positive but relatively limited operating cash flow alongside significant acquisition spending.
- The sustainability of profitability excluding acquisition costs and other adjustments, and the assumptions behind Adjusted EBITDA.
- The extent to which reported tax benefits recur; the filing attributes them largely to deferred tax effects and an acquisition-related valuation-allowance release.