Upland Software, Inc. — FY2017 Form 10-K
Business and reporting period. Upland provides cloud-based enterprise work management software across Project & IT Management, Workflow Automation and Digital Engagement. This annual report covers the fiscal year ended December 31, 2017; selected fourth-quarter results are also included. The company reported more than 4,000 customers and 450,000 users. No customer contributed more than 3% of annual revenue.
Financial performance
| Metric | FY2017 | FY2016 |
|---|---|---|
| Total revenue | $98.0 million | $74.8 million |
| Subscription and support revenue | $85.5 million | $65.6 million |
| Gross profit / gross margin | $64.3 million / 66% | $47.2 million / 63% |
| Operating loss | $11.1 million | $8.5 million |
| Net loss | $18.7 million | $13.5 million |
| Adjusted EBITDA (non-GAAP) | $30.3 million | $12.6 million |
| Cash from operating activities | $7.7 million | $3.9 million |
| Cash and cash equivalents at year-end | $22.3 million | $28.8 million |
| Debt outstanding at year-end | $113.8 million | $49.4 million |
Revenue mix in 2017 was 87% subscription and support, 4% perpetual licenses and 9% professional services. Adjusted EBITDA is a company-defined non-GAAP measure and should be considered alongside GAAP results and cash flow.
Fourth quarter
Fourth-quarter 2017 revenue was $27.8 million, versus $19.4 million in fourth-quarter 2016. Net loss was $3.8 million, compared with $2.0 million a year earlier.
Changes and drivers
- Revenue increased 31% year over year, but management attributed $23.6 million of the increase to acquisitions; organic revenue grew approximately $0.4 million, or 1%. Organic subscription and support revenue rose 2%, while organic professional services revenue fell 11%.
- Gross margin improved to 66% from 63%. The company cited planned operating efficiencies in parts of its existing business, while acquired businesses added costs.
- Operating loss widened as acquisition-related expense rose to $15.1 million from $5.6 million, and interest expense increased to $6.6 million from $2.8 million, reflecting acquisition activity and higher borrowing.
- Annualized recurring revenue value rose to $106.1 million from $64.0 million. Annual net dollar retention declined to 93% from 95%.
- Cash used in investing activities was $110.8 million, principally reflecting $110.3 million spent on business combinations. Financing activities provided $96.2 million; cash declined by $6.4 million during the year.
Liquidity, debt and capital
At December 31, 2017, Upland had $22.3 million of cash, $113.8 million of debt outstanding and $30.0 million of available borrowings reported under its loan facility. Working capital was negative $23.5 million, including $43.8 million of current deferred revenue, which is expected to be recognized as revenue under the company’s accounting policy.
The amended Wells Fargo facility provides for a stated $200 million package, including term debt, acquisition-related delayed-draw capacity, a revolving commitment and an uncommitted accordion. The facility matures in August 2022, is secured by substantially all company assets, and includes financial and operating covenants. Contractual obligations totaled $128.0 million, including debt, leases and purchase commitments. No cash dividends are expected for the foreseeable future.
Outlook, commentary and risks
- The filing provides no specific numeric revenue or earnings guidance. Management’s stated growth priorities are cross-selling to existing customers, adding new customers, acquiring complementary businesses, expanding internationally and enhancing applications.
- Upland completed four acquisitions in 2017: Omtool, RightAnswers, Waterfall and Qvidian. Qvidian’s $50 million purchase was partly funded with $20 million drawn under the credit facility. Management said integration may affect costs in the near term and anticipated completing the remaining AWS migrations by year-end 2018.
- The company has not achieved GAAP profitability: it reported net losses in each of 2015–2017 and an accumulated deficit of $81.1 million. Management cautions that growth depends on customer renewals, upgrades, cross-selling and successful integration of acquisitions.
- Key disclosed risks include acquisition execution and leverage, customer downgrades or nonrenewals, competition and pricing pressure, cybersecurity and service availability, privacy regulation, international and foreign-exchange exposure, and the ability to manage rapid growth. A 10% currency-rate change was estimated to affect 2017 revenue by $2.1 million; the company had not hedged foreign-exchange exposure.
- For adoption of ASC 606 in 2018, the company expected a $6.3–$6.7 million cumulative adjustment to accumulated deficit, principally reflecting accelerated revenue and deferred expenses. It identified potential effects on subscription price increases, certain term-license arrangements and contract acquisition costs.
- The December 2017 Tax Act reduced the federal corporate tax rate; Upland recorded a provisional $0.8 million tax benefit from remeasuring deferred taxes. The company disclosed federal net operating losses of about $181.9 million, but ownership-change limits were expected to cause approximately $77 million of those losses and $3.9 million of tax credits to expire unused.
- Other items to note: 2017 stock-based compensation was $10.0 million; the company disclosed $3.0 million of 2017 services purchased from Crossover, a related-party service provider, and a $3.2 million 2018 software-development commitment to DevFactory, another related party. The company also reversed an immaterial $1.4 million noncash debt-extinguishment and interest charge after determining the credit amendment should be treated as a modification.
Most important facts for investors to verify
- Whether organic growth, customer retention and cross-selling can improve beyond the reported 1% organic revenue growth and 93% net dollar retention.
- Acquisition contribution, integration costs and expected benefits, including final purchase-price allocations for Waterfall and Qvidian, which were preliminary at year-end.
- Debt covenant compliance, borrowing availability, interest costs and the capacity to fund acquisitions while maintaining liquidity.
- The cash-flow implications of deferred revenue, acquisition spending and contractual commitments; Adjusted EBITDA is non-GAAP and excludes material items such as stock compensation, acquisition costs, interest and taxes.
- The actual financial-statement impact of ASC 606 adoption and final accounting for the Tax Act and restricted tax attributes.
- Execution of the AWS migration and controls for customer data, service continuity and privacy compliance.
The financial statements received an unqualified independent auditor opinion. Management concluded that disclosure controls and internal control over financial reporting were effective as of year-end; the auditor did not attest to internal control effectiveness under the company’s emerging-growth-company exemption.