Upland Software, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods. Upland sells cloud-based business software primarily through subscriptions and support, with additional perpetual-license and professional-services revenue. The company reports one operating segment.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $79.5m | $76.1m | $238.5m | $226.3m |
| Gross profit / margin | $53.8m / 68% | $51.2m / 67% | $161.5m / 68% | $152.0m / 67% |
| Operating loss | $(0.6)m | $(5.7)m | $(26.2)m | $(32.4)m |
| Net loss | $(6.5)m | $(11.0)m | $(45.7)m | $(50.7)m |
| Adjusted EBITDA (non-GAAP) | $24.9m | $25.0m | $72.8m | $71.6m |
| Operating cash flow | Not provided for the quarter | $24.1m | $28.6m |
Q3 revenue rose 5%; nine-month revenue also rose 5%. Subscription and support, about 94% of revenue, grew 4% in both periods. Nine-month operating and net losses narrowed, while Q3 adjusted EBITDA was essentially flat. Basic and diluted loss per share was $0.22 for Q3 and $1.47 for the first nine months, versus $0.36 and $1.68, respectively, in 2021.
Reported revenue growth was acquisition-supported: acquisitions not fully reflected in the prior-year comparisons contributed $7.5m to Q3 revenue growth and $25.8m to nine-month growth. Management’s non-GAAP Core Organic Revenue declined $2.0m in Q3 and $6.0m for nine months (approximately 3% in each period); excluding foreign-exchange effects, the declines were $0.5m and $4.0m. Lower overage charges, reduced Sunset Assets revenue, and the non-recurrence of 2021 political revenue contributed to the nine-month comparison. Professional-services revenue from the organic business declined, in part because Upland said it avoided unprofitable projects.
Gross margin improved by approximately one percentage point in both comparisons. Operating losses narrowed as lower general and administrative expenses—primarily reduced stock-based compensation—more than offset higher research and development and acquisition-related costs. Nine-month operating cash flow fell $4.5m; working-capital uses included a $13.3m decrease in deferred revenue and an $11.3m decrease in accrued expenses, partly offset by collections that reduced receivables.
Liquidity, debt and capital structure
- Cash and cash equivalents were $241.7m at September 30, 2022, up from $189.2m at year-end 2021. Working capital was $156.4m, including $98.7m of current deferred revenue.
- Cash used in investing was $63.1m, principally $62.4m for the BA Insight and Objectif Lune acquisitions. Financing provided $97.1m, including $110.5m net proceeds from preferred-stock issuance. Cash ended the period up $52.6m.
- Debt carrying value was approximately $523.8m before current maturities and debt discount; the company reported $60m of undrawn revolving capacity. Term loans mature in August 2026. Interest on the term loans was effectively fixed at 5.4% through swaps; the revolver remains floating-rate. Upland reported compliance with credit-facility covenants.
- In August, Upland issued 115,000 Series A convertible preferred shares for $115m gross proceeds, with $4.5m of issuance costs. The preferred stock carries a cumulative 4.5% annual dividend for the first seven years, increasing to 7% thereafter; dividends may be paid in cash or in kind. It is senior to common stock, convertible at $17.50 per share, and has specified governance and change-of-control redemption rights.
Outlook, commentary and risks
- Management said cash, operating cash flows, available credit and registered securities capacity should fund operations for at least the next 12 months. It expects to continue pursuing acquisitions, but provided no numerical earnings or revenue guidance in the supplied filing text.
- Remaining performance obligations were approximately $263.6m at September 30; Upland expected about 70% to be recognized over the following 12 months. This is a contracted-revenue measure, not a guarantee of future results.
- Foreign exchange reduced reported revenue growth; a hypothetical 10% currency-rate change could have changed nine-month revenue by $5.7m. The company had no currency hedges. Management noted that inflation-related cost increases may not be fully offset through pricing.
- Goodwill was $479.6m and net intangible assets were $254.0m. No goodwill or intangible impairment was recorded in the periods presented, but the company identified impairment as a risk if performance, market conditions or estimates deteriorate.
- The filing cites risks involving customer retention and growth, competition and technology changes, acquisition integration, international operations, cybersecurity and third-party data centers, and the company’s ability to achieve or sustain profitability. It reported no material pending litigation and said disclosure controls were effective as of September 30, 2022.
Investor verification points
- Assess whether underlying organic subscription growth can stabilize, given reported growth was supported by acquisitions while Core Organic Revenue declined.
- Track cash generation and working-capital trends, particularly deferred revenue, receivables, accrued expenses and the conversion of Adjusted EBITDA into operating cash.
- Review debt service capacity and the preferred stock’s cumulative dividends, potential dilution, senior claims and change-of-control redemption terms.
- Monitor acquisition integration costs, purchase accounting finalization for the 2022 acquisitions, and goodwill/intangible impairment indicators.
- Confirm the realized effects of foreign exchange and inflation, and compare future results with management’s stated liquidity outlook and remaining-performance-obligation expectations.