Khanchit Khirisutchalual
A Quick Take on Upland Software
Upland Software, Inc. (NASDAQ: UPLD) reported its Q2 2022 financial results on August 3, 2022, which exceeded expected revenue estimates.
The company provides cloud-based work management software to organizations worldwide.
While the UPLD may really grab some bargains in the M&A bin as the economy slows down, I don’t see them being a significant catalyst in the stock.
I’m on hold for UPLD until management can organically grow revenue while generating GAAP earnings.
Overview of Upland Software
Austin, Texas-based Upland was founded in 2010 to develop a suite of work management tools for small and medium-sized businesses.
The company is led by Chairman and CEO Jack McDonald, who was previously Chairman and CEO of Perficient.
The company’s core offerings include software that covers these functional areas:
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Business Operations
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HR and Legal
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Sales and Marketing
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Contact Center
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IT
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Product Management
The company acquires customers through its internal sales, direct sales and marketing teams as well as through partner referrals.
Upland Software Market and Competition
According to a 2021 market research report by Grand View Research, the global market for customer relationship management was estimated at $43.7 billion in 2020 and is expected to reach $98 billion by 2028.
This represents a forecast CAGR of 10.6% from 2021 to 2028.
The main drivers for this expected growth are the growing demand for integrated software suites to automate interaction with customers and prospective clients.
Also, below is a historical and projected future growth for the CRM industry in the US, from 2016 to 2028 by solution type:
US CRM Software Market (Grand View Research)
Key competitors or other industry participants include:
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Salesforce
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Zoho
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Microsoft
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SAP
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Oracle
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Adobe Systems
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Zendesk
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Service Today
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BMC
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Ivanti
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Atlassian
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HubSpot
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Sage
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Different
Upland Software’s Recent Financial Performance
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Total revenue by quarter has grown at a relatively low rate over the past few quarters:
9 Quarter Total Revenue (Looking for Alpha)
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Total revenue per quarter also increased further:
9 Quarter Gross Profit (Looking for Alpha)
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Selling, G&A expenses as a percentage of total revenue each quarter varied within a relatively narrow range:
9 Quarter Selling, G&A % Of Revenue (Looking for Alpha)
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Quarterly operating income has been negative in each of the last six quarters:
9 Quarter Operating Income (Looking for Alpha)
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Earnings per share (Diluted) remained negative, as the chart below shows:
9 Quarter Earnings Per Share (Looking for Alpha)
(All data in the above charts are GAAP)
Over the past 12 months, UPLD’s stock price has fallen 74.7% compared to the US S&P 500 index’s decline of around 12.6%, as the chart below indicates:
52 Week Stock Price (Looking for Alpha)
Valuation And Other Metrics For Upland
Below is a table of relevant capitalization and valuation figures for the company:
|
Measure [TTM] |
Value |
|
Enterprise Value / Sales |
2.25 |
|
Income Growth Rate |
2.7% |
|
Net Income Margin |
-18.6% |
|
GAAP EBITDA % |
13.9% |
|
Market Capitalization |
$311,270,000 |
|
Enterprise Value |
$699,920,000 |
|
Operating Cash Flow |
$40,690,000 |
|
Earnings Per Share (Fully Diluted) |
-$1.85 |
(Source – Alpha Search)
For reference, a relevant partially public comparable is Freshworks Inc. (FRSH); shown below is a comparison of their key valuation metrics:
|
Measure |
Fresh produce |
Upland Software |
Difference |
|
Enterprise Value / Sales |
6.15 |
2.25 |
-63.4% |
|
Income Growth Rate |
42.2% |
2.7% |
-93.7% |
|
Net Income Margin |
-68.7% |
-18.6% |
73.0% |
|
Operating Cash Flow |
-$2,670,000 |
$40,690,000 |
1624.0% |
(Source – Alpha Search)
A full comparison of the two companies’ performance metrics can be viewed here.
The Rule of 40 is a rule in the software industry that states that as long as the combined revenue growth rate and EBITDA percentage rate equals or exceeds 40%, the company is at an acceptable growth/EBITDA trajectory.
UPLD’s latest GAAP Rule of 40 calculation was 16.6% in Q2 2022, so the company needs significant improvement in this regard, according to the table below:
|
Rule of 40 – GAAP |
Calculation |
|
Recent Rev. Growth % |
2.7% |
|
GAAP EBITDA % |
13.9% |
|
Total |
16.6% |
(Source – Alpha Search)
Commentary On Upland Software
In its last earnings call (Source – Seeking Alpha), covering Q2 2022 results, management highlighted beating its revenue expectations and adjusted EBITDA midpoint guidance.
Also, the company exceeded its operating plan and free cash flow despite facing foreign exchange headwinds due to the stronger US dollar.
The company went on to include two Q1 2022 acquisitions and will continue to be ‘active in the market for additional acquisitions.’
Just after the close of the quarter, management announced a $115 million PIPE (Private Investment in Public Equity) investment from private equity firm HGGC.
The investment objective, with a share conversion price of $17.50, is ostensibly to capitalize UPLD for further acquisitions that management expects will provide attractive valuations as a result of the current macroeconomic slowdown.
Interestingly, UPLD has been acquiring companies for certain technologies over the past few years but its stock has still suffered significantly over the past 15 months, falling from a high of $50.00 down to its current level of approximately $10.00.
As for its financial results for the quarter just ended, total revenue rose 5% year-on-year, while recurring revenue grew 4%.
Management did not disclose the company’s net dollar retention rate, which for a subscription software company is important for investor visibility into product/market fit and the firm’s sales and marketing efficiency.
Operating expenses were in line with expectations, while the GAAP operating loss was $6 million and the company generated a $0.52 loss in revenue. UPLD has not made positive earnings in the last 9 quarters.
On balance, the company ended the quarter with $138.3 million in cash and equivalents while generating free cash flow of $13.9 million.
Looking ahead, management said it is “targeting $30 million to $40 million of free cash flow for the full year 2022.”
Positive free cash flow along with the recent investment in HGGC, existing cash and unused revolving line of credit provide the company with ample resources to pursue its acquisition efforts.
Regarding valuation, the market values UPLD at an EV/Sales multiple of around 2.25x.
The SaaS Capital Index of publicly held SaaS software companies showed an average forward EV/Revenue multiple of approximately 7.7x as of July 31, 2022, as the chart here shows:
SaaS Capital Index (SaaS Capital)
So, in comparison, UPLD is currently valued by the market at a significant discount to the broader SaaS Capital Index, at least as of July 31, 2022.
The main risk in the company’s outlook is a more likely macroeconomic slowdown or recession, which would slow sales cycles and reduce its revenue growth trajectory.
I see UPLD as one of those companies that is in perpetual acquisition mode, with the latest acquisition being the shiny new thing that management can point to as the reason for its future growth prospects.
But, looking at the company’s performance over the past few years where it should have seen better revenue growth, I was left disappointed.
While UPLD may get some bargains in the M&A bin as the economy slows down, I don’t see them as a significant catalyst to the stock.
I’m on hold for UPLD until management can organically grow revenue while generating GAAP earnings.