Upland Software Gathers Resources for M&A Effort Amid Slowdown (NASDAQ: UPLD)

Khanchit Khirisutchalual

A Quick Overview of Upland Software

Upland Software, Inc. (NASDAQ:UPLD) released its second quarter 2022 financial results on August 3, 2022, beating expected revenue estimates.

The company provides cloud-based work management software to organizations around the world.

Although UPLD can Indeed, picking up some bargains in the M&A bin as the economy slows, I don’t see them as a significant catalyst for the stock.

I’m on hold for UPLD until management can grow revenue organically while producing GAAP earnings.

Upland Software Overview

Upland, based in Austin, Texas, was founded in 2010 to develop a suite of work management tools primarily aimed at small and medium-sized businesses.

The company is led by chairman and chief executive Jack McDonald, who previously served as chairman and chief executive of Perficient.

The company’s core offerings include software covering these functional areas:

  • Commercial operations

  • HR & Legal

  • Sales and Marketing

  • Call center

  • THIS

  • Product management

The company acquires customers through its inside 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 customer relationship management market was estimated at $43.7 billion in 2020 and is expected to reach $98 billion by 2028.

This represents a projected CAGR of 10.6% from 2021 to 2028.

The main drivers of this expected growth are a growing demand for integrated software suites to automate engagement with customers and prospects.

Also below is a historical and projected future growth trajectory for the CRM industry in the United States, from 2016 to 2028, by solution type:

US CRM software market

US CRM software market (Grand View Research)

Major competitors or other industry participants include:

  • Selling power

  • zoho

  • Microsoft

  • SAP

  • Oracle

  • Adobe systems

  • Zen office

  • ServiceNow

  • BMC

  • Ivanti

  • Atlassian

  • HubSpot

  • Wise

  • Others

Upland Software’s Recent Financial Performance

  • Total revenue per quarter has grown at a relatively slow pace in recent quarters:

Total revenue for the 9 quarters

Total revenue for the 9 quarters (Looking for Alpha)

  • Gross profit per quarter also largely capped:

Gross profit for the 9 quarters

Gross profit for the 9 quarters (Looking for Alpha)

  • Selling, G&A expenses as a percentage of total revenue per quarter varied within a relatively narrow range:

9 Quarter Sales, G&A % of revenue

9 Quarter Sales, G&A % of revenue (Looking for Alpha)

  • Operating income by quarter has been negative in each of the past six quarters:

9 quarter operating profit

9 quarter operating profit (Looking for Alpha)

  • Earnings per share (diluted) remained negative, as shown in the chart below:

Earnings per share over 9 quarters

Earnings per share over 9 quarters (Looking for Alpha)

(All data in the graphs above are in accordance with GAAP)

Over the past 12 months, UPLD’s stock price has fallen 74.7% compared to the US S&P 500 index decline of around 12.6%, as shown in the chart below :

52 week stock prices

52 week stock prices (Looking for Alpha)

Assessment and other measures for the highlands

Below is a table of relevant capitalization and valuation figures for the company:

Measure [TTM]

Rising

Enterprise Value / Sales

2.25

Revenue growth rate

2.7%

Net profit margin

-18.6%

% EBITDA GAAP

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 Research)

For reference, a relevant partial public comparable would be Freshworks Inc. (FRSH); Below is a comparison of their main evaluation metrics:

Metric

freshworks

Highland Software

Variance

Enterprise Value / Sales

6.15

2.25

-63.4%

Revenue growth rate

42.2%

2.7%

-93.7%

Net profit margin

-68.7%

-18.6%

73.0%

Operating cash flow

-$2,670,000

$40,690,000

1624.0%

(Source – Alpha Research)

A full comparison of the two companies’ performance metrics can be viewed here.

The Rule of 40 is a software industry rule of thumb that states that as long as the combined revenue growth rate and EBITDA percentage rate are equal to or greater than 40%, the company is on a trajectory acceptable growth/EBITDA.

UPLD’s last GAAP Rule of 40 calculation was 16.6% in Q2 2022, so the company needs significant improvements in this regard, according to the table below:

Rule of 40 – GAAP

Calculation

Recent Rev. Growth %

2.7%

% EBITDA GAAP

13.9%

Total

16.6%

(Source – Alpha Research)

Upland Software Commentary

In its latest earnings call (Source – Seeking Alpha), covering Q2 2022 results, management highlighted that it exceeded its mid-term revenue and adjusted EBITDA guidance.

Additionally, the company exceeded its operating and free cash flow plan despite currency headwinds due to a stronger US dollar.

The company has continued to integrate its two acquisitions from the first quarter of 2022 and will continue to be “active in the market for additional acquisitions”.

Just after the quarter ended, management announced a $115 million PIPE (Private Investment in Public Equity) investment from private equity firm HGGC.

The purpose of the investment, which has a stock conversion price of $17.50, is apparently to capitalize UPLD for new acquisitions which management expects to provide attractive valuations given the current macroeconomic downturn.

Notably, UPLD has acquired companies for specific 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 to its current level of around 10, $00.

As for its financial results for the quarter just ended, total revenue was up 5% year over year, while recurring revenue was up 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 sales effectiveness. and corporate marketing.

Operating expenses were in line with expectations, while the GAAP operating loss was $6 million and the business generated a profit loss of $0.52. UPLD has not produced positive earnings for the past 9 quarters.

For the balance sheet, the company ended the quarter with $138.3 million in cash and cash equivalents while producing 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 of 2022.”

This positive free cash flow, along with its recent investment in HGGC, existing cash and undrawn revolving line of credit, gives the company plenty of 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 had an EV/Average Revenue multiple of approximately 7.7x as of July 31, 2022, as shown in the chart below:

SaaS Capital Index

SaaS Capital Index (SaaS Capital)

So, by 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 to the company’s outlook is an increasingly likely macroeconomic slowdown or recession, which will 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 management can point to as a reason for its future growth prospects.

But, looking at the company’s performance over the past few years where it should have seen much better revenue growth, I’m disappointed.

While the UPLD may indeed be grabbing some bargains in the M&A bin as the economy slows, I don’t see them as a significant catalyst for the stock.

I’m on hold for UPLD until management can grow revenue organically while producing GAAP earnings.