Upland Software: A Fast-Growing Cloud Firm For Consideration (NASDAQ:UPLD)

Home / Upland Software: A Fast-Growing Cloud Firm For Consideration (NASDAQ:UPLD)

Sometimes loneliness makes the loudest noise.”

– Aaron Ben-Ze’ev

Today, we look at a fast-growing “cloud” concern for the first time. A full investment analysis follows in the paragraphs below.

Company Overview

Upland Software, Inc. (UPLD) is an Austin, Texas-based provider of enterprise work management software through four cloud-based offerings. Rather than develop IT organically, the company chooses to acquire technology operating in niche markets, racking up 26 acquisitions in the past eight and a half years. Upland was formed in 2010 and made its debut as a publicly traded company in 2014, raising net proceeds of $42.9 million at $12 a share. The stock currently trades right at $37.50 a share, translating to a market cap of ~$1.1 billion.

(Source: Company Overview)

Product Offerings

Upland Software provides customers with the following cloud-based offerings:

(Source: Company Overview)

Customer Experience Management Cloud, which allows businesses to manage the customer lifecycle, from awareness to acquisition to multi-channel advocacy via email, text messaging, social media, and mobile apps; Enterprise Sales and Marketing Cloud, which enables sales and marketing organizations to optimize sales activities, digital content production, automate key proposal and references processes, and track key metrics; Project and IT Management Cloud, which permits professional services and IT companies to better manage services delivery, project portfolios, enterprise knowledge sharing and spending across projects and IT/telecom infrastructure; and Document Workflow Cloud, which enables enterprises to manage and automate document-intensive business processes with data security through scan and fax platforms, data monitoring and breach prevention capabilities, and the automated routing of content to its destination. On September 15th, the company announced that its Document Workflow Cloud solutions will be offered within HP Workpath starting by the end of the year.

These solution sets are designed to aid the digital transformation of companies, with no re-platforming required, allowing for rapid adoption.

(Source: Company Overview)

Approach

The total addressable market for these cloud-based services is greater than $25 billion and growing, aided by a wave of venture capital investment in the cloud, totaling more than $130 billion between 2014 and 2018. The companies birthed by the VC firms become targets for Upland, which looks to add $25-50 million to its top line annually through acquisitions. Acquirees generally have revenues of $5-25 million, a net annual retention rate of at least 90%, 70+% gross margins, average revenue per account > $25,000, and 10+% organic growth. Upland typically pays 5x-8x’s Adj. EBITDA for these upstarts. They are then integrated onto the company’s platform and supported by an ever-expanding direct sales force. The new cloud-based apps provide an opportunity to cross-sell to existing customers while the company’s total customer base increases with each acquisition.

Most Recent Acquisition

The company’s most recent purchase, application analytics concern Localytics, was a little outside its normal parameters. In February 2020, it paid $68 million to acquire a platform employed in over 37,000 apps on more than 2.7 billion devices by companies such as ESPN (DIS), Fox (FOX), and The New York Times. Although the acquisition price was higher than what Upland usually pays, it was in its Adj. EBITDA range at ~7.6x. Localytics will add ~$20 million to the company’s top line and should be immediately accretive to earnings. With only one deal, 2020 has been a slow year for the normally serial acquirer, as it has chosen to stay on the sidelines during the coronavirus pandemic.

History of Success

Through its strategy of acquiring complementary software businesses, Upland has quickly expanded its product families and grown its customer base to ~10,000 with over 1 million individual users. Revenues have tripled since 2015 to $222.6 million in 2019 – nearly all high-margin subscription-related – while Adj. EBITDA has increased twenty-fold to $82.5 million over the same period. The company has ~1,600 customers who provide annual recurring revenue of $25,000 or more (i.e., “major” accounts) – averaging $160,000 per – and account for ~85% of the company’s sales. No customer represents more than 3% of Upland’s top line, and annual recurring revenue accounts for more than 93% of its business.

(Source: Company Overview)

Potential Concerns

To finance its buying spree, Upland has assumed debt and diluted its shareholders. Its debt obligation has risen from $24.9 million at YE15 to $536.0 million as of June 30, 2020, while shares outstanding have increased 75% from 16.8 million at YE15 to 29.4 million after its August 11, 2020 secondary – assuming exercise of the greenshoe – that was priced at $34 per share. Although Adj. EBITDA has increased substantially since the company went public, acquisition-related expenses – Upland’s normal course of business – and stock-based compensation add-backs were responsible for nearly 80% of this metric in 2019. And on a GAAP basis, Upland has never been profitable, with its best year being a loss of $0.54 in 2018. Organic growth, which (admittedly) is not the central thesis of the company’s business model, has been mired in the low to mid-single digits. As such, its approach is not devoid of critics.

2Q20 Results and 2020 Outlook

One item that is difficult to argue with is Upland meeting or beating its quarterly guidance for all 24 quarters as a publicly traded company. The company’s most recent beat occurred on August 6, 2020, when it reported 2Q20 non-GAAP EPS of $0.60 a share on revenue of $71.3 million, as compared to $0.76 a share on revenue of $53.0 million in 2Q19. These results surpassed not only its guidance, but also Street estimates by $0.16 and $6.8 million, respectively. Adj. EBITDA for the quarter grew 24% to $23.7 million versus $19.0 in the prior-year period. This solid performance was attributable to the fact that the company’s exposure to industries hit hardest by COVID-19 (travel, leisure, retail, and energy) was minimal, accounting for only 7% of its top line. In fact, with the work-at-home mantra during the pandemic, reliance on Upland’s Customer Experience Management Cloud increased significantly, resulting in 8% organic growth overall. Based on management’s increased FY20 forecast, organic growth should remain relatively brisk.

(Source: Company Overview)

Despite coronavirus, the company was able to expand relationships with 241 customers (50 of which were upgraded into the major account category) and add 118 new clients (34 major) in 2Q20.

Management guided 3Q20 revenue to $70 million (versus a prior consensus of $65.7 million) and Adj. EBITDA to $23.3 million (based on range midpoints). For FY20, it raised its top line outlook from $263.4 million to $277.3 million and guided Adj. EBITDA to $94.2 million. It also hinted at acquisitions reinitiating in 4Q20, with 2021 likely a “banner year” on that front.

Balance Sheet and Analyst Commentary

Management then used this positive outlook and a recent run-up in the stock price to raise gross proceeds of ~$136.9 million (assuming greenshoe) at $34 a share, boosting its cash position in excess of $200 million. That largess and an additional $60 million available on its revolving credit facility set the company up for another round of acquisitions. Nearly all its $536 million debt obligation is not due until August 2026.

Street analysts are buying into management’s growth-by-acquisition approach, sporting five buys and two outperform ratings. Their median twelve-month price target is north of $50 a share. Earlier this month, Trust Financial raised its price target on UPLD from $55 to $60, and Needham assigned a new Buy rating and $53 price target on the stock. The current median analyst estimate calls for $2.30 of EPS in FY2020, making UPLD’s P/E a reasonable 16 times this year’s profits.

Board member David May is also bullish on Upland’s outlook based on his recent 10,000 share purchase at an average price of $33.72 on August 17, 2020.

Verdict

(Source: Company Overview)

With exposure to a rapidly expanding industry, a large and diversified customer base, a recurring business model with high visibility, and a management team with a proven track record in the M&A space, the future for Upland appears bright and predictable. It is not so much that the company isn’t fairly valued – currently trading at 3.8x 2020E revenue – but rather, an investor can expect the stock price to appreciate in line with revenue growth for the foreseeable future. If organic growth continues to trend towards double digits, the company will command a much higher P/E multiple than the 16x 2020E Adj. EPS it currently receives. With plenty of dry powder in the form of $200+ million in cash, look for Upland to continue to execute on its business model.

Given my current view of the overall market, I think the best way to take a watch item position in Upland is via a covered call strategy.

Feeling lost, crazy and desperate belongs to a good life as much as optimism, certainty and reason.”

– Alain de Botton

Bret Jensen is the Founder of and authors articles for the Biotech Forum, Busted IPO Forum, and Insiders Forum

Author’s note: I present an update my best small and mid-cap stock ideas that insiders are buying only to subscribers of my exclusive marketplace, The Insiders Forum. Try a free 2-week trial today by clicking on our logo below!  20% Off Through The End of September only.  Our model portfolio has crushed the performance of the Russell 2000 since launch (54.31% versus 19.52% as of 09/23/2020)

Disclosure: I am/we are long UPLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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