Business automation software provider Upland Software (NASDAQ: UPLD) reported Q4 FY2022 results topping analyst expectations, with revenue up 4.07% year on year to $78.8 million. However, guidance for the next quarter was less impressive, coming in at $75 million at the midpoint, being 2.44% below analyst estimates. Upland Software made a GAAP loss of $22.7 million, down on its loss of $7.47 million, in the same quarter last year.
Upland Software (UPLD) Q4 FY2022 Highlights:
- Revenue: $78.8 million vs analyst estimates of $76.8 million (2.65% beat)
- EPS (non-GAAP): $0.37 vs analyst expectations of $0.39 (4.52% miss)
- Revenue guidance for Q1 2023 is $75 million at the midpoint, below analyst estimates of $76.9 million
- Management's revenue guidance for upcoming financial year 2023 is $300 million at the midpoint, missing analyst estimates by 3.78% and predicting 5.45% decline (vs 5.07% growth in FY2022)
- Free cash flow of $5.69 million, up from $1.46 million in previous quarter
- Gross Margin (GAAP): 66.1%, in line with same quarter last year
Founder Jack McDonald’s second software rollup, Upland Software (NASDAQ:UPLD) is a one stop shop for sales and marketing software, project management, HR, and contact center services for small and medium sized businesses.
Businesses of all sizes are driving digital transformations as a means of increasing revenue, reducing costs, and improving productivity. Increasingly this means adopting cloud based applications across different business functions: accounting and finance, sales and marketing, legal and HR, and so on. When possible, small and medium businesses prefer to get as much functionality as possible from one provider.
Upland Software has a unique business approach. The company has grown its portfolio through dozens of acquisitions to create a broad product catalog of complementary software across seven functions: marketing, sales, contact center, project management, IT, business operations, and HR and legal. Historically, the focus has been on acquiring small software companies from venture investors who are seeking exits. Upland will then integrate the acquisitions on its UplandOne platform, which both greatly increases their profitability to Upland by removing legacy infrastructure, while also making the software easily accessible to Upland’s customer base.
Whether or not companies market their products through social media, all businesses need to meet customers where they are; and increasingly, that is social media. As more and more people use a greater number of social media platforms, social media management software become more valuable to their customers.
Upland Software has a wide range of competitors given its wide breadth of offering. Common rivals are Qualtrics (NASDAQ:XM), Oracle’s Netsuite (NYSE:ORCL), OpenText (NASDAQ:OTEX), Docusign (NASDAQ:DOCU), and Adobe (NASDAQ:ADBE).
As you can see below, Upland Software's revenue growth has been unimpressive over the last two years, growing from quarterly revenue of $78.2 million in Q4 FY2020, to $78.8 million.
Upland Software's quarterly revenue was only up 4.07% year on year, which might disappoint some shareholders. But the revenue actually decreased again in Q4 by $738 thousand, compared to $678 thousand decrease in Q3 2022. While one-off fluctuations don't always have to be concerning, we have no doubt that shareholders would like to see the revenue rebound soon.
Upland Software is guiding for revenue to decline next quarter 4.72% year on year to $75 million, a further deceleration on the 6.42% year-over-year decrease in revenue the company had recorded in the same quarter last year. For the upcoming financial year management expects revenue to be $300 million at the midpoint, declining 5.45% compared to 5.06% growth in FY2022.
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Upland Software's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 66.1% in Q4.
That means that for every $1 in revenue the company had $0.66 left to spend on developing new products, marketing & sales and the general administrative overhead. This would be considered a low gross margin for a SaaS company and it has dropped significantly from the previous quarter, which is probably the opposite of what shareholders would like it to do.
Cash Is King
If you have followed StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Upland Software's free cash flow came in at $5.69 million in Q4, down 56% year on year.
Upland Software has generated $29.1 million in free cash flow over the last twelve months, a solid 9.18% of revenues. This strong FCF margin is a result of Upland Software asset lite business model and provides it plenty of cash to invest in the business.
Key Takeaways from Upland Software's Q4 Results
With a market capitalization of $278.4 million Upland Software is among smaller companies, but its more than $248.7 million in cash and positive free cash flow over the last twelve months give us confidence that Upland Software has the resources it needs to pursue a high growth business strategy.
It was good to see Upland Software outperform Wall St’s revenue expectations this quarter. That feature of these results really stood out as a positive. On the other hand, it was unfortunate to see that Upland Software's revenue guidance for the full year missed analysts' expectations and it indicates quite a significant slowdown in growth. Overall, it seems to us that this was a complicated quarter for Upland Software. The company is flat on the results and currently trades at $8.73 per share.
Is Now The Time?
Upland Software may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. We cheer for everyone who is making the lives of others easier through technology, but in case of Upland Software we will be cheering from the sidelines. Its revenue growth has been very weak, and analysts expect growth rates to deteriorate from there. And while its very efficient customer acquisition hints at the potential for strong profitability, unfortunately gross margins show its business model is much less lucrative than the best software businesses.
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