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Upland Software's (NASDAQ:UPLD) Posts Q2 Sales In Line With Estimates But Full Year Guidance Underwhelms


Full Report / August 03, 2022
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Business automation software provider Upland Software (NASDAQ: UPLD) reported results in line with analyst expectations in Q2 FY2022 quarter, with revenue up 5.19% year on year to $80.2 million. However, guidance for the next quarter was less impressive, coming in at $78.7 million at the midpoint, being 2.07% below analyst estimates. Upland Software made a GAAP loss of $16.3 million, improving on its loss of $19 million, in the same quarter last year.

Upland Software (UPLD) Q2 FY2022 Highlights:

  • Revenue: $80.2 million vs analyst estimates of $79.5 million (0.89% beat)
  • EPS (non-GAAP): $0.55 vs analyst estimates of $0.43 (26.4% beat)
  • Revenue guidance for Q3 2022 is $78.7 million at the midpoint, below analyst estimates of $80.3 million
  • The company dropped revenue guidance for the full year, from $321 million to $316.5 million at the midpoint, a 1.4% decrease
  • Free cash flow of $13.9 million, up 72.9% from previous quarter
  • Gross Margin (GAAP): 66.9%, 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).

Sales Growth

As you can see below, Upland Software's revenue growth has been unimpressive over the last year, growing from quarterly revenue of $76.2 million, to $80.2 million.

Upland Software Total Revenue

Upland Software's quarterly revenue was only up 5.19% year on year, which would likely disappoint many shareholders. The growth slowed down compared to last quarter, as the revenue increased by just $1.51 million in Q2, compared to $2.98 million in Q1 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates Upland Software is expecting revenue to grow 3.48% year on year to $78.7 million, improving on the 2.51% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 4.54% over the next twelve months.

Profitability

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 66.9% in Q2.

Upland Software Gross Margin (GAAP)

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 follow 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 $13.9 million in Q2, up 31.5% year on year.

Upland Software Free Cash Flow

Upland Software has generated $39.7 million in free cash flow over the last twelve months, a solid 12.8% 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 Q2 Results

With a market capitalization of $364 million Upland Software is among smaller companies, but its more than $138.2 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.

We struggled to find many strong positives in these results. On the other hand, it was unfortunate to see that Upland Software's revenue guidance for the full year missed analyst's expectations. Overall, this quarter's results were not the best we've seen from Upland Software. The company is flat on the results and currently trades at $11.92 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, but at least that growth rate is expected to increase in the short term. 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.

Upland Software's price to sales ratio based on the next twelve months is 1.2x, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.

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