Business automation software provider Upland Software (NASDAQ: UPLD) reported Q2 FY2023 results beating Wall Street analysts' expectations, with revenue down 7.14% year on year to $74.5 million. However, next quarter's revenue guidance of $73.4 million was less impressive, coming in 1.24% below analysts' estimates. Upland made a GAAP loss of $15.1 million, improving from its loss of $16.4 million in the same quarter last year.
Upland (UPLD) Q2 FY2023 Highlights:
- Revenue: $74.5 million vs analyst estimates of $73.3 million (1.59% beat)
- EPS (non-GAAP): $0.22 vs analyst expectations of $0.23 (3.75% miss)
- Revenue Guidance for Q3 2023 is $73.4 million at the midpoint, below analyst estimates of $74.3 million
- The company reconfirmed revenue guidance for the full year of $298.1 million at the midpoint
- Free Cash Flow of $6.73 million, down 56.9% from the previous quarter
- Gross Margin (GAAP): 67.5%, in line with the 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's revenue growth has been unimpressive over the last two years, growing from $76.3 million in Q2 FY2021 to $74.5 million this quarter.
This quarter, Upland's revenue was down 7.14% year on year, which might disappointment some shareholders.
Next quarter, Upland is guiding for a 7.73% year-on-year revenue decline to $73.4 million, a further deceleration from the 4.6% year-on-year decrease it recorded in the same quarter last year. Before the earnings results announcement, Wall Street was expecting revenue to decline 3.59% over the next 12 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's gross profit margin, an important metric measuring how much money there's left after paying for servers, licenses, technical support, and other necessary running expenses, was 67.5% in Q2.
That means that for every $1 in revenue the company had $0.68 left to spend on developing new products, sales and marketing, and general administrative overhead. While its gross margin has improved significantly since the previous quarter, Upland's gross margin is still poor for a SaaS business. It's vital that the company continues to improve this key metric.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Upland's free cash flow came in at $6.73 million in Q2, down 51.6% year on year.
Upland has generated $29.5 million in free cash flow over the last 12 months, a solid 9.59% of revenue. This strong FCF margin stems from its asset-lite business model, giving it optionality and plenty of cash to reinvest in its business.
Key Takeaways from Upland's Q2 Results
With a market capitalization of $114.2 million, Upland is among smaller companies, but its $262.6 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.
It was comforting to see that Upland topped analysts' revenue expectations this quarter, even if just narrowly. We were also glad that its gross margin improved. On the other hand, its revenue guidance for next quarter was below analyst estimates. Overall, this was a mixed quarter for Upland. The stock is up 4.94% after reporting and currently trades at $3.61 per share.
Is Now The Time?
Upland 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's making the lives of others easier through technology but in case of Upland, we'll be cheering from the sidelines. Its revenue growth has been very weak, and analysts expect growth rates to deteriorate from there. And while its strong free cash flow generation gives it re-investment options, the downside is that its customer acquisition is less efficient than many comparable companies and its gross margins show its business model is much less lucrative than the best software businesses.
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