2023-09-18 12:04:05 ET
Summary
- Upland Software has struggled in recent years and is currently facing financial uncertainty.
- The company's products and services are unimpressive and sales employees are seemingly unable to hit quota.
- Upland's acquisition strategy has failed to deliver profits in the past, leading to a significant loss of shareholder value and nothing material seems to have changed.
Upland Software ( UPLD ) has had a poor recent history and I believe the worst is yet to come. Although selling at a seemingly cheap P/E of 4.3, Upland has looked and acted much more like a value trap than a value stock. This positive P/E is misleading because GAAP earnings have consistently been increasingly negative and if you believe current sales staff nothing is changing but it might be getting worse.
The current financial uncertainty and finances are so bad they make us question whether a return to profitability is even possible. Although we believe the company could appreciate significantly on any positive news, I am currently skeptical that this will happen in 2024 because of a lack of sales and the ineffectiveness of current sales practices. For these reasons, we rate UPLD a strong sell.
Founded in 2010 and originally named Silverback Enterprise Group, Inc., the company rebranded as Upland Software, Inc. in November 2013. Upland Software, Inc., headquartered in Austin. Texas is a provider of cloud-based enterprise work management software, serving clients in the United States, the United Kingdom, Canada, and around the world. The company offers a suite of software applications branded as Upland, spanning various areas including marketing, sales, contact center, project management, IT, business operations, and HR/legal functions. Additionally, Upland Software offers professional services such as implementation, data extraction, integration, configuration, and training, along with customer support services.
Their clientele encompasses large global corporations, government agencies, and small to medium-sized businesses, across a wide range of industries including finance, consulting, technology, manufacturing, media, telecommunications, politics, healthcare, life sciences, as well as retail and hospitality.
Here is a quick glance at Upland’s many products and services:
A quick glance at Upland’s products shows nothing very interesting to me. I find the overall product offering pedestrian and not very compelling. As a business owner and former school administrator, I would not be interested in any of them. I am not surprised that sales staff is having difficulty selling products which I discuss more below.
Since I am not an insider, you could question how I am able to say definitively that sales are not due to ramp-up fast enough. I believe that the words of current employees provide sufficient evidence as to the problems the sales staff is having. It was relatively easy to find a few reviews on Glassdoor that speak to a compelling story of failure and pain. If you are interested in the most recent comments by Upland employees on Glassdoor you can find it here . Although I am hesitant to rely solely on the reviews of a few employees found on the web, I believe that they provide some qualitative data that should not be ignored.
The future results of UPLD are dependent on increasing sales of products. According to management, they are spending money on sales training and expect it to show some results in the future, but according to people on the sales staff at UPLD, this will definitely not happen because virtually no one is hitting quotas, morale is bad, and communication from leadership is lacking.
If you listen to some of the current employees, their opinion is that the company’s future is in doubt.
I will include a few screenshots that I found particularly enlightening. I also think it is important to research investments from different perspectives and getting a direct line into the thoughts of workers provides some insight that many investors could easily miss. So although I would take the critical words of any employee with a grain of salt, I would not ignore what they say altogether.
I also think it is informative that the most recent entries at Glassdoor seem to be increasingly negative especially from sales representatives. This demonstrates that sentiment has been getting more negative over time.
The words posted below cast shadows on the company's ability to deliver on the growth they mention in their recent earnings calls. It casts doubt on the company’s ability to survive the storm.
I would note that employee reviews from over five years ago did seem more favorable than recent ones. This shows a downward trend in morale and performance by employees that is reflected in the financial performance of UPLD over the last five years.
I would also note that the sales representatives were much more negative than the software engineers. I say that as a caveat because the words below are quite damning and should concern current investors.
Words from a few recent Direct Sales Representatives:
I would say, 0% of reps hitting quota does sound bad, but I always take negative reviews with a grain of salt because you don’t know the reliability of the source. Maybe only people with a gripe complain on Glassdoor. I personally can’t see writing anything like this about a company I worked for and was surprised by the completely negative outlook of employees willing to post.
The many reviews that echo the same problems supports the possible validity of the problems currently going on at UPLD, and the main problem seems to be the impossibility of hitting quotas for the sales team. Although this problem could be exacerbated by the current economy, it could also be a problem with the products. This final review below addresses the real elephant in the room.
The elephant in the room is that free AI tools can likely do most of what Upland can do. The many products that Upland has acquired over the years have lost a lot of value. The financials seem to support the qualitative evidence above. This leads me to believe that there are few if any options for the company to turn it around. The recent software acquisitions are not as valuable in a world with free AI alternatives.
Looking underneath the hood of Upland shows that the five year performance has been abysmal as its acquisition strategy has failed to deliver profits while losses have increased year over year. The strategy has instead delivered a 91% loss of shareholder value.
Typically, this would cause me to look for a possible turnaround.
As a contrarian, I like to find possible inflection points and reasons that the company could turn it around, but in the case of Upland, I see no upcoming positive catalysts. I see continued lagging sales. I see a management disconnected from their problems and a sales force that is possibly out of its depth.
This year has been one of the worst years for the company financially. Upland has lost 74% of its value over the last twelve months.
The company in my view has apparently destroyed value with non-accretive acquisitions. According to the management however core organic growth is the answer to all of its problems. Let’s look at the recent news as presented by Upland themselves.
Recent Highlights from Earnings Call
"Q2 Performance: The company exceeded its Q2 revenue and EBITDA guidance midpoints, signaling a positive operational performance for the quarter. The expansion of relationships with existing customers, including major expansions, and the addition of new customers underscore a robust customer acquisition and retention strategy.
Customer Growth: Upland welcomed 155 new customers in Q2, including 20 new major customers, demonstrating the company's ability to attract clients across various industry verticals. This customer growth indicates a broad market appeal for Upland's product offerings.Awards and Recognition: Upland's receipt of HP's Global Partner Excellence Award signifies the company's commitment to delivering flexible and dynamic product solutions to customers. Such recognition enhances Upland's reputation as a reliable and valued partner in the industry.
Financial Results: Despite a 7% year-over-year decrease in total revenue, Upland maintained a focus on core financial metrics. Recurring revenue from subscription and support, which represents a significant portion of the company's revenue, experienced a 6% year-over-year decline.
Product Margins: Gross margin for the quarter was reported at 68%, with strong product gross margins of 69%, emphasizing the company's ability to become profitable despite revenue fluctuations.
Adjusted EBITDA: Upland's Q2 2023 adjusted EBITDA of $16.6 million accounted for 22% of total revenue, showcasing the company's ongoing efforts to manage costs while investing in growth initiatives. The adjusted EBITDA decline was in line with expectations considering the growth investments.
Cash Flow and Liquidity: Upland generated GAAP operating cash flow of $7 million and free cash flow of $6.7 million for the quarter. The company's existing liquidity, consisting of cash and undrawn revolver, remains strong at approximately $323 million.
Guidance: Upland adjusted its full-year 2023 revenue and adjusted EBITDA guidance due to factors such as accelerated, Sunset Asset churn, and lower perpetual license and professional services revenue. Despite these adjustments, the company is focused on achieving a mid-single-digit core organic growth rate for the coming year.
Outlook and Challenges: While Upland is navigating challenges such as revenue declines and changes in adjusted EBITDA, the company's efforts to manage growth investments and maintain profitability are evident. The management's laser-focused approach on achieving their core organic growth goal reflects their commitment to building shareholder value.
Out of these positives, the new customer growth reflects a possibility of a turnaround. Given the opinion of the sales representatives, I have doubts that this new customer growth will be significant enough to really make a difference. A concerning note is the cash spent on growth initiatives. If they don’t pay off, Upland will have wasted more opportunities.
The Red Flags
No one likes to see red on the income statement or the balance sheet , but there is a lot of red to see here.
Negative earnings from continuing operations highlights how the situation at Upland is getting progressively worse. Retained earnings continue to also get more negative. The only slight positive I could take was that debt has stopped climbing and even appears to be going down slightly. However, that debt is still over half a billion dollars and some of it is due in 2026.
Look at how the earnings per share has gotten more negative reaching a low point of negative $5.89 a share. Turning this around will take more than annual single digit organic core growth.
With negative operating incomes and debt due in 2026, Upland has a little over two years to figure it out. These negative numbers can mostly be attributed to acquisitions. Up to this point Upland has shown no ability to make this strategy work. They even have cash on hand and lines of credit to make additional acquisitions. They seem to believe that acquiring the right new product might drive sales in all of their products. This is something they have tried frequently over the past few years and it should make investors nervous. I believe this shows a lack of belief in their current portfolio of products and contradicts their alleged commitment to core growth. Management continues to look for the magic bullet but I’m not convinced it exists.
Upland predicts a negative basic GAAP earnings per share of ($5.89) this year. The largest potential loss per share the company has ever posted.
One of my biggest pet peeves is NON GAAP normalized earnings. I never use these numbers to make an investment decision and the following picture is worth a thousand words.
If you take a quick look you notice that actual GAAP earnings are negative, but by applying non GAAP methods that eliminate non-recurring costs and acquisition costs the company reports a positive number. This makes the company appear cheaper than it is and probably misleads a number of value seeking investors. Depending on the accounting methods used, one can calculate a PE under 5 using Non GAAP methods or they get a negative PE by using GAAP methods. I prefer the GAAP methods.
This is one of the reasons evaluating stocks is so difficult. Accounting is a tricky thing or as Warren Buffet said, “You have to understand accounting and you have to understand the nuances of accounting. It's the language of business and it's an imperfect language, but unless you are willing to put in the effort to learn accounting - how to read and interpret financial statements - you really shouldn't select stocks yourself.” This also applies to individual stocks. If you can’t understand the books, you should probably avoid the stock.
Risks To the Short Thesis
The only way I see this working out for shareholders and the biggest risk to a short thesis is the remote possibility of a buyout. Although I don’t see any reason that another company would want to absorb the debt and perennial losses, stranger things have happened. It is also possible that a developer or future acquisition could change the trajectory of the company, but as a betting man, I would not wager a dollar on it.
Final Thoughts
Upland burns up a lot of cash each quarter. They have benefited from recent low rates and have piled on debt to make acquisitions. These acquisitions in my opinion have not been accretive and instead have dragged on operations income. I base this opinion on the last 10 years of operating income.
Sales representatives seem to agree that sales quotas are unattainable and that management is not providing adequate leadership. However, UPLD could turn it around by getting some large contracts that could drive vertical sales channels in the future and this is a serious threat to any short thesis.
The return to profitability will not happen in 2024 unless sales start to accelerate. While UPLD does have software assets, it remains unclear as to whether these assets have declined in value or can add to the bottom line. They have recently been investing in attaining top level sales and training, but current sales people do not appear to be delivering and frustration from sales employees appears to be rising.
For these reasons, I don't think Upland should be a stock for investors to speculate on. Given previous results, Upland’s chances of turning it around are low. The market has definitely priced Upland for failure. Any material positive changes would create large movements upward in the stock price, but it has been a longtime since real positive news. Even some of the salespeople seem to think management might close shop.
Upland also only has till 2026 to figure it out and restructure their debt. For the reasons highlighted above we believe this is highly unlikely. I personally believe that having a short position in the stock is a wiser decision, but I would not short the stock directly because of the excessive cost of borrowing shares and the danger of a potential spike due to hype or good news. They could be acquired, or they could have a fortuitous event.
For these reasons I think the best way to gain exposure to possible downside is through options. I bought a speculative small position via some $2.50 puts expiring in mid 2024. I think using puts is wise because it limits the downside risk of shorting and allows you to size the position appropriately.
Given the opinions of the sales representatives quoted above, the growing losses and no apparent positive catalysts it seems fair that I rate UPLD a current strong sell. As always, please do your own due diligence prior to buying or selling any stock. If you liked this article, please give me a like and follow and good luck investing.
For further details see:
Upland Software: High Debt And Low Sales Make Upland A Strong Sell