Upland Software, Inc. Q3 FY2024 earnings

Upland Software reported third quarter 2024 results on November 7, 2024. Total revenue was $66.7 million, down 10.0% from the prior-year quarter. Year-to-date revenue was $206.8 million, down 8.4% from the same nine-month period in 2023. The top line continued to face pressure. Management attributed the quarterly decline to expected declines from Sunset Assets, along with lower core subscription and support revenue, lower overage charges, and fewer professional services projects. The non-GAAP Core Organic Growth Rate was negative 2.3% for the three-month period ended September 30, 2024. Core organic revenue was $55.9 million, compared with $57.2 million in the prior-year period. Gross profit was $47.0 million, down 8.2% from the prior-year quarter, and year-to-date gross profit was $145.5 million, down 4.9%. Gross margin was 70.5% in the quarter, up 1.4 percentage points, and year-to-date gross margin was 70.4%, up 2.6 percentage points.

Profitability improved on a GAAP basis even as revenue fell. Operating loss was $3.3 million in the quarter, and the loss narrowed 57.1% from the prior-year quarter. Net loss was $1.7 million, and the loss narrowed 80.0%. Diluted EPS was a loss of $0.12, an improvement of $0.19 from the prior-year quarter. On a year-to-date basis, operating loss was $100.3 million, and the loss narrowed 35.1%. Net loss was $109.3 million, and the loss narrowed 33.3%. Diluted EPS was a loss of $4.07, an improvement of $1.10. Operating margin was negative 5.0% in the quarter, up 5.4 percentage points, and year-to-date operating margin was negative 48.5%, up 20.0 percentage points. Non-GAAP Adjusted EBITDA was $14.0 million, or 21% of total revenue, compared with $16.2 million, or 22% of total revenue, in the prior-year quarter. The company also reported free cash flow of $4.2 million, compared with $17.8 million.

Cash generation slowed. GAAP operating cash flow was $4.3 million in the quarter, down 76.5% from the prior-year quarter. Year-to-date operating cash flow was $14.9 million, down 63.8%. Capital expenditures were $0.1 million in the quarter, down 80.2%, and $0.6 million year to date, down 45.6%. Deferred revenue was $92.7 million, down 2.1% from the prior-year quarter. Remaining performance obligations were $242.7 million. The balance sheet remains a focus because the company has term loans maturing August 6, 2026, and it faces variable interest rate risk. Management states that current cash and cash equivalents and cash flows from operating activities should be sufficient to fund operations for at least the next twelve months.

Operational metrics offered some positive signals. Upland welcomed 122 new customers in the third quarter, including 18 new major customers. It expanded relationships with 312 existing customers, including 27 major expansions. The company earned 72 badges in G2's Fall 2024 market reports, up from 56 badges in the Summer 2024 reports. Upland RightAnswers earned 17 badges. Upland announced availability of Upland BA Insight for Microsoft Azure AI Search in the Microsoft Azure Marketplace. For the second year in a row, Upland RightAnswers was named to the 2024 KMWorld AI 100. Management also pointed to the recent availability of AI-enabled solutions as a way to expand market reach. Guidance for the fourth quarter of 2024 calls for a total revenue decline of 5% at the midpoint from the quarter ended December 31, 2023. Fourth quarter Adjusted EBITDA is expected to be $13.4 million to $16.4 million, for an Adjusted EBITDA margin of 22% at the midpoint, an increase of 6% from the quarter ended December 31, 2023. For the full year 2024, guidance calls for a total revenue decline of 7% at the midpoint from the year ended December 31, 2023. Full year Adjusted EBITDA is expected to be $54.1 million to $57.1 million, for an Adjusted EBITDA margin of 20% at the midpoint, a decline of 14% from the year ended December 31, 2023.

The main risks are familiar. Revenue is still declining, and the core organic growth rate is negative. Sunset Assets continue to weigh on reported results. Customer retention and expansion matter because the company depends on recurring subscription and support revenue. Competition and rapid technological change could pressure pricing and demand. Macroeconomic uncertainty, foreign currency exchange risk, inflation, and supply chain constraints could affect results. The company also flags risks tied to integrating AI functionality, maintaining key personnel, and protecting intellectual property. Its debt load and variable interest rate exposure add financial risk, and further goodwill impairments could occur if the stock price declines. Management says it will continue to evaluate goodwill for impairment in 2024. The quarter showed better GAAP profitability and lower losses, but the top line and cash flow trends remain weak.