300%+ up, 90%+ down: the rollercoaster journey of Upland Software (UPLD)

Background

Founded in 2010 and based in Austin, Texas, Upland (ticker: UPLD) is a rollup of enterprise work management software tools. It competes in categories such as audience engagement, contact centre productivity, content lifecycle automation and sales effectiveness. UPLD’s growth has been almost entirely M&A driven. In fiscal year (FY) 2023, it generated revenues of approx. $300M compared to a mere $712K in FY2011.

In 2014, the company listed on NASDAQ at $12/share. We should mention Upland’s connection to another software consolidator called ESW Capital. Led by Joe Liemandt, ESW is known for an aggressive cost optimization playbook that includes outsourcing of development work to lower cost jurisdictions. At the time of the IPO, ESW controlled 24% of UPLD but has since exited that position. 

UPLD stock began to take off in late 2016. A few volatile years later, in February 2021 share price peaked a touch under $52. And then things went into reverse. At the time of writing, Upland’s stock hovers above $4, implying a market cap of approx. $130M. 

Bring in Hercule Poirot…

Like in an Agatha Christie murder novel, there are multiple suspects: five, to be precise. Below, we review each one of these suspects, which we refer to “value traps”. 

Given the 90%+ share price decline over 3 years, could it be that UPLD is oversold? Unfortunately we are not qualified to offer investment advice, nor do we have a position in the stock. 

Still, consider this perspective. 

At its peak, UPLD was trading at 20X+ EBITDA, in line with time-tested compounders like Constellation Software or Danaher Corp. As our analysis shows, in hindsight this comparison was not necessarily justified given the deficiencies in its business model. 

Even today UPLD valuation is not exactly a bargain. With an enterprise value (EV) of +/-$500M, the stock is trading on a forward EV/EBITDA ratio of >8X. 

Value trap #1: highly competitive markets

Upland’s focus on enterprise software is laudable, but unfortunately none of its products can be characterised as mission critical or having high competitive moats. 

Adestra, the email automation software, competes against the likes of Intuit’s Mailchimp, ActiveCampaign and Salesforce – not to mention smaller point solutions like DotDigital or Act-On. 

Rant & Rave, Upland’s largest acquisition is a provider of customer engagement solutions. Strangely, it has only 1 review on G2 – according to which it competes with vendors such as SurveyMonkey (4K+ reviews), GainSight CS (1K+) and Qualtrics (500+). 

Value trap #2: subprime asset quality

Upland’s blended Net Dollar Retention is in the mid 90s. Not bad…if you’re a small PLG business growing 20-30% YoY. For enterprise software that’s genuinely dreadful. Upland’s competitors tend to pump out NDR in the 110-130% range. 

Upland’s investor presentation states that it aims to pay 5-8X “restructured annualized Adjusted EBITDA”. We would argue this is too much for stranded assets that are being hammered by deep pocketed enterprise vendors on one side, and AI upstarts on the other. 

Another problem is the pace of M&A. 

Upland’s most active period of dealmaking coincided with its share price riding high. In hindsight, it may have been carried away with doing progressively bigger deals. Let’s take a look at two deals: Altify (October 2019, $84M paid at closing) and Localytics (February 2020, $68M paid at closing). The aggregate $152M purchase consideration compares to the $145M in total revenue that Upland generated for the first 9 months of 2019. The answer was more debt. 

The consequences were dire. In Q1 2023 it reported a $129M goodwill impairment: a staggering 27% of the total! 

Value trap #3: poor unit economics

Let’s start from the top. How does Upland’s 69% gross margin stack up against Meritech’s public SaaS benchmarking? The median for the <$500M ARR subset is 76%. 

Next, let’s look at the Sales & Marketing (S&M) spend. At the time of the IPO, S&M was eating up 23% of revenue vs. an organic revenue growth rate of 7%. In absolute terms, Upland was spending $5 in S&M costs per $1 in organic revenue growth ($15M vs. $3M absolute). In software rollups, the best businesses either:

• Don’t grow much – but don’t spend much on S&M (i.e. VMS); or

• Have high and sustainable LTV/CAC ratios. 

You don’t want to be stuck in between. 

Fast forward to the first nine months of 2023, the S&M / revenue ratio is virtually unchanged at 21%, whereas organic growth has collapsed to -2% YoY. An article on Seeking Alpha picked up on Glassdoor reviews for insight on sales team morale. 

Finally, Upland is yet to turn a US GAAP profit. 

Value trap #4: low quality of earnings

Upland’s investor presentation paints a confusing picture. On the one hand, it is supposedly a steady business that had been producing c.$100M in “adjusted” EBITDA (AEBITDA) before it was wrongfooted by the economy. 

On the other, Upland’s free cash flow conversion has been rather poor, ranging 30-40% of AEBITDA in recent years.  

On top of that, Upland has a track record of missing guidance. Back in 2018 the company was guiding to 40% long-term AEBITDA margins – double the levels it is delivering right now.   

Unusually for an ostensibly vanilla enterprise software company, at one point Upland was highly geared to US politics, with $18M of “political messaging revenue” reported for 2020 . The loss of that revenue in 2021 was one of the factors that triggered a downgrade in earnings outlook, which in turn triggered a share price collapse. 

Value trap #5: high leverage

Acquiring runoff assets prone to disruption is a risky strategy to begin with. Leverage just amplifies the risk. As of September 30, 2023 Upland’s debt file amounted to c.$500M maturing in 2026. A timely floating-to-fixed swap keeps a lid on effective interest rate, under 6%. Still, even using Upland’s adjusted EBITDA definition its total debt/EBITDA ratio exceeds 7X (4X on a net basis). 

The refinancing cliff looms large over Upland, even if it is cushioned by a chunky cash balance of $240M. Half of it can be traced to a 2022 convertible equity investment by the private equity firm HGGC. 

TL;DR

• Upland Software is a NASDAQ listed acquirer of enterprise work management software tools. Once a unicorn, since 2021 the company has seen its market cap shrivel by >90%, to c.$130M today

• What happened? We attribute the soured investor sentiment to several factors, including: highly competitive markets; subprime asset quality compounded by rushed M&A; poor unit economics; low quality of earnings; and high leverage

• With that said, even after the collapse in share price UPLD is trading at roughly 8X EBITDA. To us, this suggests that stock isn’t as “bombed out” as it may appear outside in