Author Topic: UPLD - Upland Software  (Read 1908 times)

cameronfen

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Re: UPLD - Upland Software
« Reply #10 on: December 05, 2019, 11:14:37 AM »
Bump this as I've gotten back to this and tried to think about walkie's questions as I've looked into this some more.  I hope you don't mind that I used your questions as a template to think start thinking about the company. 

Still very much in diligence stages here, but this looks like the first quarter McDonald didn't mention beating guidance. 

Then again, sales are up 53% and dilution was 23% over the same 9 month period... there might be a typo in the press release (different share counts for 3 month and 9 month counts, not sure what this is about)

I think they are using a weighted average shares outstanding over the period which is why the numbers are different. 

Thinking about IRR: I'm paying attention to sales growth minus share growth as a first order approximation of IRR and even if shares outstanding is going up by 23% if revenues go up by 48% that's not a huge red flag considering below.  I'm curious if anyone has any idea on the second-order stuff like are they buying businesses with lower margins, and already paying for some growth.  I don't have an answer to the first question, but you are not paying a ton for this rate of growth. 

On the shares outstanding issue people have: SBC is only 3-5% of the market cap so it's likely the remainder is acquisition with shares (does anyone have a different idea where this goes?).  Not optimal but they probably are forced to do this if they want to close deals. 

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G&A is also up about 46%, which is less exciting and might speak to a lower quality asset, but this could also be resulting from more staff from recent tuck-ins ... total opex up a far greater percentage of sales mostly resulting from a spike in acquisition-related expenses (which might need to be broken out)


Sales up 48% G&A up 46% that doesn't seem to bad.  The opex is due to Sales maybe if you are looking at the same thing I'm looking at? 

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On a gross basis, we see 53% increase in gross profit, which means the rest is maintenance and growth investment on the p&l

The red flag I see is the sales and marketing increase relative to sales...58%


This is not egregious and similar to above could simply be resulting from consolidation of the sales force and timing (or simply building the sales force as needed for achieving scale)

It seems like a timing issue.  For both G&A and sales the 9mo YoY and 3mo YoY show differing trends.  Unless this establishes itself it probably all just noise. 

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On the other hand, increase in goodwill is only 25% with a 53% increase in sales, which reflects the general thesis that the company buys firms much smaller and at a discount to where the market trades the stock...thereby making the game of musical chairs make sense for the time being

Should this company trade at 10x EBITDA?  Is this expensive?  Well, nearly 70% gross margin business is certainly higher than average...

I take issue what what the company calls a major account ($25,000 of annual recurring revenues) ... this seems light considering that many others will use a $100k multiple
I think this is reasonable for them in a vacuum.  They are buying companies with 25m revenue maximum and growing low single digits organically.  If they use 100k bar that's maybe 175 customers for the average portfolio company's entire revenue.  Obviously once integrated they are doing some cross-selling, but this has only just gotten significant focus from management with Upland PSA in April.  That said it still doesn't reflect well on them to lower this bar without clarifying as it would have fooled me if you hadn't mentioned it. 

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Perhaps, however, because this expense is relatively low, even for a middle-market enterprise customer, the stickiness might be greater AND the ability to increase fees over time far higher? 

It would be helpful for them to list net-dollar-retention metrics (unless I'm missing something?)

Obviously you said this before their latest presentation but NDRR is in their December presentation: 98%

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What is it about the statements that everyone hates?  Why is this a bad business?  Market cap looks like 10x Adj EBITDA?

My thoughts on this company in general

I think the complaints about SBC are not as big a deal as people say.  SBC is 3-4% of market cap.  The rest is (I think) acquisition payments and as a SAAS acquirer what are you going to do?  Not pay in equity.  Removing stock based comp I have them at run rate: 19x EV (1350)/EBITDA (70) .  Its a little expensive but not for something that pays low taxes and has limited true D&A.  I guess you are paying a little bit for growth but this thing grows net revenue per share at 20-30% a year with perhaps a long runway and really you only need it to grow at that rate for 2 years and you're at a reasonable valuation for a firm that has mid-single digits organic growth. 

McDonald seems promotional, but it seems there is a decent amount in this business model to be promotional about.  You by companies at 5-7x EBITDA plus one turn for acquisition fees.  They have no debt so you fund with 2-4x EBITDA.  Take some NOLs in the processes.  Streamline back-office, sales, R&D, integrate microservices to make your total offering more sticky.  You have a stable high recurring revenue business that the market values on a market cap basis at 10x EBITDA.  They seem to be able to increase EBITDA by enough through synergies or efficiency so that they aren't forced to become increasingly levered as they obviously pay some equity for these firms and they aren't generating much in the terms of earnings.  I only looked at last year and this year, but it looks like debt to EBITDA (minus SMB) is still constant to down.  I haven't yet looked at the long term trend. 

That being said I'm curious how this behaves in a recession.  Googling seems to suggest SAAS companies do fine in a recession, which can make sense due to the recurring revenue bit, but all these people publishing whitepapers on the topic have their own agenda too.  I think part of the outperformance has to do with the business model being both new and more lucrative during the great recession.  Curious on other people's thoughts. 
« Last Edit: December 05, 2019, 11:20:59 AM by cameronfen »