UPLD - Upland Software

[EricSchleien]

Starting this as a new thread.

 

Has anyone ever looked at Upland Software? Figured some of the people who are familiar with Constellation are familiar with this company too. There was a VIC writeup on it.

 

https://valueinvestorsclub.com/idea/UPLAND_SOFTWARE_INC/0371366189/messages/151783#description

[spartan]

Maybe it's just me, but Jack McDonald strikes me as an empire builder and a bit of a charlatan. Read his LinkedIn...

 

"Prior to founding Upland in 2012, Jack served for 10 years as chairman and CEO of Perficient (NASDAQ: PRFT), a leading IT consulting firm. Jack led Perficient’s IPO, completed 19 acquisitions and grew Perficient from a startup to an award-winning industry leader, with more than $250 million in revenues, 1,200 employees, and operations in North America, Europe, China, and India."

 

His article on Forbes about Outsiders is pretty basic and offers no insight. He basically says: Look at all these people that made money. I want to be like them and Mark Leonard.

 

https://www.forbes.com/sites/forbesbusinessdevelopmentcouncil/2019/08/13/the-outsiders-revisited-business-lessons-for-consolidation-companies/#6fff4294fbcb

 

I could be wrong. But for whatever reason, I just don't trust the guy.

[kab60]

The VIC writeup fails to account for SBC - they hand out options like cookies - as well as acquisition costs. So while I find Upland interesting, his valuation seems flawed.

[Casey]

I have been following them a bit. More interested in PAR at this point as far as small software co's go. Upland's conference calls come off as overly promotional almost to the point of goofy to me.

 

That being said, they probably come off that way to the market in general, so if they can get things right and don't do dumb things with the SBC could see it going well. There's a lot of room to cut out fat in small process and workflow software companies.

[Liberty]

I have been following them a bit. More interested in PAR at this point as far as small software co's go. Upland's conference calls come off as overly promotional almost to the point of goofy to me.

 

What do you like about PAR (apart from that good interview that the CEO gave to Patrick a while ago)?

[Casey]

I have been following them a bit. More interested in PAR at this point as far as small software co's go. Upland's conference calls come off as overly promotional almost to the point of goofy to me.

 

What do you like about PAR (apart from that good interview that the CEO gave to Patrick a while ago)?

 

Posted in the PAR thread. I think it's just a credible story over the next few years with what they're looking to do.

[peterHK]

Maybe it's just me, but Jack McDonald strikes me as an empire builder and a bit of a charlatan. Read his LinkedIn...

 

"Prior to founding Upland in 2012, Jack served for 10 years as chairman and CEO of Perficient (NASDAQ: PRFT), a leading IT consulting firm. Jack led Perficient’s IPO, completed 19 acquisitions and grew Perficient from a startup to an award-winning industry leader, with more than $250 million in revenues, 1,200 employees, and operations in North America, Europe, China, and India."

 

His article on Forbes about Outsiders is pretty basic and offers no insight. He basically says: Look at all these people that made money. I want to be like them and Mark Leonard.

 

https://www.forbes.com/sites/forbesbusinessdevelopmentcouncil/2019/08/13/the-outsiders-revisited-business-lessons-for-consolidation-companies/#6fff4294fbcb

 

I could be wrong. But for whatever reason, I just don't trust the guy.

 

The outsider's reference makes me cringe; huge red flag IMO.

[walkie518]

Maybe it's just me, but Jack McDonald strikes me as an empire builder and a bit of a charlatan. Read his LinkedIn...

 

"Prior to founding Upland in 2012, Jack served for 10 years as chairman and CEO of Perficient (NASDAQ: PRFT), a leading IT consulting firm. Jack led Perficient’s IPO, completed 19 acquisitions and grew Perficient from a startup to an award-winning industry leader, with more than $250 million in revenues, 1,200 employees, and operations in North America, Europe, China, and India."

 

His article on Forbes about Outsiders is pretty basic and offers no insight. He basically says: Look at all these people that made money. I want to be like them and Mark Leonard.

 

https://www.forbes.com/sites/forbesbusinessdevelopmentcouncil/2019/08/13/the-outsiders-revisited-business-lessons-for-consolidation-companies/#6fff4294fbcb

 

I could be wrong. But for whatever reason, I just don't trust the guy.

 

The outsider's reference makes me cringe; huge red flag IMO.

 

many know who Mark Leonard is, fewer ppl know Jack McDonald ... that some have heroes and let other ppl know is a form of commitment to the public, I don't think McDonald should get negative points on that matter but should be marked for the difference between what he does and what he says

 

to that end, one must remember that McDonald is a deal attorney by training ... he may never admit mea culpa, but he will let everyone know when he's doing well, which is seems he does every quarter

 

Upland is compelling but in addition to the risks noted, dilution of equity has been cause for recent volatility, and I don't see a reason or commitment for UPLD to stop let alone buyback stock? 

 

If revenues increase by 50% on back of 20% dilution, perhaps it's warranted to keep selling stock in a hot market, but this should give investors pause

 

The economics appear fairly straightforward: buy tiny companies at 6x EBITDA then let the market price at 15x, rinse then repeat. 

 

Do I agree regarding what has been written about the VC opportunity?  No.  There are certainly many more bad ideas getting funded today than yesterday, but in theory this should also mean there are more good ideas?

 

A consultant from Amalgam recently wrote on the Cimpl acquisition that was quite favorable to Upland. 

 

Maybe Kubernetes lives forever as a microservicer consolidator's primary tool and Docker becomes a beached whale ... in that world, a company doing 5-6 buys a year in complementary spaces, increasing the NOL by virtue of buying positive EBITDA w/slightly negative tax cash income, and building more functionality translates into a stickier customer base who pays more with each new service and sheds another microservice every year in favor of Upland's product?

 

[walkie518]

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)

 

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)

 

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)

 

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

 

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?)

 

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

[cameronfen]

^ I’d be interested if you had more to report back as I agree it looks interesting and I think the concept of a tech firm roll up is good but I think it’s less than ideal how much management dissembles.  23% increase in S/O, then not backing out such a significant number out of EBITDA (which it looks like you didn’t add back in).  Seems like a good bet on the surface, but I’ve seen many companies that looked like great opportunities but were run by less then trustworthy people, all of them turned out poorly. 

[cameronfen]

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. 

 

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? 

 

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. 

 

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. 

 

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%

 

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. 

[walkie518]

agreed on conclusion after some digestion

 

I think they have been playing private and public markets against one another to show massive spikes in revenues, but there doesn't appear to be any traction in terms of net expansion rates

 

while I don't think they collapse in a recession necessary, I think the MO looks like playing with house money?

[Spekulatius]

agreed on conclusion after some digestion

 

I think they have been playing private and public markets against one another to show massive spikes in revenues, but there doesn't appear to be any traction in terms of net expansion rates

 

while I don't think they collapse in a recession necessary, I think the MO looks like playing with house money?

 

SAAS Company revenues may not collapse in a recession, but it will be harder to land new deals, meaning that revenue growth will fall substantially and with that it will be hard to justify the frothy multiples.