Divestitures, BA Insight, And Panviva Will Drive Future Performance

Key Takeaways

• Strategic refocus and AI-driven innovations could enhance core organic growth, customer acquisition, and future revenue streams, aligning with high-growth areas.
  
• Streamlining by divesting underperforming lines and reducing debt may improve efficiency, net margins, and earnings stability.
  
• Declining revenue from asset runoff and divestitures, combined with debt focus and retention challenges, could strain Upland Software's future growth and profitability.

Catalysts

Provides cloud-based software applications under the Upland brand name in the United States, the United Kingdom, Canada, and internationally.

• Upland Software is experiencing an improvement in core organic growth, projected to increase to 2.5% in 2025, with expectations of exiting 2025 closer to mid-single digits. This growth potential is likely to positively impact future revenue streams.
  
• Increasing adjusted EBITDA margins by 400 basis points in 2025 (from 20% to 24%) suggests that Upland is becoming more efficient, which could lead to improved net margins and overall earnings.
  
• Upland's divestiture of two nonstrategic underperforming product lines simplifies the business, allowing focus on high-growth areas, enhancing execution, and expected positive impact on core organic growth, impacting future revenues positively.
  
• The AI-driven innovations and expansions in products like BA Insight and Panviva show potential for new customer acquisition and upsell opportunities, potentially boosting future revenue growth.
  
• Debt reduction efforts, including paying down $33 million in 2025 and an additional $189 million in 2024, reduce financial leverage and interest expenses, potentially improving net margins and boosting future earnings.

Upland Software Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Upland Software's revenue will decrease by 15.0% annually over the next 3 years.
• Analysts are not forecasting that Upland Software will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Upland Software's profit margin will increase from -18.0% to the average US Software industry of 13.2% in 3 years.
• If Upland Software's profit margin were to converge on the industry average, you could expect earnings to reach $21.8 million (and earnings per share of $0.68) by about July 2028, up from $-48.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.7x on those 2028 earnings, up from -1.2x today. This future PE is lower than the current PE for the US Software industry at 42.7x.
• Analysts expect the number of shares outstanding to grow by 4.47% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.6%, as per the Simply Wall St company report.

Upland Software Future Earnings Per Share Growth

Risks

• Upland Software is dealing with a decline in total revenue due to the runoff of Sunset asset revenue, which is expected to cause an 11% decline in total revenue for 2025, potentially impacting overall revenue growth.
  
• The divestiture of two nonstrategic underperforming product lines resulted in a reduction of the 2025 revenue guide by about $18 million, which although having no adjusted EBITDA impact, results in lower baseline revenue expectations.
  
• Despite improvements, the company's net dollar retention rate of 96% suggests there is still room for improvement in retaining and expanding existing customer revenue, which could affect ongoing revenue stability and growth.
  
• The company's focus on paying down debt, while financially prudent, may impact its capacity to invest in growth initiatives or react to unexpected market opportunities, potentially affecting future earnings.
  
• The impending rise in debt costs due to refinancing could increase financial expenses, leading to tightened margin pressures, which may negatively influence net margins and profitability.

Valuation

• The analysts have a consensus price target of $4.25 for Upland Software based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $5.0, and the most bearish reporting a price target of just $3.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $164.7 million, earnings will come to $21.8 million, and it would be trading on a PE ratio of 8.7x, assuming you use a discount rate of 11.6%.
• Given the current share price of $1.98, the analyst price target of $4.25 is 53.4% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.