Five analysts have increased their EPS targets for this software company in the past 30 days.
Upland Software, Inc. (UPLD)
From Canaccord Genuity Research
This morning Upland Software, Inc. (UPLD) announced that the firm has acquired Rant & Rave, technology that broadly falls into the customer experience management (CX) category, for $58.5M in cash at closing and a $6.5M 12-month cash hold back. Rant & Rave provides customers with cloud-based customer engagement solutions that, through its voice of customer (VoC) and voice of employee (VoE) applications, allow them to gather, analyze and act on customer and employee feedback across multiple channels. Rant & Rave is used by over 100 European and international brands and is headquartered in the UK.
We find this transaction significant for three reasons: (1) it is the firm’s largest to date, consistent with our view that UPLD’s deals are likely to get bigger on the margin as the firm moves toward interim financial targets; (2) the addition of voice of the customer (VoC) and voice of the employee (VoE) applications gives UPLD a footing in what is a leading edge and fast-growing part of the CX stack; and (3) the acquisition adds an established sales channel for UPLD’s other messaging solutions in Europe as well as a cross-sell opportunity for R&R in the U.S. Consistent with most of UPLD’s other transactions, this deal is expected to be immediately accretive and the price paid falls within the firm’s targeted 5-8x pro-forma Adjusted EBITDA once integrated (in this case, it’s about 6.8x).
Rant & Rave is expected to contribute roughly $21M in annual revenue and $9.5M in adjusted EBITDA once integrated into the Upland platform, which is a very healthy 45% incremental margin. In conjunction with this announcement, Upland is increasing its credit facility from $259M to $359M and has drawn down an additional $63M in debt. The company is currently in a $209M net debt position.
Companies globally are trying to reinvent themselves with a renewed focus on the customer. A couple of prominent private companies and a recently gone public company (SVMK) have grown into big businesses by focusing on this shift and providing the tools needed to accurately assess and react to customer and employee feedback. This acquisition brings this functionality to Upland’s Mobile Messaging (UMM) platform in addition to further opening up the European market to cross-sell its solutions into and introducing Rant & Rave to Upland’s existing 350 UMM customers.
In terms of the stock, this deal is further evidence that management intends to move quickly toward interim financial targets of $250M in revenue and 40% EBITDA margins (it’s at a run rate of $168M and 36% margins today). In our view, these targets seem feasible at some point in C2022, so if we assume investors are willing to pay in the range of 13-15x forward EBITDA for UPLD, we can make the case for a $45-50+ stock in roughly 2.5 years from now. That’s a ballpark 13-17% annual upside from here, which is why we continue to think UPLD is worthy of consideration in a small cap portfolio. BUY.
Our $40.00 price target is based on a 16x EV/EBITDA multiple and 30x EV/FCF multiple applied to our C2019 estimate of $62.5M in EBITDA and $34M in FCF and taking into consideration ~$190M in prospective net debt and assuming 21M shares outstanding.
Richard Davis, CFA, David Hynes Jr., and Mark Belcarz, CFA, Canaccord Genuity Research, www.canaccordgenuity.com, October 4, 2018