Executive Summary / Key Takeaways

• Upland Software is undergoing a strategic transformation, shedding non-core assets and focusing on AI-powered knowledge and content management, digital marketing, and secure file transfer solutions to drive future growth and profitability.
• Recent divestitures, while impacting reported revenue, are expected to improve core organic growth rates, enhance adjusted EBITDA margins, and increase the Net Dollar Retention Rate of the focused business.
• The company is seeing positive momentum in core organic growth, projecting a turn to positive growth in Q2 2025 (2%) with further acceleration expected in the second half of 2025 and into 2026 (>4%).
• Adjusted EBITDA margins are expanding significantly, forecast to reach 26% in Q2 2025 and 27% for the full year 2025, with targets approaching 30% in the second half of 2025 and beyond, driven by operational efficiencies and focus on higher-margin products.
• Aggressive debt reduction, totaling over $220 million since the HGGC investment, is a key priority, with plans for continued paydowns and a refinancing targeted for the first half of 2025, aiming to lower net leverage.

The Foundation of Transformation: Focusing the Portfolio and Embracing AI

Upland Software, incorporated in 2010 and evolving through a series of strategic acquisitions, has built a diverse library of cloud-based software applications aimed at digital transformation. Historically, this growth-by-acquisition strategy propelled revenue from $149.90 million in 2018 to $274.80 million in 2024. However, this approach also resulted in a portfolio of varying performance and strategic alignment.

Recognizing the need for sharper focus and enhanced profitability, Upland has embarked on a significant transformation. The core of this strategy involves divesting non-strategic, underperforming product lines and concentrating investments on areas with stronger competitive advantages, higher growth potential, and better margins. This strategic shift is coupled with a substantial commitment to technological innovation, particularly in Artificial Intelligence.

Upland positions itself as a leader in AI-powered knowledge and content management software. Its technology aims to help enterprises unlock critical knowledge, automate content workflows, and drive measurable ROI. This includes a suite of products like RightAnswers and Panviva for knowledge management, BA Insight for enterprise search, Qvidian for proposal automation, and InterFAX for secure cloud faxing.

A key technological differentiator for Upland lies in its ability to integrate AI capabilities into its existing product base and connect disparate enterprise data sources. For instance, BA Insight, an AI enablement platform, boasts over 90 enterprise connectors, solving the "last mile problem" for companies implementing large language models (LLMs) by securely bringing proprietary data into search and AI environments. This connectivity is crucial for training enterprise LLMs on trusted, auditable knowledge bases, a tangible benefit for customers seeking to leverage AI for enhanced customer and employee experiences while maintaining compliance.

Specific product innovations highlight this AI focus:

• Panviva Sidekick: An AI-driven agent assistant designed for contact centers, providing real-time, contextualized knowledge, particularly valuable in highly regulated industries.
• Qvidian AI Assist: An AI-powered tool for automating RFP and proposal responses, integrating with leading AI models like OpenAI and IBM Watson. Management has noted seeing substantial sales opportunities around this, including a $5 million ARR sale to a major technology company.
• RightAnswers: Integrates with OpenAI's ChatGPT to enhance search and automate content creation, aiming to streamline customer support content.
• Altify: A B2B sales enablement tool that is adding AI capabilities and benefits from a strong partnership with Salesforce (CRM).

These technological advancements are not merely features; they are central to Upland's strategy to drive growth and create a competitive moat. By embedding AI into core workflows, Upland aims to deliver quantifiable benefits to customers, such as increased productivity (e.g., 20-30% faster knowledge retrieval cited for AI knowledge management solutions) and efficiency gains. The company has invested significantly in R&D, including building an offshore development center in India which was completed at the end of 2024, to increase development throughput and accelerate the delivery of these innovations.

In the competitive landscape, Upland operates alongside larger, more diversified players like Salesforce, ServiceNow (NOW), Microsoft (MSFT), and Atlassian (TEAM). While these competitors offer broader platforms and possess significantly greater scale, Upland differentiates itself by focusing on specialized, often mission-critical, solutions within its chosen niches. Compared to Salesforce's broad CRM suite or ServiceNow's extensive IT workflow automation, Upland's offerings like BA Insight's deep connector library or InterFAX's secure, compliant faxing provide focused capabilities that can be more cost-effective or specifically tailored for certain industries (e.g., healthcare, financial services).

Financially, Upland's gross profit margin of 67.5% (TTM) trails that of larger competitors like Salesforce (77%), ServiceNow (79%), Microsoft (70%), and Atlassian (82%), suggesting a less efficient cost structure at the gross level. However, Upland's strategic focus on higher-margin products through divestitures is intended to improve this. While competitors like CRM and NOW boast strong revenue growth (11% and 24% YoY respectively), Upland's reported revenue has been declining (-10% YoY in Q1 2025), reflecting the impact of shedding lower-performing assets. The investment thesis hinges on Upland successfully executing its turnaround to achieve positive core organic growth and expand margins, demonstrating that its focused strategy and AI investments can yield improved financial performance relative to its current state, even if it operates at a different scale and margin profile than the market leaders.

Performance Reflecting Transition and Strategic Execution

Upland's recent financial performance clearly illustrates a business in transition. For the first quarter of 2025, total revenue was $63.7 million, a decrease of 10% compared to $70.7 million in the same period of 2024. This decline was primarily driven by the expected runoff of "Sunset Assets" (non-strategic products/contracts) and the impact of divested businesses. Subscription and support revenue, the largest component, also decreased by 10% year-over-year to $60.2 million. Perpetual license revenue saw a modest increase, while professional services revenue declined.

Despite the top-line contraction, there are clear signs of operational improvement and strategic execution. Cost of revenue decreased, particularly in subscription and support, reflecting lower infrastructure, personnel, and amortization costs associated with divested product lines and ongoing efficiency efforts. Operating expenses also saw reductions across sales & marketing, R&D, and general & administrative functions, driven by personnel cost decreases and strategic shifts like focusing R&D spend towards the India Center of Excellence. Depreciation and amortization expense also declined due to divested assets and prior periods' assets becoming fully amortized.

Adjusted EBITDA, a key profitability metric for Upland, demonstrated sequential growth throughout 2024, reaching $14.9 million in Q4 2024. For Q1 2025, Adjusted EBITDA was $13.1 million, resulting in a 21% margin, up from 19% in Q1 2024. Management highlights this as the beginning of significant margin expansion, projecting 26% in Q2 2025 and 27% for the full year, with aspirations for margins approaching 30% in the second half of 2025 and beyond. This expansion is a direct result of focusing on higher-margin core products and realizing cost efficiencies from the strategic repositioning.

Core organic growth, which excludes the impact of Sunset Assets and divestitures, is the critical metric for evaluating the success of the turnaround. This rate was flat in Q1 2025 but is showing positive momentum, projected to reach 2% in Q2 2025 and increase further in the latter half of the year. Management is targeting a 2.5% core organic growth rate for the full year 2025, with an exit rate closer to mid-single digits, and internal forecasts pointing to growth north of 4% in 2026. This anticipated acceleration is attributed to the investments in demand generation, sales talent, and product innovation, which are starting to yield "chunkier deals" and increased marketing-sourced bookings.

Net Dollar Retention Rate (NDRR), a measure of customer stickiness and expansion, is also improving. While the reported NDRR was 96% at the end of 2024, excluding the impact of the mobile messaging divestitures, the NDRR for the core business would have been 99%. The company is targeting continued improvement, aiming for 98% NDRR as they exit 2025, driven by enhanced gross dollar retention resulting from product investments and a more focused portfolio, as well as opportunities for upsell, particularly with new AI capabilities.

Liquidity and capital allocation remain central to Upland's strategy. The company ended Q1 2025 with $33.7 million in cash and cash equivalents. Cash flow from operating activities was $8.3 million in Q1 2025, an increase from $5.1 million in Q1 2024, partly benefiting from a non-recurring gain on the sale of interest rate swaps.

The company has been aggressively paying down debt, reducing its Term Loans by $189 million in 2024 and an additional $34.2 million year-to-date in 2025. This has lowered gross debt to approximately $259 million at the end of Q1 2025. The company utilizes floating-to-fixed interest rate swaps to hedge a significant portion of its debt, effectively locking in a 5.40% rate on approximately $217 million, mitigating interest rate risk on that portion. Management plans to continue paying down debt with excess cash flow, targeting up to $2 million per month, and expects net leverage to decline to roughly 3.7x by the end of 2025. A refinancing of the Term Loans, which mature in August 2026, is anticipated in the first half of 2025.

Outlook, Risks, and the Path Forward

Upland's outlook for 2025 reflects the ongoing transformation and the anticipated benefits of its focused strategy. For the second quarter of 2025, the company expects total revenue between $50.3 million and $56.3 million and Adjusted EBITDA between $12.1 million and $15.1 million, implying an Adjusted EBITDA margin of 26% at the midpoint. For the full year 2025, guidance is set at total revenue between $209.5 million and $227.5 million and Adjusted EBITDA between $55.0 million and $64.0 million, resulting in a 27% Adjusted EBITDA margin at the midpoint. This guidance incorporates the impact of recent divestitures, which lowered revenue expectations but did not materially affect Adjusted EBITDA guidance, reinforcing that the divested assets were not significant margin contributors.

The core assumption underpinning the positive growth outlook is the successful execution of the growth plan initiatives and the absence of significant macroeconomic disruption, such as from tariffs. Management's confidence stems from the progress seen in pipeline generation, sales execution, and the market reception to AI-enabled products. The projected increase in core organic growth and significant expansion in Adjusted EBITDA margins are the key financial outcomes expected from this strategic pivot.

However, the path forward is not without risks. The company's stock price trends can impact goodwill impairment assessments, as seen in Q1 2024, and significant declines could lead to future impairments. While hedged, a portion of the debt remains subject to variable interest rate risk. Foreign currency exchange rate fluctuations can also impact financial results, particularly as a significant portion of revenue and expenses are international. The successful integration of AI capabilities and their market adoption is crucial; while early signs are positive, the competitive landscape is rapidly evolving, and larger competitors have vast resources for R&D and market penetration. Execution risk remains in achieving the targeted core organic growth rates and margin expansion, as these depend on the effectiveness of the revamped go-to-market strategy and continued operational discipline. Furthermore, the company's ability to utilize its Net Operating Loss carryforwards (NOLs) could be limited by ownership changes, a risk addressed by the Tax Benefit Preservation Plan, but still a factor influencing future tax liabilities.

Conclusion

Upland Software is actively reshaping its future by divesting non-core assets and sharpening its focus on AI-powered solutions within strategic niches. This transformation, while causing near-term reported revenue declines, is designed to unlock higher core organic growth, expand profitability through improved Adjusted EBITDA margins, and strengthen the balance sheet through debt reduction.

The investment thesis for Upland hinges on the successful execution of this turnaround. Early indicators, such as the projected turn to positive core organic growth in Q2 2025, the significant anticipated expansion in Adjusted EBITDA margins, and the improving Net Dollar Retention Rate of the core business, suggest the strategy is gaining traction. The company's investment in AI and its ability to leverage technological differentiators like the BA Insight connector library position it to capitalize on the growing demand for intelligent enterprise solutions. While challenges remain, including navigating a competitive market dominated by larger players and executing against ambitious growth and margin targets, Upland's focused approach and commitment to operational efficiency and debt reduction provide a clear path towards enhanced financial health and long-term value creation. Investors should closely monitor the company's progress in achieving its stated core organic growth and Adjusted EBITDA targets, as these will be key determinants of the success of its strategic transformation.