Needham's Scott Berg said Upland Software (NASDAQ:UPLD) has stabilized its business with a sharper product focus, stronger cash flow visibility and a clear path to growth through debt reduction and AI-driven innovation.
The analyst noted Upland emerging as a leaner, cash-generating software player, projecting over $20 million in annual free cash flow and margin expansion as the company doubles down on knowledge and content management solutions.
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He upgraded Upland Software to Buy from Hold and set a price target of $4.50, valuing the company at 8.0x fiscal 2025 adjusted EBITDA.
Berg projects roughly 60% upside from current levels, citing stronger cash flow visibility, a streamlined business model and a strategic focus on debt reduction.
The analyst expects Upland to generate $20 million+ in annual free cash flow (FCF), supporting 10%+ FCF growth even without significant margin or revenue expansion.
He values Upland at ~6.2x fiscal 2025 FCF guidance of $20 million and notes that the company trades at 7.3x fiscal 2025 adjusted EBITDA on his estimates.
Debt reduction will drive incremental growth, as every $20 million in principal payments cuts interest expense by ~$2 million annually, particularly meaningful with Upland's $240 million floating-rate credit facility, Berg noted.
Management plans to allocate most FCF toward debt repayments, with a minimum 50% FCF sweep required under covenants, he said.
Upland will also execute its $10 million share buyback program within 12 months, while preferred shares, which carry a 4.5% dividend rising to 7% in 2029, will remain outstanding due to their perpetual structure and high redemption price, as per the analyst.
Berg noted Upland as unlikely to pursue acquisitions or become a takeover target, citing its high-margin, low-growth profile.
Upland has divested and sunset low-margin front-office products and now focuses on Knowledge and Content Management (KCM), which represents 70% of core revenue and nearly all growth, he said.
Specialized market solutions make up the remaining 30% of revenue, generating higher contribution margins but stable top-line growth, as per the analyst.
Upland is leveraging AI to drive upsell momentum, with SKUs powering tools like call center bots, chatbots for global tax firms and automated RFP writing, Berg said. The entire portfolio is cloud-native, with minimal reliance on legacy licenses.
The company abandoned its centralized sales model, returning to product-level field sales to boost new customer acquisition and deepen product expertise, the analyst noted. While upsell success has lifted net dollar retention to 99%, new customer additions remain muted, he said.
Berg expects this shift, combined with AI-powered SKUs and inflation-linked price increases, to help Upland achieve 5%+ core revenue growth.
Management targets 31%+ EBITDA margins by 2027, with fiscal 2026 margins projected at 29%–30%.
R&D outsourcing in India and reduced front-office investment have already improved profitability, while sales and marketing expenses should fall by 200–300bps, partially reinvested in growth initiatives, as per the analyst.
Berg estimates FCF conversion at 34% of adjusted EBITDA, with temporary compression in fiscal 2026 due to higher interest costs and a $5 million increase in cash taxes.
UPLD Price Action: Upland Software stock is down 4.02% at $2.75 at publication on Tuesday.
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