Investing.com -- S&P Global Ratings has revised its outlook for Austin, TX-based Upland Software Inc (NASDAQ: UPLD ). to positive, affirming the company’s ’B-’ rating due to its prudent management of its debt balance and lower leverage. The software company has prepaid a significant portion of its first-lien term loan since 2023, bringing its leverage down to approximately 6.8x from about 9.5x in 2023.

Despite recent challenges to its topline growth and EBITDA margins, Upland Software has managed to decrease its leverage. The company is expected to modestly grow its core organic revenue and improve EBITDA margins in 2025, which will support continued positive free cash flow generation and debt service, even amid macroeconomic uncertainties.

The positive outlook from S&P Global Ratings is based on the expectation that Upland Software can maintain its leverage below 7x while executing its core organic growth plan and expanding EBITDA margins over the next 12 months.

Upland Software reported an EBITDA margin of around 21% in 2024, impacted by sunset assets, higher investment spending, and a lower core organic growth rate. However, the company’s EBITDA margins were historically in the range of 25%-27% during 2020-2022. S&P Global Ratings expects the company’s EBITDA margin to expand to 24%-25% through 2025 as it reduces its investment spending and achieves higher core organic growth.

Despite headwinds, core organic growth is expected to improve and turn positive in 2025. Upland Software divested two nonstrategic underperforming product lines early in 2025, which allowed the company to prepay $33 million of its first-lien term loan. These divestitures will create a $26 million revenue headwind in 2025 but will not materially impact profitability.

Total consolidated revenue is expected to decline by about 12% in 2025 due to the sunsetting of non-core assets and recent product divestiture. However, the 2025 midpoint guidance indicates a positive core organic revenue growth of about 2.5%, representing a modest improvement from the previous years.

Upland Software has integrated AI capability into 80% of its core content and knowledge management products, creating potential upselling opportunities. The company’s net retention rate improved modestly to just under 100% in 2024.

S&P Global Ratings expects Upland Software to continue generating modest positive free operating cash flow (FOCF) in 2025 and sees limited refinancing risk on its 2026 debt maturity. The company made debt repayments of about $189 million in 2024, and an additional $33 million in 2025, leaving a remaining first-lien term loan balance of about $261 million. The company’s leverage is expected to improve to about 6.5x by the end of 2025.

The positive outlook on Upland Software reflects the expectation that the company can sustain its leverage below 7x while executing its core organic growth plan and expanding EBITDA margins over the next 12 months. Upland Software’s EBITDA is expected to improve to about 24%-25% in 2025 due to investment rationalization and a focus on products with higher margins.

The outlook could be revised to stable if Upland Software’s performance suffers from missteps related to its growth plan initiatives or if incremental debt-funded acquisitions fail to perform as expected. An upgrade could occur if Upland Software sustains its leverage below 8x and its FOCF to debt near 5% through sustainable organic revenue growth, increasing scale and EBITDA margin expansion, or repayment of debt.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.