AvePoint, Inc. (AVPT) Earnings Call Transcript & Summary

Greetings, and welcome to Apex Technology acquisition or proposed business combination conference call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Jeff Epstein. Thank you. You may begin.

Today, we would like to present what we believe to be a compelling investment opportunity with AvePoint, the leading Microsoft data management SaaS provider. I'm Jeff Epstein, Co-CEO of Apex Technology. I'm the former Chief Financial Officer of Oracle, where I led a team in the finance department of 6,500 people. Over the past 20 years, I've served on over a dozen technology company Boards of Directors, including Booking Holdings, which I joined when it was Priceline and had a $1 billion market capitalization. I retired a year ago after 16 years of service when it had $80 billion market cap. I'm the Lead Director and Chair of the Audit Committee at Twilio, which I joined when the company had a $4 billion market cap and which today has over a $40 billion market cap. My partner, Brad Koenig, led Goldman Sachs Global Technology Banking team for many years. He and his team led over 100 merger transactions and over 200 initial public offerings. One of his first projects at Goldman Sachs was working on the Microsoft IPO, which is especially relevant to AvePoint. Brad continues to have close senior-level relationships at Microsoft today. Before partnering with AvePoint, Brad and I met with over 100 companies, venture capital and private equity firms. We believe we are the ideal partner for AvePoint due to our many relationships in the capital markets, boardrooms and executive offices of AvePoint's customers and prospects, our knowledge of enterprise software and our experience with some of the most effective and efficient leadership teams in the world. At the same time, AvePoint is the ideal partner for Apex. Why? First, cloud software. AvePoint is a market-leading SaaS company. Second, leadership. AvePoint is a highly capable, technical leadership team. I believe the best technology companies have technical founders, like Jeff Lawson at Twilio, where I'm the Lead Director and like TJ Jiang, AvePoint's CEO. TJ has the same product vision, technical expertise and entrepreneurial determination, I've seen in other world-class technology leaders. Third, growth, Microsoft Cloud, is a tidal wave sweeping through the world's enterprises. AvePoint is perfectly positioned to take advantage of this trend. Fourth, product leadership. AvePoint is the clear leader in data management for the Microsoft cloud ecosystem. Fifth, customers. AvePoint has hundreds of high-quality diversified, referenceable customers across the Global 1000, the mid-market and small business. Sixth, compelling financial results and business model. AvePoint is growing 30% per year. and with fresh capital from this transaction, AvePoint will invest further in customer success, sales, marketing and product innovation. AvePoint is already profitable and it's very capital efficient. TJ and his team built a company worth over $1.7 billion today on only $60 million of capital on 29x return. Finally, investors in our pipe have the opportunity to invest at a significant discount to AvePoint's high-quality, high-growth software peers. To summarize the transaction, AvePoint and Apex will combine to create a $2 billion market cap public listed company, including the value of our cash and AvePoint will trade under the ticker AVPT. The transaction implies an enterprise value of 9.0x 2021 revenue. The transaction will be funded by a combination of approximately $352 million of cash and trust and a committed pipe of $140 million from a group of highly respected institutional investors. Existing AvePoint shareholders will maintain majority ownership with over 70% of the pro forma company. Upon closing of the merger, AvePoint Co-Founder and CEO, TJ Jiang, will continue to serve as CEO, while Co-Founder, Kai Gong, will serve as Executive Chairman. Brad and I will continue to be involved in the company through the Board of Directors. I will serve as a director, while Brad will join as an observer to the Board. Now it's my great pleasure to introduce TJ Jiang. TJ went to Cornell and NYU, where he earned a PhD in data mining. He then worked at Bell Labs and on Wall Street as a software engineer building trading systems before cofounding AvePoint. TJ and his team have built a wonderful corporate culture. The leadership team has worked together for many years. They understand the value of money. Even though TJ travels throughout the United States, Asia and Europe constantly, he continues to fly coach. That's our kind of CEO. Now I'd like to introduce my friend, the CEO and Co-Founder of AvePoint, an entrepreneur, an engineer and a world-class leader, TJ Jiang.

Thank you, Jeff. AvePoint is the largest SaaS data management provider for Microsoft 365, where our Azure-based SaaS solution help organizations improve the security, compliance and productivity of their digital collaboration. AvePoint today is a true global organization with well over 1,300 employees across 14 countries and 5 continents. Microsoft 365 is the largest enterprise cloud platform on the planet, servicing approximately 250 million users. Over the last 19 years, AvePoint has developed a tremendous relationship with Microsoft. We're amongst hundreds of thousands of Microsoft partners, AvePoint is one of the very few that has been awarded Global Microsoft Partner of the Year Award 5 separate times. In 2020, AvePoint will achieve approximately $148 million in revenue, which represents a second year of nearly 30% growth in ARR and 26% year-over-year growth in revenue. We also have a 14% EBIT margin with 0 debt, demonstrating our history of disciplined growth that has made us a SaaS solution provider, experiencing both high revenue growth and free positive cash flow. AvePoint has achieved all of this with approximately $60 million of primary capital. A big part of AvePoint's growth and exciting future is knowing that all organizations need help in managing their data. Today's enterprise generate data at exponential rate, the amount of data is growing fast. In addition, the complexity of legacy on-prem solutions that enterprises need to properly transition to cloud presents new challenges for organizations. Some of these include how to protect and back up vast amounts of data. How to enable the right controls to understand who has access or delete the data and also how to receive alerts and audit reports on those access. The COVID-19 pandemic only accelerates this massive digital transformation movement. Microsoft CEO Satya Nadella is famously quoted on his observation of how enterprises are compressing digital transformation road maps from 2 years down to 2 months. We have seen this as well. And from industry surveys of enterprise CIOs, a post-COVID world will continue to rely heavily on remote work and digital collaboration. So what does AvePoint do? We bridge the gap between what Microsoft Cloud offers and what the enterprise requires. We do this through data transformation from legacy enterprise content management platforms to Microsoft Cloud. And once the data is in cloud, proper data and information management as well as governance and compliance to ensure the right individuals are accessing the right data at the right time. The business benefit we provide our customers can be categorized in 3 main areas of data transformation, governance and compliance. Some examples include in data transformation, our solution helped with information life cycle management as well as providing automation for end-user services. For data governance, we're helping our customers with content and collaboration security. We also provide information asset management capabilities and controls for internal and external sharing of documents. Lastly, for data compliance, we have a comprehensive offering covering data retention policies, file analysis and data classification and records management capabilities. Simply put, the AvePoint advantage is that we help customers maximize their ROI in the Microsoft Cloud. We help enterprises solve the last-mile problem and make Microsoft Cloud work for them in a scalable and automated way via our continuously improving multi-tenant SaaS offering. AvePoint's total addressable market is truly vast. You can see here that the TAM of security, cloud integration and data protection as a service combined, makes up nearly $15 billion. In the short term, covering slightly more than 10% of the current Microsoft 365 active user base, our current portfolio can help -- already can propel AvePoint to become a $1 billion annual revenue company. With 19 years of deep enterprise customer engagement history, AvePoint truly has a diverse set of blue-chip customer base across industries and geographies. And no singular customer represents a significant percentage of our revenue. Moving forward, AvePoint is looking to significantly speed up our growth profile with our first mover and technology advantages in Microsoft cloud space. First, we will look to improve our dollar retention already at 106% to match that of SaaS industry best benchmarks within the next few years. Second, we'll continue to increase our small and medium business segment investments in digital marketing spend and channel partner expansion to dial up our triple-digit growth. Third, we'll deepen our enterprise segment by expanding the team to ensure we achieve our stated 30% year-over-year revenue growth projections into 2022 and beyond. And lastly, we'll continue to strengthen our product portfolio by building industry-focused solutions. I now turn this presentation over to our CFO, Sophia?

With the SaaS transition, we have built a powerful financial model with significant acceleration in ARR growth, from 18% to almost 30% in the past 6 quarters. We already saw this accelerating growth in ARR over the last 1.5 years, even before the impact of COVID. As of today, over 70% of our revenue is recurring and the dollar grew to over 85% in 2 years' time as our subscription business continues to scale rapidly. More importantly, we are successfully navigating our business shift to a recurring model, while expecting a 30-plus percent compound annual revenue growth between 2020 and 2022, primarily driven by recurring revenue growth of 38%. In the coming year, we plan to increase our investments in sales and marketing to take advantage of our efficient go-to-market motion. As a result, we expect a modest impact to our operating margin next year, and then we will see some acceleration in revenue growth as our salespeople and the channel partners become increasingly productive.

Thank you, Sophia and TJ for presenting the AvePoint story, which represents a compelling opportunity for public market investors. The total equity value of the company is priced at approximately $2 billion, which translates to a 2021 projected revenue multiple of 9x and a 2022 projected revenue multiple of 6.8x. The transaction will be funded by a combination of approximately $352 million of cash in trust and a committed pipe of $140 million from a group of highly respected institutional investors. This transaction will strengthen AvePoint's balance sheet with over $250 million of cash, which will enable the company to aggressively invest and accelerate growth. The transaction provides members of the senior leadership team, all of whom have been at the company for more than 10 years, a modest amount of liquidity. The pro forma cap table will feature ownership percentages of 72% for existing AvePoint shareholders, 21% for the Apex shareholders and sponsor and 7% for Pipe investors. We expect the transaction to close in the first quarter of 2021. We believe that this transaction is priced at a compelling valuation. At 9x projected 2021 revenue AvePoint's valuation is at a considerable discount to the 14.1x multiple for other growth infrastructure companies such as Dynatrace and Alteryx and 20.2x for other comparably growing SaaS companies. As shown in the left column, AvePoint's projected revenue growth and profitability compares favorably to these very high-quality company valuation peers. An additional relevant comparable company is Jamf, whose position in the Apple Ecosphere is analogous to outpoints in the Microsoft cloud environment, which is a much larger market size. AvePoint, which is growing 30% compared to Jamf's 20%, is attractively priced at a revenue multiple to growth ratio of 0.28x compared to 0.60x for Jamf. This final slide, which presents the funnel of Elite software company metrics, represents why Brad Koenig and I are delighted to partner with TJ and AvePoint. Out of 212 public software companies listed on NASDAQ and the New York Stock Exchange, only 5 have achieved the same combination of scale, high growth and profitability that AvePoint has accomplished. As you can see, this is quite an exclusive club. AvePoint is a leader in a massive and rapidly growing market, has a long history of excellent execution as many opportunities to gain market share and accelerate growth and is led by an accomplished, experienced, highly capable and motivated CEO and management team. Thank you.

[Operator Instructions] First question comes from Derrick Wood with Cowen and Company.

This is actually Nick Altman on for Derek. Just to start, maybe from an R&D perspective, sort of where is the focus right now? I noticed in the slide that you guys have around 10 solutions today, but where do you see sort of the most opportunity going forward?

That's a great question. This is TJ from AvePoint. We continue to see tremendous opportunity in the information management space. The biggest opportunity comes from what we call the next-generation enterprise content management solutions on Microsoft Cloud, specifically around industry-specific, record management, document management, where you even have for higher ed exam management solutions that's highly integrated with our management platform on Microsoft Cloud. We see industry vertical solutions to be the high-margin premium business, critical solutions that we look to expand into.

Great. And just as a follow-up to that, in terms of vertical exposure, where is sort of the bulk of the revenue coming from today? I know you guys don't have any customer concentration. But are there any sort of verticals that have been showing more strength during COVID? Or is it more kind of broad-based strength?

Yes. So over 50% of our revenue come from regulated industry. So public sector, as an individual vertical, is the biggest industry for us. That's U.S. government, Western European government, Japanese, Singapore, Australia and New Zealand government and then followed closely by financial services, healthcare, pharma. So very much regulated industries, manufacturing as well. Because, again, our pedigree where we started from is that we're very much focused around Microsoft Enterprise Content Management that was SharePoint on-prem and then we moved to cloud. So these large regular industry with multi-geo presence has the biggest need for regulated information governance needs, multi-geo support. And so that's our starting point. And that's been our strongest and highly resilient enterprise customer segment.

This is Jeff Epstein. If I could add, one of the reasons we're very excited about AvePoint is we like to look at companies where the wind is at your back instead of the wind in your face. And of course, the whole work-from-home, remote work, COVID world has been a big wind at our back. But what TJ just talked about in terms of regulation, fundamentally, the world is waking up that data management is extremely important. Everyone is concerned about privacy. Everyone is concerned about cybersecurity. And in order to optimize for governance to minimize risk in terms of privacy and cybersecurity, you need the products that AvePoint has. So that's a big part of the thesis that we're long regulation on privacy and cybersecurity and it's going to benefit us.

No, that's really helpful. And then just lastly for me. You guys mentioned sort of going forward, there's going to be a greater emphasis on the SMB part of the market. What is sort of driving that? Are you guys seeing sort of greater demand at the low end, maybe a little bit of that is COVID induced. But how do SMB customers, I guess, have different needs versus some of your larger enterprise customers?

Yes, that's a great question. So we have always been focused on large enterprise. And we classify SMB as any business doing less than $250 million annual revenue or smaller companies. So historically, we don't touch SMB. But what we noticed that since we've gone to SaaS, and we've been doing Microsoft SaaS for 9 years now in this remote everything world, right? The big theme here is you can't fake SaaS. You can't just put things in VM and running AWS and call it SaaS. This is truly a multi-tenant SaaS solution where we update our software literally for all of our customers every 2 weeks. And we have all the cloud security cloud operations and ISO audits that go along with it with data centers with instances around 12 data centers around the world, including FedRAMP certified data center in U.S. Arlington for Fed government. So what we noticed, though, is that 2-plus years ago, small customers, 50 seats, 20C law firms, 50C accounting firms are coming to buy our SaaS software. So we realized very quickly just because you're small doesn't mean your data is worth less to you than a city bank of the world. So we start to look at that market segment. You're absolutely right, the SMB needs are slightly different. But at the end of the day, we realize that it's the same great enterprise grade, enterprise-grade SaaS software functionalities made now much, much more accessible to SMB because, again, we run a SaaS or a Software as a Service. So the small businesses don't have the installed, don't have to maintain. We run all the operations for them. So in the last 3 years, we organically grew this segment. We integrated in 100 digital marketplaces with some of the biggest software distributor in the world, Ingram Micro, SYNNEX, Tech Data, SoftBank in Japan. And we see 3-digit growth, tremendous growth in that segment, just organically. We also note that, that market segment for Microsoft, in today's office 365, Microsoft Office Cloud, 250 million active user seats, 40% of users in that segment. So we look to significantly step up the investment in that segment to, again, apply that same enterprise-grade software functionality available for SMB. The go-to-market is different. There's going to be a lot of investment in digital marketing. This is actually 0 human touch market motion here. It's monthly contracts, MSPs, these managed service providers because small businesses don't have IT. They will use our software to manage office 365 tenants for small businesses, several hundred at a go. Our software allows them to scale their managed services practice on a monthly basis, make a sticky business and grow from there. So actually quite excited about that segment for our business here.

[Operator Instructions] Next question comes from Kirk Materne with Evercore.