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

Good morning and good afternoon for all of those tuning in today. I'm Fatima Boolani. I run the U.S. software equity research effort here at Citi, and I am thrilled to be kicking off our set of sessions on day 1 of the Citi Global Tech Conference with the management team of AvePoint. And with me, I have CEO and Founder, TJ Jiang; as well as CFO, Jim Caci. Gentlemen, thank you for joining me today.

Good morning, Fatima.

Good morning.

Excellent. Well, I appreciate everybody's patience as we iron out some of the technical kinks we had this morning. But without further ado, I want to turn the floor over to you, TJ, to work through some prepared remarks, and then we can dive right into some dynamic Q&A. So TJ, take it away.

Perfect. Well, good morning, everyone. Yes, so we have prepared several slides for everyone to get a sense of what AvePoint is for those of you who are not familiar. Today, AvePoint is the largest data management SaaS solution provider for Microsoft 365. Our solution sits in Microsoft Azure and is used by large enterprises, around 16,000 customers around the world managing over 8 million enterprise users for their data in Microsoft 365. Specifically, we are focused around this whole end-to-end collaboration, security and governance space, where we focus on the end-to-end life cycle management and governance and compliance of unstructured data. So these are e-mails, file shares, chats, shared documents, all Microsoft Office documents, whether it's in Teams or SharePoint Online or via e-mail or OneDrive. And then of course, we've then expanded to other cloud platforms like Box, Dropbox, Google and Salesforce. So I'll go into more detail on that in a minute. So today, the company's last 12 months revenue is $170 million. This is the third year of 30-plus percent ARR growth. And this year, we're looking at essentially a 30% revenue growth as well. Positive EBIT margins and positive cash flows and no debt. We just went public on July 2nd via route of SPAC with Apex Technologies. That puts a total -- aggregate of just shy of $270 million cash on the balance sheet with no debt. So this is a company that's been around for a better part of 2 decades now. And this is actually the history of our revenue growth. And you will see that throughout we have enjoyed high revenue growth with the exception of this subscription conversion period of '14 to '18. The company has went through several major pivots in our business as well as technology. We started our history by becoming the biggest global data management provider or software provider for Microsoft SharePoint, very much focused on the enterprise content management space. Again, that's the genesis [ of ] unstructured data management. And in 2010, we actually really aggressively invested into cloud. We saw that not only is Microsoft cloud going to be something that's very big and continue their dominance in the enterprise space but also the opportunity for us to really expand our total addressable market well beyond just the enterprise content management platform, that's SharePoint, into the entirety of Microsoft Office. So today, in the Microsoft world, with Teams, with e-mail, with cloud file shares, you could not do anything without invoking essentially SharePoint whenever you do file shares, co-authoring, editing, version control, et cetera. So we're really in the fabric of the Microsoft cloud here. So we have been SaaS and IaaS enabled as well as -- for a long time. So IaaS and PaaS enabled since 2010 and SaaS enabled since 2013. So that's actually quite important. That give us a first-mover advantage in the enterprise SaaS cloud space because that's not just technology, but it's also security, operation control, compliance and even FedRAMP Authorization certification process. Also, we went through the subscription conversion, where notably Adobe went through very successfully as a public company and now Splunk is going through it. There was some painful process that come out of that. We did that without borrowing any money, and we did it organically. So this company has always been very fiscally disciplined. So we have built this business with just $60 million of primary capital and no debt. And now coming out of the subscription conversion since '18, we have experienced 2.5 years, so 10 quarters of record quarter and consistent growth now with a flywheel of subscription business model. So we announced that in our Q1 earnings release. The background for, obviously, the market, what is driving this groundswell is the enterprise explosion of data and then how much of that data is going to digital transformation, going to cloud. And of course, the large enterprise we address today, 60% of our customers in regulated industry. So they have complex environments, hybrid environments, multi-cloud. And of course, Microsoft digital collaboration, namely Teams, went through this massive growth from 20 million active users in 2019 to now well over 250 million active users. So that's creating this massive uplift and complexity demand around data management. Also, Gartner is now increasingly defining this concept in this area called SaaS management platform where it's all about data, right, at the end of the day. It's -- the SaaS management platform coexists and works with the other cloud applications and then talk about ingesting data to drive discovery. So today, we already have a product that does the migration. We do the information and data governance. And we're actively working with partners to do the endpoint security as well. So this is a space we increasingly are expanding and playing in that arena. So very importantly, what is our SaaS management platform? That's powered by our AvePoint online services, SaaS offering. It's one of scalable and secure architecture. Today, we're already managing hundreds of petabytes of data across our 8 million cloud users, and this is just on the SaaS world. And this is also just the piece that customers entrust us to store. We offer Bring Your Own Storage, Bring Your Own Encryption, Bring Your Own Authentication. There's also much of the data that customers actually store in their own AWS storage or their own on-prem storage for business continuity purposes as well as their own potentially Azure contracting storage so that we don't touch. But already, we touch hundreds of petabytes of data across 14 instances around the world. Talk about data sovereignty, every country want their own cloud. So this is where there's a lot of complexity arise about where even for MNC, they need to segregate and deposit their data by geographies, by country. So in that sense, this is something, again, that takes time, literally, to build up. So for example, FedRAMP authorized process, it's a 3-year process. So we went through that. We're now picking up 6-digit clients on that with the government in Arlington, Virginia-based data center. And talk about -- then from the data orchestration side because now we have all these management capabilities and the data with the customers. So we actually talk about data automation, generate insight and offer self-service. So we're now surfacing this capability to the front office. Traditionally, our users are back office, IT, CIO, CIO minus 1, risk officers, compliance officers. Now with the orchestration, we're actually essentially doing -- surfacing that to front office business [ actors ]. So I'll discuss a little more detail on that. And overlaid all of this, of course, is intelligence, so AI-driven, machine learning-driven data and user insights. But my background is actually doctorate in machine learning and data mining. So that's near and dear to my heart. So at the center of what our offering is, is this data orchestration engine that we ingest data, we [ use ] automation and then offer insight and self-service. Today, we already cover multi-cloud. So while we drive a vast majority of our revenue in the Microsoft 365 cloud, our customers are multi-cloud. So to follow our customers, to become more strategic provider partner for them, we also now cover Google Workplace (sic) [ Workspace ], Salesforce, Slack, Box and Dropbox. And our products that we focus on from a SaaS perspective, we loosely grouped them into control, fidelity and resiliency. And these are 1/3 and 1/3 and 1/3 of our recurring business. Today, just Q2, we announced with our public earnings, our mix is already 83% fully recurring and 17% is service-orientated. And we're working aggressively to get that down to about 10% of our mix in the medium term. We do services to generate innovation and also the fact that we engage very large clients. These are $2 billion in annual revenue clients, that's our enterprise segment, that we do a lot of business in, and there necessitate some services. In the control side, we have cloud governance that talk about data asset, management provisioning and also turn on and turn off external access. So this is very, very important for essentially teams' collaboration internally and externally. You don't want data assets to lay around forever. You want to time-lease it, you -- people's job changes also external sharing projects have the sunset, have life cycles. So we [ bake ] that automation out of the box to enable secure collaboration, access data whenever, wherever you want, but have control. And that's very, very important to enterprise. And we also start to get into the whole area, which is very important to enterprise, this license and title management across cloud. So think about, Fatima, you have different license types in Microsoft. 365, we have the kiosk license, which is F1, and all the way up to E5, right? They're most expensive license type. And Microsoft has just announced that they're increasing license costs across the board, 10% to 20% different license types. So we actually help large enterprises doing this allocation of entitlements because think about someone like a Nestle, 300,000 employees across the world and many of them don't even have a computer, they have tablets. So -- and they have seasonal employees. So how do they actually do entitle management? So that's very important. And also, from a policy perspective to see who has access to what and what are some of the potential violations occurring. So think of Varonis almost. They do a great job for file shares. But again, we do that for the entirety of Microsoft 365. The fidelity side, we talk about migration. It's -- migration, people used to think about it as a onetime project, but it's actually -- the better way to think about it is almost like a data integration and data broker type of services. It's migration of service not only from legacy ECMs, from file shares, from e-mails, but also, very importantly, cloud-to-cloud. So we actually -- we're the first one to come out with Slack, Teams bidirectional movement capabilities via SaaS offering and also think of all the multi-tenancy management, so divestitures, merger and acquisitions. We have MNC clients that have 72 separate tenants with Microsoft 365 from all the different type of acquisitions, being a conglomerate that they are. So how do you actually move data across? How do you even move data you even, say, [ let's pick ], from Box to OneDrive, right? So making sure that while you're doing that move, the access is controlled in a proper fashion. So those are very important on that. And then the last slide is the resiliency. We talked about business continuity. So Stackup as a Service, Archiving as a Service, Record Management as a Service, so all of those goes into our ECM routes, where today, we actually back up hundreds of petabyte data. And interestingly, while we can go into accounts with governance and security of collaboration data, our #1 backup workloads is actually Exchange Online. So we back up all the workloads in Microsoft 365, including chats and channels in Teams as well as, obviously, e-mail, file shares, projects as well as SharePoint and Yammer. And then we now are able to surface this capability to the front office. So why does business users care? Well, they can have chat bots. They can restore items without bothering IT. Especially when there's a ransomware attack, end user can actually do the restore of their files, of their e-mails. And then we also surface out these applications in Teams that allow end users to actually properly manage this data straw. So Teams and Slack, these type of tools are designed to be viral. So it's very easy to use. You can create channels, create chats. But then very quickly, within a matter of a month, you have hundreds of channels, hundreds of chats. How do you track what's important and what should be retired? So we have an automated way to do this with and surfaced it out as MyHub. It's actually one of the very few security certified application in Teams. And of course, with Windows 365, so this cloud PC, every instance of Windows now have Teams baked in and the customers who can just pick up our secure MyHub application out of the marketplace. It's already the #1 most popular and used enterprise Teams app in Japan and top 5 globally. So this is the way we actually surface our capabilities behind the scenes with the governance and security and control to the end users as well. And this capability allow us to also build that platform play that's a competitive advantage. On the left side, we also start to surface up going to the industry solutions with education solution, with public sector solutions, again, leveraging this data management capability across all these workloads and then surfaces that out and leveraging Microsoft Teams and cloud and now also LinkedIn and Viva. So these are the things that we actually see tremendous momentum and allow us to be quite differentiated of a player in a SaaS data space. So talk about the competition and differentiation. We don't have a singular competitor, as you can tell, from our collaboration, security and governance, from [ our then ] pivot into SaaS management platform. We do many things with our platform. And this integrated approach, for instance, when we do records and labeling, right, we can label across all license type. Microsoft natively only offer us labeling only in E3. So that means all the users without the more advanced mixed expensive license type. Their data is not properly labeled and handled and processed. So what we do is we label across all license types. Of course, we also label data in Box and Dropbox and Google Drive that allow us to give customers the ability to have proper record management across different multi-cloud. But also very importantly, think about Backup as a Service. When we do backup, in the traditional sense, you just back up everything and you're done. But what if you can actually proper do record management and then sunset the data. Actually, most enterprise, 90% of -- up to 90% of the data are inactive data. So they may not be -- they may not need to be backed up every single day. So there, we could actually sunset and archive. And based on these labeling and the access patterns, we can actually reduce the amount of data people back up by as much as 90%. So this is this example of interworkings of different products across the platform. Another important aspect about labeling is this GDPR, right, data privacy. The EU have this regulation called right to forget. So when an EU citizen requests the company to delete all of his or her records, you need to purge that even in backup data and records. So -- even inactive content repositories. And we can do that because we have that labeling classification and record management capabilities across the platform. Therefore, we don't have a single competitor. We have point competitors. In the large enterprise space, which we do most of our revenue, so we have a field sales that focus on $2 billion and up enterprise segment. And we have inside sales focus on $250 million to $2 billion annual revenue companies. So in that segment, the point competitor we run into in migration space, could be Quest; in backup space, could be Commvault; in the security space, could be Varonis. But all these vendors I just mentioned are very late to the cloud game. And in cloud, in SaaS, especially enterprise SaaS, it's not about just playing something in VM and call it SaaS, right? It's actually all of the above I talked about. It's about continuous deployment, continuous integration, ISO audits, FedRAMP Authorization certification and then 24/7 cloud operations, security team. So all of that investment literally takes time, not to mention global presence for data sovereignty concerns. So that is something that we have a really lead time out. And on the SMB side, which is another market now we increasingly address, which is the small $250 million and smaller 500-employee or fewer companies, we actually see tremendous uptick in demand for our enterprise-grade SaaS collaboration, security and governance solution from MSPs because small businesses don't have IT. They have managed service providers. These are service organizations that manage your e-mail infrastructure, your Zoom call infrastructure. Those folks are actually getting to build this monthly recurring managed services that baked in with Microsoft licenses. So that's a segment we have been able to successfully tap into. They started coming to us 2 years ago, and we started to see, hey, this is a very interesting segment, even though they're buying 20 seats, 50 seats on a monthly contract, whereas enterprises, yearly, multiyear, our blended average is 2.25 years. This is a monthly contract, but it's high growth. And actually, for Microsoft, it's about 40% of their market from a seat headcount perspective. And we're seeing triple-digit growth. It's already 5% of our recurring business. And we see the opportunity to grow that to potentially become 1/3 of our business as that's 40% of Microsoft business. So that segment is also very, very interesting to us. And there, we could run into other SaaS players like Datto of the world. But again, because we came from the enterprise side, we're able to take an enterprise-grade SaaS offering, wrap actually a simplified SMB wrapper around that called Elements platform that enable enterprise -- these SMBs to also not just do Backup as a Service but also Security as a Service, Compliance as a Service, Migration as a Service. So again, this platform approach is resonating very, very well in the market. Overall, the segment and the TAM, it's massive. Today, we have over 8 million active users. Our stated goal is to get to 50 million active users. That's about 10% of the Microsoft's estimated growth for their Microsoft 365 market segment. And of course, we're also now increasingly investing and growing into multi-cloud. So just only on the Microsoft segment side, if we get to that 10% market capture, and again no one else has more, that's the good thing about this accelerated movement into cloud. At 10%, we will be able to reach $1 billion recurring revenue. So we have very, very strong TAM in front of us and also early mover advantage and technology advantage. So that's exciting, very, very exciting story for us. That will enable us to -- we also have multiple tailwinds for growth. And I'll just end with some financial highlights, and I'll open up for questions, Fatima. So last 12 months, again, $170 million revenue. And now 83% mix is recurring. And our SaaS is also growing very, very rapidly. So we have what's called -- in the recurring, we have SaaS and term. Term is just -- it's all subscription, by the way. We're only selling subscription. So everything is recurring. And term is just whenever a customer uses, whether it's dedicated VM or some bits of on-prem environment, given that federal government, public sector is a large customer of ours globally. So we have many customers that have some on-prem components. So that is terms. So that only makes matters, not only matter in the revenue side on that because of the revenue recognition, ASC 606, but when you look at then the ARR, that's actually the true recurring nature of the business, and ARR continued to grow very robustly for now, 10 consecutive quarters, and the market in front of us is very large. We also improved our net retention quite significantly by investing to customer success so that we actually are very bullish to get this current 111% to 120% in the medium term. So that means our revenue, just by focusing on existing customers, can grow 20% year-over-year. So that's also a tremendous kind of push for our tailwind for growth here. And overall, our long-term margins is to maintain very healthy margin of mid to high 70% gross margins. And sales and marketing percent cost is about 30%. And we still think that we can maintain a very healthy EBIT margin, so basically staying in that north of that Rule of 40 for SaaS enterprise businesses. So with that, Fatima, maybe let's open up for questions.

Yes. Excellent. I know we're bumping up against time. So the themes that I wanted to touch on with you are, look, you've got a number of different vectors to grow the business, whether that's improving the rate of the dollar net retention, improving your new logo acquisition activity. And that's all really important. But I want to get down to the brass tacks in terms of your pricing model. There's, again, a number of different opportunities with respect to how much data growth is proliferating. There's a number of different opportunities with a number of cloud assets organizations have to manage. So how do you -- between you, TJ and Jim, how do you structure a pricing strategy and a pricing program whereby you're really leveraging some of the growth in the secular trends that you talked about, while not disincentivizing adoption of the platform because customers feel like they're on a sort of a consumption meter.

Yes. That's a great question, Fatima. So overall, we sell by subscription, very much like how Microsoft license their software. There are consumption aspect to the -- our licensing as well. So for example, on the migration side, we actually are selling by consumption. However, in the SMB, because the MSPs are using this managed service provider as a service, so they're actually subscribing to our migration as a service capability. So they can essentially do migration for hundreds of tenants. They also manage 100 tenants in 1 single pane of glass for all of our capabilities for those clients. So we have already a mix of subscription and -- as well as consumption-based licensing model. In July, we launched our global partner program. So here you see that for our mid-market, which is $250 million to $2 billion customer segments, we also are now -- have a force function to run 100% through channel. So mid-market SMB is 100% channel-focused to drive that multiplier. And over there, we're actually opening up our APIs so that we can have DevOps partners that will be able to consume our services and provide unique IP to their customers. So increasingly, we're looking at more ways to drive towards a consumption-based model from just only doing subscription-based model.

Jim, maybe for you, just as it relates to the number of opportunities that you can prosecute to drive growth, how does that factor into the investment envelope that you have for 2021? And maybe comparing and contrasting that with 2020 that I imagine was a very anomalous year for you as it was for most software companies where T&E spend pretty much ground to a halt. So can you just help us sort of compare and contrast the spending profile and how we should think about the growth and margin algorithm for AvePoint?

Yes. Well, surprisingly, you're right. So T&E dropped, but we made some significant investments toward the end of '20 and into '21, where we've increased, TJ alluded to before, our customer success team. We've grown both all of our customer-facing teams by over 50%, so sales teams, customer success teams, really looking to take advantage of this migration and how we can accelerate that. And so we've been pretty bullish on that. Obviously, that's been a significant investment on our side in terms of cost. But we do expect that to pay benefits as those people are now really ramped and now fully engaged in terms of understanding the business. And so we expect to see some pretty good leverage from those folks going into '22.

And then maybe just the last question for me. And TJ, you alluded to this as we went through the presentation. Microsoft is your biggest source of revenue at present. But at the same time, they're also a juggernaut as it relates to infrastructure and application incumbency for a lot of organizations. And by virtue of that, they tend to embed a lot of capabilities and offerings and feature functionality that some of their partners, in their partner ecosystem, run their business on, right? So what I'm trying to get at is Microsoft as a friend and a partner versus a frenemy or even an enemy as it relates to some of the core capabilities you offer from a data governance, data protection and collaboration, security and governance standpoint, how does that dynamic evolve, you think, from here with Microsoft?

Right. Fatima, firstly, we don't compete with Microsoft, we compete within this multitrillion dollar Microsoft ecosystem. Microsoft always say that for every dollar they generate, there's $9 partner opportunities, and that's what we see. As Microsoft continue to grow, the opportunity to do value-added business grow geometrically. And that's how we have seen it over the last 20 years. So Microsoft, yes, they will continue to improve their baseline functionalities, but at the same time, this monolithic cloud, right, that's servicing now 280 million users going towards 500 million. And you have companies that are sophisticated and regulated. On one end is Goldman Sachs and then you have companies like a 10-man law firm on the other end. At a certain point, it doesn't meet and match all the needs of these customer sets that are differentiated. And especially then you throw in this regulated industry, like government, financial services, pharma. It becomes complex quite quickly. And historically, this is where we have really provided value and so much so that there were certain things that is not -- it doesn't even behoove Microsoft to do. So for example, providing consistency across all the different license types. On one hand, Microsoft will encourage everyone to buy their Cadillac version, right? But there's plenty of customers who don't even have -- they have users that's on mobile devices that are only going to buy the light version. So there, there's very shortage of good solution that offers this governance and security management. And also, very importantly, there is this multi-cloud flavor that Microsoft never addressed, right? The world is multi-cloud. Most customers don't want to rely on a singular cloud platform. So what happens when you have data within Microsoft 365, also across Box, Salesforce and Amazon, then what do you do, right? So this is where we then come in also to extend our coverage so that these companies that are regulated will have recourse to actually manage data across cloud. And so these platform vendors, they want to be well guarded, but ultimately, the reality is a lot messier for that, right? So again, we are also -- this market is so big, we're just looking at 10% of market share. Regulated industry itself for Microsoft is at least 30%. Think of the government, right? Governments around the world are the biggest buyer of software. And that, for us, is 1/3 of our business. So just getting 10% of overall market when regulated industry for Microsoft is at least 30% to 40% of the market, so that just means we have so much run rate to become a much bigger company. Lastly, I just want to say we have a great relationship with Microsoft in the sense we have MVPs and RDs, so these are research directors, MVP and [ MVCs ]. So we actually see Microsoft's product in other TAP programs 6 months to at least 1.5 years ahead of time. So we know how to anticipate what are the major areas of growth and which areas we potentially need to avoid. And also our sales organization is selling because we're consuming so much Microsoft cloud and lighting out Microsoft workload were top 5 most successful, what is called, IP co-sell partner in the Microsoft world where Microsoft sales are getting compensated. They're getting [ swift ] on our success. So they're -- it's truly a multilayered win-win relationship with Microsoft today.

Great. Well, I know we're out of time, so we'll have to cap it there. But I wanted to thank you so much for spending some time with us this morning, giving us the lay of the land with AvePoint. And thank you for your patience for a little bit of our tech [ difficulty ] this morning, but thank you for joining me.

Always a pleasure, Fatima. Thank you.

Thank you, Fatima.

Take care.