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

Good morning, everyone. I'm Derrick Wood, senior analyst covering software at Cowen. And today, we've got TJ, I'm going to mess up your last name, Jiang.

Jiang.

TJ Jiang, CEO of AvePoint. Thanks for joining.

Yes. Good morning, Derrick. Good to be here.

Good to see you. So let's start off with people that aren't familiar with AvePoint, give an overview of the company.

Yes. AvePoint is a 20-year-old company. We're the largest SaaS data management player in the Microsoft Cloud ecosystem. We focus on business data, security and governance. We have a whole SaaS platform that's been ongoing for 9 years now servicing over 9 million enterprise users. We also have service on-prem hybrid scenarios as well because of our history in the enterprise content management space. And since gone to SaaS, we were able to in our TAM from just enterprise content management into entirety of office productivity workloads that includes e-mail, OneDrive, now, of course, Teams, channels, chats. We have also since expanded into Google workplace as well as Salesforce. So as a global organization and 25% of our revenue is North America, rest of it is evenly split between Western Europe and premium software markets in Asia, Japan, Australia, New Zealand, Singapore, South Korea. We're literally in 17 countries because we were so focused on before in our first 10 years of a journey on the enterprise content management system, and that's large enterprise, that's really the kind of the high-touch segment. So we are literally global in all these territories, but since we've gone to SaaS, we have seen a massive uptick and the availability of SMB market to our solutions. So our enterprise-grade SaaS solution is now more accessible to SMBs and specifically managed service providers. Those are because small businesses don't actually have IT, so they leverage third party to actually manage their digital transformation experience. And we actually -- because our SaaS platform does the end-to-end data management play, we're able to offer value-add solutions where $1 of our software generates about $7 of services capability for these managed service providers. And we're also be able to offer to them on a monthly recurring format versus enterprise customers, which is annual or multiyear blended average 2.2 years. So that's now about 10% of our ARR. This year -- we'll be well over $200 million ARR this year. And the SMB segment, we forecast would be easily 30% of our ARR within the next few years because for Microsoft SMB is 40% to 45% of their total business. So that's just one really fast-growing segment for us. Of course, the enterprise continue to grow. In the enterprise space, we are very much focused on regulated industries, so government, banking, pharma, health care, manufacturing. So yes, our biggest market is U.S., Japan, Germany, all very heavy, regulated industry-focused segments for B2B software. And yes, that's where we play.

What is it that -- I mean, understanding and regulated industries having data management, data protection, compliance is super important. In SMBs, it's just as important, what's the dynamic there?

Yes. We actually learned this because SMB customers were coming to us and we realized just because you're a 50 men law firm, it doesn't mean you don't care about your data in the cloud. Anybody that actually works with the regulated industry they are contracting with governments, with health care, with banking, thereby indirect association part of the regulated industry.

Including financial services [ where you've ]...

Exactly, It's massive.

10 persons [indiscernible].

Anybody that care about who's accessing their data when and from where? And where is the data residency then they are a prime customer of ours. And that's a huge segment. And Derrick, in this current climate of anti-globalization, this is becoming even more of an issue. So we're actually seeing countries erecting barriers, every country want their own local cloud. And that's actually increased the cost of operating for some businesses, but of course, they're doing their digital transformation, which, in turn, try to drive innovation. And these are all really good macro conditions for where we offer value.

So could we just double click a little bit into the portfolio. There's kind of three main segments. I think that you sell into kind of data migration from on-prem to cloud back up and then just governance and policy controls. Can you just give us a sense of the value prop on each one of those and the kind of percentage of your business across those 3?

Right. So we collectively call our SaaS offering a confidence platform. It's a highly scalable solution that we actually update every 2 weeks via DevOps. So monitor 24/7 with a cloud operations and security team. We have about 40 instances around the world, including FedRAMP authorized data centers, in Arrington, Virginia, so is that data orchestration and scaling architecture. And you talk about alluding to the three major areas of our product around the data management and security capabilities, that's resiliency and fidelity and control. So resiliency, we really talk about backup as a service and cloud archiving. So once you're more mature, you need to worry about how to sensor your data, right? So -- and also record management as a service in cloud and also compliance as a service, talk about data privacy. So that's resiliency. And then the second pillar, what we call Fidelity. It's basically migration integration. So it's a full fidelity experience for customers going from legacy ECM or SaaS -- to SaaS type of data movement between enterprise content management platforms and then control its governance, entitle management, license management, its policy and insights, again, showing you who has access to what workloads. And this is increasingly important for multi-tenant management or MNCs that have need to delegate administration. So for example, WPP, Nestle, are a huge customer of ours in that space. So each one of these areas is about 1/3 of our overall revenue. Our total revenue is 82% recurring software subscription and 18% services. Previous year, it's about 20% services. We have already indicated to the market that we're working that service piece down to 10%. The dollar value will continue to increase because, again, the company revenue is growing very well every year. Our open guidance is at least 25% year-over-year, but ARR recurring side is growing well north of the 30-plus percent year-over-year. And the service piece will -- dollar value will increase, but as the percentage composition will go down to 10%. So what's really interesting is in the last 2 quarters, we have seen a continuation of interest around business, security -- data security as well as business continuity. So this actually highlighted the more importance of back-up as-a-service offering. So we're actually -- we're off -- because we are in Microsoft Cloud the longest, and we offer the best and most comprehensive as identified by Forrester, backup in service capabilities across all of M365. So Microsoft 365, that includes e-mail, OneDrive, Teams, Marine Projects. And of course, we extend that to include Salesforce and Google as well. So recently, we released our ransomware detection. So when you're in the throw of a ransomware attack, we can actually detect your real time because it's certain signature on your networks, on your CPU usage and on your storage. And then we can actually alert administrators to cut off the network and then also point them to a point-in-time recovery point so that they can recover data prior to the attack had taken place. So all of those is actually driving that segment, that resilience side to be about 50% of our mix now, just in the last couple of quarters. We also see in Europe, for example, some of our biggest enterprise customer in Germany, they're talking about, hey, we're not just -- it's not just a one-way movement to cloud anymore. There's a war going on. We need to think about business continuity and resiliency. So we actually want to keep some stuff on-prem. We want to keep some stuff in the private data centers. We want to have a hybrid deployment scenario. So that complexity is something that we also very well addressed between 20 years in the business. So yes, there's that nuance and evolving nature that's coming up. So the other two pillar, fidelity and control, then becomes the 25%, 25% of the mix.

So it's 50% of total ARR now or of net new business?

On a quarterly basis, just for the last 2 quarters. We need to be seeing what's on an annual basis -- annualized basis. Previously, the annualized basis is 1/3, 1/3, 1/3. And that's how we have grouped it as well.

Yes. And I guess -- like what are the secular drivers? I mean, you kind of already talked about it, but the movement to cloud, you've got more data sprawl. You've got, I guess, maybe users trying to license a lot more stuff than they were before. I mean -- and then you've got data protection being even more important in the cloud. I mean, are those kind of like some of the core secular drivers?

Yes. I mean the biggest secular driver, obviously, is digitization of industries and applications, right? So then why do people go to cloud? Because once they're there, the cloud just evolves much faster. The overall total cost of ownership for cloud solution is actually more compared to on-prem. But with a new wave of everybody have to compete and innovate and be able to survive in these current conditions, you'd have to digitize even faster. There's estimated -- so Microsoft has been talking throwing around this $1 trillion digital transformation opportunity just within Microsoft ecosystem. Their most recent data analysis, if you include the Google and Amazon in the world, it's talking about $4 trillion digital transformation opportunity by 2027. So it's a massive market. So in that consolidation of legacy systems and processes into cloud, we play a very, very vital role. We help enterprise go to cloud. faster because we understand, we've been around for 20 years. We went through 2-plus recessions and self-manufacturing recession that's called a subscription conversion. So we understand all the systems, and we know how to bring them to cloud. And once they're in cloud, obviously, protect their data, recover their data, but then sensor their data. And then, of course, a lot more around SaaS management, so entitle management, license management to maximize customers' ROI, which, now in this inflationary environment, is even more important, right? We, as a percentage of overall IT spend is small compared to their Microsoft spend, right? It's less than 10% of their Microsoft spend. But what we offer is the ability to help customers maximize their ROI, help them address hybrid deployment scenarios, multi-cloud deployment scenarios because every customers out there, predominantly especially enterprise are multi-cloud also, so that new ones that complexity is something that we really thrive at.

You mentioned 9 million subscribers or users, what is your -- within the Microsoft base, what's that opportunity look like? I think you've -- you've talked about targeting 10% penetration, what would that look like in terms of total users?

So that 9 million is compared to 7 million year before. Essentially, it's a 30% increase, right, as our revenue increased 30% last year. The total addressable M365 market, and this is just Microsoft Cloud, right, the Microsoft Collaboration Cloud. We're not even talking about Azure and Dynamics 365 yet, which we also have play in there. The total addressable market of M365 is $350 million now actively monthly users. Now predominantly, these users are using really base-level workloads like e-mail and just file share OneDrive, right? But as they get more complex use cases like Teams when they start to share documents, co-author, internal external collaboration. That's where we really light up. We enable -- so for example, Citibank didn't roll out the advanced workloads on teams globally until they had our team's governance solution to make sure that we have the right provisioning and control on who has access to what, when, where and with which parties, internally and externally. So those are the really good use cases. That's also pandemic-driven where everybody deployed Zoom and Team in a hurry, and there's massive data sprawl. And this is where governance on thought of that becomes very important.

And I mean, where -- just do overlap with E3, E5. I mean, E5 has some more advanced data governance solutions but there's majority of users are on E3. Can you just talk about, is there a little bit of overlap? And then maybe back up and just talk about the relationship with Microsoft from kind of a co-selling?

Yes. We have 0 overlap with Microsoft functionalities. We sit on top of the Microsoft stack. So when E5, you're talking about more advanced threat protection, for example, we can actually leverage those services and to enhance a better experience for a vertical solution, right? Because at the end of the day Microsoft produces product and platforms for all of their customers in the world. It's a singular M365 platform for the likes of WPP, state department and to the accounting firm down the street, right? At some point, it's not going to meet everyone's requirement. So this is where, historically, in our 20 years of existence as a company, and we're actually the first Microsoft ecosystem company to go public. So that's how special we are. I was just having a conversation with Head of M12 last week. They were modeling like we should have more partners like you that's successful and go public, and we kind of figured out how to work that ecosystem. But we have 0 overlap, we actually help customers regardless of what license type they have, and we have different type offering to match against that. At the same time, we also help them maximize their investment because most customers are mixed license types as much as Microsoft loves for everyone to go to E5. And you still see reports that's still early endings. The fact is E5 is a lot more expensive than E1 and E3. And also for a company like Walmart, they have vast majority of their employees and Amazon, et cetera, they are -- they don't even have a computer, right, even laptop. So what do they need a E3,E5 for? So they are mobile users, they're what we call frontline users, Microsoft has a special kiosk license type for them. You think about seasonal workers, large manufacturing players, right? So mixed license type is what the reality and we help companies address that. And our relationship with Microsoft is one of -- we have -- it's a multilayer relationship. We're actually a top 5 global partner when it comes to what is called Azure consumption and was IP co-sell. It's interesting like 2 weeks ago, Ingram Micro, the biggest distribution house -- software house in the world, they did their Miami kickoff. And we were on stage with Microsoft and Adobe and AvePoint. Let's talk about intentional conversation on innovation with Microsoft, AvePoint and Adobe. So we are also top 5, only 5 global managed partner at Ingram. The other 4 are Microsoft, Adobe, DocuSign and Amazon. And Microsoft, were top 5 IP co-sell. The other 4 are also Adobe, DocuSign. So much bigger players. That means asymmetrically, we're actually very, very important to these companies that are looking forward to invest more and aggressively grow more in cloud. And we're really punching our build level there. So that's on the business side -- on the sell side. So Microsoft actually even have internal program to incentivize their sellers to be comped when we actually sell into those accounts because our Azure consumption in the next 3 years is going to be over $100 million. So they love us. Obviously, we're getting smarter and also now that we've been doing this for some time, to even lower our cost to reach even better economy scale. Already, we have better economy scale than most Microsoft Cloud vendors and partners. So there's that engineering piece of it. Also, we're in all these partner advisory councils and Boards. So we actually see their roadmap at least minimum 6 months ahead. There are some really exciting stuff coming out. We're going to be always the first class citizen. And also lastly, also Microsoft Head of Development for Teams, for OneDrive, for SharePoint, Jeff Teper who runs a 20,000 people organization, has been an independent board member since 2014. So in all these 360-degree relationships, we're a very, very important partner and almost a poster child of success in the Microsoft ecosystem.

Is there -- are there -- when you think about the competitive landscape, are there -- it seems like you got an advantage given the relationship with Microsoft. Are there other vendors that try to target the Microsoft ecosystem and what differentiates you guys?

Absolutely. We -- so now I think in the last couple of years, people start to realize, wow, there's a lot of money to be made on the Microsoft Cloud, not just Azure. So you see Commvault releasing metallic, you see Varonis announcing some products for SaaS security, data detection and management in the Microsoft 365 and others, right? And Rubrik now announcing that they're supporting M365. Fundamentally, we have been there the earliest. We started investing in 2010 when Steve Ballmer was still CEO and everybody said, Microsoft's not cool anymore. And so we're really -- even Jeff Teper recently at our latest board meeting mentioned, people don't realize how hard it is to keep up with the pace of innovation in Microsoft Cloud. Teams has feature updates every 2 weeks. So to be a responsible first-class citizen in data management of every aspect of private channels, chats, right, conversations and how you share document internally and externally, it's a practice that takes time to get it right. You talk about data sovereignty concerns, et cetera. So that's where we excel. Having said that, we don't have any singular competitor. We have point competitors. So all the competitors I gave you, for example, they compete in a different part of our 3-pillar product function areas. So -- and we're also now interestingly -- because we cut across the enterprise and SMB segment, we also see different point competitors with each segment. For example, in the SMB we would never see Commvault, but we will see a Datto, right? We will see Viva. In enterprise, we will never see Datto and Viva because also our definition enterprise is 10,000 employees and up, and mid-markets in the 10,000 to 1,000 employees and 1,000 below is SMB. And then -- so we have different segmentation play. And when we win, majority time is because we have the platform play. We don't just do backup and service for you. We also do compliance. We also do data privacy. We also do governance entitlement and license management. We also do migration service for you. So in today's climate, where everyone is looking at what -- there's a lot of uncertainty going forward. So the revert to me is to go back to singular vendors, go back to platform providers, simplify management capabilities. And that really also works well to our advantage.

The -- how should we think about the pricing model? Is it pretty -- I think it's on a per user basis?

That's right.

Checking my notes, I think you mentioned kind of a percentage of what the Microsoft data.

Yes. So it's less than 10% of customers Microsoft spend. So you said -- you think you are...

Yes. But they are suite or by product line or?

We have bundles, right? We have bundles, and we have sometimes just the SKUs. But on average, you're talking about like $3 per user per month, right, $3 to $4 on average. So compared to your E3 license, which is $20-plus per user per month, right? And then, of course, our E5 is far more than that $30 plus like almost $40. So we also -- using that same platform can cover like Salesforce and even Google. A lot of enterprises will have both, obviously, M365 as well as Salesforce or CRM. So there, the price point we license the same way Microsoft license based on the number of employees in our organization. So we just map up to their M365 license. So every employee will get a license. So obviously, the more advanced workloads they require, the more -- the ARPU that we can upsell into.

It wouldn't be by department, if you win -- it's employee wide?

Employee wide, that's right.

And what are you doing for Salesforce?

So Salesforce is -- right now, it's backup as a service. It's part of our same backup as a service offering. We back up M365, Salesforce as well as Google Workplace. And actually, the sales force segment is growing pretty well as well.

But smaller and newer?

Yes, smaller and newer.

The macro is certainly tropical. What are you seeing in terms of spending behavior and if we do go into a tougher environment and contracting environment, what do you think that does for -- demand for your products?

Yes. So for sure, the macro -- we're cautiously optimistic. The macro condition, everyone is talking about cutting prudence in spending. We are also a very fiscally conservative company. We built this company with just $60 million of primary capital, no debt. But we think that, again, first, because our price point is actually pretty low compared to their typical M365 spend. And second is because the market that we address is the massive Microsoft Salesforce, now Google and then we're going to extend to AWS, these are massive market spaces. So we are still a law of small numbers, right? This year, our forecast total revenue is about $240 million at the midpoint of the guidance range. And so there's plenty of room -- headroom to grow. And the market is -- there's no dominant player right now in the market. So that's also very good. And third is this what I talk about of revert to platform play, right? In the time of budget conscious decision climate revert to platform play, revert to vendors that can help maximize your ROI. And that's a core pillar of the offering we make to our enterprise customers as well as SMB customers is to help them maximize the investment on Microsoft Cloud, especially if you thinking about MSPs, right? So customers are actually leveraging third parties to streamline management of their cloud assets. That's why they use managed service providers. And we are a partner to managed service providers because we enable them to have a far more sticky business. I mentioned that every $1 of software they deploy, they generate $7 of service opportunities, whether it's migration services, governance services, and running back out of service, kind of hands-free mode. So that's where we continue to matter.

And I mean security is certainly not really fungible in terms of decrease in spend and you talked about how you're being used for security use cases still.

Yes, most people don't realize. I think security is a big, big word, right? It's actually truly a multilayer approach. The analogy I make is like, you have your castle on the hill and the barbarians are storming the castle, right? The hacker is always looking at to get in but you have multilayer approach. Firstly, on a hill and you have a moat.. And, of course, beyond the moat this castle walls, on top of the case walls are your defenders with hot oil and arrows. And once you get through the wall, you can do hand-to-hand combat, right? Literally, that's the security space. You have different layers and different players, right? You've got firewall players, you got the malware players, you got your antivirus. We're in an inner sanctum, you can think of us, we're looking at protecting the actual core business data, and who has access to it and what's happening to it. So we're really inside. We're not on a periphery. We don't do the endpoint. So it is a multilayer approach. There's no server bullet to the security protection because it truly is a very fast and evolving dynamic. I think the recent estimate is that every 11 minutes, there's like a ransomware attack, right? And thanks to crypto, the cost of ransom -- the amount of ransom being paid every year keep going and this is in the tens of billions of dollars. So it's -- that's just another aspect of security.

In terms of the go-to-market changes, and that's kind of slowed down your ARR growth recently, you're expecting that to reaccelerate by the end of the year. Talk -- walk us through what changes you've made on go-to-market? And why -- what kind of dividends you're expecting coming out of it?

Yes. We -- our business is relatively seasonal because, again, predominantly -- currently, our majority of our revenues still come from large enterprise. So Q3 and Q4 are big quarters for us. So Q3 is our end of fiscal for our federal government and Q4 is end of fiscal for a majority of the large enterprise around the world, their calendar years. So we have a seasonality breakout of the revenue. If you look at last year's guidance, we have say Q1 is 20%, Q2 is 23% and then 27% and 30% of our yearly revenue. And that's how you can see if you map back the ARR increment -- the expected total increment that we are growing, and that's exactly what's happening. So there's that seasonality to it. What we have done this year is, as a SaaS company, every year, we do evolve to change the composition and focus of the sales organizations so that we can maximize both the gross retention, therefore, improve the net retention as well as hunt for new logos. So creating that focus is very important. So this year is the first time we actually give our sellers upsell quotas, so that means they're actually truly accountable for their patch of accounts, whether that account is in the middle of a renewal cycle or not. So let's say you have actually 70 accounts and total ARR of the 70 accounts, $10 million, as a rep, right -- our senior level rep. This year, all of a sudden, you have a quota. We expect at least a 20% upsell on that $10 million, whether they're due for renewal or not. Then a lot of the reps that say, hey, there's no way I can have that level of coverage and diligence on 70 accounts, I'm just going to shrink my coverage to 20 accounts. And also you free up 50 accounts to assign to other reps and this even to customer success in the mid-market segment. So all of a sudden, we have a very focused sales and customer success organization. They have their new logo quotas, they have their upsell quotas and some of them become dedicated farmers, all they do, and these are our veterans, all because they have big accounts like Northrop Grumman, right, and IRS. And these are multiyear ARR accounts. They are very, very focused. If you look at Microsoft, for example, a Vodafone team is already like 30 people, just handing the one account, right? So we're going towards that model as well. So on the extreme end, it's the enterprise side. And of course, on the SMB side, we are introducing far more automation and marketing rhythm to have that monthly MRR that's growing very fast, 10% of ARR this year to continue to grow. And that's a really low touch automated capabilities and high margin, right? So those are the changes that we introduced this year to create that focus. So Derrick, one of the things we appreciate -- not only regret is not going public earlier, like 10 years earlier, we should have done it before Goldman Merchant Banking invested before we did the subscription conversion. Being public, creates that focus for you. Every 3 months, right, there is a very, very detailed examination of your business model. Whatever you said you need be to be accountable, you need to execute on it. And not only that, you have to do better than what you're trying to articulate. So I think that really creates the discipline for us globally. And of course, there's no better report card for cost management and for our employees than look at what the market perceives what we are, right? So I think collectively, that's a really healthy way to drive this company forward.

I know we're out of time. Last question just in terms of now you've got this hunter farmer model and you're going to be more focused on cross-selling, what product area? Is it the whole portfolio? Or is there one product area that you think that's going to get more attention with the cross-sell?

We think -- so the resiliency is the table stakes, right? The backup as a service is a table stake now. But what's -- we think, area that will continue to be really, really hot. It's going to be the SaaS management capability. So that's the control side. So that's the entitle management, license management, control, privacy insight. And then we're also rolling out capabilities. So on the backup side, we're rolling out -- announcing soon on Azure then subsequently on to AWS. On the resiliency side, we already rolled out solutions around license entitlement management with WPP as one of our anchor clients. So yes, so there, we think there's massive opportunity, again, in this -- especially in this macro climate conditions. So this -- the SaaS management piece is even bigger area.

Great. All right. We're out of time. Thanks, TJ.

Thank you, Derrick.