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

Well, TJ, thanks very much for joining us at the conference. Excited to have you here and looking forward to frugal discussion today. For everyone in the room. I'm [ Jack Antony ] from Goldman Sachs. I've got a couple of questions. I'll sort of moderate a bit of a fireside chat style discussion with TJ today, but feel free to jump in at any stage with any questions you might have. And hopefully, for those who can hear us on the webcast, we'll repeat the question to make sure that you're feeling participation in discussion. TJ, maybe starting off with maybe a little bit of a softball at you to kick things off and get going. We're in a big conference today, with 10 days all the time. You hear about digital transformation and acceleration of cloud transition. It's an important topic, I think that from a macro perspective, what are you seeing inside your own customer base on those 2 fronts?

Yes. We think the digital transformation momentum is still growing. We are not even halfway there yet. Some estimates are 25% weight there, especially if you look at the large enterprise with massive on-prem and different type of legacy deployments in the space we're in, we came from the enterprise content management space. So we continue to see, for example, where a customer like a Shell we've been helping them for over the last 10 years to go to different type of cloud, one variant of another. And of course, the U.S. government with fair amount of authorized data centers, so it's really table stakes to be part of multi-cloud strategy, but we continue to see enterprise customers, including government and regulated industry are still going to continue on that track to go to cloud as part of the digital transformation journey.

Got it. Got it. That's actually now that segue into the next question which I had was, if you think about your SaaS offering, you've hit a really important milestone. You've just surpassed 50% of your revenue is part of the SaaS product. Where do you see that going? How do you feel about the acceleration of the SaaS product? Obviously, you're talking your quarterly earnings around that being an emphasis for the business. And then to the point you were making around some of the customers in your bank, large governments, et cetera, what are potentially some of the challenges to sort of move folks to sort of deploying the SaaS offering?

Yes. Firstly, I want to say 82% of our revenue is recurring, and this year, we'll exceed $200 million ARR. And the reason we actually break out between SaaS and term is something that SEC asked to do. If you look at Salesforce, everything is just subscription. And everything we sell is subscription fully recurring. So 82% fully recurring subscription software and then 18% of services going down and our short-term goal is to get that down to 10%. And the subscription side actually mass majority of it is SaaS. Whenever our customer do some sort of hybrid deployment, when they actually have data stored in their own siloed secure data facility, storage facility or do some sort of hybrid deployment we call it term. But nonetheless, for us, actually predominantly our software business SaaS and subscription. So that's a very important key note. So when we talk about breaking this milestone getting over $200 million recurring and growing, we already said this is openly stated goal, 31% constant currency year-over-year. We see that from large government and regular industry is continuing that trend. We actually see us being very resilient against this macro geopolitical and anti-globalization climate, where literally 18 countries physically and our biggest markets are U.S., Japan, Germany, and of course, we play in Australia, Singapore, we just got into South Korea as a market and then Western Europe and Nordics, Benelux. So those markets are all highly resilient, especially from the regular industry and government perspective and going towards cloud at that trend. We do see in Western Europe, there's this need to have a much more focus around business resiliency, business continuity, the sense of not only multi-cloud strategy, but also hybrid. We actually have very large German customers asking us to instead of only going to 100% cloud going to a hybrid format just because given the conflict that's so close to the borders, everyone is thinking about business continuity and resiliency, but nonetheless, regardless of the complexity of deployment types, which we are very comfortable with, familiar with being in business for 20 years, we actually see this climate to be one of conducive to be this localization phenomenon, global and local, where we do have local instances, local data center representations within Microsoft Azure to handle all these data sovereignty and business continuity to lead from large regulated customers.

Got it. Okay. That's helpful. You mentioned there at the end, Microsoft Azure. As we think about your relationship with Microsoft, in particular, you're obviously large and have a very heavy presence inside the 365 ecosystem, which is clearly great because they're the biggest and most important player. However, how do you think about the risk reward profile from depth of relationship with Microsoft versus potential expansion inside the Salesforces and the Googles of this world. But how do you when you're sitting up and think about sort of the trade-off between those 2 elements?

Yes. So we actually follow our customers who want to be a strategic partner to customers. So we actually today are already multi-cloud. Over the course of the last 12 months, we released products for Salesforce as well as Google. We actually now already have really meaningful revenue from those product lines to support multi-cloud. Our SaaS platform today sits in Azure, but it's Kubernetes containerized. So we can't actually host it in other data centers if the customer want to. In fact, we do have instances of hosting on AWS and especially when it comes to GCC Government Cloud, the other data centers, like, for example, Singapore is actually on AWS. So that kind of complexity, and we will follow the customers' demands because customers today predominantly are multi-cloud. They'll use Microsoft Office for their office cloud use, e-mail, PowerPoint et cetera, collaboration teams. But then they probably would use Salesforce for CRM, and they most likely use even potentially Zoom for video conferencing or Slack because they're a Salesforce customer. So with that, we do actually support all these multi-cloud and getting meaningful revenue. Having said that, we are a very large Microsoft cloud ISV, one of their top 5 globally from an IP co-sale perspective. In fact, our own Azure consumption in the next 3 years would be north of $150 million. So we are consuming, we're growing our customer base aggressively, consuming aggressively and Microsoft love that, right, because we are really a very important and healthy aspect of their ecosystem. We make their solution that much more sticky. We onboard customers faster and allow customers to get on to more advanced workloads on Office 365 that much sooner. So what most people don't know is that this 280 million user base in Office 365, vast majority of the use cases are the simple use cases like exchange, buy share, maybe just Teams call. But use the more advanced workloads like collaboration, like document management, workflow, power platforms, internal, external sharing, project management and variety customers they need our automated programmatic provisioning and automation solutions, life cycle management solutions and insight solutions, we will be announcing soon that we're actually even looking at productivity, how engaged is your employees in the cloud space because now everybody is only working Tuesday to Thursdays out here, so we need to know that from an HR perspective to zero into folks who perhaps are not as engaged or disconnected to help them be feel like part of the productive company teamwork.

Okay. That makes sense. Maybe should give you a little bit now more towards the go-to-market of the business. A little over 12 months ago, you launched an initiative to focus on the channel and relationships with channel partners, particularly as you're going after the SMB segment of the market, sort of a little north of 12 months down the track, how do you feel that is tracking and particularly how is it tracking relative to your expectations when you sort of announced and launched initiative?

Yes. So we actually hired some really senior folks in the channel business to help us build out this global program and run them. And we just brought another set of senior folks to actually operationalize it. Our progress so far, we're actually quite happy with the progress thus far. We have launched our global channel program with 1,000 enabled channel partners with thousands of hours of enablement that go into it. And then over and this is that we also publicly released that over half of the new ARRs are coming from the channel in use, right, generated deals that we actually would never have touched without the help of channel. We always say, Jack, that we do the things hard way. We actually always started hardcore engineering myself and all our co-founders are computer scientists by background, coders by background. So we've always done the direct sales enterprise motion, global deployment footprints. But now we are actually by becoming a public company, really focused on scaling and growth and really focus also on the bottom line. Channel and scaling through channel is the most important factor for us. And if you actually look at all the other enterprise software companies, their success is through channel growth. You look at somebody like AV, right? Of course, Microsoft, 100% channel. So that's the way we're going. We're very happy with the progress thus far, and you also mentioned the SMB segment, which is a complete new segment to us as of 2 years ago. It went from 0% to 10% of our ARR within 2 years. and also thank largely to channel. And we define SMB as companies with less than 1,000 employees. And for Microsoft, that's actually 40% of their revenue. It's a massive, massive green field for us, a space where just in the backup space [indiscernible] other vendors like Cohesity, [indiscernible] et cetera. We're going to that space very aggressively because we take that enterprise capabilities and pedigree and also, more importantly, our platform play because we don't just do back up as a service. We actually given our ECM, enterprise content management pedigree, we do the end-to-end data lifecycle management. So migration, integration, back on to service, document management, record management and of course, governance, right? And then now we're getting to this whole massive space that's growing our #2 fastest-growing product segment is this entitlement management, license management, SaaS management capabilities. across all the nuances and workloads of status M225. So all those things holistically taken together for SMB partners who are the buyers, basically MSPs, managed service providers, is ticker is MSP because that small business don't have IT. And those folks are using our platform to manage hundreds of tenants in one go. So we make their business far more efficient, thereby make our software a lot more stickier. So we're very, very excited about the SMB segment. We think it could become 30% of our total business in the next few years. So it's a fastest-growing 3-digit growth segment for us.

I mean, [indiscernible] you've been able to have such great early success and traction. One of the really interesting little nuggets data that I picked up during your recent earnings call was whilst you've been able to do what you just spoke about there. On the other hand, your core ARR per customer has actually increased. And if you look at some of the other metrics that you put out, number of customers over $100,000 of ARR, et cetera, all going really, really nicely in what I'd call the core business, so the non-channel the non-SMB business. How have you been able to develop this new motion and bring these new resources in and focus on that and drive this early success. At the same time, organization we keep your on the ball and continue the growth in your existing business?

Yes, that's a great question. So the core ARR growth is in our enterprise as well as mid-market segment. Enterprises over 10,000 employees. Mid-market 10,000 to 1,000 employees. Their enterprise will predominantly do direct sales. So thereby, we actually continue to enlarge our footprint in their existing customers. For example, one of our largest customers, IRS and the state department. So we'll continue to increase our ARPU in those type of accounts. There was a bit of an interesting thing. The Congress just had this new stimulus bill that they're increasing the IRS by 87,000 agents. So to us, that's a increase of 87,000 subscription seats. It's a bit of a joke. Becoming bigger customer to us. Nonetheless, yes, so we track them separately. So that's the ARR growth. Now the SMB growth is the seat count, but if you look at the ARPU level, so dollar per user per month at the SMB level is actually bigger. So the way to think about it is like buying a soda can at 7-Eleven versus a Costco. So the unit cost of purchase for sodo can is much more expensive at 7-Eleven versus Costco. So when we deal with enterprise customers, when you're talking about 100,000 seats, 200,000 seats just this morning, we got an e-mail from Japan, where they're negotiating a $3 million deal. And again, 30,000 seats. That's where the customer has some sort of negotiation power to actually trying to negotiate as best a deal as possible for their ARPU. But for SMBs, you're literally talking 0 human involvement, digital marketplace integration, and they're just buying on a marketplace. So that's fantastic for us.

Got it. I guess the other thing top of mind when I think about your go-to-market and some of the recent transitions would be the shift to kind of the Hunter pharma model you talk about. How do you feel that's progressing? And why was that an important initiative for you guys as you think about sort of in the cost factor when you implemented that restructure?

It's all about focus, right? I think one of the only regret I have I was sharing with my partners that we should have gone public 3 years ago prior to conversion to subscription and going to cloud because at that point, we were since Summit partner invested in 2006 before Goldman Sachs Merchant Banking invested 2014. We were growing doubling tripling every year for 9 straight years. In public company forces that discipline because there are these key metrics, business performance metrics that we share with the Street every quarter. And also, the analyst community, the institutional investor community have their own set of models, and they keep us literally brutally honest with the business performance metrics. So this Pharma Hunter separation is to create that focus to say, "Hey, you need to because recurring this whole NR business, it's very, very important for us because that's a lot of our revenue comes from our recurring customers by working again, continued that for our infrastructure SaaS space, the industry benchmarks is 110%. Getting 110% means every year, you will have 10% revenue increase just from your existing customers. So maintaining that very, very critical. Now for our sellers is creating that focus. Some of them are more apt to be farmers. So if you actually have a patch of 50 enterprise accounts and need to guarantee not only the $3 million ARR in these accounts, but also 20% to 25% growth year-over-year, then they will necessitate a reduction of those accounts. What that does is they actually free up the accounts for other reps to take over or even for customer success to directly take on those accounts. So this distinction, so this year, we actually implemented for the first time, actually upsell quotas. So if you actually own cement account, you have this upsell quota, our internal target to hit those ARR growth metrics. So that creates the focus. They allow us as a business to be far more disciplined and to continue to reflect the healthy growth rate in all the key business metrics that we disclose.

I think it's actually a ton of sense. And I think the metrics that you're putting out, particularly on a constant currency basis, you could see kind of that playing out early green sheet.

That's right.

This will be my last question or last sort of focus around the go-to-market in particular. Would love to hear your perspective on what you're seeing across your customer base. Now there's a lot of chatter about this in the last earnings season. There's been a lot of talk around sales elongation in the sales cycle. How you within your own base, the own customers that you're talking to, how are they thinking about things in terms of internal budget approval, pushing out deals. Is that something that you're noticing picking up in your own discussions with you or your team's discussions? Or how are you feeling about things on that front? And then what are you seeing out there in the market?

Yes. So if Jim was here, Jim is more conservative than I, he would say that, yes, we do see deal elongation among enterprise customers. But honestly, I also see the other side of the coin is that given what's happening, there's rush to consolidate platforms and also consolidate providers. So that's actually working in our favor because we are a platform provider. So yes, you do have very large deals this elongation, more process in the whole procurement cycle to justify the OpEx expenditure increase. But on the other side that's helping us is this movement to consolidate your systems and investments so that you get a bigger bang for the buck, if you will, out of the ROI. And this is also we see that in the Microsoft space as Microsoft increased license costs. for customers. There is even more intense need to maximize what customers have out of the mixed license types. So Microsoft for Office 365 has various license types. There's key ask license, front worker license called F1 license and it's E1,E3,E5. If you, obviously, Microsoft want everyone to buy the Cadillac version of all the licensing, but the reality is most customers have a mixed license type. So maybe the C-suites will have an E5 license. The vast majority employee will have an E1 or E3 license. Now how do you actually allocate those license properly, maximize returns? And what license do you need is something that our software programmatically help customers with. So in today's landscape of this inflationary pressure towards spending, they actually help us to actually to present this type of solution for customers to help them maximize their investments.

Okay. Shifting gears a little bit. Let's talk for a second but I'll just remind the audience, if you have any questions, feel free to jump in. Talk a little bit about the regulatory environment. A lot's happened with GDPR regulations, privacy laws, you're playing in a particularly hot button area, I guess, in terms of data protection. How do you see things evolving? And do you view for AvePoint in particular, broader regulatory environment more of a tailwind or more of a headwind, I imagine it's more of a tailwind, but I'd love to get your perspective.

Yes, definitely a tailwind. So GDPR and data privacy has been a topic that's been around for quite some time. And of course, California also adopted a very stringent privacy protection act, which hopefully will be propagated across the states, other states. So that's something that we are very well versed into where we whether the very few back of the service provider, a SaaS provider to allow for right to forget in a GDPR context when a European citizen come and say, "Hey, you need to delete all data containing my PII, private identifiable information." We can actually go through the archived stores, the backup stores because we tag and classify all of that and properly do approach. So that's something that we do. But we also see that backup as a functional area has pivoted more and more towards security. So we have introduced a very demand feature this last 12 months is around ransomware detection. So ransomware attack has a specific signature because when a ransomware software attack happens, it's not actually deleting things, it's actually encrypting things, MMD leading things. So that you have a spike in actually network activity, data volume creation. And we actually detect that in real time and notify administrators. And also, we're able to then go back point in time before the attack occurred do the proper recovery. More importantly, we also back up all the proper audit laws so that customer can do the forensics because oftentimes when the attack takes place, the attacker has been in your system for a month. to actually observe and see which segment of your system is most important to you, right, for such encryption-related ransom attack. So those type of things are this pivot towards security as a very important aspect. Now of course, the industry is calling a zero trust backup. So we do that across all the platform that's Office 365, that's Google Docs, that Salesforce, that Dynamic 365 and also Azure. Of course, we're looking at also supporting AWS Amazon. So that's a very, very important thing, especially to even SMBs who doesn't necessarily have the wherewithal or the budget to do that kind of sophisticated security protection. So much so, we're so confident in our solution that we actually offer a $1 million warranty for ransomware attack against the data sets that we cover for the SMB customers. so that if they do get affected and oftentimes for small businesses, was collateral damage, it wasn't really target towards them. And there are several instances recently that shows that even OneDrive is vulnerable to such attacks. So small businesses can, if they cannot restore with our solution, we will actually offer them up to $1 million to remediate, to do the forensic to do the recovery to tie the experts to get their data back so that their business continue. So that type of offer is coming from a place of confidence because we're able to do this globally.

Got it. Got it. Okay. Can you just expand on that in terms of confidence or you partnered with insurance companies anyone to help [indiscernible].

Yes. Currently, we actually use our own liability insurance to cover for it, and we work with our insurance agents. But obviously, we have a very rigorous process to make sure that the data we back up are indeed secure, highly secure so that we can recover. And of course, the partners and customers need to use our software in the proper way so that they are not unintentionally embedding attack vectors, so in the environment within the back of data. So yes, we actually know. We don't offer someone else's insurance service, we're actually using our own liability insurance to cover that.

Just to double click, I guess, on some of the things that you've said, and I'm particularly focused around [indiscernible], what's the competitive landscape like at the moment and how are you seeing things evolve. But if you think about your business, you're sort of building this new middle market SMB, I could call it function, right? So you're kind of expanding in terms of customer slicing dicing. On the other hand, the breadth of your platform is clearly differentiating product feature. And so the breadth plus your particular strength and all the things we just spoke about from a security perspective, how are you seeing place from a competitive perspective with the overlay, I guess, of the geopolitical landscape and all these things going on. How do you feel about from a competition perspective? Are you seeing new competitors? Do you feel like you're sort of winning share versus something potential incumbents elsewhere? How is that all playing out for you?

We're living in very interesting times right now. I'm actually very excited and bullish about our prospects. Firstly, we have a first-mover advantage because we've been operating in enterprise cloud for a long time and work globally. So we know how to address some of the most demanding and rigorous requirements for large enterprises and government security. And then we're applying that, of course, in the SaaS delivery format to SMB. So that's the first and foremost, a huge advantage. But we grow in multiple ways, not only the SMB segment, but also obviously, enterprise segment, we talk about introducing new features, employee engagement, governance, et cetera. On top of that, you probably saw in the recent news, we have a vertical solution set starting with education platform that's now pivoted towards commercial learning and development, but that's also sitting on top of our data security and orchestration platform. So what we see is everyone saw recently in the news that Salesforce has just exceeded SAP in terms of value, right? And all what they have done is built a fantastic business application ecosystem around CRM. Now imagine what we can do around the entirety of Microsoft Cloud. That's not just Dynamic 365 with CRM and ERP. That's not just Azure, which is compute that competes against AWS and GCP, but also M225, which is obviously Office 365 and Teams, et cetera. So there's this massive opportunity to build these vertical solutions, business vertical solutions, that's also consuming our data security and management framework. And we think that also allow us a very nice way to continue to expand our footprint with the existing customer set to increase ARPU. So it's SMB, it's enterprise expansion, but it's also vertical business solutions investments that allow us to grow in multiple directions.

Interesting that last comment, growing in multiple directions. One thing we haven't discussed that clearly there is a very healthy, robust organic growth trajectory of the business. Let's talk a little bit about potential inorganic growth. Recently, you made an acquisition, you talked about the corporate education platform in the U.K., how do you see potential M&A complementing or supplementing what you're doing from an organic growth perspective?

Yes. So we have always signaled that now that we're public, have a very healthy balance sheet and no debt and being cash flow positive on an annualized basis, we have appetite to do inorganic expansion on top of our organic investment. We have done so. So the combined knowledge entity you mentioned is our second acquisition. They're actually the premier MCC 5 training content provider. What we're leveraging them to do is the tip of spear to get into multiple accounts. All of our customers need change management, need training on how to use Teams, how do you use power platforms, how to use SharePoint, right, OneDrive for business. So they are the premier content provider globally, they actually produce tons of content for Microsoft themselves. We think that that's the tip of spear to introduce in our learning and digital assessment into this corporate learning and development kind of vertical solution set that we talk about. So yes, so we have other exciting ones that we'll announce shortly in the coming weeks to continue to expand our portfolio. We think this inorganic IP expansion, fully integrated it into our SaaS data management and security platform. It's a way forward for us to continue to increase ARPU with the existing counts.

Got it. Okay. Well, that's exciting. I think last question for me, and then maybe we can take some more questions from the floor. But as I think about it back at least from my respect for our perspective, multiple avenues to grow, already a high-growth business, north of 30% ARR reaching really nice scale, $200 million of our SaaS piece is growing aggressively. You've got M&A optionality, mentioned being cash flow positive on a full year basis. There are a lot of great things about AvePoint that I think outside in, feel really exciting. From your perspective, what do you think the market is potentially missing about the story? Obviously, valuations have contracted, you're focused on execution. But if there's a couple of points to leave the audience here with today, they fully grasp what you're doing and what you want to tell them about the future of that point, what would that be?

Yes. I think the important thing is to, a lot of folks are casual investors think about, "Oh, Microsoft is their natural habit's just to kill everyone." So I always go back to, we don't compete against Microsoft, we compete within this $1 trillion robust Microsoft ecosystem. We want to be one of the biggest player in that ecosystem. And we're doing very well in that regard. In fact, as we contribute to the ecosystem, we're one of the top global partners that Microsoft is like touting is seeing on the top of the hill to say, "Hey, come to our ecosystem because we have a very robust ecosystem where you can grow and make money." Because if you look at the start, there's a faster conference that's down the street here, starting tomorrow, you look at majority of the SaaS B2B software company, they started in AWS and Google world. They don't start in Microsoft Word. Why? Because Microsoft was more complex. It's more enterprises, so that's where we actually can help. We can help a whole class of vertical software solutions, get into the Microsoft space faster and then go to market because ultimately, Microsoft own the enterprise world. And 95% of the accounts, enterprise accounts have Microsoft as a mission-critical system. So we think that's one of the misunderstanding that happens to say, okay, you guys whatever you do, you will just be key Microsoft. We actually had dealing with some industrial assets, they said, when did that actually happen to you? This did happen in 2003, a long time ago. When we quoted this very simple product called Recycle Bin, we spent a weekend coding it. We made $2 million in 2 years. And the Microsoft came out with this recycle bin like feature on their SharePoint platform. That was it. In the 20-year history that we have worked with Microsoft, that was onetime, but it's a small product. And we, in the software business, we know that we have to continue to evolve and change it even cannibalize ourselves to grow to matter. So I think, yes, one of the most commonly asked question is that flavor.

Got it. Okay. Well, TJ, thanks very much for the conversation today. I said out there in case there's any potential questions from the audience. Any further questions or otherwise, I think thank you very much. It was great to...

Can we talk a little bit more about competition and segments...

Yes. TJ, just for the audience potentially guiding via webcast, that was can we talk a little bit more about competition, how you compete in various segments? And the color there?

Yes. We don't have any holistic competitor. We have point competitors. And because we do play in the enterprise space as well as the SMB space, in the different segments, we see different competitors. So for example, in the enterprise space, one of our big portfolio of product is backup as a service. And there, we see folks like Commvault, right? However, Commvault just recently announced their metallic backup revenue, which is their SaaS backup business. It's a fraction of what we do today. And then on the governance side, we actually provide similar type of governance and provisioning and security features as what Varonis would do for [indiscernible]. And also, Varonis just recently announced publicly that their entire cloud business is less than $5 million, right? So it's, again, completely minuscule compared to everything we do natively in cloud. So that's the enterprise segment in those point competitors. The SMB segment, we actually do see [indiscernible] and there, again, because we come from enterprise going to SMB, our platform play resonates very, very well. And of course, in the market, there's some consolidation that's happening, and we all know, and that's creating a lot of anxiety among partners and customers, and that's happening to our advantage because we are now coming across as a steady hand as a steady holistic platform for partners to rely on going forward. So those are some of the point competitor dynamics. But again, we don't have any holistic competitor because we came from this ECM pedigree and we do the end-to-end. Now there are other ECM players like OpenText that's out there, but OpenText is so not cloud, very, very legacy and they just buy Documentum, they buy HP Trim. So they're just collecting some of the on-prem legacy workloads. And we don't really see OpenText.

[indiscernible] does that potentially change things in there? Or the...

So data is actually because of the recent acquisitions, there's a lot of chaos and disruption there. That's worked out to our flavor. We actually have quite a number of [indiscernible] with partners as we continue to roll the partner motion. So yes, so that's actually really good for us.

Anything else? Any other questions, Q&A it sounds like it, TJ, thank you very much for coming in and having a discussion today. [indiscernible]

My pleasure. Thank you, Jack.