UiPath, Inc. (PATH) Earnings Call Transcript & Summary

My name is Bryan Bergin. I cover software and services here at Cowen. Thank you, everybody, for being here. We're very delighted to have UiPath with us today. UiPath's a leading enterprise automation vendor. It has a growing base of solutions around its core RPA software product. With us today are Daniel Dines, Co-Founder and Co-CEO; and Ashim Gupta, CFO. Thank you both.

Thank you, Bryan. Great pleasure to be here.

Thanks, Bryan.

All right. So why don't we -- you reported results last night, so we're going to start there. First quarter results, having a nice reaction today. What were the most critical, I'd say, items in the quarter, in your view, that stood out? What areas did you feel like the company executed best in that 1Q?

Let me put things a bit in perspective for you. We -- when we guided the entire year in Q1, like 2 months and something ago, we were one of the first company that were seeing the macro headwinds. And we always guide looking what's in front of us. So we guided prudently. As we progress throughout the quarter, for -- the outlook for automation, I think, has increased a bit. We are seeing a positive momentum. Actually, these headwinds affect the entire industry right now. Most of our customers are affected. So in the light of inflation, labor cost, interest rates rising, the drive to become more efficient is real. And they need to increase productivity to cope with inflation. And automation is clearly a natural way to increase productivity. So I was seeing more elevated discussions during the quarter and that some of them materialized into some big deals taking better shape, progressing through the pipeline. And our optimism have increased during the quarter and also with the [ way and the overall ] proceeding a bit, we are seeing more of a positive environment than a couple of months ago.

Okay. Would you say that demand progressed better than expectations? Or was it just timing and that high level of uncertainty? Or you did see the true improvement of demand in that quarter you saw deals move?

Well, we see some of the deals move. It's more positive than two months ago. I would say that we are cautiously optimistic again in how we are seeing, and our guide reflects that positivity that we were seeing.

Okay. And what about Europe specifically, too? I know that the most uncertainty, obviously, is there. What are you seeing specifically there?

Well, I think if you look two months ago, we were looking at the prospect of Russia conquering Ukraine in a couple of weeks. And we have a good chance for door to extend to other countries in Europe, becoming more pan-European work. That was -- could have been a terrible outcome. And many European customers were in a bit of a shock in the beginning. And when you are in shock, you don't [ plan it ]. Now as the war receded into very specific regional war, and even if it's long term. And I think most businesses come to terms of exiting Russia, and this is the new normal. And the new normal have restarted a bit. So we are seeing more of the normal behavior. And automation, it's a good technology, both when you -- in growth time and also in efficient time. So it's not better right know.

Okay. Okay. And you offered a new fiscal '23 outlook that was raised. Kind of talk about some of the biggest swing factors that you see in hitting -- I guess, refresh us what those targets were. And then what are some of the bigger swing factors in the updated outlook for '23?

Yes. So we -- our initial guidance, I think, starting there, just to remind everybody, we had an impact for foreign exchange, Russia and the large deals that we talked about. So we've actually taken our quarter outlook and put it between $10.85 and $10.90 of revenue. And we have talked about seeing positivity in terms of operating leverage and increasing the overall operating leverage outlook that we have there. And then when we think about kind of the -- what are the factors there, really, the large deals progressing through the pipeline gives us more confidence to have been able to raise the guide versus our previous -- versus our previous discussions. And in terms of the operating leverage, we've got 2 great leaders that have entered the company in Chris Weber and Rob Enslin. We have Daniel and the experience that we've gone over the last couple of years, we've invested a lot in the company, and we'll continue to invest in certain areas that we feel there. But we're also identifying pockets of efficiency that we're optimistic that we can actually run the company even more efficiently than we are today. And so that gives us positivity in terms of our overall operating margin guidance as well.

Okay. Let's dig in some of the leadership changes. So can you -- can we talk about the co-CEO movement? So you recently announced co-CEO. How are you and Rob going to be splitting responsibilities? Maybe give us a sense of what your day-to-day changes will be.

Yes. Look, I want to start by saying that between Rob and I, there is really good chemistry. And he's only 3 weeks in the company, but I'm already experiencing more fluency in our day-to-day flow, how we make decisions. Sometimes we will finish other's sentences. So it's really a good dynamic, and it's also across our leadership team. We are seeing an uptick in how we operate. Look, my job growing further will be focus more on the product innovation, on keeping the culture alive and also talking to customers. I need to -- I'm one of the people in the company that can make this circle, customer, partners, product flying. And it's very important. We have a company that was driven by customer demand. I want to stay there. But sometimes I feel that in the product, we go a bit too distant to the customer. So I feel this is really a good time to step in, in the product and make sure we stay customer centric. And this is also our go-to-market strategy, to be more focused, more customer-centric. That will -- Rob will take over and make sure it happens. And also, he will be in charge of day-by-day functions of the company.

Okay. From the operational area, right?

Yes.

Okay. And then also Chief Business Officer, what with Chris coming in. So I think you're only one quarter into that change, to make sure. But maybe touch on the key areas there that Chris will be focused on as CBO. And any -- are we talking notable changes, tweaks to strategy? What's going on with that?

I think Chris has already come with a great plan to kind of match our new strategy that is around key accounts, being more customer-centric, increased adoption within key accounts and also dial in better on the emerging enterprise segment, velocity, digital sales. So what we plan to do is to also globalize and centralize some of the go-to-market functions to bring more consistency and efficiency into our operations. We are also looking differently to the partner organization. We want to align better the GSIs with key accounts, while the long tail of partners will better serve the emerging enterprise segment. We don't estimate dramatic changes. We are not changing territories, [ sizements ] of customers. We are just investing more into centralization, globalization and alignment.

Okay. So more blocking and tackling. None of this, any key change in the strategy there. Okay. Ashim, let's talk about kind of growth opportunity and target. So clearly, you have isolated items in fiscal '23. We lay those out with Russia, with Ukraine and FX. But do those dynamics change anything, in your view, around the growth opportunity? How do you think about kind of the longer-term sustainable ARR growth type of trajectory?

Yes. The fundamentals of our company feels strong. I mean we've talked about a large -- we're in the early stages of a large and growing market. We've talked about our total -- our TAM of being $60 billion plus, and that automation is ubiquitous. I think that's not an area of debate anymore. You can look at our 10,000-plus customers, customers greater than $1 million and the speed at which we've scaled that crossing 155, meaning, north of that number, and even customers greater than 100,000 is showing the potential. And that is just in the last 3 to 5 years of accelerated hyper growth. So when we look long term, we've got -- we started as an RPA company. We've expanded to an automation platform. They're both organic and inorganic investments. And we see that becoming more and more relevant at every level and every function of a company. So long-term growth, we feel very good about the prospects that we see in front of us. We're investing in that way. If you think about our engineering team, I remember entering the company 4 years ago, maybe 100 to 150 people in product, 400 people in total. Today, we have just more than that in itself in each of our core hubs. We've expanded dramatically there. And you look at the breadth of our platform. The reason why we're crossing that $1 million mark is not just the relevancy and the high ROI and the agility that RPA brings. But the fact that we now offer the right platform to be able to discover automations with process mining and task mining and be able to go through the full life cycle, including engagement. That includes all the way to the end of testing -- of testing and automating the testing both within RPA processes and larger applications. So we feel really bullish about the platform and the go-to-market.

Okay. Then you started earlier talking about -- obviously, with inflation, cost-cutting is important. Automation is an obvious solution for that labor and other labor dynamics today or it seems like another obvious one, too. I've had very notable tech companies over the last several weeks talk about slowing hiring, there's labor market imbalances across all company size. But do you see many clients recognizing the potential for RPA there? Should we have -- is that a prevalent recognition? Or is it still early?

Bryan, we are not positioning our service an RPA company. We are a broader automation company. And our secret sauce is that we combine RPA with API, with AI and in a single low-code, no-code offering the studio. This is very powerful to address the needs of -- the strategic needs of our customers, both long term where they see more API-driven and short term where RPA can get the best benefit. It's very important to have the same platform addressing both. So right now with the tightening that we are seeing in the labor market, of course, the opportunity is to do more with the same number of people that you have, but also automation and upskilling your workforce, it's a great retention tool. And I can give you an anecdote with one of the largest public institution in Europe, maybe the largest. They hired a lot of people, like PhD people, in actually kind of very low-entry position like management assistance. And they want to convert all of these people in citizen developers to basically help automate a lot of the tasks that they are seeing in that institution.

Okay. So let's talk about retention. So net dollar-based retention. How are you feeling about the retention sustainability? Remind me where did you land in the quarter? How are you thinking about how that progresses?

Yes. So we landed at 138% still when you look across the peer group of software companies, whether at a smaller scale or at our scale crossing $1 billion here. This quarter, we feel great about where we stand there. That includes the absorption of FX in Russia. So we're really closer to 140% million, depending which way you swing the round right there. Expansion is a major -- is going to be the growth engine for our company. And when you look at it, it's just part of the land and expand motion of somebody coming in and really understanding our platform, plugging it in, getting a few use cases up and running, seeing the paybacks of 6 months, seeing ROIs. Like a major automotive company that, in their first automation, saved 2,000 hours. That translates to dollars that they can reallocate across the company. And then it becomes -- the flywheel starts moving, more pipeline of automations come and more opportunities allow it, and then they go deeper and wider across our platform. So the land and expand motion, we see that as continuing to evolve strength. And then as the platform evolves, if you -- again, 2 years ago, we didn't have companies adopting process mining and process discovery. Major food and beverage company started with RPA, expanded into process discovery. Test automation is now making its way more into that. So these are all upsell opportunities. More chances for our sales team to sell a platform that has immense value to our customers and really drive that dollar-based net retention rate.

Okay. Sounds like they're really seeing the value of that combined solution beyond just the, I guess, the historical product by itself. That's good to hear. So retention on one side of the growth, new logos on the other side. How are you thinking about kind of the go-to-market and really the new logo performance? And if you can kind of help us, talk about new logo acquisition over the course of the pandemic and how that has been progressed over the last several quarters. How are you feeling about the pace of new logo acquisition?.

Well, pandemic for us was net neutral in terms of new logos. On one side, we got an improved interest in health care and public sector, but other traditional good industries for us like transportation, retail, we're seeing more of a downwards trend in terms of new logos. So it was -- effect was negative. And Q1 was a choppy quarter for us. We knew upfront. We have accounted part of the reduction in net new logos is caused by Russia, where we basically we -- down to zero, all the sanctioned entities. And we are progressive throughout the year. When they will renew, basically, we will drop them. So kind of this is how we are seeing Russia. So it was a material impact to Q1. But with all our initiatives around digital sales and with the advance that we made into cloud that will remove the friction of adoption, we are seeing really a great opportunity within the mid-market to really increase the new logos in the few years to come.

Okay. Let's take it to that latter point as it relates to the 22.4 release. So you mentioned some things last night. But maybe including automation cloud robots, can you talk about how that augments the offering for clients? And then just more broadly, any other aspect that you think are most critical within that release?

Yes. I think it both remove the friction of adoption and also increase the number of use cases that the platform offers. So I will take a [ bow ]. Why it removes the friction of adoption? Because this is the moment when our platform is fully cloud-based SaaS. So especially in the mid-market, where IT might be more of a bottleneck and they are not equipped to manage this sophisticated infrastructure, it's really speeding up by month the adoption. Right now, it's the first time in our history when line of businesses have the ability to configure automation themselves without reliance on IT. And in many instances, the center of excellence that are in charge with the automation program stay within the businesses for us. So that's a really positive for them. Also, it reduces actually the total cost of ownership for our customers. IT person or the expense with IT personnel managing such a complex server software can really mount to large amount. Right now, we manage the robots for them. This is a huge offering. Now second, in terms of expanding the use cases. We introduced now what we call serverless robots, which is a -- it's a technology based on Linux containers and Kubernetes that allow us to scale efficiently in a multi-tenant environment our cloud offering. But what allows us to do right now is to address better API integration use cases. In some instances, our customers were using more UiPath like vendors for these API integrations. Now combining the serverless, where you can run without caring where you run, with our very powerful API integration story, we bought Cloud Elements. It's fully integrated, and it's a very powerful solution. We have a world-class API integration and UI automation story. And they are delivered in the same package. Again, this is very -- it's address both short-term and long-term strategy of all customers.

Okay. How does -- as you see more and more clients adopt full cloud, how do the economics change for you?

The economics actually are not very different in the sense of we continue right now to command good gross margin rates even with our cloud product. So we've talked about greater than 80% gross margin as sustainable. Automation cloud robots will be an important test to that because they'll obviously use the max amount of compute. But so far, the early signs says we feel really good about where they are. What I do think is cloud is always easier to control in terms of pricing power and discounting when discussing with the customer. And just you add that much more value in terms of taking the maintenance, taking the total cost of ownership away from a customer, from VM provisioning, et cetera. The other thing that I think it's there is telemetry. So I think what's -- we're going to find more efficient ways of connecting with customers through the product whereas on-prem, you don't have that. So our go-to-market motions and our marketing campaigns, we have a lower cost in a more direct channel to touch customers. And that's really exciting for us as we look forward.

Okay. Just to clarify, when you talk about key accounts versus the mid-market, what -- is that a revenue cut -- a head count cut up -- how do you segment those?

We do it both on revenue and employees. I mean there's many customers -- there's many companies that have low revenue, but a high employee count. And automation is ubiquitous, so it can go across any employee. And then you have groups that are out there like state and local governments. So we look at it both ways. And what's very good for us is our emerging enterprise or our velocity motion, our digital sales motion, they're highly productive. So we still have good land sizes there. We have good expand motion. So we can actually chew up this and we can move up on that tier and drive efficiency by putting more and more customers through that emerging enterprise, that mid-market motion. But really, employee and revenue, we look at it both ways.

Okay. Okay. Daniel, let's talk a little bit longer term that you -- semantic automation is something you've discussed here. The way we understand this really somewhat of a form of awareness of the robots on why they might be performing a task or a process. But can you kind of dig in here why is this so important? And what opportunities do you think that will open up for you?

Well, let me start a bit with the high-level opportunity. We believe that we can train our robots to perform more meaningful high-level tests. Like, for instance, right now, if you delegate to a human user a test like booking an airline ticket, right, they can go to any airline kind of website in the world, and they will figure it out, right, how to choose. But in the other way, this is not rocket science. So we believe that we can collect a lot of data of how the actual work is done. And if you think of who is the company that can get more data about tasks, user-based tasks, it's us, it's UiPath. There is no other company in the world that can collect more data. So we believe we -- based on this data, we can figure out how to train models to do higher level tests. So this is -- semantic automation is really all about this. And now what are the meaningful steps to get there? We are launching a very interesting product and is going to be in preview in the next -- in the near future. But this product aims to look at business operations through the lenses of 3 major tasks that you can look at any operation. One is people, whatever they do basically in operations. You can see people extract data from a system and then they transform and validate the data and then they load the data into another system. It's the ETL paradigm, which is not new in business, database integration. This is the way people think. But we think the same in terms of the business operations. So we are coming with the product that simplifies these 3 operations for people. So they will grow using our technology and just say, show me, I will show you this is the data that I want to extract. This is where I want to -- that when I want to load the data. It can be anything, really, from a document, an image, a PDF to a website or SAP, whatever that can be. And then we really use all the power of AI, computer vision and document understanding and then natural language mapping between concepts. So we figure out exactly how they will go, and we can let them do some transformation. And this is where also the automation power comes. And even business users can create this type of templates of quick automations that work for them. So this is the intermediary step to get to that level of high-level steps, where you can ask to do more meaningful. But this is something that will really let us collect a lot of data. Because think about -- let's assume in the happiest case, every business user in the world to use our technology, we will get access. This is where I get the information. This is how I transform or validate. This is where I load the information. Do you imagine how powerful it is to have access to all of this? Already in a high-level context because ETL, it's a higher-level context than where we are today. Today, we are at the level control C, control V, control C, control V, it's already a higher level that you can create more meaningful models starting from this level.

Okay. I want to pause here and see if there are any questions in the audience. Go ahead.

Can you talk about your level of spending on sales and marketing? I think it's around 50% of revenue. How do you think about why that's the right level? And why not spend more, why not spend less?

Look, I think we -- I'll pass to you quickly. I think we need to look again to our level of [ SMN ] spending. In perspective, historically, we've been into investing more than digestion mode. So it's been a bit of a cycle for us. In the first year of pandemic and almost first quarter of 2021, we didn't invest so much. And then we went into an investment phase, and now we are in the digestion phase a bit. So we estimate that in time, this -- I'm not saying this is the right number, but this is being in digestion phase, we estimate we will see -- we will bring more efficiency in our sales and marketing expenses.

I mean we're committed towards 20% operating margins in terms of our long-term sustainable model. Within that model, I think sales and marketing comes in more in line with scaled benchmarks. Two points of just added perspective. We believe we're in an early stage of the market right now. So making sure our customers are still learning about automation, making sure that we're covering the right markets, putting the right information and the right support around our sales team to make this a strategic part of the -- of every enterprise in this early stage, that, to us, is a good investment in terms of what we've done and where we stand. And it shows in our results in terms of when you look at Gartner, the market share that we've been able to capture is very good. And in the land and expand mode, this is very sticky. Our gross retention rate is 98%. So for every dollar that we're bringing and with a dollar-based net retention rate of 140%, even if that's 130%, that's a great annuity return on the investment we're making. That being said, we crossed $1 billion this year in one of the fastest ways to get there, and we say that -- we feel that with humility. We also, at the same time, recognize that driving operating leverage is important long term. And sales and marketing efficiency is an area that we do think there are -- there are areas that we can become more efficient, as we learn, as we bring in leaders like Chris Weber and Rob Enslin into it. And we've talked about being committed to realizing that even some of that this year as we go through our digestion of the investment we did.

Last one.

It seems like [indiscernible] have had API account. Coincident with that, like the Milsoft business that CRM is -- that they're behaving so well. Just I mean is that -- is it something more than a coincidence going on there? And also if you could just discuss that from a technical foundation, the differences or similarities with ServiceNow and Microsoft's RPA efforts. How are they different or similar to what you've done? And how long do you think it will take that [indiscernible].

Yes. Let me start with why API is important for an RPA company. And look, I was talking to one of our large banking customer, and they were doing a big transformation in their contact center, for instance. And they aim to replace, to consolidate to like 3 major platforms, and they are like at 10 right now, and replace all legacy vendors. This is their long-term strategy. And this is going to take a few years down the road. But also part of the strategy is to let's put a layer of automation on the top of this platform. I will connect my users. So most of the repetitive task will delegate to this layer of automation. And that will allow me to actually replace the legacy systems with more ease because you -- so you connect to legacy systems by RPA, right? And then you bring a new platform. And then you can just change. In this layer of automation, you change RPA to API. So this is what I meant by short term and long term. And this is -- for them, it's important to be in the same package. Now we made for many years significant investments in our API platform. So it's not only the Cloud Elements acquisitions, but it's all our internal effort to scale. It's the serverless that is the back end now for all our API work. We have launch and preview our Studio Web, which is a browser-based offering tool, where you can combine API and UI, actually UI automation, which is also -- it's a unique offer right now in the market to -- we have an extremely scalable API integration story. Cloud Elements is behind really big, big software names. They are using it for scaling their own API story. So our API story is world-class in this moment, and the combination is pretty unique to have both world-class. Now going to Microsoft and ServiceNow. They are very different type of companies in their relation to the RPA market and the automation market. Microsoft has built, technically speaking, a platform for citizen developers. This is what Power Automate is. It's a simple-to-use platform but it lacks the power to scale up when you really need more complex use cases. So Microsoft has two type of technologies. One is for pro dev, where they have all the Azure suites, Visual Studio; and then its Citizen Developer, which is Power Platform. But actually, they don't address well what is in between, which is more like this technical business users that have a bit of coding concepts and they can -- and in our world, they deliver [ module ]. They need a bit more sophisticated tools than Power Platform offers, but not as sophisticated as Visual Studio. So it's this layer. And this is how we scale this company based on this population. So therefore, Microsoft competes with us in the personal productivity space, where it's driven by citizen developers, and more on the low end of the market, where they can penetrate better through their channels. And in our big accounts, people realize the power of having the same program, even for citizen developers for business users because you can take elements of automation and then you can have a professional developer working directly on them. It's the same onboarding program and it's, frankly, much more powerful tools talking about. Now with ServiceNow, we have not seen yet in a material way ServiceNow. Right now, we -- it's less than 1% in the opportunities that we have in our CRM system where we are seeing ServiceNow. Also, you need to think of ServiceNow as what is the persona their sales team is keen to sell. So persona is more of an IT persona, while automation and RPA requires a bit more of business skill. So we sell more into the CFO line of businesses rather than IT. So we are seeing both Microsoft and ServiceNow more partners than competitors.

Okay. we're over time, but I want to really thank you, Daniel and Ashim, for joining us today. Thank you all.

Thanks.