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

Ashim, thanks for joining us. First session for the conference. So no pressure on kind of being -- performing here from us. The -- it's great to have you back.

It's kind of funny, last time, we both live in Connecticut. So why are we flying all the way over to do the conversation. But the -- maybe just get everyone back on the same page is like, you just had very good Q3 results. Your share price reaction suggested even more. So let's not discuss that part. But from your perspective, what were the highlights from the Q3 results?

Yes, great question. We had a -- we're very positive about our third quarter. I would -- I look at it in three lights. One, we demonstrated the ability to have a business model that can both drive profitability and growth. The balance of growth and profitability is a focus for us. It has been a focus for us, and we're very pleased with that delivering. The second is just the positivity and the continued momentum on the go-to-market changes that we've made and how it's been received by our customers. That is, engaging with C-level executives, meeting and selling the platform beyond RPA, really selling multiple elements of the platform. And third is just the vertical strength and the intimacy that we're seeing there. And then the third, which is no small feat, is just the power of AI and automation and how AI is infused in our platform, I think, has resonated well. Just seeing that through customer stories and also seeing that through our messaging, and that's well received and much better understood. So we're very pleased with third quarter.

And I will touch on some of those points a little bit later again. But if I start big picture, like if you look at your ARR growth, it's kind of settling down mid-20s again. And given the scale of the organization and kind of the environment that we're in, I think it's very, very impressive. Is that kind of -- what's driving it? Is that macro getting better? Or is that like you guys executing with Rob, now it's several quarters under his belt, the execution is getting sharper?

Our growth rate reflects really the tangible strength and technological strength of our platform as well as the execution by the entire UiPath team, especially go-to-market. When you peel that back, again, our ability to take the strategy and execute, whether that's bringing the conversation to the C-level, several marquee deals in the quarter, continuing to drive strong customer growth, particularly at the top end of $1 million-plus and $100,000-plus customers. And then seeing the leadership changes that we made early, especially in certain verticals like public sector, seeing those take root. That really is there. So execution is really a large part of our quarter. When you look at the macroeconomic environment, we continue to see it as variable. It's been consistently variable, as much of an oxymoron as that may sound. And so it's definitely had a disproportionate impact on the lower end of the market, meaning small and midsized companies, in our emerging enterprise segment, but we have seen strength in enterprise. And that strength is also where there is ROI. Feedback from our customers is they're willing to invest where there's an ROI, and we've demonstrated that as a company.

And then the -- talking about execution a little bit, like it's a big word. If you think about for us as software investors, it's like yes, we're working on execution. What exactly do you have to think about that?

Yes. I think at the core of it, it's Say:Do ratio. What we say we put into practice, and we also are monitoring the results of it, such that we can make minor adjustments where needed or pivot where it's needed. For me, that's like the hallmark of execution. And what goes into that is really starting when you have 4,000 people and greater than 10,000 customers, is making sure your position, what you're trying to do is understood by every employee. You train them, you give them the tools to be able to execute, and you go out and make sure that, that's -- you're resonating -- that's resonating and it's impacting the customers in a positive way. That's how we think about execution.

And then what's -- from that perspective, like with Chris Weber and then Rob Enslin, you kind of got like some people that were in much larger organizations who are very focused on process, et cetera. Like what do you get from them that's extra or...

I think what's the power of UiPath is we have a diversity of experience. And I think what people who've seen scaled organizations have brought to us, and the experience of growing them, is a couple of things. One is, what does a mature process look like to build a foundation to scale. And that credibility is something that gets embraced, not by 5 people. So to scale, you need a broad foundation. You can't build a mile high if your foundation is a toothpick. You need wide -- you need a wide foundation. And so they're very good at being able to rally the teams to be able to get there. The second piece is also relationships. I think they continue to elevate the company with our customers. As they elevate customer conversations, it's amazing how the company also elevates and how employees respond.

Yes, I can imagine. And I mean those kind of -- those changes that you talked about, usually it's a journey for an organization that kind of takes time, like I want to say should we talk innings, should we talk cricket. I don't know the cricket. Where are we in terms of innings like in terms of that, kind of [ overall ] organization?

There's only one inning in cricket. But what I would say is look, there's two parts of it. I think foundationally, the major changes like segmentation of our customer base, bringing in the right talent, like Mark Gibbs in Europe, Mike Daniels in our public sector. Employing the strategy of getting the -- selling the platform. Those are -- we're well on our way. We feel really good about that. There are other areas that we are in the early innings of, pricing and packaging. That's -- we feel very good about the progress we've made on simplification there. There is -- we just see a lot of power in being able to go out and see what other advancements can we make and continuing to package our value for our customers. The second is AI. I think we've been investing in AI all along. The integration of AI, the messaging of AI, the monetization, we're -- in some areas like Document Understanding, we're doing that today, but there is even more scope to do that. And those are things that are still in its early innings.

Yes, yes. Okay. And AI will be a big topic in a second, but I wanted to stay on go-to-market a little bit. What are you seeing in terms of like new customer logo, like getting new clients in versus like getting deeper into the installed base at the moment?

Yes. I think it's very important to first rearticulate what our strategy has been. We've been very deliberate in saying we want to focus on growing and acquiring customers with a high propensity to buy. And that means focusing on the upper end of the value equation, and that's what we've done. In the areas like that, enterprise, we're really pleased with the progress in terms of what we're seeing. Quality logos, we announced New Relic as just an example. It's a smaller company, but a really powerful opportunity. Go back to third quarter, companies like Apprio. So smaller companies, but higher propensity to buy, in addition to marquee deals. We have -- we continue to drive like major insurance companies, major health care companies, major manufacturing companies in oil and gas. We're seeing very good progress there. The lower end of the market, that's where we really see more attrition. And that's, again, deliberate with our strategy. And also understandable, given the macroeconomic variability is impacting those types of customers. Very small customers that have low ARR and a lower propensity to buy and invest.

Yes, yes. Okay. And then the -- on that note, what -- if you think about it, as you kind of play in this field at the moment, like what are you seeing on the competitive dynamic as you kind of focus more enterprise? Like you talked about the issues in the low end. Like -- and I wanted to split it a little bit into the classic. Let's talk about those ones, like the private company -- well, now they're all private -- companies like, what are you seeing from that side? And then I kind of talk about the topic once in ...

Yes. I think we've -- if you look -- if you divide our competitors between the legacy RPA competitors and the more, what I would say, contemporarily viewed competitors. The Automation Anywheres and the Blue Prisms. I feel with confidence and still with a lot of respect, we've leapfrogged. Our capabilities range far beyond RPA. Our ability to reach their customers, the conversation levels we're having, just the size of our installed base. I think we're far away, we're well moated against those competitors. And while we'll always have a level of paranoia to -- especially in those areas. I think we feel very good about where we are and how the markets are responding to us. When you look at the newer competitors, like Microsoft, et cetera, we also feel good about where we are. And we can double-click on Microsoft [ if that's ] of interest. But really, Microsoft has been focusing on personal productivity. We are seen by our customers as enterprise-grade productivity, right? So downloading of field documents from your e-mail versus running claims processing. Value, and then therefore revenue, is really geared towards those higher enterprise-grade automations. And we -- that customer responds to us, we've seen that differentiation really be reinforced by the way our customers have responded.

And then -- like staying on that Microsoft story a little bit longer, the -- from the outset, it does look like Microsoft doesn't want to get their hands dirty on doing kind of unextending screens in the deep insurance system. Like -- and I get from our end, like every time someone mentions Microsoft, it's like, "Oh my God, Microsoft is coming." Like, where do you see that -- what's the conversation that you have with the Microsoft guys in terms of how they think about your partnership? Because you're working very closely with them.

Yes. I think -- first of all, that's a great question. And I'm going to slow it down just to reinforce it. Microsoft has named us their preferred automation partner. Our relationships between Daniel and Rob and their executive team are very strong. And they see our growth positive in lieu of their growth, because our cloud is partnered with Azure in a major way. What I think is misunderstood about Microsoft versus UiPath is really two things. The first is, really they're focused on personal productivity. We are focused on enterprise productivity. So if you sit down and you think about your corporation or customers or companies that you've seen, you don't hear Microsoft talking about automating claims processing, automating customs forms applications, automating invoice to cash. You don't see that in -- with them. And that is where we shine, and they know we shine. So personal productivity versus enterprise-grade productivity. The second area is Autopilot and CoPilot. CoPilot and AI has been seen as a strength for Microsoft. And historically, I would say, I think that has significantly changed -- viewed as what does that mean for UiPath. AI is a tailwind for us, and CoPilot is not really a source of direct competition against our platform. In fact, we have partnerships [ who we're ] talking about how to further partner with that. Autopilot brings the power of our platform to our customers to make it easier. CoPilot cannot do that. CoPilot doesn't create a workflow using UiPath's platform. And the AI conversation has been a benefit for us. One, because we didn't react when the news of ChatGPT came out. We've been investing in AI for 5 years plus. We've been talking about semantic automation for 2 years plus. Our technology road map has already had a lot of that in, and it actually has allowed C-level leaders to recognize that strength in UiPath.

And then the -- before I go to AI, like one last question is, the other name that comes up a lot is ServiceNow, where actually, at the moment, there's not that much of a product there, but everyone feels like m-maybe. How do you -- like how do you see it? And what do you see in customer conversation? Does it come up?

Yes. I'll give two data points on it. One is ServiceNow is in less than 1% of our deals. We see them in less than 1% of our deals. So it really -- it doesn't manifest itself as direct competition. The second piece is, there's really a synergy that is often overlooked. So if you look at our most downloaded connector of our platform, and used by our customer, not just downloaded, that is the ServiceNow UiPath connector. And so they don't really come up -- they're focused on areas and problems like ITSM, et cetera. They can increase their range of solutions, but we are really focused on broad end-to-end automation across enterprise processes.

Okay. It makes sense. And then -- now going towards AI. Like if you think about it, you guys have been trying to automate things for a long, long time. And so you must have worked on AI. So now Generative AI comes out, kind of earlier this year and everyone is like, "Oh my god, UiPath, where should they end up." Like how do you see this playing out between like classic AI, what Generative AI could bring extra, and where you are going to play in it?

The first is, I think the AI wave has elevated the conversation. And I think that's really important to note. People are getting more knowledgeable about it, which is a benefit to us. Where it directly impacts our platform is, AI can think, but automation provides that force of action. That's what UiPath's platform brings. So you can have a chat and you can have a Generative AI chat, but actually going and processing that invoice or retrieving that customer data requires action. That's where this is very complementary, just at the highest level between AI and automation, and why us at the center of automation, this is a very positive thing for us. The second piece is, there's general AI and then there is specialized or domain-specific AI. If I just took an example, when you're dealing with an invoice, to be able to read that document and understand what is on that document, that requires a specialized model. Because 70% throughput isn't enough. 70% accuracy isn't enough. You need 95%, 99% accuracy to meet customer value. So in that standpoint, we actually can build upon foundation models and create specialized AI models, which is one of the things that we are working on, that directly impacts the value of automation for our customers. We are already selling that in products like Document Understanding. We are -- we have a ton of opportunity in products like Re:infer, which is communications mining: looking at e-mails and being able to create models to understand what actions can be taken based on that data.

So do you think customers are a lot more -- further advanced in their understanding of where AI plays in for you [ various ] investors at the moment? Like because like on the investor side, I still get a lot of, well, what's AI going to do to this?

I think the wave is so large that it varies. I mean every day, there's something new. So I don't think anybody can say, "I finally understand it." I don't think a customer can, an investor can. And I know that we sit at the center of that, and we are constantly learning ourselves. What I can tell you is, customers who spend time with us, when we're brought into their boardrooms, they always leave with an understanding and the feedback that says, "Now we get it. We need both. We understand what you're doing and what this is not doing. We understand how to integrate this better." Where you see the proof point, so it's not just a discussion, is in the marquee deals that we talked about for the quarter. In our $1 million-plus customers, that continue to grow at a rapid pace, and our $100,000-plus customers. Those customers are investing not in our older products alone, they're investing in our entire platform. And they're also investing because they know the road map is very synergistic and helpful in their AI ambitions.

And then you mentioned CoPilot versus Autopilot, et cetera. So if I think about -- like if I come to you guys, what do I get on the Autopilot, for example?

So Autopilot brings the power of automation closer and faster to business users and developers. And so when you look at what we demonstrated or we demoed, if you get to see our FORWARD VI demos, it brings UiPath's platform into the hands of the user. You can go and interact with an automation. You can develop automations faster. You can develop -- business users can interact with those automations using Autopilot. CoPilot doesn't create the workflow. CoPilot can do the things for Microsoft's platform, in those areas. They can -- it really doesn't have an impact on being able to develop and build automations on UiPath's platform. So the three things that you're able to get is: one, you get a better user experience in the front end, building on the large language models. Being able to interact and say, retrieve my travel data, right, as an example of what Graham demonstrated. The second is, business users can develop their own automations faster. And then the third piece of it is, we are able to build -- core developers or professional developers are also [ going to ] be able to build larger and more complex automations faster and more accurate.

Okay. And then now the CFO question. Like how do you make money out of that?

So one is, we're already making money off of it. And I think this is a fact that I really want to emphasize. We've been selling Document Understanding, which is infused with AI, for a while now. And when you look at our larger deals, we talked about some of the large health care deals or the large insurance deals. Document Understanding has been front and center into those deals -- into many of them. So I think that's first. Second is, we already have offerings like Communications Mining as well, which are also ramping up in their monetization. The third piece of monetization for us, even in the short term, is going to be just driving efficiency and faster time to value for our customers. The faster that flywheel moves, the more value they provide, the more that they're going to invest. In terms of direct monetization of AI, we launched Autopilot into Preview. We have hundreds of customers now on that Preview. We are excited about the feedback and the value proposition. We're going to listen to the customers, make sure that they see -- how they see value in the simplest way to package, so that they will buy it. And that's something that we're going to look at over the -- in the coming quarters and months.

And so will that be an extra -- do you charge extra for that? Or is it part of the platform fee?

I think we have multiple options. I think we want to listen to our customers first to make sure.

Yes, yes, we don't know yet. Okay. Okay. And then last couple of minutes. Since you're the CFO, we need to talk a little bit about your progression on margins and cash flow this year, like really impressive. Like, talk a little bit about that journey there.

I'll first quantify it for everybody. If you look at our guidance that we provided in the third quarter, 900 basis points expansion is what's implied.

That's pretty good.

Which is -- we're really pleased with and we're really happy. I'll start with saying, it is a complete team effort. That's number one. Number two is, it's not at the expense of, no pun intended, at the expense of starving investments. We're continuing to invest in AI. We're continuing to invest in go-to-market. We have a very powerful business model: strong gross margins, really good land and expand and stickiness from our customer base, which means we're not investing for things that attrit, which is accretive to margins. And then the third piece is, we are able to find pockets of productivity just given our global base that's there. And we have a very scalable foundation. If you look at our G&A foundation, we're running hundreds of robots within our finance and our back-office operations. That means that we can continue to scale the company without significant investments in G&A, which also falls through to the bottom line.

But the getting 900 bps is kind of a pretty big number. Like how did you achieve -- like -- I mean I know like -- but there must have been like a cultural change, a lot of projects [ that ] kind of work differently?

Yes. I think the first piece was explain -- literally, we did scrutinize every line item. I think that's one. The second is the culture of ROI. We preach ROI into our customer base. We talk about ROI internally. So we're investing because we see ROI, right? But that also means we can curb investments where we don't see ROI paying off. And anybody who invests knows that you never get 100% payoff. So you're constantly reassessing. That's a second piece -- another piece culturally. And then it just goes across the board. It's the little, little things that every single employee can impact, that adds up. And that gets you to 900 basis points.

And are we now at the end of the journey on the margin side? Or it's looks like there's a lot of stuff that you do that where you have the action today, but the benefit will come through later like. So where are we on that journey of like action and results?

Yes. Look, providing longer-term guidance, I think we talked about ourselves being a 20% long-term margin company. I feel like we're really -- we're well on our way to that. We're very pleased with where we've executed. We'll provide updates to that long term when it's the right time.

So I'm not getting [ filings ] out of you...

No answer on that one.

And then last question for me is like, if you think about it, you're now like nicely cash flow positive. You have a good, healthy cash balance. Does that trigger rethinking about your kind of usage of cash? Or how you think about the kind of cash position of the company?

Yes. I'd start by highlighting like I think our cash position is strong and we're generating large amounts of cash. We've already taken action like returning share -- cash back to our shareholders in the form of the $0.5 billion buyback that we've done. We already purchased 5 million shares, as we disclosed here in the last quarter. So you can see our Say:Do ratio when we talk about execution, and our commitment to that manifesting in real action. We have a powerful business model. And so that, I think we have opportunities in M&A if we wish, and if we see value. Nothing large scale, but there's areas that we can expand upon if needed. And then we'll constantly reassess how to redeploy cash. Our focus is really just making sure we generate the right ROI for both our customers as well as our investors.

Yes. Actually, Ashim, that's -- look, we have a minute left. I think that's a good closing statement though. I think I'll leave you with that.

That's fantastic.

Thank you for being here again.

Thanks so much, Raimo.

Thank you.