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

Well, thanks, everyone, for joining in-person in the room and those that are joining virtually over the webcast. Just kick things off, my name is Jake Roberge. I'm the research analyst here at William Blair that covers UiPath. And for a full list of our research disclosures, please visit our website at williamblair.com. But with that, really happy to have Ashim Gupta, Chief Financial Officer of UIPath here. Well, this day, Ashim is going to start with a few slides just to kind of level set with people in the room with the business overview, and then we're going to jump into more of a fireside chat to dig a little bit deeper into the business. But thanks, Ashim, for being with us today.

Thanks so much, Jake, and good morning, everybody. Just a quick introduction. Ashim Gupta, as Jake said, I've been with the company for over 6 years, various roles, not always in finance. And I actually joined the company because I was a customer. So I was both the CFO and CIO at General Electric, GE, where this was the leading technology of ROI, and I fell in love with it, and that's how I joined the company. So with that, let me jump in. So what is like the numbers of UiPath just at a quick glance. These are first quarter numbers. $335 million of revenue, $1.5 billion -- north of $1.5 billion of ARR. And we generated non-GAAP operating margin of $50 million and associated with that over $100 million of cash flow in the first quarter. So when you look at our company, we are a scaled company, even though it is really the product market fit when I joined, we were less than $50 million when I joined over 6 years ago. We've scaled the company to $1.5 billion in ARR. And we have taken the company to a really good, sustainable level of profitability where we even find that there continues to be opportunity to be even more efficient while we continue to lead in this area and grow. Our revenue growth rate is 16% for the first quarter. We have both on-premise and cloud software and SaaS software. So we follow 606 accounting. For those who go through it, you know the revenue is a little bit different than the straight ratability. And therefore, we always point people back to that ARR metric of $1.5 billion. And you can see that, that's growing 21%. And so when you're looking at 11,000 customers, [ 288 ] greater than $1 million over 2,000 customers greater than $100,000. So it is really broad-based growth and a broad-based foundation with strong levels of profitability, while we continue to invest both within AI as well as extending our platform. And so what is this platform that we talk about. When I joined the company, we were an RPA company. So for those who don't know RPA perfectly well, robotic process automation, manual work that is emulated by software. So instead of you punching an invoice into a computer or workers doing that, they are actually freed up to actually solve harder and tougher problems. Now I give you a simple example of invoice processing. But our RPA platform extends across every single industry, doing really complex things like claims processing, customs, integration and customs processes, all the way to interactive areas like call centers for large banks and within their entire banking operation. But that is just the tip of the iceberg for what our platform is. Over the last 6 years, both organically and inorganically, we've expanded the platform to also do discovery. So for those who know Celonis for process discovery or process mining, we have that capability, and we are a leading -- we've been ranked with analysts in the leader quadrant around process mining as well. We do task mining, which is actually sitting as an agent on the desktop, so we can analyze what people are spending their times into. Process mining looks at the logs of work or transactions going through and says, wow, this is nonstandard or this is manual. So we've expanded into discovery. Our automation suite also goes across a ton of areas instead of just citizen development, where you'll see something like a Microsoft, we actually have -- we have advanced automation with our unattended platform. And that means that you have agents or robots that are sitting and doing complex tasks in the background that is there. And we have both a professional developer persona that we cater to as well as the citizen developer persona that's there. And we've incorporated now an infused generative AI with Autopilot. That is what Microsoft does in Copilot, that's what we do for our platform for Autopilot that is lowering the barriers for really driving complex automations into the system. And then we help operate a company. I think the biggest differentiator for UiPath, besides the breadth of our platform is the fact that we have governance. If you are a health care provider or a bank or a manufacturing, you have a lot of compliance that you have to go through. Sarbanes-Oxley on the finance side, regulatory and HIPAA regarding to patient information. And so we allow the governance to be able to operate. That means real-time analytics. That means making sure that we have the right AI trust layers in place to use our AI capabilities as well as the ability to create audit logs and manage the digital workforce that we are providing. So when you look at all of this together, we have both AI, API automation and UI automation and RPA, which makes us really the most -- the largest platform that is there, which is what leads us to our competitive position in analyst reports as well as at scale. So where have we applied AI in this world of AI? We are -- if you get to see Daniel Dines, our founder, I would say the #1 adjective that gets used is authenticity. And I think in the world of AI hype cycles, we are substantively putting it within our products. So where do we do it? In our discovery suite, one of our discovery suite, parts of our discovery suite, just to give you an example is communications mining. What does that mean? That means you can ingest all of the millions and billions of e-mails in a corporation to understand what people are doing. So you can interpret data that is flowing through e-mails, using artificial intelligence, using AI, and you can start creating automatic routing and categorization of that. We use AI within our automation itself to see a screen as computer vision. That's not traditional screen scraping to be able to go into a multi -- one of the largest banks in -- the top 10 largest banks in the world and see how every screen within their application stack, [indiscernible] that is artificial -- that is AI applied. Autopilot, which I talked about, using common expression to generate code. That is another area that we do it. And then the last piece is we really use AI for a purpose, and that is to help employees and knowledge workers free themselves up from common tasks. So that is -- we put AI not in the hands of just professional developers, but also into business users and everyday knowledge workers within a company. None of this happens through a direct or a singular focus. So partners in our ecosystem is probably our most valuable asset. So we have our ARR balance of $1.5 billion. We have 11,000 customers around and the next piece is our partners and our alliances that we have. You can see on the screen, our tech partners. We actually have -- we have one of the deepest relationships with Microsoft. We -- they call us their preferred automation vendor as they go to their customers. AWS, Google, we're integrated deeply with these technologies amongst all of the other logos that you see there. Those integrations are critical for us because -- and for our customers because UiPath is not all about automating a single task or a single screen. It is about really automating across the stack and the screen that's there. And then last is proper implementation. So our go-to-market partnerships with GSIs, they are out there at the forefront selling transformation, and they know the power of our platform. So if you look at Wisconsin Energy, which we'll talk about in a few areas, they use -- Accenture brought our platform to them to consolidate vendors under one vendor that could do everything from traditional automation to document processing to test automation. So when you look at that, these partnerships that we have, they are critical to us. They're critical to our customers, and they are an area that is deeply valued across all the major GSIs that are there. So in sum, if you look at our company, ARR growing 18% or 20-plus percent, sitting down with the strong cash flow, strong cash flow margins, really incredible gross margins at 85-plus percent. We have a highly scalable organization that is also continuing to be able to grow in a time where productivity is at the forefront of every corporation. So with that, I'll sit down and have...

That sounds great. Well, thanks, Ashim. I appreciate you level setting with us there and just given a good overview. But just to kick off the questions here. One of the recent dynamics we've seen in the automation space is just the appetite from customers to consolidate tools onto broader platforms. You laid out your discover, automate, orchestrate or optimize product suite there. What's driving that appetite to consolidate on the broader platforms? And how does that change your competitive positioning in the market?

Yes. Let me just start by saying vendor consolidation is a tailwind for us. Very few -- there's -- if you go in Google or if you go in search or look at analyst reports, vendors that have the ability to discover, automate and operate. Vendors that have test automation and document processing, you're going to find really one vendor, and that's UiPath. So the vendor consolidation is a tailwind to us. Now what drives it for a customer is 2 things. One is, of course, they get a simpler tech stack that they can work through, which in a world of security, in a world of data integrations, that is the simpler the stack, the better it is and the more capabilities it has and the more cost-effective is for customers. The second reason why vendor consolidation is important is because the integration is important. Why did we build out our platform because you need the ability to -- if you could just automate, you don't have the ability -- and you don't have the ability to find automation then you have to buy that tool and figure out how to integrate them. We solve that integration. So we can make 1 plus 1 equals 3 for our customers in that way. And you see that in many areas. So if you look at Etihad Airlines, they bought our full platform. They consolidated, so they have all of the elements of our platform that are there running 300-plus processes, which is -- shows the kind of the value of the platform for our customers as well.

Yes, that's helpful. And then there are some -- you talked about the logos in terms of partners with AWS, Microsoft, some of those larger vendors. But there's also some larger software vendors that are trying to address the automation opportunity with Microsoft and ServiceNow. So maybe help us understand what are the functional swim lanes between your platform and what those vendors are doing?

Great question. So when you look at -- let's just take Microsoft and ServiceNow. Microsoft is really personal productivity. So apart from cloud, just think about a corporation. What do they use that really is a true enterprise process, defined as invoice to cash, procure to pay, record to report, employee onboarding, et cetera, et cetera? So really, Microsoft is around the personal productivity side, and that is the swim lane where they stay. Do we see them in that swim lane? Yes, because we have personal productivity elements of our platform. But what our customers value about us is the level of enterprise-grade automation that we have. ServiceNow is more of an IT tool than a line of business tool. So they -- where you see ServiceNow is really on the longer-running workflows, which we are driving capability towards. But they are not nimble enough to deal with the thousands of use cases that exist within a customer. So if you think about a corporation like where I came at GE, we have -- when we look at customs and the amount of processing what it takes to get manufacturing components through export controls and customs processing, you need a level of agility to be able to truly automate that process. So ServiceNow really focuses more on that swim lane within IT than the line of business users that are there. And you see them to scale very well with ITSM as an example. But we have got -- if you look at our typical customer, they have thousands of use cases or hundreds of use cases that they're using with their area. We are really in that enterprise-grade automation. That is our bread and butter. That's what the majority of -- where the majority of our revenue is generated.

Yes, that's helpful. And then just double-clicking into the Microsoft relationship because they have RPA technology, but there's also a really tight partnership. So can you just help us understand what exactly that coopetition dynamic is? And how exactly that works in the market?

It's interesting. I mean I'll probably start with this, and I'll probably end with this. Satya stays on stage -- Satya Nadella stays on stage with UiPath logo in the background. So we are one of their largest consumers of Azure because our cloud platform is based on Azure. So every dollar or every automation that is running on our platform is a benefit to Microsoft in terms of their cloud consumption and they know that and they see it. That's why they put us in their marketplace. That's why they promote us with many customers and why we have that alliance that is there. The second piece of it is, Microsoft looks at our enterprise-grade capability and they look -- they've called us their preferred enterprise automation partner. Where Microsoft, so to speak, competes or where we -- kind of the coopetition enters in the phase, the first part is true partnership is really just around the personal productivity side, which, as I said, is an important element of our platform, but it is not the larger revenue generating element of our platform. And so when you put that together, that is kind of how we compete or cooperate and compete simultaneously with Microsoft. And again, we're connected at the very highest levels of Microsoft, whether it's Scott Guthrie, et cetera, Satya, and you can see them in their presentations and at our [ Ford ] event, you can see that partnership really shine in terms of how they spotlight us and how we spotlight them.

Yes. That's helpful. And then just in terms of the platforms, you've recently kind of been expanding beyond RPA over the past few years and gone into areas like process mining, document understanding, test suite. Can you talk about how adoption for those other products have been? And just kind of what milestones investors should be looking at for success in those products?

Yes, it's going great. Let me give you a couple of facts. I'll give -- I'll try to give you 2 facts. One is the majority of our customers greater than $100,000, have some element of more than RPA, have some element of our full platform. So we have 2,090-plus customers greater than $100,000. All of them have now started either at scale or begun the journey with multiple elements of our platform. The second example that I can give you is just IDP. So in fourth quarter, we said we gave the statistics of our top 100 customers or 100 deals in the quarter, 65 of them had IDP, which is intelligent document processing as a part of those deals. So the adoption of it. What we love about many of these elements is they scale better -- as good or better than RPA. So think about it. The commissioner of the IRS stood on stage with us in Washington, D.C. at our TOGETHER event because they believe and they understand the power of how much paper is running through the government. Lo and behold, there's a lot of paper running through the government, which we all know. They have an appetite to automate it. So we've gotten our first set of use cases moving with them and there's even more that is on the background. And what's exciting is once you're in one use case with IDP, it just scales because the amount of documents is only increasing as businesses grow. And then with test automation, we have really great examples, whether it's Orica in Australia or other examples of customers that have adopted our full platform. And what they're starting to see is when you put processes through your system, you also can use the same database of understanding of a process to automate your application testing. Every time they change code, they have to make sure they don't break a process. Somebody can either manually test it or you can run automated scripts and people are doing that with UiPath.

Yes. That's helpful. And then maybe just jumping into some of the recent results. Q1, there's a little bit of noise during the quarter. So maybe if you could just walk through kind of what happened in the quarter, some of the recent dynamics that you've seen in the business and just how things have changed over the past few quarters?

Yes. I think when you look at our Q1, where we ourselves said on the earnings call, we're not satisfied with the results of it. We met -- we came within the guidance for our net new ARR, and we met our revenue guidance. At the same time, when we look at Q1, there were -- there was 2 really areas that we highlighted. The first area is the macroeconomic environment. I don't think we're alone in it. When you look at kind of Q1 earnings across many people highlighted somewhere around that mid-March -- mid-March time frame. It just felt like the environment got tougher, longer deal cycles, more scrutiny on deals. That's not about UiPath, I think that's more about just the environment that our customers are working through. And we saw the impacts of that, particularly with the impact of larger multiyear deals. The second area was a few key areas of execution. And without going through all of them, here is we just feel like we could have been deeper in the details on many -- on our deals and some of the scrutiny that we have around it and the change manage about simple processes like sales compensation and just making sure we understood the downstream effects. What we committed to on that call is really -- is 3 things: one, making sure we adjust the guidance as appropriate, just given the environment. So we really have a -- to me, a very good baseline of how to run the business just given the environment that we're in and a few of the changes that we're going through. The second piece is quick fixes on execution. The impact on sales compensation, fixed already. Just that is something that we committed to that we would fix in the quarter, and we're running with that. And then there is more of -- as Daniel takes the helm of the CEO, that is fixing those deeper execution items on the go-to-market side, just being closer to the customer. We built some too many central organizations that slowed down the chain of information, and I think we can speed that up.

Yes, that's helpful. Maybe just double clicking into the CEO change that's going on. Can you just better -- help us better understand what's going on in there? And what are some of Daniel's priorities as he steps back into the CEO role?

Yes. So Rob was our CEO, and he left for personal reasons. As you double click, I was talking about it this morning with a few investors. Daniel has run the company for 17 years. He grew the company from 0 to $1 billion, right? So he comes in, and he hasn't been away from the company. He just was focused more on the P&E side that is there. So really, as Daniel comes in, he's outlined a couple of key areas. The first is really driving back to the agility of the smaller company. Sometimes as you scale, you start to think you need to -- you need bigger processes, more cumbersome processes to fit into the big company mold. I mean it's exactly the opposite, actually. And I think driving down those silos that we created has both the cost efficiency potential, but it also puts us closer to the customer and closer to the field, which allows us to react and have a deeper strategy. The second piece is just really nailing down on the execution front, just making sure that the silos of product and go-to-market are better connected. And I think if we do those 2 things, I feel really positive about what's ahead of us.

Yes, that's helpful. And then just last thing on the kind of current results and current demand environment. You talked about some growth investments might not be panning out as well as you would have hoped. How do you think about kind of rightsizing those to continue to drive leverage in the model while already being at a decent profitability profile, but how do you keep pushing that from...

Yes. I think the moment that you put the customer in focus and you put innovation in focus, you really -- like waste kind of like highlights itself. And I think the investments that when you look at the common theme of investments that have paid that we're not satisfied from an ROI standpoint that has been built over the last year or 2. It's really the central organization. The organizations that are furthest away from the customer. What do they look like? Use words like playbooks. You use the words like initiatives, program management, right, things like that. And there's things like we can just be more agile. It doesn't need 5 people to make a simple decision. And so I think that -- those are the types of investments. And we're putting together our thoughts in terms of go forward, but we definitely see both within sales and marketing and G&A. We see what you see, which is there -- when you look at our benchmark, there's a continued -- there's a continued opportunity to drive efficiency without really sacrificing innovation or growth.

Yes, that makes sense. Switching gears over to the AI part of the story. You've obviously been leveraging AI for some time now. So maybe talk about how you've previously been using it and then how GenAI changes what you're able to do with the platform?

Yes. AI is, like we said, has always been infused within our platform. So when you look back computer vision, as I talked about, that was embedded deeply within our platform. Task mining. You really need to understand and analyze data at scale and use AI to give the appropriate suggestions and inferences that are there. The advent of Generative AI has given us really an open source set of LLMs to build more efficiently specialized models. So where does that help us? We're not building our own general LLMs. We're really specializing on top of the LLMs that are there. And so what that allows us to do is if you look at Autopilot. Autopilot, we have almost -- which is our version of Copilot, generates expressions for our developers to be able to code faster, lowering total cost of ownership and reducing the barriers of entry for automations -- for harder and tougher automations. There's a 70% acceptance rate on the expressions that our Autopilot is generating in the hands of our test -- of our pilot group. IDP, we're able to build faster models to process more documents. Talked about a health care customer in fourth quarter. They started with one model. We're able to train 4 or 5 of those models now at a faster pace to expand and really impact more of their documents.

That makes sense. And then you've talked about earlier, the nice traction you're seeing with IDP and Autopilot. I guess just in terms of the traction you could see going forward, like how big of opportunities -- could those products be?

I think it's significant. If you just sit back and say how much paper is flowing through processes -- enterprise processes in the space. I won't -- I find TAM numbers sometimes just because I'm -- I've come from a finance background, I guess, like I think for me, that's a common sense TAM, right? The opportunity is massive to be able to get after it. And it's different than OCR vendors, right? Because I used OCR optical character recognition back a couple of years ago. This is really pairing the power of automation of processing the document with seeing the document, not just seeing the document. So I think like there's a massive opportunity that exists there. And with Autopilot, super excited. I mentioned the 70% acceptance rate. But as we go to our developer conferences and our customers, they just see the power of having that in their hands, which allows them to attack faster. We have faster time to value and lower total cost of ownership, which basically means an expanding ROI for our customers.

Yes. That makes sense. And then you noted on the last call that the GenAI hype might be causing some confusion among customers and maybe crowding out some mind share. Can you just help us understand what those comments were about and how customers are viewing the combination of AI and RPA versus those different factors?

Yes. I don't think it's specific to us. I think it's specific across software. If you're a CIO, and everybody in here is an investor or an analyst in one way, shape or form, how much do you hear about AI in every single company? So how do you make sense of what's real and what's not real, right? So when you sit down and you look at a CIO and they're going through their areas and their road map, all of a sudden, every single company is claiming to be able to do something that they weren't able to do before. To me, what is the power of UiPath is we are saying -- we are enhancing what we already did before. And so what I would look at -- when we talk about the confusion that could be there, and we really talked about it in the context of expanding deal cycles. Here's 4 or 5 extra questions that customers now have to get through as they have their conviction. And as the landscape changes, as they are a little bit more uncertain, they're not as willing to sign longer-term contracts that are there. And like I said, that is not something just about UiPath, that is something across to all vendors and many other companies came out kind of in a similar fashion in first quarter.

Yes. That makes sense. And then shifting gears over to the partner channel. You obviously had a lot of big logos up there, but one that really sticks out is SAP. So maybe if you could kind of dig into that partnership, how it looks different from some of the others and just the opportunities you see ahead with that?

Yes. SAP is super exciting because we see the opportunity to sell software and software together. So if you look at like we love our GSIs. They will go and were selling software with process transformation and consulting and implementation. With SAP, we're selling software and software together. And so what SAP sees the value in the relationship is a cleaner core. What is their major initiative is clean core, less customization. If you have more automation at the forefront, we're sitting on top, you have less surgery, you have to do to customize the ERP itself or the application itself. And so they have 40,000-plus customers, we have 10,000-plus customers and the opportunity to reach those incremental customers together and continuing to go higher and higher levels within our current customer base, that's super exciting. We're making great progress. Every quarter, we sign a customer. This quarter, we signed an eye lens manufacturer. Last 2 quarters ago, we signed Arnott, a biscuit manufacturer out of Australia, which makes delicious biscuits by the way, but also makes a lot of money, and they invested within our platform. So we're super excited, and we're going to continue making progress there.

That makes sense. We're coming up on time here, so maybe last question of the fireside chat. But you have close to $2 billion on the balance sheet, targeting close to $300 million in free cash flow this year. How should we be thinking about capital allocation on a go-forward basis?

Yes. I would start by reemphasizing what you said. I think we have an incredibly strong balance sheet and position. No debt and that like a very healthy cash balance and not a need to burn the cash in our area. That being said is we can be opportunistic in where we are. We are 100% committed on our buyback authorization on executing against it, $0.5 billion. In the first quarter, because of a little bit of material nonpublic information, you'll see a little bit of a slowdown in that area, but we are very committed towards that buyback. And then we can continue to deploy capital either returning it to investors or using it in smart ways like our holistic partnership that we did, which really is a longer-term bet. So we can both use it for short-term bets, medium-term bets or we can put it back in the hands of our investors. And we evaluate that not every quarter, but we evaluate that every quarter, single week. And so doing that -- working that opportunistically, we think is a great advantage for us.

Well, thanks, Ashim. Appreciate you being with here today. And thanks all that joined in the room.