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

Welcome to our next session. Hi Evan -- the -- hey, really happy to have Ashim from UiPath here. Your role is expanding like crazy. Like do you still have time to sleep?

I still have time to sleep and hug my kids. Those are the 2 most important things.

The quick one, like because you had to -- numbers out last week, maybe we start with like a quick summary on the numbers, and then we'll take it from there.

Yes. I think we were really pleased with our third quarter results. When you step back and you look at it, we delivered -- we beat our numbers across the board for ARR, revenue, operating margin and free cash flow. And when we look at the quarter, we saw our ARR continue to be at 17% growth. We drive and run our business to ARR because of our 606 accounting. We saw positive movement in operating margin, really reflecting the outperformance or the good execution in terms of streamlining the organization. And when you look at our core metrics, net dollar expansion rate continues to be a strong point for us in terms of 113%. What was very encouraging, it was last quarter, we had crossed 300 customers greater than $1 million. So if you put that in perspective, in -- Raimo was just talking about 2019 questions. Back then, we were less than 100 customers, greater than $1 million. So we crossed 300 customers greater than $1 million. And when you look at what we talked about for the total year, we continue to drive free cash flow at a high level, $325 million. So 17% ARR growth, revenue continuing to outperform even with the volatility of 606, and we -- and reflecting some of the fixes and execution that we've been working on, and really strong progress in operating margins.

And then -- so as we all are in that kind of more kind of current subject, like what are you seeing in terms of macro environment? Because that's the big debate, like Salesforce sounded like a little bit better, but not 100% sure. I also weave in post election, it's like the question you're going to get today a lot...

Well, we're post election and pre...

Whatever?

Yes, pre whatever that's going to be. So from our perspective, I think we've described -- we look at the environment as stable. And the way we've characterized the environment is variable. And it's a very deliberate word. I think there's pockets of strength and there's pockets of weakness, and they move. So on balance, we feel that to be a stable macroeconomic environment.

Okay. And then the elephant in the room for you guys is kind of -- or that comes up a lot in my investor conversations is like GenAI. So what's the role of UiPath in this new GenAI world? And I'm starting with like what's your message to the client? Like I mean, first, maybe start differently. Does it come up as much of a discussion in terms of how you fit in when you talk about clients versus investors? Because investors did a lot of like hot debate, how are clients thinking about it?

Clients are becoming more clear than investors if I'm really candid about it. And it's not an indictment on investors at all. I think it really reflects when you actually use the technology and put it to work, it becomes clear what is used for what because the word AI and GenAI are very broad terms. I would break down our strategy in terms of 3 key pillars. The first one, which is newer is Agentic. We are all in on Agentic. And what Agentic for us means is giving agency to our technology to complete the long tail of tasks within a workflow. There are deterministic tests, things that are really rules-based and things that are undeterministic, where it requires some level of thought or agency to be able to accomplish it. UiPath's foundation has always been in the deterministic area, and that is very important for us. The Agentic wave is really about taking a task and saying, don't just hit the approval for a discount, decide whether you should be able to approve it. And so within GenAI, Agentic is a very core part, and we use GenAI, we use LLMs, we use context grounding, we use prompt engineering as ways of making sure that we can operationalize Agentic within our platform. What is a very big differentiator for us, though, is agents use robots, they need to take action. You are not going to give an agent access or LLM's access or credentials into your systems of record or systems of reporting. So having the governance, having the deterministic element of robots and agents using robots is very important.

I mean the -- it does sound like it's a higher level than what people initially thought in their early thinking. It's like the debate that where it starts is like, there's a large language model -- sorry, that's all the time [indiscernible]. But like there's a large language model and that can just do exactly what a bot can do. So...

Yes, it's a great question. Large language models, they are really great at gathering -- at synthesizing information or gathering information. And you can go and take large language models and take -- and deliver certain outcomes for it. For large language models, you're not going to give large language models access to your wealth management system, ungoverned, right? So robots and agents use large language models in very specific ways to be able to get -- to be able to have outcomes that are there for enterprise processes. I think there was a question.

[indiscernible].

No, there's 2 ways. Remember, our platform has UI automation, API automation as well, right? So there's multiple ways to do it. The second piece is APIs are very highly governed in terms of where -- how the structure of what that looks like compared to a large language model that can go and take a decision and have access at the same time. So in our minds, when you go through -- when you look at it, we have both pieces of technology depending on where it is. A lot of claims processing in highly regulated areas, they are actually -- they're going to look at things like APIs and even have higher governance standards. They would prefer to emulate what a human does via the user interface. So we have multiple avenues to go after that workflow.

Okay. And then so if you think about like where your -- you said your customer understands the best, like what's your customer interaction like or what's the customer thinking in terms of adoption? Because you have like the Salesforce with Agentforce and et cetera, that kind of market the heck out of this kind of...

Like a machine.

Yes, a machine. They're like -- so how do you fit in then in a way? Like what's your position there?

So if you look at it, we definitely see every company doing in-app automation, just like they did with robots. There would be an automation bench within an Oracle, within an SAP where our sweet spot is large complex processes that span across applications. Let me give you some numbers to put some things in context. For us, when I look at like our top 50 customers, the average number of enterprise applications that they're dealing with is over 12,000. So their processes spend multiple applications that are there, right? The second piece is when you look at specific in-app, they are limited by their application itself. We call ourselves the Switzerland. So we are a very open architecture. We can integrate with Agentforce and robots that -- agents that Salesforce is going to create for certain customer processes. We can integrate with mainframe applications. And we can be the connective tissue that actually liaisons both of those together. So from our standpoint, our niche is cross application, Switzerland in terms of integration across any number of processes. And there's 2 more important differentiators. We are really going across the entire workflow to multiple areas of multiple steps. And so we believe that robots, humans and agents, all are required to complete that workflow, right? And one of that proportions of the workflow can be customer-facing, a call center agent, another one can be the accounting function to go and retrieve a receipt, right? And the last piece is governance. We believe orchestration, so Agentic orchestration as we talk about it. And within our RPA platform, we had the orchestrator. That is one of the most under-looked and frankly, under-marketed parts of our platform. It is an area where we've invested a lot of our engineering effort to drive governance to drive scalability and those are our differentiators versus a lot of the players that you'll see entering the scene.

So is the idea then in a way that the -- like an Agentforce will be on sales or like on call center and will do that and they do really well. But if you think corporate wide, it's going to be broader.

It has to be.

Yes. And then, see -- okay. So how does that -- what does it mean to the competitive landscape then for you guys? Is that kind of then not straight into Microsoft, et cetera or like...

So what you end up seeing, Raimo, is you actually end up seeing a lot of competitors on the fringe of different areas because they enter a different workflow.

Yes. Exactly.

Right? So -- but where we look at our competition is we are kind of an N equals 1 when it comes to going across the entire enterprise workflow. That is one of the reasons why in 7 to 8 years, we've scaled to $1.6 billion of ARR, right? When a lot of people would say the same question came about RPA early on. Oh, RPA is just screen scraping repackaged, right? Screen scraping never developed into such a large monetized and governed and valued piece of software. So that's kind of how we look at the competitive landscape. A lot of players on the fringe that we will meet and run into. But when it comes time to the transformation across an end-to-end workflow, we feel like we are very uniquely positioned.

So you're kind of -- will you not then be the -- well, you always said it, you want to be the automation platform for a company?

We are the automation platform, yes, for end-to-end automation for enterprise processes. And then from there, we have the ability to do in-app automation. We have the ability to do citizen automation like Microsoft's Power Automate or Copilot-like features. So that's why you see a lot of coopetition like we have a great partnership with Microsoft. They've stood on stage and talked to us -- talked about us as their preferred automation vendor because while we can do some things that they do, we do a lot of things that they do not want -- they cannot do and they do not want to do.

Yes. I think on that note, Ashim, like that's the one thing where I still had confusion with a lot of investors in a way when you had your previous co-CEO, still -- that was kind of the -- you want to be the automation platform. But then when he left, we want to be more nimble, more smaller, more departmental, how does that fit together?

No. Yes, that's a great question. What we meant is what our prior kind of leadership really drove, and I thought they did it, it was a very positive thing, is driving the conversation to the C level in the boardroom. We want that. What we feel is in doing that, we created a lot of big company dynamics. And we lost sight of the grassroot citizen developer, right? The grassroots developer who is going to go and drive automation? It requires both a tops-down effort, but also a bottoms up in the grassroots. So being more nimble and being -- we still have the same aspiration of being the overall automation platform, but we want to be more balanced between grassroots adoption and tops-down transformation.

Okay. So how do you measure success then now as part of this -- like if this works for you, like where would you see it like -- or how do you measure that?

So I think 3 key places. The first is the number of -- for Agentic in particular, the number of use cases that get put into production as we start moving through the next year in the complexity areas -- in the areas of complexity that we see. We do look at it and say it should be a tailwind for larger customers. So our customers greater than $1 million, our customer is greater than $100,000. We look at those cohorts of customers being right to expand their automation -- to continue to expand their automation platform. To put it in context, customers between $100,000 and $1 million for us, their net dollar expansion rate is 119%.

Okay.

Right? We have over 2,200 customers that are greater than $100,000. So those are 2 key metrics that we look at in terms of the success rate for that.

So then in a way, like if it works then that 119% is like that, law of large numbers brings it down a little bit. But it's kind of the number -- if that goes up, it's kind of...

That should be the driver of propelling growth even if the law of large numbers creates a little bit of an offset.

Yes, yes, yes. Okay. Makes sense. Okay. We'll look for that. Okay. The one thing that you talked a lot about on the last earnings call and it was something that I had kind of thought that should be interesting, covering SAP as well with testing like that came up a little bit more than in previous quarters. Can you talk to that? Like what's going on there?

Yes. We -- so testing is actually a very synergistic part of automation. Think about it. Every time you put a new feature or a new version of software, you have to go and run test scripts in order to make sure that processes don't change, applications are well managed, et cetera. Those scripts are emulating what a human does in human transactions. So when we started 3 to 4 years ago, it's taking our RPA platform and adopting it to testing -- to application testing. We started very nascent. In the third quarter, we signed our largest deal with one of the largest tech providers in the world, one of the largest technology companies in the world. And the synergy is actually quite large. So it is not the -- how do you say, the most hottest, most cutting-edge technology that gets spoken about, but it has immense value. Companies have thousands of testers. They spend millions of dollars and especially as software moves forward, that is in a market that is ripe for disruption. The second piece is we're able to -- most of the technology incumbents are legacy. They have very old platforms, old architecture. Our architecture can bring in Agentic. So Agentic testing can be a part of what we do. We can bring in Copilot to Autopilot to be able to automate what those test scripts look like in those areas. So that is we're seeing traction there. We see a good healthy demand from our customers, and that gives us an adjacent revenue stream that is very productive for ourselves and for our customers.

Is it like you did name like SAP moving to S/4HANA, that must be like a huge thing?

Yes. It's a huge area for us. And actually, our partnership with Deloitte. So talking about SAP, we announced our SAP-SOLEX partnership, right, that shows SAP's value of UiPath's platform. But the tangential benefit of that is GSI has really got to know UiPath at another level. Because obviously, when you're one of the few SOLEX partners with SAP, you command that attention. Deloitte and us, we actually look and have formed a partnership to bring testing to S/4HANA migrations. And so the number of HANA migrations that are going to happen as for migrations, that is a market, that is a set of use cases that is a real good TAM expansion for us.

Sorry, I apologize because it's actually an SAP question. It's like -- so like I think they have the deadline 2027, where by the time all the customers need to be over. So trying to do innings or -- where are we on that journey? Like in theory, that it's been going on for a while and SAP shares kind of keep acting well because of it, but...

Yes. I think in the innings of a 9-inning game -- I follow cricket these days. But in a 9-inning baseball game, I would say we're probably in the third or fourth inning for it. Yes. I mean for UiPath in terms of where we are. I think the migrations have been happening, but now our platform has given us an area to speak to those customers. And that's an area that we can produce a lot of runs.

And do you -- I mean, it's up to 2027. So that's like a multiyear story.

Exactly. And the reality is, even post that, it's not a one-and-done thing. Then people are going to continue to drive expansion across and implement new versions, and those are things that we can definitely do.

Yes. And I had you on -- like as a CFO, like that was the COO hat, now it's the CFO hat for you. You gave us an idea about growth next year already. And it's Q3, so everyone was a little bit surprised, but you talked about stable net new ARR next year. Given all the uncertainty -- well, we're hoping it's getting better in the economy, but given all the uncertainty, people were like, okay, that's a statement like what drove you to kind of...

I think -- I'll be very direct about it. I think the #1 question for UiPath is our scale is impressive. Actually, our core metrics are impressive. The question is, over the last 3 years, they've seen a deceleration of our net new ARR dollars and production. So when you sit in a conference like this, people are saying, great, what does that outlook look like, especially as we're talking about some of the execution challenges that we had discussed and that we have put in place mitigating factors. So we wanted to be very clear that is based on what we see here today, we see that the efforts of our execution, the changes that Daniel is driving the execution of our teams, we see net new ARR stabilizing. And when you do the math on that and you look at the free cash flow, that is a profile of -- in our minds that kind of shows you what is the potential financial equation or financial DNA of what the company entails.

I mean if you -- and there's a lot of guys that run models and numbers here, stable net ARR means that the year-over-year growth for ARR is still coming down?

Great question. Yes. So look, at the end of it, you create a base case. So if you look at it stabilizing net new ARR, the dollars production. So if you say this year is the exact number now where consensus and everything is landed, $208 million of net new ARR, $210 million, whatever that could be. When you just go and you carry that forward, that still shows you a double-digit ARR story, right? I mean I think that's a directional area. I don't -- there are definitely a few companies that accelerate as they scale. But generally, you do hit the law of large numbers at some point. And the question is, what is a good growth rate that investors can assume. And we feel like that gave -- that allowed us to give some direction and show the confidence in the changes that we are trying to drive. And along with that, acceleration of free cash flow. So we believe that we can stabilize those numbers. We are stabilizing those numbers, but having 85% gross margins, driving efficiency and driving discipline, we have scalability of our free cash flow margins, which is already generating $325 million this year. There's room to further accelerate.

And then how did you -- like in a way because it's -- you're giving me one number. You know net new ARR is like $280 million, $210 million, as you said. And -- because you're only giving us one number, you could have given us like a $250 million or $150 million. So it's a level. How did you come up with that? Because you're [ on the hook ]. And so we're going to turn to Ashim, not to Daniel, if that number doesn't come in. How did you get comfortable about that?

Yes. I think the first thing is we do not provide a number specifically. I think that's really important. I think we provided contextual data and we said stabilizing, right? And when I look at -- when I look -- we've always said we guide to what's in front of us. I'll give context to what I see in front of us factually. When we're looking at various things, we analyze things 3 different ways: field sentiment, quantitative pipeline and data science, like FP&A in the pipeline, demographics and data science. When we look at those 3 dynamics and we look at kind of what our customer base is where we are today, we look at the trends that we're seeing in the third and fourth quarter. And then you add to that, SOLEX being signed, Agentic being signed meaning Agentic being launched, traction and test automation, our platform expanding, and we've given the customer examples of that, putting behind some of the streamlining of the organization behind us, right, as we move forward. Those are all things that when you add up, we felt that, that is an appropriate direction.

Like how much of -- or how much extra visibility do you get from looking at the renewal pool in terms of thinking like...

It's actually a great visibility. And one of the things that we've really doubled down in the last 6 to 9 months, I think we were very quarterly focused, frankly, as sales team and as a leadership team, which is appropriate. We've started taking longer -- we've set up operating rhythms to start looking at our renewal cycle in a much more longer view. What do the renewals look like in the second and third quarter next year? How are the customers adopting? What is the field sentiment? So when Daniel talks about customer centricity, that's not an empty corporate word. That is about are we talking to the customers at the time of the transaction? Are we staying with those customers and getting feedback and really assessing what their trajectory is 2, 3, 4, 5 quarters ahead of time.

Yes. Okay. Shifting gear a little bit on the -- you kind of adjusted the organization a little bit over the summer. Like can you speak to what was going on there?

Yes. Great question. When you -- leaving May and when Daniel came back into the organization, we really did a full assessment of go-to-market. And what we found is a lot of central organizations have been created. We created a structure that was more akin to a $100 billion company than a $1 billion company. $1.5 million company, $2 billion company, a $3 billion company in our minds. So there's a lot of centralized structures. Those centralized structures had 2 effects. One, the further away you are from the field, ironically, salaries tend to increase, okay, the more expensive it is. The second point is the more layers you have between the field, the slower you become, the less responsive. And so when you add those 2 things up, it just adds to inefficiency. So to give an example, we had an industry team that was central, the field was not really -- did not find as much value from it. So the field created their own industry teams. So now you have duplication and you don't have actually a really cohesive industry strategy. That's an example of some of the streamlining efforts that we did.

Is that a little bit like -- and like full disclosure, I've seen this before, if you take someone from a very large organization, they kind of do what they've seen before, but in a very large organization that's kind of probably how you would do it. And then it's kind of you overbuild compared to -- because then you think you build and then you kind of fill it later but, then it never really works.

Yes. I think directionally, you're correct, Raimo, but I'd be careful -- I don't think it's one person. I think it's the we, and I think there was an over rotation. And I think accepting or acknowledging a mistake, that's part of our culture and then coming back and saying, let's how to fix it quickly, that's also what we do.

And then the -- one question I got is like a lot of like how much disruption -- like if you think about it, there was like you've changed a little bit on sales and marketing. So then everyone is like nervous about like how do we make numbers, like how net dollar is going, et cetera. Like what was the impact there?

Look, when you're going through it, when you start it, you feel like this won't be too -- like there won't be disruption. When you're going through it, it feels like, oh my gosh, this is crazy. And then when you look back upon it, you feel like it's somewhere in between, it's appropriate. I think it was -- there was a set of changes for the organization. I think what we executed well is we were clear. We were fast, we were principled. I think that mitigated things about where we -- about that disruption. That being said, I think we're still in the process of stabilizing. Like we've talked about it in this area that we've put a time line like the first quarter in terms of finishing streamlining the organization. And so we're continuing to move through it. I think the company has pretty well settled our third quarter results, beating all of our metrics across the board, making sure that even amongst this change, we were happy with that outcome, especially being able to continue to hold guidance in the fourth quarter as well.

Yes. And then how sustainable are those changes? Because obviously, you kind of pulled back, but sometimes you kind of pulled back to build up, like...

Yes. That's a great question. We are still investing in the company. It's just if you look at where our priorities for investment are, they are investing in the roles that are closest to the customer. So sales capacity with our quota-carrying reps, right? That is an area that we will continue to look at to see where we invest. Within specialists within our platform, test automation, process mining, those are areas that we can go and double down on. They provide much more tailwind and deal acceleration, both short and long term than some of the process-oriented organization that sits centrally. And that is both on the G&A side and the sales and marketing side.

Yes. So when I -- I don't know if you think about investment style. So if I put these 2 together, you give me like a number where I can kind of think about the growth profile for next year. We have the profitability, so would you kind of position -- how do you think that positions you when you talk to investors like a [indiscernible] how do you think about that?

I kind of let the investors decide if I'm open. I think we provided the numbers where we are. Look, this is -- I'll give you kind of the -- if you step back and you say, a customer that -- a company that has scaled from 0 to $1.6 billion, approaching $2 billion in a span of 7 years. ARR is growing 17%, right? Revenue and 606 dynamics, you still feel like you have a path to double-digit revenue growth. Free cash flow is $325 million, 23% free cash flow margins, accelerating free cash flow margins, strong gross margin, an on-prem and a cloud business. And frankly, a platform that is very akin to the Agentic and the AI wave that is there and it has a very good product market fit. I feel like that can fit multiple investors speaks because that's just a rock-solid strong company.

And the last question for me is like, how do you then think about -- if you have the cash generation and you have good cash flow margins, how do you think about capital structure from here then? Or what do you do with the money?

Look, I think we have a very strong balance sheet, as you know. We bought back nearly $0.5 billion worth of stock over the last year. We reauthorized or we increased our authorization to another $500 million back this year. So that is definitely a lever that we'll continue to pull opportunistically. I think M&A is always on the table for us in terms of smaller tuck-in acquisitions in terms of what is there. And then we have a lot of optionality that we will constantly consider whether that's partnership, whether that's investment, companies like H that we invested in that gives us a 5-year investment horizon as they're really on the cutting edge of combining LLM and user interface and UI and screen automation, like those are things that we have the ability to do.

Yes. Okay. Perfect. Thank you, Ashim, 5 seconds left.

Perfect timing.

Okay. Perfect. Thank you.

Thank you so much, Raimo.

Hey good to see you again, thank you.