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

Thanks. We're going to get rolling here, it looks like. So thanks, everyone, for joining us. My name is Scott Berg. I lead our enterprise software and SaaS research efforts here at Needham. Today with -- we have UiPath. Joining us today, we have the company's CFO, Ashim Gupta. Thank you so much for joining us today. I was just kind of thinking is I've done this with the company in the last 3 years, but it's been a different person every year. Daniel, a couple of years ago. I had Rob last year now have yourself. So we're running the gamut here at each. So -- but Ashim, why don't you start giving you an overview of UiPath for the 1 or 2 people here that might be not as familiar with it.

Yes. So $1.6 billion approximately of top line. When you look at our company, we started out -- Daniel started the company back in 2007, really spent a lot of time just on the product. Daniel, the CEO and Founder out of Romania spent a lot of time just on the technology. So the core platform was built as an RPA platform, incredibly strong, very contemporary, very open architecture, which is one of the reasons why we scaled so nicely. And then over the last 5 years, it's really expanded from an RPA platform to a full-fledged automation platform. And what that means is the full life cycle of automation from discovering automations and process intelligence to be able to automate simple task to the complex tasks of our customers. We have a global customer base of 10,800 customers in and around the majority of the Fortune 500 customers. When you look at it, we've scaled very broadly as well, 50% of our revenue, international, 50% U.S., across every single industry. And when you break it down, our core customers continue to expand very nicely. Customers between [indiscernible] and $1 million. They're expanding at 119%. And when you go across our base, the entire company as well as our customer base is energized by what the Gentek wave can do. RPA is a great platform to build off of agents and agents can take the workflows of our customers and really heighten the value and increase the surface area of what we provide for them. So $1.6 billion of top line generating $325 million of cash this year, looking to accelerate that next year while stabilizing our growth rate as we reach a really nice scale.

So talking about your products actually one of my favorite things lately right now, we'll get to that question next. But the first question is really around kind of management changes at the company. I mentioned last year, I had Rob on stage. The year before that was Daniel. Daniel moved back into the CEO realm about 9 months ago. As we think about the business over the last 9 months is has anything changed from an operational perspective? My guess is there's been some differences, but has there been anything significant that you would call out?

Yes. I think -- look, Daniel is the Founder and CEO of the company. He started -- he was the CEO for many, many years of the company, more than 7 years with the company and obviously, for the full life cycle, but 7 years from the product life cycle mix. What Rob did for us is Rob really brought a confidence in selling to the C-level and that is something that really helped our team and gave them a great energy. What Daniel has brought back to the company though is really a balance between a large company and a small company agility. And so what that means for us is a couple of things. I would name three. The first is a maniacal focus on the day-to-day execution of how the company is running. If you build your own house, you're very careful about how people walk in your house. And so Daniel really drives that level of execution. And so all the tactical things from the details of how we compensate our customers -- our employees to how are we engaging with our top customers, that is a rigor that we brought in. Second, as we announced restructuring, I think sometimes when you build a larger corporation, you get away from your core focus, which is your customers and your technology. And you build a lot of middleware organizations that are in between there. One of the things that we've really done is lean that out. That has helped to accelerate our profit -- reaccelerate our profitability and drive the cash generation, but it also helps growth because when you have less insulation from the customer, you're able to act faster and act more in their areas. And the third piece is around innovation. When you look at Gentek and you look at the pace at which Gentek is moving, our company needs to move at that pace and focusing on fast focused decisions with deep technology, that's a third point of emphasis that Daniel has really brought back into the company.

So we're going to focus a lot here on product. I'm sure some of the other go-to-market changes and whatnot. But the part that gets me fired up is around the AI Agenetic theme a little bit. My background is in internal IT management, did that before I got my MBA, I've been doing this almost 20 years now. So I've been in those product kind of environments. Enterprise businesses for the last 20 years have really gotten out of the business of developing applications, right? They brought in SaaS applications for a variety of reasons. We can debate if they overbought certain SaaS solutions, but companies have really gotten out of the business of trying to develop applications themselves. Fast forward to today, you have these AI models, these genetic platforms that are out there. And I think the average investor I tend to debate what believes that companies are going to ditch these software applications to some extent and try to develop them internally. I still don't know why a company would want to numbers to do that because they're not product experts, models change and then you got to blow it all up at 6 to 12 months. Your conference though, helps solidify that from some of the customers that we spoke with and how you talked about your new Agenetic strategy. Tell us why these AI technologies aren't going to use [indiscernible] with this RPA space is. And this is really about bringing kind of a full suite of automation [indiscernible] pairing 2 complementary technologies.

Yes. Let me give the background just on an [indiscernible] processes. And I came from a corporation of General Electric. And so I was the CFO of their division as well as shared service organizations. When you look at a workflow workflow has developed multiple steps. There are probabilistic steps, and there is deterministic steps. What I would consider a deterministic step is things that are very rules-based that you can't get wrong. You don't want a 7% error rate. You can take [indiscernible] how an aircraft engine moves through customs or for 1 of the Fortune 50 health care customers that has started using a Gentek on our platform, they're not going to go through claims processing and put that in a probabilistic process. So at the core of the workflow are deterministic steps. Those are the areas where core automation works. Now in order to build around it, it's not building a model. It is building an entire ecosystem of how your user interfaces and codes those automations. How those automations are run and most importantly, how they are governed. And so those core automations, none of our customers are saying that they're going to go and build, use a model that is built to replace any of those enterprise-grade processes that are deterministic that are scaled and that require the appropriate level of enterprise governance across it. So that's kind of step 1. What Gentek does for us is a Gentek allows the probabilistic areas that could not be done -- could not be met by the deterministic elements of our platform to be able to come now into a area where they can be automated, which unlocks incredible value. So let me give you an example. How you process the hundreds of thousands or hundreds of millions of claims that are processing your system entering data. You're not going to give that, you're not going to give agents or models access to those systems of records to do what they think is correct. But when you have to go and decide which of these records should I audit, that is a probabilistic step that you want to be able to understand. You want to be able to go and say, of these 50,000 areas, if I run it through a model, which is the greatest area of fraud? That step, you can't do it through -- you're limited if you do it simply through a rules-based engine, right? So by being able to do that and interpret different data, whether that is written information through LLMs, or being able to use other elements of AI, you've now expanded the scope of what's possible for automating that area. That isn't just in health care. You look at airlines. We had one of the largest airlines come and talk at our conference from Europe. They are super excited, and they've received incredible value from our RPA elements, our document understanding and even our test automation platform that was our core platform. What they're excited about at Gentek is how to transform a lot of the work that they're doing with customers that require not rules, but some level of agency to be able to understand how to interact and how to respond to customers. So those are the areas where we don't see it as cannibalization, we see that as really additive. The last point I would make is when chat GPT first came out, the #1 question I got, which Daniel was [ infuriating ] as an engineer is, "Hey, why can't I just tell chat GPT write me UiPath's platform?" Two years later, you don't see that in the market. right? And the answer to that is that every piece of software, every Microsoft Excel, I could do the same action. So those things, I think, are more around fears than true capabilities. The -- what customers are excited about is the openness of our architecture allows them to use our models, allows us to use any model in the marketplace and give them access to it. or for them plug in their models into our platform to inform the workflows that they've already been automated.

To your point, I kind of touched on it earlier, the changing models, I think, has been the biggest difference in this space over the last year, at least the questions I get. It seemed easy "to develop against name your model, right, OpenAI, et cetera." But we're seeing more vendors like yourself and customer conversations say, hey, I want this orchestration and workflow that's here. But I want to be able to plug-and-play model. Take it out today because today, it's the right model, but 6 months from now, it's not probably in a different model if just find something else works better there. Are you starting to see that from your customers want that flexibility actually?

I think customers want both choice. And interestingly, they also want specific. So I'll give you an example. I met the CIO for one of the largest banks in the country. One of the things they talked about their security. They are not going after and certifying every single model or platform out there. They're going to let the use of which models can be used. So now every bank may certify different models. So in order to scale, you need to be able to have openness. That's to be successful across an industry. But a lot of our customers for different use cases are using different models. For customer responses, they may decide to use a GPT, but they may decide to use Lambda for something else for handwriting or some type of specific document type that they're looking to process. So our ability and our ability to sit on top of all the models give access to that, that is a differentiator for us. And why when you see our earnings transcript, if you hear the word Switzerland, why it's one element of it, we're not tied to any one technology or any one model.

A subtle part of your innovation with these GenAI technologies actually came out a year ago with your autopilot functionality. I thought it was almost ingenious because it could help with adoption of the platform because while I know the platform is developed for the end business user, I still think the average user needs a little bit of SQL scripting experience to really kind of understand it properly. Has that actually helped with the adoption of really kind of pushing the platform out to more employees?

Yes, very much so. I mean, in third quarter, we closed -- in second quarter, sorry, we closed one of our largest deals, which was Gentek. But it wasn't with Gentek in the way that our new products are being used, we actually used Autopilot as the front end for that. That is the example of blood plasma or blood plasma donations in which you're screening different donations and millions would be rejected because they didn't have the ability to really interface or understand what the various donation parameters would be. That is an example where Autopilot being a front end and also helping with the scripting on the back end, enabled that use case to come to life, not for a specific bucket to be to be scaled across the entire user community for that health care organization.

When you think of the Gentek functionality in the platform, whether it's today over the next, I don't know, 1 to 2 years, how do you think about monetization? Is it going to be a separate SKU that you charge for? Is it really just kind of built into the base product? Just trying to maybe help us understand how that may change the P&L.

Yes. I think the first piece is we will monetize Gentek I think the -- in terms of the method in which we're going to monetize, there are definitely going to be SKUs that are going to be launched. The question is, what is the right avenue for monetization? So we have 1,000 -- we have over 1,000 customers sign up to our private preview. That is the largest number of customers that have signed up to any private preview in the history of our company. So the energy is there, and we're getting a lot of feedback from it. What we want to do in terms of our process is make sure we go through the customer feedback. We understand the pricing strategy. We introduced a set of SKUs, which we are going to be going into public preview with and then deciding what's the right way to monetize. Do you monetize the development of the agent? Do you monetize the consumption of the agent? How do you go through -- how do you actually go in and do that? One of the things is we want to hear the customer feedback before we solidify it. What we're conscious of, we've seen over the last 2 years, a lot of promises of monetization that have not panned out. And a lot of that is because customer value or customer feedback comes back and it's too hard to pivot. And you end up kind of just running into a wall. We really want to use the customer feedback to understand the best way to extract that value.

This question has come up a couple of times kind of historically is, how do you think about trying to report on your usage or metrics around customers using your Gentek platform. You're clearly not there yet. It's too early. But do you think we can get to a period of time, I don't know, a year from now, 2 years from now, whatever it looks like that you can actually kind of report around what the impact looks like because I think the narrative in the RPA space, as I mentioned, is these GenAI technologies are going to use [indiscernible], which I'm not a believer of -- but do you think you can get to a point where you can actually have something reportable that really shows your impact...

Yes, 100%, yes. And I think one of the things which is interesting that Daniel and the team are really driving is a focus on adoption internally. So when you think about it, we are -- we have a multi-cloud strategy and a multi-deployment strategy. But more and more, I think the first step to be able to do that reporting is getting people to the cloud, right? The on-prem offerings that we've had, while very beneficial to our customers because it's allowed them to use and adopt and make us the incumbent while they're kind of working through their cloud road map, we want to get more and more customers to the cloud. And you see that with some of the cloud metrics we showed at the beginning of the year in terms of just the growth rate of overall adoption of our cloud getting more people adopting to our cloud unlocks the telemetry. And with that telemetry, I think being able to report on that internally, report on that for our customers and do the appropriate external reporting is within grasp.

So interesting, I'm going down a slightly different route here, if you haven't noticed. But are you seeing customers actually make the migration to the cloud or have that conversation because they want to get to these technologies?

Yes. Look, I think that different industries in different countries move at their own pace. So financial services, they move at a slower pace than manufacturing. Health care is a little bit more progressive than financial services, but also moves at a slower pace than manufacturing. But we are a cloud-first company. And the majority of the ecosystem of software is predominantly cloud first. So I think more and more emphasis on getting to the cloud and being able to unlock the latest features that we bring, that is a point of emphasis for our sales team and for our customers.

Okay. Just moving to general go-to-market a little bit. I think if you look at the results, the company's results last 3 quarters, net new ARR has actually been down each of the last 3 quarters after having a little bit of a bounce back in the back half of last year. What's happening in the environment to kind of drive that right now? Is it macro? Is it execution? Is it something else? And what kind of -- what do you think changes that here going forward?

Yes. Look, at the beginning of this year, I think we talked very openly about the macroeconomic environment. We were on alone in that. But we also admitted the points on execution. I think when you're farther away from the customer it puts you further away from the core things that you need to do to drive your business. And what's ironic is it costs you more. People talk about investing for growth. I would say investing to be as close to your customer and surrounding your customer, that's more the right mindset than just spending money on go-to-market. So a lot of the execution areas that we feel has inhibited us over the last year, those execution areas, we feel we've made a lot of progress on. We've reduced the silos within the organization within some of the restructuring that we have done. Second is we fix some of the compensation plans that were honestly rolled out in a suboptimized way or something that created disruption. We've been able to quickly refocus that as well as stabilize those areas. So as we commented here in our last earnings, as we enter in next year, while first quarter, we'll see a little bit of the normal seasonality, regular -- relative to fourth quarter. We really see the overall year as a year of stabilization of net new ARR as we fix a lot of the execution items that we've highlighted.

Good. As you think about that growth algo, you guys have kind of talked about focusing more on your largest customers a little bit. Is that being able to drive more expansion within those customers or maybe just landing more of those large customers that can drive that expansion?