AvePoint, Inc. (NASDAQ:AVPT) Q3 2023 Earnings Call Transcript

AvePoint, Inc. (NASDAQ:AVPT) Q3 2023 Earnings Call Transcript November 9, 2023

Operator: Good day and welcome to the AvePoint Inc. Q3 2023 Earnings Call. Today, all participants will be in a listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note that today’s event is being recorded. I would now like to turn the conference over to Jamie Arestia, Vice President, Investor Relations. Please go ahead, sir.

James Arestia: Thank you, operator. Good afternoon and welcome to AvePoint’s third quarter 2023 earnings call. With me on the call this afternoon is Dr. TJ Jiang, Chief Executive Officer; and Jim Caci, Chief Financial Officer. After preliminary remarks, we will open the call for a question-and-answer session. Please note that this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management’s current expectations. We encourage you to review the Safe Harbor statements contained in our press release for a more complete description. All material in the webcast is the sole property and copyright of AvePoint with all rights reserved. Please note this presentation describes certain non-GAAP measures, including non-GAAP operating income and non-GAAP operating margin, which are not measures presented in accordance with U.S. GAAP.

The non-GAAP measures are presented in this presentation as we believe they provide investors with the means of evaluating and understanding how management evaluates the company’s operating performance. These non-GAAP measures should not be considered in isolation from, a substitute for, or superior to financial measures prepared in accordance with U.S. GAAP. A reconciliation of these measures to the most directly comparable GAAP financial measures is available in our third quarter 2023 earnings press release as well as our updated investor presentation, both of which are available in the Investor Relations section of our website. Lastly, we have added an Excel file containing our historical financial metrics to the IR website for ease of reference.

With that, let me turn the call over to TJ.

Tianyi Jiang: Thanks, Jamie, and thank you to every one joining us on the call today. Q3 was another strong quarter for AvePoint, as we again meaningfully outperformed our guidance for both total revenue and non-GAAP operating margins while delivering total ARR growth of 25% after adjusting for the impact of FX. Jim will spend more time on our third quarter results and updated guidance, but I would like to spend today discussing the inflection point we currently face and why we are so excited about the many opportunities ahead of us.

shifthappens:

SISO’s: I hear this concern in every conversation with customers and partners and more formal studies also back this up. 89% of executives say that high quality data is essential, but 75% of them don’t trust their data and 66% believe they’re below average in managing the information lifecycle, properly governing the data and ensuring its compliance. For AI projects to succeed, organizations must address these data challenges by applying key strategies to better manage, clean and enrich their data. This is where the power of AvePoint Confidence platform comes in and why we believe AvePoint can be a key enabler of generative AI adoption within enterprises in the coming years. On a daily basis, we manage more than 250 petabytes of data for our customers and partners, enabling them to modernize, control and apply resilience to their data management practices.

And we have a proven time tested playbook to do so, which is only becoming more relevant with the desire to leverage AI across businesses of all sizes around the world. Specifically, these are the steps we take with the AvePoint Confidence Platform. One, we bring together data from all repositories and sources across the enterprise. Two, we ensure that the data is properly classified and intact. And three, we implement the correct lifecycle and access controls for that data.

shifthappens: With AvePoint Opus, organizations can manage their information and ensure compliance, optimize cloud storage and streamline data management processes, all of which are essential to the AI focused ambitions of our customers and prospects. We’re excited about our roadmap for AI Power Solutions and you’ll hear more from us on new products and enhancements to our existing offerings that will drive even more customer value. Let’s discuss a couple of customer wins and expansions in the third quarter that show how we are not only helping organizations establish that solid data foundation, but also helping them extract more value from that data to reduce costs, improve productivity and make more informed business decisions.

One of our most notable customer expansion in Q3 was a large U.S. Federal agency, a long time AvePoint customer. They faced several challenges in meeting their stringent compliance, governance and security requirements for their 95,000 users as they moved to the cloud. With AvePoint Confidence platform the agency can address its complex record management needs including data [ph] compliance and data protection, identify and secure a sensitive data and implement the proper controls over its workspace provisioning and lifecycle management of their productivity environment, including Microsoft 365 and Power Platform. This competitive win also unlocks future opportunities as we’re already in talks with them to accelerate their migration of remaining self-hosted assets to Microsoft 365, implement Information Lifecycle Management with AvePoint Opus and transform analytics into workplace insights with tyGraph.

One of the world’s largest financial service company has been a long time customer of our Control and Modernization suite and in the third quarter came to us for help reducing high capacity and consumption costs for their citizen developer platform. They purchased AvePoint Power and now have better visibility into their local no code application development and license usage of Microsoft Power platform allowing them to optimize their resources and save on cost for their 106,000 users.

generative: In Q3 a United Kingdom based public sector agency needed a comprehensive solution to protect its increasing amount of data for Microsoft 365. After purchasing AvePoint Secure Backup Service Solution, the customer can implement robust resilience for data generated by its 123,000 users. And this new customer is already considering extending this security to their Microsoft Azure investment in order to provide comprehensive protection across their entire digital workplace environment. I’m extremely proud of the team for another strong quarter in closing new customer wins and existing customer expansions and just want to spend a moment discussing the channel, which as you know is a key pillar of our strategy to drive profitable growth.

Our investment in AI and proven ability to create a robust and secure data strategy will not only benefit our customers, but it will also provide significant value to our expanding partner network. By integrating more AI capabilities into our technology our partners will be equipped with smarter, more automated tools to manage and protect their clients’ data and collaboration environments. Ultimately, this will reduce complexity and optimize costs for our partners, enabling them to better focus on delivering strategic solutions tailored to enhance the customer experience. We’re entering the next phase of generative AI where the focus is shifting from scaling models to building products that solve real business problems and transform the customer experience.

The key to doing this effectively is by having a robust data management strategy, which is the core business problem AvePoint has solved throughout its 22-year history and then integrating AI to fully harness its potential. We’ll continue to update you as we execute the product roadmap for AI powered solutions that transform and enrich data to provide perfectly tailored experiences for our customers. As a whole, my remarks today make clear we are well positioned to help companies adapt and compete in today’s dynamic business and technology landscape as the value provided by the AvePoint Confidence Platform is critical to the success of AI ambitions of companies around the world. With that, I’ll turn it over to Jim to discuss our financial results in more detail.

James Caci: Thank you, TJ, and good afternoon everyone. As we review our strong third quarter results today, let me remind you that unless otherwise noted, I’ll be referring to non-GAAP metrics. For the third quarter ended September 30, 2023, total revenues were $72.8 million, up 16% year-over-year and once again above the high end of our guidance. Within total revenue, third quarter SaaS revenue was $41.9 million as our fastest growing revenue segment grew 40% year-over-year and in Q3 SaaS comprised 58% of total revenues compared to 48% a year ago. Looking at the business geographically, our solid performance was once again driven by the growth in our SaaS business. In North America, SaaS revenues grew 28% year-over-year and represented 57% of North America revenues, which in turn grew 8% year-over-year.

In EMEA, SaaS revenues grew 51% year-over-year and represented 72% of EMEA revenues, which in turn grew 14% year-over-year. And in APAC SaaS revenues grew 50% year-over-year and represented 43% of APAC revenues, which in turn grew 35% year-over-year. Total ARR surpassed the $0.25 billion dollar mark this quarter as we ended Q3 at $250.6 million. This represents year-over-year growth of 23% and growth of 25% when adjusted for the impact of FX. Net new ARR in the third quarter was $14.4 million representing year-over-year growth of 14% after adjusting for the $3 million of ARR that we added in the prior year period through the acquisition of tyGraph. And as we look at ARR geographically, we are pleased that year-over-year growth for all three regions was generally in line with total reported ARR growth as we saw another strong quarter of execution by our sales teams.

Continuing with ARR and the metrics we assess against several key growth strategies, we ended the third quarter with 518 customers with ARR of over $100,000. That’s up 16% from the prior year period. As of the end of Q3 50% of our total ARR came through the channel compared to 47% a year ago and for Q3 specifically, 72% of our incremental ARR came through the channel compared to 61% for Q2. As discussed at our Investor Day in March, the channel contribution to our incremental ARR may fluctuate from quarter-to-quarter, but we expect the channel contribution to total ARR to continue increasing each quarter. In turn, this should continue driving ARR growth and operating efficiencies as we have seen through the first three quarters of this year.

Turning now to our customer retention metrics, adjusted for the impact of FX, our trailing 12-month gross retention rate for the third quarter was 87%, in line with what we reported at the end of Q2. And looking at our net retention rate, we saw another strong contribution from our existing customer base in Q3, highlighted by several of the expansion examples TJ just discussed. This led to another improvement in NRR versus the prior quarter as this metric was 108% in Q3 compared to 107% at the end of Q2 after adjusting for the impact of FX. On a reported basis, Q3 GRR was 85% and in line with Q2 GRR, while NRR improved from 104% in Q2 to 107% in Q3. To remind you, our medium term target for gross retention rate is 90% plus and for net retention rate is 110% to 115%.

Turning back to the income statement, gross profit for the quarter was $53.7 million, representing a gross margin of 73.7% compared to 74% in Q3 of 2022 and 71.1% in Q2 of 2023. We are pleased that our gross margin remained in line with last year and improved versus the prior quarter. Going forward, we would expect to see improvements in our overall gross margin as services, which is our lowest margin business, continues to become a smaller portion of our revenue base. Moving down the income statement, we are pleased that Q3 operating expenses were flat year-over-year totaling $44.3 million or 61% of revenues. This compares to $44 million or 70% of our revenues a year ago. As a result, Q3 non-GAAP operating income was $9.3 million or an operating margin of 12.8%, well above the high end of our guidance.

This compares to operating income of $2.4 million a year ago or an operating margin of 3.8%. We continue to show leverage across the business, especially in the sales and marketing and general administrative lines, which, as we discussed at our Investor Day were the biggest areas of opportunity for us. Overall, our sustained focus on profitable growth drove year-over-year margin expansion of approximately 900 basis points in the third quarter. Turning next to the balance sheet and cash flow statement, we ended the third quarter with $209.3 million in cash and short-term investments. For the nine months ended September 30, 2023, cash generated from operations was $13.3 million while free cash flow was $11.8 million. This compares to cash used of $6.9 million and free cash flow of negative $10.3 million for the nine months ended September 30, 2022.

Taken together, our strong cash balance and our ongoing cash flow generation provide ample flexibility as we constantly evaluate our capital allocation priorities, which include investing for profitable growth, M&A and share repurchases, where I’ll turn next. During the nine months ended September 30, we repurchased 6 million shares for a total cost of approximately $33.6 million and through the close of trading yesterday we have repurchased a total of 6.6 million shares for a total cost of approximately $37.7 million in 2023. I would now like to turn to our financial outlook where for the full year we are pleased to once again raise our expectations for total ARR, total revenue and operating income. For the fourth quarter, we expect total revenues of $70.5 million to $72.5 million or year-over-year growth of 12% at the midpoint.

We expect non-GAAP operating income of $8.1 million to $9.1 million representing an operating margin of 12% at the midpoint and year-over-year margin expansion of more than 1000 basis points. For the full year we now expect total ARR of $261 million to $263 million or year-over-year growth of 22% at the midpoint. We now expect total revenues of $267.7 million to $269.7 million or year-over-year growth of 16% at the midpoint. Lastly, we now expect non-GAAP operating income of $20 million to $21 million. This represents an operating margin of 7.6% and year-over-year margin expansion of nearly 900 basis points. This also represents nearly 240 basis points of improvement relative to our initial 2023 operating margin guidance in March as we continue to drive operating leverage across our business.

In summary, we are pleased with our Q3 results and we are equally excited for a strong close to 2023 as our commitment to profitable growth continues to drive shareholder value. Thanks for joining us today and with that, we’ll be happy to take your questions. Operator?

Operator: [Operator Instructions] Today’s first question comes from Fatima Boolani with Citi. Please proceed.

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Q&A Session

Fatima Boolani: Thank you. And thank you for taking my questions. TJ, I wanted to start with you with respect to Opus and really delve into your philosophy around commercialization. In other words, I want to get an understanding of is this going to be a discrete incremental monetization opportunity for you or is it going to be used as a strategic and competitive maneuver to drive better retention and expansion velocity in the base? I would love to unpack that with you in terms of monetization strategy. And then a follow up as well, please.

Tianyi Jiang: Thank you Fatima for that question. Yes, so last earnings we already discussed, we had preview customers with government agencies that’s already deriving productivity improvements with this product. This is actually the new generation of our cloud archiving and record management product. So it’s actually both. It’s both of incremental revenue go getter for us as well as the expansion of emphasizing the platform play that we have around the whole end-to-end lifecycle management of business data. So that’s part of it. It’s also related to second part of your question.

GenAI Rush:

Fatima Boolani: Thank you for that. I just wanted to shift gears into your performance by geographic theaters. I mean, the United States performance stands out to me. It’s growing at a fraction of the rate of your rest of world regions. And it’s actually, based on what I see, has seen the most deceleration in the last several quarters. So I kind of wanted to understand why the disconnect in the North American markets versus your international execution?

James Caci: Great. Thanks, Fatima, for the question. So may be a couple of thoughts. Right? One is, we’re seeing, as you mentioned, it’s 8% growth in terms of revenue growth. But if we think about that, it’s really a revenue mix issue that’s driving that. And what we’re seeing is in North America, we’re seeing significant growth on the SaaS side. So we saw 28% growth year-over-year on SaaS. And then our term license revenue was actually down 10%. So it’s a little bit of a mix. So the most important thing that we’re looking at is really our ARR growth in North America. And what we see there is growth that’s in line with the overall company growth that we reported for the quarter of 23%. So we’re right in line with that. And so for us, we don’t look at it as necessarily deterioration. We’re just looking at really as a mix shift. And in the long run, I think that helps us.

Fatima Boolani: I appreciate that color. Thank you.

James Caci: Sure.

Operator: Your next question is from Gabriela Borges with Goldman Sachs. Please proceed.

Unidentified Analyst:

GenAI:

Tianyi Jiang:

GenAI:

GenAI:

GenAI:

GenAI:

Unidentified Analyst: Got it. That’s helpful. And you raised your operating income guidance again for the year. What’s driving that operating leverage? Is that primarily associated with your shift to the channel or other factors that might go into this?

James Caci: Yes. Thanks, Max. I think it’s really across the board, right. That is clearly a factor. I think we are getting leverage really across our sales and marketing teams as well as our general and admin expenses. You can see that really across the board. So I think the channel is playing a component. We’re able to see some leverage there. But I also think we’re able to take advantage of really leveraging some of our G&A expenses as well. So, I think we’re looking to continue that really into Q4 and beyond. The focus this year has really been on profitable growth, and I think that comes from the channel is helping that in terms of leverage. But we’re also examining all parts of the business and ensuring that we’re as efficient and effective as possible.

Unidentified Analyst: Got it. Thank you.

Operator: The next question comes from Kirk Materne with Evercore ISI. Please proceed.

Chirag Ved: Hi, this is Chirag Ved on for Kirk. Congratulations on the strong quarter, and thanks for taking the question. I first wanted to ask about the broader demand environment, whether anything has changed from the past quarter and how that compares across the customer segments you sell to whether enterprise mid-market and SMB. So any commentary on the general macro spending environment and customer budgets would be very useful. Thank you.