UiPath Inc. (NYSE:PATH) Q2 2024 Earnings Call Transcript

UiPath Inc. (NYSE:PATH) Q2 2024 Earnings Call Transcript September 6, 2023

UiPath Inc. beats earnings expectations. Reported EPS is $0.09, expectations were $0.03.

Operator: Greetings, and welcome to the UiPath Second Quarter Fiscal Year 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to turn it over to our host, Kelsey Turcotte, Senior Vice President, Investor Relations. Thank you. You may begin.

Kelsey Turcotte: Great. Good afternoon and thank you for joining us today to review UiPath’s second quarter fiscal 2024 financial results, which we announced in our earnings press release issued after the close of the market today. On the call with me are Daniel Dines, UiPath’s Co-Founder and Co-Chief Executive Officer; Rob Enslin, Co-Chief Executive Officer; and Ashim Gupta, Chief Financial Officer. Rob will start the discussion and then turn the call over to Daniel. After that, Ashim will review our results and provide guidance. Then we will open the call for questions. Our earnings press release and financial supplemental materials are posted on the UiPath Investor Relations website: ir.uipath.com. These materials include GAAP to non- GAAP reconciliations.

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We will be discussing non-GAAP metrics on today’s call. This afternoon’s call includes forward-looking statements about our ability to drive growth and operational efficiency [Technical Difficulty] full year fiscal 2024. Actual results may differ materially from those expressed in the forward-looking statements due to many factors and therefore, investors should not place undue reliance on these statements. For a discussion of the material risks and uncertainties [Technical Difficulty] for the year ended January 31, 2023, and our other reports filed [Technical Difficulty] July 31, 2023 to be filed with the SEC. Forward looking statements made on this call reflect our views as of today. We undertake no obligation to update them. Finally, we invite you to join our user conference, Forward VI, next month in Las Vegas from the evening of Monday, October 9th through Wednesday the 11th.

Please reach out to the investor relations team for details. I would like to highlight that this webcast is being accompanied by slides which includes an embedded AI demonstration video. We will post the slides, and a copy of our prepared comments to our investor relations website immediately following the conclusion of this call. And with that, I will hand the call over to Rob.

Rob Enslin: Thank you, Kelsey, and good afternoon, everyone. Thank you for joining us. Second quarter was incredibly busy. Highlights include the delivery of exciting new AI platform capabilities and several high-energy in-person customer events around the world, all of them to standing room only. Not surprisingly, AI is at the top of everyone’s agenda. Digital transformation, where automation plays a strategic role, has never been more important or, with the latest evolutions in AI, more powerful. Customers are excited about the value we deliver and recognize that our platform, which has been infused with AI since inception, provides an integrated set of capabilities that combines the best of our Specialized AI and governance with the creative power of GenAI, making the potential of automation almost limitless.

And we aren’t just talking about AI, we deliver on the promise of AI and automation today across our platform. In particular, communications mining and document understanding are generating a lot of excitement which Graham Sheldon, our Chief Product Officer, will demo in a few minutes. Turning to the numbers, we ended the quarter with ARR of $1.308 billion, an increase of 25% year-over-year, driven by second quarter net new ARR of $59 million. We have approximately 10,890 customers, including new logos like Australian Postal Corporation, Leroy Seafood, Holmes Murphy & Associates, Daewoong Pharmaceutical, and Arrow Food Distribution. Customers with $1 million or more in ARR increased more than 30% year-over-year to 254, while customers with $100,000 or more in ARR increased to 1,930.

Second quarter revenue was $287 million, an increase of 19% year-over-year. Non-GAAP operating margin increased from negative 5% in the second quarter of last year to positive 10% in the second quarter of this year. As we progress towards our 20% plus long-term operating margin target and, we delivered $47 million in non-GAAP adjusted free cash flow, a continuing reflection of our growing scale and focus on efficiency. Given that the macro environment continues to be variable, I am pleased with our execution and results. The cohort of customers of $100,000 or more in net new ARR is performing well. Value selling is driving platform adoption and these deals are typically expansions where we have a good line of sight into deal progression. The lower end of the market has been harder to call, particularly new customer acquisition.

I want to be clear, we feel good about the business and the role automation plays in digital transformation. We continue to execute against our strategic initiatives and there is a nice pipeline building as we move into the second half of the year. Two quarters ago we formally launched our new go-to-market strategy to improve productivity, sell the platform, and intensify focus on customers that represent the longest and largest long-term opportunities for us. The team transitioned well to our new segmentation model and is embracing the broader platform opportunity. In go-to-market, we continue to invest in industry verticalization, both in people and enablement tools, which is yielding nice results. We saw particular strength in banking and financial services, manufacturing, and technology in the second quarter, including great new logos like Performant Healthcare Solutions, First City Monument Bank, and Saint Peter’s Healthcare System.

Expansion deals in the quarter included Mitsubishi Materials Corporation, a customer since 2017, who expanded to the full platform as they look to grow their automation program across the company. In addition, our industry expertise gives us unique insights that we can leverage across our customer base, including tools like our solution accelerators. We now have more than 60 available to customers. A Texas based digital health system recently automated their claims form intake process. Using our accelerators, they expedited their design-to-deploy time from more than eight weeks down to just two. The foundation of every sales engagement is defining the value of our end-to-end platform which helps customers accelerate their automation programs, drive operational efficiencies, and consolidate spend.

During the quarter, Saudi National Bank expanded to the full platform as they plan to take their already mature automation program to the next level. Driving rapid digital transformation and using the full range of capabilities in our platform is a Board level priority that is actively sponsored by their Chief Technology Officer and the Chief Operating Officer. Platform adoption is also driving competitive displacements. A great example is a fortune 500 oil producer and a UiPath customer since 2018 with over $10 million in cost savings to date. In a competitive take-out, that expanded to incorporate document understanding and process mining into their automation program as they look to consolidate one AI enabled platform. Looking forward, they plan to leverage our NorthStar value model to identify expansion opportunities across additional lines of business.

Not only is NorthStar helping to build pipeline, it also drove several strategic deals in the quarter. Using NorthStar the team delivered a comprehensive view of the operational excellence and tangible value automation could deliver to a financial services company. And as a result, the customer expanded to the full platform, including process mining, document understanding, communications mining, and test suite. As part of our new segmentation, we have tasked our Emerging Enterprise team with driving both customer acquisition and early-stage expansion. And as an example, Apprio, a provider of specialized IT solutions, started their automation journey several years ago and recently engaged with UiPath to clearly define how automation can accelerate their growth trajectory.

This resulted in a multi-year, seven-figure full platform deal to help them achieve rapid market expansion in healthcare operations. Industry analysts are also recognizing our platform capabilities. UiPath was recently designated as a Leader in the Everest Group Intelligent Document Processing Products PEAK Matrix Assessment 2023. This is the first time UiPath has been named as a Leader in Intelligent Document Processing, and the only Leader recognized as a Star Performer for the biggest year-over-year advances. We were also named a Leader in the Everest Group Process Mining Products PEAK Matrix Assessment 2023 and the Everest Group Task Mining Products PEAK Matrix Assessment 2023. Our partner ecosystem is key to elevating our market leadership position, growing our share of wallet across key accounts, and delivering best outcomes for our customers.

One of many partner-led customer success stories is with Ashling Partners, who has helped ADT build a transformational automation program across its operations and customer service. This quarter that program expanded to ADT’s call center to provide customer service agents with a single pane of glass to reduce data entry, troubleshooting, and other time-intensive tasks. We are also making great progress with SAP, engaging with customers and building a joint pipeline. During the quarter, a German agricultural company challenged by their S/4 migration, selected UiPath in a competitive win based on our holistic integrated platform. They are in the process of implementing test suite for regression testing on their S/4 migration and testing of all SAP modules.

They also plan to automate processes in their finance department and incorporate process mining and AI into their automation program. Before I move on, I want to highlight that our board of directors has authorized a $500 million stock repurchase program which underscores the confidence we have in our business, our ongoing cash flow generation, and the strength of our balance sheet. In summary, we delivered another solid quarter of execution against a variable economic backdrop. We’re starting to see the benefits from the go-to-market changes we implemented two quarters ago, and we’ll continue to exercise expense discipline, while investing to extend our market leadership. With that, I’ll turn the call over to Daniel.

Daniel Dines: Thanks, Rob. Good afternoon everyone, before I begin, I want to thank our team members for their relentless commitment to building UiPath, serving our customers, and delivering our market leading AI-powered Automation Platform. I believe we are now at an inflection point with AI and I’m excited to have more time to focus on this next important evolution for the company. This is a time of unprecedented technology advances. Having said that, AI has been an integral part of our platform since inception, starting with our original core capability, Computer Vision, which allows software robots to see and understand screens. Today our entire platform is infused with AI and we are at the cutting edge of the quickly evolving intersection of AI and automation.

To be effective, Generative AI needs context, which our software robots can deliver by gathering information from across the enterprise – in data, documents, CRM, ERP, and beyond. It also needs our platform to take action and operationalize the promise of AI today with an integrated set of capabilities that combines our Specialized AI with Generative AI. And, finally, it needs the governance our platform provides to help customers overcome a significant barrier to adoption. Looking ahead, we expect this next evolution of GenAI to be a tailwind to the business, helping customers create better, more resilient automations more quickly and opening up novel use cases that facilitate the automation of even more processes. First, we are enhancing developer productivity by reducing barriers to development with co-pilot-like experiences and project Wingman which we showed you during last quarter’s earnings call.

At the Ai4 Conference in mid-August, we officially launched Wingman into private preview and we are already seeing strong demand from customers. Wingman brings together our AI Computer Vision’s deep understanding of computer screens with GenAI and is designed to enhance automation creation for both business users and developers through a user-friendly experience. Second, we are leveraging GenAI to make our products better. For example, in document understanding and communications mining, we leverage Specialized UiPath models to classify and extract information, augmented by Generative models to achieve faster time-to-value and higher accuracy for unstructured data processing. And third, this next wave of innovation will allow our customers to identify and enable more advanced automations capable of handling even the most complex processes.

To give you a better sense of how this all comes together, I’m going to share a demo narrated by Graham. While this scenario has been simplified for the earnings format, this is a use case that should resonate with many of you. If you are not on the webcast, please go to our investor relations website homepage for the demo link. [Video Presentation] [Technical Difficulty] responsible platform. And third, allow customers to drive action through our built-in models, their own custom models, and deployment of best-in-class external models. The result is a speedy resolution and smoother experience for Connor, efficiency and savings for Goldner Bank, and more time for Lisa to spend with customers. Our constant innovation drives our growth and is essential to providing our customers with market-leading capabilities.

Looking across the platform, we have established a competitive moat which is bolstered by our more than 850 patents globally, either granted or in the application process. Inside that number, there are more than 300 specific to AI, which we expect will grow as we continue to invest. Finally, we invite you to join our user conference, Forward VI, next month in Las Vegas where you are invited to kick-off cocktails on Monday the 9th followed by our main event on the 10th and 11th. We will be showcasing our latest platform release 23.10, which introduces new Generative AI developer and end user experiences across our platform to help customers build real-world automations faster than ever before. Please reach out to the investor relations team for details.

With that, I will turn it over to Ashim.

Ashim Gupta: Thank you, Daniel. And good afternoon everyone. Unless otherwise indicated I will be discussing results on a non-GAAP basis and all growth rates are year over year. Turning to the second quarter, ARR totaled $1.308 billion, an increase of 25%, driven by net new ARR of $59 million. Excluding the FX headwind, net new ARR totaled $61 million. Included in this total is more than $500 million in Cloud ARR, both hybrid and SaaS, an increase of more than 125%, as customers continue to adopt our cloud offerings. For example, Scotiabank, who chose UiPath to further scale their global automation program as they move to the Cloud and plan to utilize our AI capabilities, document understanding, and unattended automation. Our dollar-based net retention rate for the quarter was 121%.

Normalizing for FX, our dollar-based net retention rate was 125%. Dollar-based gross retention of 97% continues to be best-in-class. Revenue grew to $287 million, an increase of 19% year-over-year. Normalizing for FX impact, which was an approximately $3 million tailwind, revenue grew 17%. Remaining performance obligations increased to $905 million, up 28% year-over-year. Normalizing for FX impact, which was an approximately $4 million tailwind, RPO grew 27%. Current RPO increased to $560 million. Turning to expenses. We delivered a second quarter total gross margin of 86%. Software gross margin was 91%. Second quarter operating expenses were $217 million. The restructurings we announced in fiscal 2023, combined with our go-to-market segmentation, have created an organization that’s increasingly efficient and scalable and one which gives us ample room to continue to expand margins without sacrificing investments to grow the business.

GAAP operating loss of $78 million included $102 million of stock-based compensation expense. Non-GAAP operating income was $30 million, resulting in a second quarter operating margin of 10%. Second quarter non-GAAP adjusted free cash flow was $47 million. We ended the quarter with $1.8 billion in cash, cash equivalents, and marketable securities and no debt. And, as Rob mentioned, we are pleased to announce a $500 million stock repurchase program this afternoon. Now, let me turn to guidance which assumes the overall macroeconomic environment continues to be globally variable. For the fiscal third quarter 2024, we expect ARR in the range of $1.359 billion to $1.364 billion. Revenue in the range of $313 million to $318 million. Non-GAAP operating income to be approximately $32 million.

And, we expect third quarter basic share count to be approximately 567 million shares. For the fiscal full year 2024, we expect ARR in the range of $1.432 billion to $1.437 billion. Revenue in the range of $1.273 billion to $1.278 billion. Non-GAAP operating income to be approximately $188 million. This translates to a non-GAAP operating margin of approximately 14.7%, an 850 basis point increase year-over-year. And, finally, we expect fiscal year 2024 non-GAAP adjusted free cash flow of more than $250 million or 20% adjusted free cash flow margin. As we head into the second half of the fiscal year, the team remains focused on innovation, and driving the best possible outcomes for our customers and partners. Customer success is at the core of everything we do and also the foundation for profitable growth and long-term shareholder value.

Thank you for joining us today and we look forward to speaking with many of you during the quarter. With that, I will now turn the call over to the Operator. Operator, please poll for questions.

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Q&A Session

Operator: Thank you. And ladies and gentlemen, we’ll now conduct our question-and-answer session. [Operator Instructions]. Our first question comes from Raimo Lenschow with Barclays. Please state your question.

Raimo Lenschow: Perfect. Thank you. Congrats from me. One question on the — in this new world where AI is getting more and more important, what do you see in terms of your customer conversations with budget still kind of limited from the budgeting cycle last year? Like how does it play out for you? And how are you competing for budget dollars in this sort of environment where you know you need to spend more on AI, but the money needs to come from somewhere. And how does it fit to like overall spending? Thank you.

Rob Enslin: Yeah, Raimo, I would say it’s positive for us the discussion around AI. I think it helps infuse the platform. Our message around specialized AI and Generative AI together has really come through. Customers are generally confused by all the announcements that happened in the market, and they like our approach of showcasing how we’ve actually bolted into the product with Wingman and Jarvis and other solutions, which actually and document understanding, which we actually showed, which actually helps the platform be more valuable to them and helps us drive the platform to more important consequences.

Daniel Dines: Yeah, I would like to add that more customers are realizing that automation is a great mean to get more value from Generative AI. Actually, even today, I was talking to one of the largest airline in the world, one of our biggest customers. And they highlight how they plan to combine GenAI with automation in their customer service. So I would say that it’s a great tailwind for automation adoption across most of our customers.

Raimo Lenschow: Okay. Perfect. Thank you. And a quick follow-up for Ashim. Like a great increase on the free cash flow outlook. Were there any special factors in there that we should be aware of or just the better profitability is starting to play through? Thank you, and congrats again.

Ashim Gupta: Thanks, Raimo. No, just we feel really good about the changes that we made last year. We are continuing to see benefits of that come through. So that’s organic. There’s no special items to mention. And we feel like that is a sustainable path forward.

Raimo Lenschow: Thank you.

Operator: Thank you. And our next question comes from Mark Murphy with JPMorgan. Please go ahead with your question.

Mark Murphy: Thank you so much and I’ll have my congrats on top of Raimo’s. Ashim, are you able to provide the Q3 ARR growth guidance if we converted it into constant currency terms? And/or what is implied for the fiscal year now in constant currency terms. I’m not sure if any of that has moved around.

Ashim Gupta: Yeah, nothing has really moved around. We talked about it in the script of the headwinds, Raimo — sorry, Mark. And so like I think that what we provided is there, normalized for foreign exchange, it’s 26% growth in terms of the year-over-year comparison. And I’d say very similar outlook here for third and fourth quarter in terms of FX. It’s not much of an impact as we go forward.

Mark Murphy: Okay. Got it. And then, Rob, I’m curious just how commonly you see UiPath being pulled into some of the boardroom discussions out there that are maybe being led by the Accentures and Deloittes and Capgemini’s of the world when they’re sitting down with a large company and trying to formulate a Generative AI roadmap for a customer, and they made sense that some RPA would be involved as part of that tapestry. Do you see much volume along those lines popping up into the deal pipeline because I think you had some pretty upbeat commentary on that, how that pipeline is developing?

Rob Enslin: Yeah. Mark, what I’d say we’re having much more significant conversations with the systems integrators and with customers together with the systems integrators where we actually are working on joint opportunities with them. I would not classify it only as RPA. It is about the platform, it’s about document understanding, communication, mining test, mining the moat that makes a difference and infusing our GenAI capabilities, which are actually visual for customers to see and how that benefits them. So that’s happening much more. I mean, I spoke a lot about our NorthStar in the script, and our NorthStar is having — is placing us in the boardroom. I mean, the value proposition that we are able to showcase with our customers even at a conservative level, is very, very strong.

And I mentioned a very large insurance company, where we went out to a pretty detailed process level on explaining how automation and the full platform can benefit them. That customer is going to replace the document — the existing document understanding with their communication and test mining and process mining and go all in on the platform. So we’re very positive about our approach the SIs and being in the boardroom with customers, and we feel like it’s fulfilling the — what we said two quarters ago that, that’s what we needed to do.

Mark Murphy: Excellent. Thank you so much, Rob.

Rob Enslin: Thank you, Mark.

Operator: Our next question comes from Bryan Bergin with Cowen. Please state your question.

Bryan Bergin: Hey, guys. Good afternoon. First one, on just the go-to-market progress. So is there any additional metrics you can share that would really demonstrate that the change in the go-to-market in really selling down through the C-suite is gaining that traction? I think I heard 30% growth in that $1 million cohort year-over-year, which is certainly encouraging. But just anything else there you can give KPI-wise sales force productivity, anything like?

Ashim Gupta: I think when you look at it, that is the primary metric that we look at, Bryan, because the $1 million-plus customers really shows the value of the platform in terms of what’s moving and that is up 34%. We feel customers greater than $1 million that we feel really content with. The intangible piece that you also can look at is just overall, like our RPO balance is growing very well, which shows continued commitment on deals from our top customers. And then Rob has commented, but we really like the activity and the way that the sales force and the intimacy of customer relationships is happening. We talked about it in the first quarter among some of the changes. And feel like those discussions and those deal discussions are progressing very well. And that’s the intangible factor that we really monitor.