UiPath Inc. (NYSE:PATH) Q3 2023 Earnings Call Transcript December 1, 2022
UiPath Inc. beats earnings expectations. Reported EPS is $0.05, expectations were $-0.03.
Operator: Greetings. And welcome to the UiPath Third Quarter Fiscal 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note that this conference is being recorded. I will now turn the conference over to our host, Kelsey Turcotte of Investor Relations. Thank you. You may begin.
Kelsey Turcotte: Good afternoon. And thank you for joining us today to review UiPath's third quarter fiscal 2023 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.
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 and our financial guidance for the fiscal fourth quarter 2023. 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 that could affect our actual results, please refer to our annual report on Form 10-K for the year ended January 31, 2022, and our other reports filed with the SEC, including our quarterly report on Form 10-Q for the period ended October 31, 2022 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. I would like to highlight that this webcast is being accompanied by slides. We will post the slides and a copy of our prepared comments to our Investor Relations website immediately following the conclusion of this call. As a reminder we price in local currency and have experienced a significant foreign exchange headwind as we have progressed through this fiscal year. Now, I would like to hand the call over to Rob.
Rob Enslin: Thank you, Kelsey, and good afternoon, everyone. Thank you for joining us. We are pleased with third quarter results, which delivered both topline growth and margin expansion. ARR was $1.110 billion, driven by net new ARR of $67 million. Excluding the FX headwind of $22 million, total ARR grew 38% year-over-year. Revenue was $263 million. Excluding the FX headwind of $22 million, revenue grew 29% year-over-year. Non-GAAP operating income was $18 million, a third quarter record, reflecting our focus on disciplined capital allocation and cost management. During the quarter we added new logos like Petco, Nautilus and Wisconsin Energy, and saw particular strength in our healthcare and telecommunications verticals. A great new logo in the quarter was Orica, one of the world's leading mining and infrastructure solutions providers.
In a competitive win over two standalone vendors, one in enterprise automation and one in test automation, and working with Accenture as an advisor, Orica selected UiPath, because of our ability to deliver both enterprise and test automation in one platform. With C-suite sponsorship, Orica is planning to migrate and scale their existing enterprise automation program with UiPath and utilize test suite to enable successful upgrades of their SAP S4/HANA. Third quarter is also the federal year-end, and under new leadership, we are very pleased to report that we delivered a strong quarter in that vertical, including expansions with The U.S. Air Force and the U.S. Department of Homeland Security. Customers appreciate both the quantifiable and intangible business outcomes that our automation platform can deliver, including business risk reduction, improved customer and employee experience, profitable growth and the ability to more effectively allocate resources.
These are outcomes that resonate across lines of business and up to the C-suite. For example, one of North America's largest third-party logistics firms, Total Quality Logistics, is using Document Understanding, software robots and Task Mining across their organization. In just two years automation has delivered both strong ROI and helped them grow, including driving revenue in a new line of business without adding headcount. Going forward, Total Quality Logistics also plans to implement Process Mining to identify macro processes that can benefit from automation. It has been a busy few months for the team and we are executing well across all of the key strategic initiatives that we laid out at our Investor Day. These include, extending our market leadership with our largest platform release 22.10, which Daniel will talk about in more detail, driving platform adoption with our market-leading capabilities in every stage of the automation lifecycle, making significant progress upleveling our go-to-market model, which I will talk about in more detail next, announcing some great technical and go-to-market partnerships, and lastly, to build out our world class team, with the addition of Lee Hawksley who will lead our APAC go-to-market team.
Now, I would like to take a few minutes to update you on progress we have made on our go-to market initiatives. All of this work is designed to enable our teams to sell higher into organizations, define business outcomes that resonate with C-level executives and accelerate customer time to value. To make sure we are on the right track we tested many of these new approaches in our North American market and were very pleased to see they played an important role in several notable third quarter wins. Next step is a formal roll-out across the geos, much of which we started at the beginning of the fourth quarter when we launched new packaging and pricing designed to simplify our go-to-market motion. This approach brings together the solutions necessary to more quickly realize the advantages of broader platform adoption in a one line-item SKU.
We also expect this pricing model to reduce friction in the purchasing process. We formally introduced NorthStar, our new value-based selling tool. This prescriptive and predictive model helps our sales reps position the value of automation to customers through an engagement framework that defines economic value, the execution roadmap and best practices. It is a great tool to clearly position the differentiated, long-term benefits of automation delivered through our full platform of capabilities. We are also leveraging our extensive industry insights to align sales teams around verticals like financial services, healthcare and TMT, where we have had good success to-date and identified considerable white space to continue to grow in both new and existing customers.
The focus helped us close a third quarter expansion deal in the financial services vertical with Bank of New York Mellon Pershing, a UiPath customer since 2020. Through their implementation of UiPath, their automation program scaled quickly, improving both efficiency and risk mitigation across the firm, as well as their client experience by leveraging UiPath's software robots to process transactions more consistently. As a result of these positive outcomes, Bank of New York Mellon is now rapidly expanding to the full platform across their organization. And to give customers in these verticals even more tools for success, we are pilot -- piloting our first Solution Accelerator to provide them a starting point for their automation journey. We are excited about Solution Accelerators and believe they will provide our customers with the technical knowhow to help them complete their implementations significantly faster.
With customer success always in mind, we continue to deepen our relationships with global GSIs and automation experts. At Forward 5 we announced our expanded partnership with EY, also one of the largest UiPath customers, that puts the partnership on par and at scale with their largest Ecosystem Partners. The strengthening of this global alliance is a testament to the trust that we have developed and their belief in the massive growth potential that the UiPath automation platform presents for global organizations. We also continue to expand our technical ecosystem. During the quarter, we announced several strategic partnerships with major technology providers, including Microsoft, which named UiPath as their preferred enterprise automation partner, while we announced Microsoft Azure is a preferred cloud platform for UiPath.
We plan to continue to collaborate and innovate together to bring automation solutions powered by Microsoft Azure to market. And Outsystems, to combine the power of the UiPath Business Automation Platform with OutSystems' high-performance, low-code. Together, we expect to enable customers to securely and intelligently automate core business processes and applications. One of the best proof points of our execution is the growth of our larger customer cohorts and this quarter we were very pleased that our cohort of customers over $100,000 in ARR increased to 1,711, including customers over $1 million of 201. For these customers, automation isn't just a tool they can use to reduce or eliminate tedious work, it's part of their strategy, growth plans and operating model.
I feel good about where we are in our journey to take this company beyond $1 billion. We have the market-leading automation technology and platform, the right leaders putting the right go-to-market structure in place and we are making the disciplined decisions that allow us to drive growth, increase productivity and expand operating margin. We are already seeing the positive impact of our work as we head into the fourth quarter and the team is focused on a strong close. I will turn the call over to Daniel to talk about our 22.10 platform release and newest innovation. Daniel?
Daniel Dines: Thank you, Rob. Good afternoon, everyone. Before I get started, I'd like to thank the UiPath team for their hard work and commitment to our customers and partners who recognize and appreciate your dedication to their success. In fact, one of the things I enjoy most about my role at UiPath is spending time with customers to understand where they are in their digital transformation journey and talk to them about the role automation can play in that evolution. Given today's unpredictable operating environment and tightening budgets, automation is a powerful engine that directly addresses these challenges and changes the way organizations of all sizes operate and innovate. We had great platform expansions in the quarter, such as ManpowerGroup, a UiPath customer for four years.
After successfully deploying automations in their finance department, they expanded to use our full platform in the quarter as they look to scale their automation program internally and deliver workforce solutions to their clients. Ultimately, platforms win, because integrated technology is easier to manage and drives faster time to value. With market-leading capabilities in every stage of the automation lifecycle, our platform outcomes resonate with the C-suite and are a huge competitive advantage for us. A great example of platform adoption is a deal we closed with HCA Healthcare, one of the nation's leading healthcare providers. HCA has been a UiPath customer for two years with numerous software automations in production. In the quarter they expanded our partnership by adopting the entire UiPath platform in a multiyear agreement.
Coming out of our Forward 5 user conference and our most important platform release this fall, 22.10, momentum is building across the business. This release allows customers to automate more, faster and with less friction, expand user and builder bases, and operate it all more efficiently and effectively. This recent platform release includes a preview of Studio Web, the latest member of our Studio family, which completes our cloud offering, further reduces the friction in ramping citizen developers, and provides a cross platform developer experience. 22.10 also delivers the ability to build public-facing applications with UiPath Apps, enhanced capabilities in Process and Task Mining, and platform intelligence to help our software robots understand both structured data with Document Understanding and unstructured data with the acquisition of Re:infer.
There's a massive amount of value to be captured by automating processes involving unstructured data. During the quarter, several customers added Re:infer, which we recently acquired and have renamed Communications Mining to their automation program. This includes a leading U.K. fund administrator and UiPath customer since 2019, that is planning to leverage Re:infer to drive efficiencies and improve customer experiences by automating tickets in their case management system for their HR, payroll, accounting and tax departments. 22.10 also delivered enhanced capabilities for both Automation Suite and Automation Cloud, both of which helped drive triple-digit year-over-year growth in Cloud ARR. One of our core tenants is flexibility of deployment to meet the customer wherever they are on their automation journey.
This constant focus on innovation has won us recognition by thought leaders and industry analysts and we are proud of the recent reports from Everest Group and ISG. According to Everest Group's Robotic Process Automation Products PEAK Matrix Assessment 2022, we were named an RPA Leader for the sixth consecutive year and Star Performer in the Technology Provider Landscape. ISG named UiPath a leader in their latest application development research focused on low-code/no-code software companies. This recognition reflects our commitment to category leadership and innovation across the platform. I am proud of what we accomplished in the third quarter and excited about the massive opportunity ahead. The need for automation is greater than ever before and I believe UiPath will continue to play a leading role in helping organizations not only thrive, but increase their competitive advantage.
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. I also want to note that FX was a significant headwind to our results again this quarter. I will start by running through our third quarter and then provide fourth quarter guidance. Third quarter ARR totaled $1.110 billion, driven by net new ARR of $67 million. Because we sell in local currency, foreign currency fluctuations do not impact demand for our product, but do impact the translation of our results. On a year-over-year basis, FX was an approximately $10 million headwind to net new ARR, and for total ARR, FX was an approximately $22 million headwind.
Excluding FX, total ARR grew 38%. We now serve approximately 10,650 customers. As we shared at Investor Day, we are positioning the company to land and grow customers with a high propensity to invest in automation, while distributors will serve the lower end of the market. Moving on, our dollar based net retention rate was 126%. Normalizing for FX and excluding the impact of Russian sanctions, our dollar based net retention rate was 130%. Americas continues to show strength as our dollar based net retention rate outperformed relative to the rest of the world. Dollar based gross retention of 98% continues to be best-in-class, underscoring the transformational business outcomes that customers achieve with our platform. Revenue grew to $263 million.
Normalizing for the year-over-year FX headwind of approximately $22 million, revenue grew 29% year-over-year. Remaining performance obligations increased to $759 million. Normalizing for the year-over-year FX headwind of approximately $50 million, RPO grew 40% year-over-year. Current RPO increased to $441 million. Total gross margin was 86%, reflecting ongoing investments in support and cloud infrastructure as we scale that business. Software gross margin was 92%. Third quarter operating expenses were $209 million. We continue to focus on operational efficiency including our restructuring actions, hiring freeze and tighter control of discretionary spend. GAAP operating loss of $67 million included $81 million of stock-based compensation expense.
Non-GAAP operating income was $18 million, our strongest third quarter non-GAAP operating margin to-date. Third quarter non-GAAP adjusted free cash flow was negative $24 million, reflecting timing of collections and prepaid vendor contracts that allow us to lock in favorable terms for UiPath in an inflationary environment. We have a very strong balance sheet, which is an important asset in the current operating environment, with $1.7 billion in cash, cash equivalents and marketable securities and no debt. Now, let me now turn to guidance. We guide what we see in the pipeline and assume that the current choppy macro environment and pressure from foreign exchange continue. Turning to the numbers. First, for fiscal fourth quarter 2023, we expect ARR in the range of $1.174 billion to $1.176 billion.
This is an increase from prior guidance of $1.153 billion to $1.158 billion. We expect revenue in the range of $277 million to $279 million. We expect non-GAAP operating income to be approximately $35 million. And we expect fourth quarter basic share count to be approximately 554 million shares outstanding. Finally, we will guide to first quarter and full year fiscal 2024 when we announce our fourth quarter results, but I want to highlight that we expect typical enterprise seasonality from the fourth quarter to first quarter in both net new ARR and revenue results. We delivered a solid third quarter as our durable financial model and strong balance sheet give us the resources to invest in long-term growth and drive sustained profitability, both of which are core to our go-forward strategy.
The team is focused on delivering meaningful outcomes for our customers and we look forward to a strong close to fiscal year 2023. Finally, I would like to wish our employees and all of you a healthy and happy holiday season and we look forward to speaking with many of you in the coming weeks. With that, I will turn the call over to the Operator. Operator, please poll for questions.
To continue reading the Q&A session, please click here.