AvePoint, Inc. Q3 FY2021 Earnings Call

Good morning, everyone and welcome to the AvePoint Third Quarter 2021 Earnings Call. For opening remarks and introductions, I will now turn the call over to Erica Mannion at Sapphire Investor Relations. Please go ahead.

Thank you, and good morning. With me today from AvePoint are TJ Jiang, Chief Executive Officer, and Jim Caci, Chief Financial Officer. TJ will begin with a brief review of the business results for the third quarter ended September 30, 2021. Jim will then review the financial results for the third quarter followed by the company's outlook for the fourth quarter and full-year of 2021. We will then open the call for questions. 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 materials in the webcast are 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 prepared in accordance with the U.S. GAAP. The non-GAAP measures are presented in this presentation as we believe they provide investors with a means of evaluating and understanding how the company's management evaluates the company's operating performance. These non-GAAP measures should not be considered in isolation from or as substitutes for or superior to financial measures prepared in accordance with U.S. GAAP. Listeners who do not have a copy of the quarter ended September 30, 2021 press release may obtain a copy by visiting the Investor Relations section of the company's website. Now, I'd like to turn the call over to TJ.

Thank you, Erica. And good morning, everyone. Welcome to our third quarter earnings call. Our team delivered again, record results with revenue of 54 million, up 36% year-over-year, driven by continued strong demand from customers to make their digital collaboration more compliant, productive, and secure. Subscription revenue grew 79% year-over-year, representing 74% of our total revenue in the quarter, compared to 56% of total revenue a year ago. Organizations accelerated their shift to cloud-based collaboration in response to high pre-work demands. However, many organizations still have a long road ahead of them. This shift hasn't been easy. Complex requirements, prolific amounts of legacy data, and processes all create challenges. Our migration and transformation products allow us to capture the customer as they begin their cloud journey. We're able to showcase additional yields with our platform as they mature their SaaS operations. As a result, our subscription growth is a healthy mix of our product portfolio. For example, we recently completed a three-year digital transformation initiative for a critical U.S. government agency with more than 100,000 users, and one of the largest on-premise collaboration environments in the world. This long-time customer also successfully transitioned from leveraging our hybrid software to our FedRAMP authorized SaaS platform this quarter, which enables them to collaborate securely and prevent data loss in Microsoft 365. We're proud that our technology enables our customers' mission, and that government officials are safer, thanks to the security, availability, and integrity of their sensitive data during and after their cloud transformation. Total ARR, an important indicator to track the health of our business, grew 32% year-over-year. We had great momentum in our business in the third quarter with a number of customers spending more than $100,000 in ARR, up 37% year-over-year. The tailwind of organizations maturing their SaaS operations will continue in 2022, which will drive demand for data protection as a service, governance, and compliance products. This is supported by the continued growth we're seeing in the amount of data managed by our platform, which exceeds hundreds of petabytes of data. Extreme flexibility will define the post-pandemic workplace and continue to drive a seismic shift in how organizations automate their SaaS operations across collaboration services. Gartner predicts public cloud spending will exceed 45% of all enterprise IT spending by 2026, up from less than 17% in 2021. With that increased spend on SaaS, IaaS, PaaS, and more, we believe organizations will be pressured to justify these investments, optimize their spend, all while keeping security risks as low as possible. One-size-fits-all collaboration management settings are too clumsy for the post-pandemic workplace. Each region, department, and even project team needs specific digital workspace settings. And they need it done quickly and accurately. It's just not efficient or effective for humans to do this manually within each collaboration technology using native capabilities in a siloed, ad hoc fashion. For example, this past quarter, a U.S. based consumer packaged goods organization with more than 100,000 global employees decided to leverage multiple solutions within our platform to create more agility within their IT operation model. By automating Microsoft 365, digital workspace, lifecycle, and access controls, our technology is enabling faster collaboration with less risk that results in an estimated $11 million savings of operational costs over three years. Our customer success investments continue to drive improved year-over-year results with a net dollar retention rate of 110%, up 4 percentage points from one year ago. Jim will elaborate on some of the sequential movement, but it remains a strategic priority, as we believe our deep customer relationships are a competitive advantage and our post-purchase initiatives are key differentiators. Eight out of the ten biggest upsells this quarter were with customers that have been with us for more than five years. We're one of the only companies in our space to offer standard 24/7 world-class live person support. We're continuing to expand our SaaS and data management platform to deliver compelling industry and business-centric solutions. By doing so, our platform is stickier, and our customers receive even more value from their AvePoint investments. One of those current industry focus areas is education and career training. We're excited to announce that we have been awarded a $37-million Singapore dollar contract from the lead agency to Ngee Ann Polytechnic to deploy an integrated SaaS training management platform for career professionals. The platform will be powered by AvePoint EduTech and available to six institutions of higher learning in Singapore as part of the government's drive to build relevant future skills through continuing education and training. Today, nine out of ten Singapore workers see an urgent need to upscale. By investing in a training management platform to Ngee Ann Polytechnic and the five additional institutes, they are demonstrating their dedication to providing quality continuous education as part of the overall Singapore goal. The platform will give over 100,000 learners access to a catalog of 44,000 courses designed to teach them a variety of professional skills in both digital and hybrid learning environments. I've shared how AvePoint is expanding our indirect sales channel as part of our go-to-market strategy to scale our business. In the third quarter, we maintained triple-digit growth in our monthly recurring revenue tied to our managed services provider business. According to IDC and Gartner, $1 Microsoft spend generates $9.5 in total ecosystem economic opportunity for the partner community. Channel partners can capture that 9.5x multiplier when working with AvePoint through attach selling or through a wide variety of managed and professional service opportunities that AvePoint products drive. We believe these channel source deals will minimize competitive threats and result in reduced sale cycles. That said, it will take time for our channel partners to ramp up productivity. And as such, while we may have incremental pipeline builds across a subset of partners, we do not expect to see a material contribution from the partner channel until the second half of 2022. As this program builds, we expect long-tail partners to contribute smaller opportunities first followed in the mid-term by larger MSPs, who consistently sell into larger accounts. For example, a new logo was sourced by a key partner in Germany. This retail organization has launched an approval concept to consolidate their customers' collaboration data and implement a data protection program to meet their retention and GDPR requirements. Our solutions will help this partner's IT team scale and increase margins by providing self-service recovery for tens of thousands of end-users. Finally, I'm excited by our product investment this last quarter; cloud backup for Google Workspace was released in our global distribution network to expand our market reach of our multi-cloud backup as-a-service offerings. In Q4, we will be promoting that offer with integrated go-to-market campaigns. We also released Sense, a solution to help organizations optimize Microsoft 365 license utilization. Long term, Sense will also be available for other cloud services. None of this would have been possible without the amazing people I get to work with every day. Thank you to my fellow AvePointers. I've never been more excited in our 20-year journey. With that, I will turn it over to Jim to discuss our financial results in more detail.

Thank you, TJ. And good morning, everyone. Before we begin, I'd like to take a moment to express how exciting it is to return to AvePoint. I've always been a strong believer in the long-term growth prospects of the market and AvePoint's unique position within the industry. Our continued execution against our targets resulted in another strong quarter of growth. As I review our third quarter results today, please note that I'll be referring to non-GAAP metrics unless otherwise noted. A reconciliation of GAAP to non-GAAP financials is included in today's earnings release, which is available on our website. Total revenues for the third quarter ended September 30, 2021 were 54 million, up 36% year-over-year. Within this, subscription revenue, which includes both SaaS and term license revenue was $40 million, constituting 74% of total revenue, up 79% year-over-year. Our continued execution against our targets resulted in another strong quarter of growth. As TJ mentioned earlier, subscription revenue has become a much more substantial share of our overall revenue year-over-year. SaaS revenue was $22 million, constituting 42% of total revenue, and up 59% year-over-year. Term license revenue, constituting 32% of total revenue was up 114% year-over-year. As a result of the timing of hybrid cloud projects and a seasonally stronger third quarter for U.S. federal public sector customers, given their fiscal year-end and their propensity to do on-premises and hybrid deals versus SaaS only. As a reminder, the SaaS portion of our subscription revenue is recognized ratably over the length of the contract, while the term license subscription has a higher percentage of revenue recognized upfront. As a result of this, revenue may fluctuate, and we believe that ARR is a more useful metric to track period-to-period progress of our business, as it provides a more relevant comparison of the aggregate growth in our SaaS and term license revenue streams. As of the quarter-end, we had total ARR of $148 million, which grew 32% from the prior year period and includes 316 customers with ARR of over $100,000, up 37% from the prior-year period. TJ mentioned earlier we are seeing consistent ARR account growth as customers mature their SaaS operations, and our average Core ARR per account at the end of the quarter was approximately $36,500, which represents an increase of 27% year-over-year. We highlighted that in the third quarter, our core dollar-based net retention rate was 110%, an improvement of 4 percentage points since last year. It is important to point out, we do expect some slight fluctuations from quarter-to-quarter. As we saw this quarter, our net retention rate was down 1 percentage point from Q2 2021. Overall, the NRR trend is where we expect, and we anticipate continued improvement in Q4 as we refine our processes and invest in our customer success, technologies, and team. Now let's review the income statement in more detail. Gross profit in the quarter was $41 million, representing a gross margin of 76% compared to 75% in the year-ago period. This margin improvement is due to the continued shift in the mix of our revenue towards subscription and away from maintenance and services. Subscription revenue gross margin improved to 87% in Q3, up from 86% in the year-ago period. We expect to see our overall gross margins remain at approximately these levels, or slightly higher going forward. Sales and marketing expenses were $23 million or 43% of revenue compared to 35% of revenue a year ago. This represents an increase of $9.1 million year-over-year or 65%. This increase was driven by an increase in headcount and personnel-related expenses as we expanded our sales and customer success organizations, as well as additional marketing spend as we invested in both our direct sales and channel strategies. We've grown our sales and marketing headcount by over 50% during the past year and have increased our marketing spend by 113% year-over-year. We intend to continue to invest in sales and marketing as we further drive awareness in the market and leverage our industry-leading position to capture significant opportunities. R&D expense was $5 million or 9% of revenue compared to 7% in the year-ago period. The increase was driven by investments in product innovation, resulting in additional development costs and additional headcount. We believe these investments support our solution sales approach designed to deliver multi-product deals. G&A expense was $9 million or 17% of revenue compared to 13% in the year-ago period. The increase in G&A expense largely reflects an increase in people and infrastructure-related expenses associated with our public company readiness and ramp-up efforts, including headcount increases of approximately 25%. We expect that the rate of expense growth will decrease in future periods. Non-GAAP operating income was $4 million or 7.4% of revenue compared to $7 million in the year-ago period. Turning to the balance sheet and cash flow. We ended the quarter with $262 million in cash and short-term investments. Cash used in operations was $2 million in the quarter, while free cash flow, which includes CapEx, was a negative $2.5 million. This negative free cash flow was primarily driven by the timing of a number of large expenses related to our conversion from being private to being public. I would now like to turn to our outlook for the fourth quarter and the full year 2021. For the fourth quarter, we expect revenue of $56.4 million to $58.4 million and non-GAAP operating profit of breakeven to $1.5 million. Our current outlook for fourth quarter operating profit reflects additional fourth quarter operating expenses primarily relating to accelerating our marketing investments. We believe our Q4 financial guidance reflects our ability to continue capitalizing on the growing demand for our platform. For the full year, we expect revenue of $194.4 million to $196.4 million, and a non-GAAP operating profit of $4.7 million to $6.2 million. In summary, we're pleased with our third quarter results as the ongoing execution of our go-to-market strategy and investments in the business continue to drive our growth. With that, we'll open up the call for questions.

Thank you. We will now begin the question-and-answer session. We will pause for a moment as callers join the queue. The first question is from Brian Essex from Goldman Sachs, please go ahead.

Hey, good morning and thank you for taking my question. Maybe TJ, if we could start with you around how the puts and takes that you've seen in the business over the past quarter. If we look at the business from a segment perspective, transformation, governance, and compliance. Where do you see the greatest adoption and where do you anticipate that strength will be going forward?

Good morning, Brian. The trends across these three segments have remained consistent throughout the quarter. We continue to observe a strong shift towards the cloud. We will send you the research report on this. Currently, 92% of enterprises are utilizing multi-cloud environments, and 82% are employing hybrid models. Moreover, 63% of enterprise employees express a preference for remote work, according to McKinsey reports. These significant trends highlight the ongoing movement of enterprises towards increased use of cloud collaboration platforms. Regardless of the hybrid work situation with employees returning to the office part-time, the cloud is a permanent fixture, and our primary value proposition is to expedite the transition of enterprises to the cloud. Once they are onboard, we emphasize collaboration, security, and governance workloads. From this viewpoint, the trends have remained consistent with those observed in previous quarters. Looking into 2022, we continue to see similar patterns.

Got it. That's super helpful. And just one follow-up on net retention rate. What were some of the primary puts and takes there if we think about churn versus cross-sell versus upsell? Maybe just help us unpack that a little bit and understand some of the moving factors underlying that number.

Hey Brian, this is Jim. Thanks for the question. So, it's a good one, right? We expect to see, as I've said earlier, some fluctuation from quarter-to-quarter, right? It's not a completely stable environment in terms of some customers. What we really saw in Q3 was a couple of customers that we're working with on their journey. If those customers had converted and we are still working with them, and we expect to conclude with them in Q4, we would have been consistent around a 111% net retention rate. So, we don't really see any real massive change other than a couple of large customers that we're really partnered with. We're hoping that in Q4, we're going to conclude with them in terms of their next steps.

Great. And can you maybe expand on the term 'converted'? Is this a take on to transformation and then you're going to cross-sell or up-sell across the platform, or just to get a better understanding of that description?

Yes. There are multiple scenarios. There are some regulated customers as well as government customers going from fully on-prem environments to government data centers or to public cloud. There's that transition period where we actually get involved in the transformation project by the recurring revenue piece, for the on-prem environment had to shift over to the cloud. Therefore, there are some contract renegotiations effectively to ensure they're licensed properly for the full SaaS management licensing. So, there's that one scenario. Another scenario we have seen is the consolidation of multiple environments into singular tenants or vice versa, where single tenants move to multi-tenant. These introduce type of conversations about the renewals. What Jim is referring to is essentially, we had a couple of situations like that. That's now pushed into Q4, where we continue to work with the customer to guide them. Overall, our guidance remains that we are from in our perspective, moving in a positive direction, and our goal is to achieve the industry best practice for 120% NRR.

Got it, very helpful color. Thank you, TJ.

The next question is from Jason Ader from William Blair. Please go ahead.

Thank you. Good morning, everyone. First question for me is just on the housekeeping item, which is: is there any impact from FX in the quarter?

Yes, no significant impact from FX.

Okay, and do you price in dollars globally?

In terms of pricing, we utilize local currencies in specific regions. For instance, we use dollars in the U.S., yen in Japan, Singapore dollars in Singapore, euros in Germany, pounds in the UK, and the Australian dollar in Australia. To date, we have not observed any significant effects on our pricing.

Okay. And then just, TJ, on the quarter. Can you talk about some of the highest growth products in the quarter? Where were you really excited by the growth? And then maybe some comments on growth by vertical or by region just differences across verticals and regions where you're seeing the strength right now.

So that's a great question. From a product perspective, clearly, we have the government's side. Q3 is the fiscal year-end for the U.S. federal government. We picked up a very nice seven-figure deal, as I mentioned in the earnings call script, with an existing customer of more than 100,000 employees going to FedRAMP authorized environments. Also, from an overall region perspective, we have very strong showing in the APAC and EMEA regions in Q3. Again, demonstrating this company's unique position as a truly global distributor. 45% of our business is in North America and nearly 30% in Europe with the rest in APAC. We continue to see strength in terms of vertical solutions. We announced this large education solution deal, which is a Microsoft Office 365 and Teams integrated higher education solution targeting institutes of higher learning. That revenue recognition will come in Q4 and subsequently because it is a multi-year contract as typical with government organizations. We see a significant uptake in the education space. We're seeing good growth in manufacturing and automotive space, especially in Germany, which we'll share more detail later. But overall, regulatory industries, government, and now education is the vertical that's growing very well for us.

Great color. Thank you. And then on the product side, any more detail there? I know Teams governance has been really strong. Any other specific products that you want to call out?

Yes, it's Teams governance, it's backup as a service that continues to grow strong. But again, the amount of data we touch exceeds hundreds of petabytes. It's really the unique offering and positioning of our platform where we always have this migration integration story. We always have the backup as a service story, data protection, and of course now Teams governance and security. Increasingly, we see customers also coming to us for essentially ransomware attack recovery story that ties very well with our backup in service story. We released new products this quarter. In Q3, we launched the Google Workspace Backup service offering in addition to Salesforce backup as a service. That's also picking up growth. We have seen a threefold increase in pipeline for those new products. Lastly, we released a new product called Sense, which is in the Microsoft 365 license and entitlement management space. It's in high demand within the enterprise segment where you're talking about tens of thousands of employees, determining what kind of license and what kind of entitlement to allot to, in a much more dynamic and resource-based way versus manual and script-driven. We're very excited about that product set and we're also now actively working to expand that product set to cover other clouds.

Great, and then lastly from me for Jim. Do you have any early view on 2022? For us, I mean, you talked about in your pre-IPO discussions about a 30% ARR growth being sustainable. Are you able to reiterate that? Any early view on 2022?

Sure. I think it's early as you say, but we're pretty confident that mark is not going to change. We're pretty bullish on keeping that 30%. We feel strongly about that. I don't see any change there, but we're working through 2022 and we'll have some more insight in the future. Yes, I would say you could consider that 30% to be consistent going forward.

And this is 30% ARR as well as revenue growth.

Fantastic. Thank you, guys.

Thank you, Jason.

Thanks.

Our next question is from Kirk Materne from Evercore ISI. Please go ahead.

Thank you very much. TJ, Microsoft recently held its Ignite Conference. Was there anything from your perspective that you found encouraging? I know you have a very close relationship with them, but was there anything noteworthy from that conference that you would emphasize regarding your opportunities for the upcoming year?

Yes. We think Microsoft continues to evolve quickly in providing value-added services and features. There is a very aggressive push on their side to compete with Zoom. We see that Microsoft continues to strengthen their dominance in the enterprise space. We see more convergence around governance and also Office for frontline workers as a way to make Microsoft solutions more accessible. This helps to enlarge our total addressable market. There is also a raised need for governance solutions because now, these Microsoft 365 cloud solutions are more accessible to frontline workers, folks that do not even have computers; they are just using mobile devices and tablets. Overall, we see the opportunity for our growth continue to enlarge and strengthen. As Microsoft releases new services, we are constantly looking at ways to make our SaaS offerings more efficient. For example, more snapshot APIs are available for us to provide backup services far more efficiently. In the cloud space, it's all about consumption. At the same time, we're aggressively working to lower the cost of running our SaaS solutions as well. There are a lot of economies of scale and experience that gets built over time. Overall, we will continue to innovate our productivity solutions.

That's great. And can you just talk about, obviously, like two quarters ago, Microsoft talked about only about 8% of its base was on the E5 version of Microsoft 365. When they're discussing, sort of upselling them from E3 to E5, is that an opportunity for you to engage with those customers as well as they look to take a deeper or extend the relationship with Microsoft? Are you able to dovetail on those Microsoft upgrade discussions?

We view our relationship with the customer as a mutual and strategic outside partner in this sense. We first and foremost help our customers maximize their ROIs on Microsoft tech investment to the extent that it makes sense for them. We have set up bundles and offerings for E1, E3, and E5 license types. What we see out there is really a mixed license type reality. Most large enterprises will have a mixed proportion, where E5 being the smallest percentage of information workers for the C-suites and senior executives leveraging all the advanced functionality. So that's the reality; it's actually pretty messy out there in terms of these deployment scenarios that allow us to really help. So, we often help customers advance their workloads with governance solutions to again address that mixed license type scenarios. Yes, we see an opportunity from these motions to go to a different license types.

Right. And then just one last question for Jim. Jim, you mentioned the hybrid deals you completed in the third quarter regarding term licenses. I assume there was a noticeable spike in term licenses that may not continue into the fourth quarter. Can you elaborate on that? I understand you’re not providing specific guidance, but qualitatively, how should we approach the term licenses and the fluctuations that could affect your guidance?

Yeah. And I think that's where we were trying to, we didn't obviously raise guidance in Q4. The terms in Q3 had a little bit of a spike, as you noticed, even a little bit more than we had expected. We do expect Q4 to have a strong term component again; we've seen that in the past, so I would expect to see some comparable to Q3. But again, we're there to support the customer on their cloud journey, and there's a little bit of variability there in terms of do they go complete SaaS or hybrid models. We're working through some of those things, which again is why we didn't want to change the guidance at all for Q4. I'd say Q4 should be similar to Q3 from an expectation point of view.

I would just highlight that regardless, yes, I'll add a layer or more color. Regardless of term or SaaS, at the end of the day, it's all subscription licenses. It's only termed when the customer has some other data on-prem that they're protecting. Nonetheless, it's all subscription, and we believe that ARR, Annual Recurring Revenue, is the right way to guide to see growth of our business because that cuts across this revenue recognition issue for term accounting.

Got it. Thanks, guys. Appreciate it.

The next question is from Derrick Wood from Cowen and Company. Please go ahead.

Thanks for taking my questions. Regarding ARR, net new ARR was about $8.5 million in Q3, down from approximately $10 million in Q2. A year ago, there was sequential growth in net new ARR. Can you discuss whether this decline was surprising and what seasonal factors we should consider for Q3, as well as the outlook for Q4? Any additional insights would be appreciated.

Hey, Derrick. Thanks for the question. I think as we're thinking about it, our goals at the beginning of the year were really to achieve kind of 30% year-over-year, which we've done. So, I feel really good about that. We've added a bunch of salespeople to the team, as we've mentioned previously, and we're expecting them to really have an impact. I don't know if there's any specific color around Q3, but we anticipate improvements in that number as we move forward into Q4, as all these newly hired salespeople become ramped and get to their full productivity stage. From my side, I would just layer in the color here. We have increased our client-facing workforce by 50% in the last nine months. One of the things that did catch us off guard a bit is the prolonged ramp-up period. We've recognized this essentially at the beginning of Q3 already, as when everyone's working remote. Essentially, all of the new hires that we made were all working remote. Most of them have yet to meet their hiring managers or their team colleagues. We all know, as human beings, we learn better in person through those activities and learn through experience rather than just attending webinars or video calls. There's definitely a bit of that COVID and a video call fatigue happening. We're addressing that very aggressively. We have come back into hybrid work mode in Q4. That means employees returning to when they're near one of our many offices around the world, where allowed especially in regions with high vaccination rates. They can actually come back two days a week to work with their team to ramp up more effectively. Some regions, like Australia for example, are still going through lockdowns, which is not helpful. But we recognize that even with the best technology in collaboration, which we're obviously at the forefront of, this still cannot replace in-person interactions at certain times, especially for new hires ramping up. We see this as a factor in the slower new net ARR growth.

Yeah, that makes a lot of sense. So, the time to ramp the productivity has gotten a little bit longer. I guess since you've hired so much capacity over the last nine months, when do you see that being more impactful to the model? Is it the first half of next year? Do you see that coming more into Q4 this year? Any more color on timing?

It's no accident that we continue to guide ARR and revenue of 30% growth year-over-year while we increase our client facing team by 50%. We see that we'll work through the challenges in Q4. Next year, we should be back to our ramp-up expectations. Overall, our business model we shared is consistent, and the opportunity in front of us is great for the long term. This is really just a short-term phenomenon that we're experiencing.

Great, makes sense. Maybe squeeze one more on this $30 million contract. Pretty impressive then, can you walk us through what technology of yours they'll be using to help build this and why you won this contract?

That's a great question. This is a displacement of AWS. We've been building our SaaS platform as one of data management and governance solutions. On top of that platform, we do all these data orchestration and data insight, allowing us to then surface and get into business solutions. So, we have solutions around end-user data recovery, and we have now insights and policies that engage end-users directly. We started doing vertical solutions, like manufacturing as well as education. For this new deal, it's based on that; along with some integrations that allow us to do training management. It's leveraging our existing solution in the education space of exam management and learning management, which integrates seamlessly to provide digital exams online and all integrated into a cohesive learning management solution that sits on top of Microsoft Cloud. This solution is competitive against AWS, as many educational institutions already have Microsoft Cloud deployed.

Derrick, one more thing to that.

Yes?

One more thing, just thinking about the models and stuff. This is a five-year deal that TJ is referring to. We would expect very little additional revenue in Q4. Q4 really is the planning phase of the project, and we’ll have a better sense of what that revenue recognition looks like over the next five years. I would say that for modeling purposes, Q4 will have very little impact.

The next question is from Nehal Chokshi from Northland Capital Markets. Please go ahead.

Yes. Thank you. TJ, you're new to AvePoint. I’d love to hear your perspective on any changes you plan to bring to AvePoint?

Nice to meet you and thanks for the question. I was with AvePoint several years ago, so coming back is a little bit of a homecoming. The team has done a great job, grown the business, and really executed well. I don’t think there are any major changes, I think it's just continuing to step up our game in executing at a high level. Now as a public company, we have additional responsibilities both to you guys and to the public at large and all the necessary required filings. We want to improve on the great execution AvePoint has already provided.

Great. And then in the quarter, your incremental AR was very healthy, but that is a tick below the past two quarters of $10 million. Can you talk a little bit about how you feel you did on that incremental ARR performance relative to prior quarters?

Yes. From my perspective, if you look at our year in terms of seasonality, the second half usually shows larger numbers than the first half. We experienced significant ARR growth and strong second-half performance last year, and we are seeing similar trends this year. So, while it may appear that there is some compression, our overall guidance for the year remains unchanged. We are anticipating 30% revenue and ARR growth.

Okay. I guess the question is, why does it seem to be a bit of a compression? Is there some sort of artifact in there? Or is there something actually fundamental that happened?

I think last Q3 and Q4 were very strong quarters, and similarly this year. I don't think there’s too much to read into it. There is some relation to the net new ARR that we just discussed. It has to do with a bit of prolonged ramp-up period for the new hires. We're very confident that we can work through those kinks this quarter.

Got it. And I think that's a very good point that, the year ago, September and December quarters were very strong. With that in mind, the reason why those were very strong because Teams was just starting to ramp here. What are you seeing in terms of Teams adoption at this point in time? Are you still seeing it penetrate a lot of new organizations or is it more about it going deeper and us being the catalyst for a greater compliance stature that organizations are taking?

That's a great question, Nehal. We continue to see this $250 million monthly active Teams user pick up more advanced workloads. The default usage pattern for Teams has been just video calls and chats. Increasingly, we see adoption going further, which honestly in many cases enable our product. The advanced workloads like document sharing, co-authoring, editing, and internal/external sharing usually are enabled when the CISO and Risk Officer are more comfortable with the security and governance infrastructure laid out, especially in large enterprises. We're enabling advanced workloads, and from a channel collaboration, we require data lifecycle management. This is the exact value our platform provides.

Great. Thank you.

This concludes the question-and-answer session. I would like to turn the conference back over to TJ Jiang for any closing remarks.

Well, thank you everyone for attending our Q3 earnings call. We had a really strong quarter and we continue to be very bullish and confident in our execution. The market in front of us is massive. We are building up and ramping up our workforce to address that to take advantage of our first-mover advantage in the Microsoft enterprise SaaS space, as well as our platform advantage where we have truly differentiated offerings around collaboration, security, and governance. With that, we look forward to seeing everyone, and wish you a good, happy holiday season and New Year. I believe the next time we'll sync and talk to each other will be for the year-end earnings. Thank you for attending our earnings call.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.