AvePoint, Inc. Q1 FY2023 Earnings Call

Good day, and welcome to the AvePoint Inc. First Quarter 2023 Earnings Call. All participants will be in listen-only mode. After today’s presentation there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Jamie Arestia, Vice President Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, and welcome to AvePoint’s first 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 prepared 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, as substitutes 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 first 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. With that, let me turn the call over to TJ.

Thanks, Jamie, and thank you to everyone joining us on the call today. We had a solid start to the year as we exceeded our financial guidance on both the top and bottom line. We continue to see healthy demand from organizations that need to address the abundance of SaaS applications and the growth and sprawl of data to deliver a seamless and enhanced digital workplace experience. First quarter highlights included 31% ARR growth and 23% total revenue growth year-over-year, both adjusted for the impact of foreign exchange. Q1 reported revenue of 59.6 million, comfortably above the high end of our guidance. Additionally, Q1 non-GAAP operating income also came in ahead of our guidance, especially in the current environment. As we maintain a laser focus on profitability, we are well positioned for steady margin expansion in 2023 and beyond. I want to thank those of you who attended our first-ever Investor Day in March, where we shared our view of the market opportunity, our strategy for capturing it, and our longer-term financial outlook. It is clear that as organizations modernize their digital workplaces, they need a platform that is well governed, fit for purpose, easy to use, and built on automation. AvePoint's confidence platform capitalizes on this need by empowering organizations to optimize their SaaS operations and secure collaboration. Despite the continued uncertainty in the macro environment, our customers rely on AvePoint’s confidence platform to rapidly reduce costs, improve productivity, and make better-informed business decisions. As the organizations we work with continue to think long-term, they are just beginning to see the opportunities to innovate their businesses amidst the proliferation of software applications, relentless growth of data, need for optimization, and the evolving compliance and threat landscape. To highlight a few customer wins from Q1, these reflect early successes tied to acquisitions we made last year. As a reminder, our M&A strategy has focused on tuck-in deals to accelerate our product roadmap, expand the offering of our core confidence platform, speed our time to market, and improve the penetration of our existing customers—all with the goal of delivering a robust end-to-end experience to organizations building today’s digital workplace. The first is a significant new customer win in the quarter with the largest industry training and development organization in Singapore, which underscores our commitment to building industry solutions. We were selected as the platform choice to power a new learning experience, administering learning services seamlessly, managing course micro-certifications, and offering enhanced digital services with 26,000 partner organizations. We secured this marquee new logo by leveraging the strength of our confidence platform in data management and governance, coupled with domain knowledge from last year’s acquisition of AI access, to successfully transition from the back office to the front office while addressing a new use case. Taking a step back, we see the education and higher learning space as prime for digital transformation, and we are honored to be recognized for innovation by winning the Microsoft Partner of the Year award in Singapore in the education industry category. We also remain significantly under-penetrated with our existing customer base, regardless of which stage of their digital workplace journey our customers are in; we have solutions that address their unique challenges. Our ability to offer our customers a full platform solution is a key differentiator and the foundation of our land-and-expand strategy. Ultimately, our platform approach enables our sales teams and partners to capitalize on additional upsell and cross-sell opportunities. A notable example of this in Q1 is our expansion win with one of the largest financial services firms catering to individual investors and small business owners. As an existing cloud governance customer with 40,000 employees, this firm needed a better way to measure the effectiveness of its internal communications—a trend we hear more frequently from the C-suite in today’s hybrid world. Our tyGraph offering, which we acquired last year, provides the capabilities our customers need to discover critical workplace communication insights. With tyGraph implementation and interoperability with our confidence platform, the firm replaced its previous analytics solution for Microsoft 365 and can now effectively measure employee engagement, driving improved decision-making and organizational performance. In both examples, the breadth of the AvePoint confidence platform, bolstered by our acquisition of critical technologies, enabled us to meet compelling customer needs. We will continue to evaluate opportunities of all sizes to further expand our platform offering and provide greater value to customers and partners. In summary, Q1 was a solid start to 2023. While we remain mindful of near-term economic uncertainty, we are excited about the opportunities we see in 2023 and beyond to deliver shareholder value by advancing the digital workplace and capturing a large and growing market while prioritizing profitable growth. With that, I will turn it over to Jim to discuss our financial results in more detail.

Thank you, TJ, and good afternoon, everyone. Thanks for joining us. I want to start today by recapping some of the primary takeaways from our recent Investor Day, as well as addressing some of the common themes in my discussions with many of you since then. I will then turn to our first-quarter financial results and updated financial guidance before we open up for Q&A. First, our top financial priority over the next few years is profitable growth, and we are targeting that by the end of 2025. AvePoint aims to be profitable on a GAAP basis, as well as a Rule of 40 company based on the combination of ARR growth and non-GAAP operating margin. Many of you have asked how we are thinking about the mix of those two components as we move toward 2025. While we believe the mix remains flexible, we do see several levers on both the top and bottom lines and thus several ways to achieve the Rule of 40. I also want to remind you that our ARR growth expectations for 2023 are not the new normal, and the go-to-market strategies we discussed at the Investor Day should accelerate ARR growth while supporting steady ongoing margin expansion over the next few years. I would also stress that we view our long-term non-GAAP operating margin target of 20% to 25% as separate from the 2025 profitability contribution to the Rule of 40. Second, looking at both our top-line results and our guidance, you can see that there continues to be a delta between revenue growth and ARR growth. Many of you have asked when this delta will close, so let me spend a minute on it. The delta is purely a function of our revenue mix, which includes our SaaS, term license, and maintenance revenues, all of which are recurring, as well as our services revenue, which is not recurring and excluded when we calculate ARR. At approximately 16% of our Q1 revenues, services remain a meaningful component of our business, but its 9% growth rate in Q1 is much slower than the 20% growth from our recurring revenue business. The slower growth of services, which we are purposefully deprioritizing from our sales mix, serves as a drag on our total revenue growth but does not impact ARR growth, hence the delta you see today. As we look ahead, our long-term expectation is that services will continue to decline and represent approximately 10% of our revenue. Therefore, as services become a smaller percentage of total revenues, the delta between total revenue growth and ARR growth will narrow, but it will never completely go away. We expect the delta between recurring revenue growth and ARR growth to tighten substantially over time. This was evident in Q1, with recurring revenues growing 20% and ARR growing 26%. Taken together, this dynamic in our financials is why we believe that ARR growth is the best measure of our underlying performance. The third point I would like to make is around our three product suites. At Investor Day, we disclosed the ARR contribution from each for the last few years. While many questions centered on the fact that our resilience suite has consistently represented nearly 60% of our ARR, I want to point out that our teams have done a fantastic job in driving the growth of all three suites. Specifically, from 2019 to 2022, our control suite grew approximately 33% per year, our modernization suite grew approximately 40% per year, and our resilience suite grew approximately 48% per year. So even with our backup products serving as the largest contributor to the growth of our resilience suite, we have seen and will continue to see strong demand for our modernization and control suite, as evidenced by the two examples TJ just discussed. As such, we are confident that our go-to-market strategies will provide durable and well-balanced growth. Lastly, regarding share repurchases, at Investor Day we discussed expectations that share repurchases in 2023 would be in line with 2022 levels, approximately $20 million. After subsequent discussions and analysis, we plan to increase our buyback level and anticipate deploying approximately $50 million in 2023 to repurchase shares, given our strong cash position and our belief that our stock remains undervalued at current levels. We believe this is an effective use of capital right now. Through the close of trading yesterday, we have repurchased a total of 1,025,000 shares for a total cost of approximately $4.4 million so far in 2023. Turning now to our first-quarter results, where I will be referring to non-GAAP metrics unless otherwise noted. For the first quarter ended March 31, 2023, total revenues were $59.6 million, up 18% year-over-year and above the high end of our guidance. As TJ noted, total revenue growth on a constant currency basis was 23%. Within total revenues, first-quarter SaaS revenue was $35.5 million, up 34% year-over-year and up 39% on a constant currency basis. In Q1, SaaS comprised 60% of total revenues compared to 53% a year ago. Looking at the business geographically, we saw strong performance across all regions, driven once again by the growth in our SaaS business. In North America, SaaS revenues grew 32%, while total revenues grew 13%. In EMEA, on a constant currency basis, SaaS revenues grew 39%, while total revenues grew 35%, and in APAC on a constant currency basis, SaaS revenues grew 53%, while total revenues grew 25%. As of March 31, 2023, total ARR was $222.4 million, representing year-over-year growth of 26% and growth of 31% when adjusted for the impact of foreign exchange. I want to remind you that ARR includes our migration products, and prior year periods have been restated to include this as well. We ended the first quarter with 465 customers with ARR over $100,000, up 20% from the prior year period. As discussed at our Investor Day, we are now providing new disclosures that we believe better align with our strategies and provide more visibility into our performance. One of these was our strategy of driving more business through the channel, and as of the end of Q1, 48% of our ARR came through the channel, compared to 46% a year ago and 47% at the end of 2022. For Q1 specifically, 56% of our incremental ARR came through the channel. As discussed, we expect the channel contribution to continue increasing, which in turn should support continued ARR growth and operating efficiencies. Another new disclosure discussed at Investor Day is our trailing 12-month gross retention rate. Adjusted for the impact of foreign exchange, the gross retention rate for the first quarter was 87%, in line with what we reported at the end of 2022. On an as reported basis, Q1 gross retention rate was 84%. Turning to net retention rate, adjusted for foreign exchange, our first-quarter NRR was 106% and was 102% on an as-reported basis. Turning back to the income statement, gross profit for the quarter was $42.6 million, representing a gross margin of 71.5%, compared to 71.8% in Q1 2022. The slight year-over-year gross margin decline is a result of foreign exchange and lower gross margins on services. Q1 operating expenses totaled $42.9 million, or 72% of revenues, compared to $41.6 million or 83% of revenues a year ago, representing a growth of only 3% year-over-year. As a result, Q1 non-GAAP operating loss was $329,000 or an operating margin of just below breakeven, again above the high end of our guidance. This compares to an operating loss of $5.5 million or an operating margin of a negative 11% a year ago, as we continue to focus on profitability and drive meaningful operating margin expansion. Turning to the balance sheet and cash flow, we ended the quarter with $231.7 million in cash and short-term investments. For the three months ended March 31, 2023, cash generated from operations was $1.25 million, while free cash flow was $1 million. This compares to cash used of $6.1 million and free cash flow of negative $7.1 million for the three months ended March 31, 2022. I would now like to turn to our outlook for the second quarter and the full year of 2023. While it is appropriate to be cautious in this economy, our ability to drive continued top-line growth and ongoing margin expansion provides the confidence to raise our full-year expectations for total ARR, total revenues, and operating income. For the second quarter, we expect total revenues of $60.5 million to $62.5 million, representing 10% year-over-year growth. We expect non-GAAP operating income of $0.8 million to $2 million, which represents a year-over-year margin expansion of more than 450 basis points. For the full year, we now expect total ARR of $255 million to $261 million, or approximately 20% year-over-year growth. We now expect total revenues of $256.5 million to $262.5 million, or approximately 12% year-over-year growth. Lastly, we now expect non-GAAP operating income of $13.9 million to $16.2 million, which represents year-over-year margin expansion of more than 700 basis points. In summary, 2023 is off to a solid start, and despite today’s uncertain macroeconomic environment, we remain focused on controlling the controllable and consistent steady execution. Thanks for joining us today, and with that, we would be happy to take your questions.

The first question comes from Kirk Materne with Evercore ISI. Please go ahead.

Hi, this is Chirag Ved on for Kirk. Congrats on a great quarter, and thank you for taking the question. I wanted to ask about how you are thinking about AvePoint's role in strategic positioning as Microsoft is starting to infuse more artificial intelligence into the product suite? How are you thinking about potential changes to your own product suite, sales processes, and customer engagement? Thank you.

Thank you. That is a great question. We are actually very excited about the disruptive nature of Generative AI. In fact, we have been long-time consumers of Azure Cognitive Services, which is what Microsoft uses to surface OpenAI services. We are in the business of data management and governance. Satya Nadella recently mentioned that by 2025, 10% of all data generated will be through Generative AI. This indicates a continued explosion of business data, which positions AvePoint very well in managing and governing data. We have been a long-time user of cognitive services in our product lines, particularly around the modernization of document management, records management, and case management solutions. At the same time, we are actively exploring making our internal operations more efficient concerning support, case number tracking, and automated assistance related to coding and case numbers, as well as content marketing. We are also trialing with Copilot with our developers. So we are very excited about the latest disruptions in Generative AI.

And maybe one follow-up to that. Are you seeing any hesitation from any customers in terms of engaging in longer-term digital transformation until they have a clearer idea from Microsoft on what their new AI features and offerings are, so they can plan the roadmap accordingly?

The enterprise customers we engage predominantly see digital transformation as a one-way street—table stakes to ensure they have the latest technology to leverage innovation. All innovations are happening faster in cloud environments, with the hyperscalers. What that means is everyone is focused on digital transformation and moving to the cloud as a necessity. Yes, there is some hesitation around AI and machine learning concerning data privacy and copyrights, especially among our banking clients. But the overarching theme of digital transformation and leveraging the cloud to drive innovation is evident across the board.

Good afternoon, and thank you. I will follow up with a question on the demand environment, which you touched on in the prepared remarks. I would love to get more detail here. What are you seeing by vertical in pipeline build? Also, could you remind us of your cadence for revenue this year as you have experienced deceleration and then re-acceleration? So give us a little more color on how you think about the structure of revenue growth?

Hi Gabriela, great question. From an overall demand perspective, as we discussed at Investor Day, we set our expectations for the year while highlighting macroeconomic uncertainties and volatilities. We don’t foresee worsening conditions. Of course, we had an excellent quarter, and we continue to anticipate a wider range of outcomes by industry verticals, consistent with what we have seen previously. So we haven’t seen material changes there, and we continue to execute the business while anticipating that wider range.

There was a comment on 2023 not being the new normal. The first question would be why is 2023 not the new normal? And then how do you think about your long-term growth model? You mentioned the Rule of 40 and operating margin targets being independent of the 2025 target. So how do you think about that?

Hi Gabriela, this is Jim. Let me address that. We plan for a wider range of outcomes in 2023, which is reflected in our budget. We anticipate a higher range of outcomes, and we included some expectation that our growth rate would decline. We built those considerations into our plans, and we are currently in line with those expectations. While we see an elongation of the sales cycle this year, we do not expect this trend to continue well into 2024 and would expect to see growth rates return to more normalized levels beyond 2023.

Thanks. Good afternoon. I just wanted to ask you to give yourself a report card for being here in May 2023. What areas of the business do you feel like you are making the most progress in, and where do you think you still have some room for improvement?

Hi Jason, great question. The area of our business where we continue to make significant progress is in the SMB and channel segments. Historically, we had minimal focus there, but in the last few years, we have built that segment to now comprise 20% of our business with the highest growth rate. To remind everyone, SMB is defined as companies with 1,000 employees or fewer. We continue to see strong global growth there. Our direct enterprise sales business had associated services, and those are some areas where we actually want to improve, as Jim commented. Our goal is to reduce direct enterprise sales from 60% to about 10% in the medium term. In terms of the areas still seeing some elongated sales cycles, as Jim mentioned, continue to be in the large enterprise space. We continue to win as a platform provider rather than a point solution provider, although we observe some elongation in sales cycles, but it is not meaningfully different from the previous quarter.

If we look at Office 365 and how resilient that business has been for Microsoft, how should investors think about your correlation to that? In a tougher macro environment, are there customers less focused on add-on capabilities? Is that the right way to think about it?

That is a great question, Jason. What we focus on is providing more value to improve ROI on customers' existing investments in the Microsoft stack. This includes consolidating other stacks that customers have. There are numerous providers in the market, and customers have multi-cloud deployments, presenting an excellent opportunity for them to consolidate, which is especially relevant in 2023 as customers focus on efficiency. We help our customers drive economic outcomes through platform consolidation. Our migration and data integration platforms bolster our customers' investments in governance and management capabilities. The elongation in sales cycles is indeed a function of the budget environment. Customers are still progressing with us; it is just taking longer to close those deals.

Thank you.

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

Thank you. First, I want to thank the entire AvePoint team for their tireless efforts to start the year strong. The in-person conversations we've had in recent weeks with our management teams in North America, EMEA, and APAC demonstrate that we have the right team and processes to capitalize on the opportunities before us. We are committed to advancing the digital workplace. We are still in the early stages of digital transformation, and profitable growth remains our top priority in this environment. Thank you for joining us today.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.