Good day and welcome to the AvePoint Inc. Q3 2023 Earnings Call. Today, all participants will be in a listen-only mode. Please note that today's event is being recorded. I would now like to turn the conference over to Jamie Arestia, Vice President, Investor Relations. Please go ahead, sir.

Thank you, operator. Good afternoon and welcome to AvePoint's third quarter 2023 earnings call. With me on the call this afternoon is Dr. TJ Jiang, Chief Executive Officer; and Jim Caci, Chief Financial Officer. After preliminary remarks, we will open the call for a question-and-answer session. Please note that this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. We encourage you to review the Safe Harbor statements contained in our press release for a more complete description. All material in the webcast is the sole property and copyright of AvePoint with all rights reserved. Please note this presentation describes certain non-GAAP measures, including non-GAAP operating income and non-GAAP operating margin, which are not measures presented in accordance with U.S. GAAP. The non-GAAP measures are presented in this presentation as we believe they provide investors with the means of evaluating and understanding how management evaluates the company's operating performance. These non-GAAP measures should not be considered in isolation from, a substitute for, or superior to financial measures prepared in accordance with U.S. GAAP. A reconciliation of these measures to the most directly comparable GAAP financial measures is available in our third quarter 2023 earnings press release as well as our updated investor presentation, both of which are available in the Investor Relations section of our website. Lastly, we have added an Excel file containing our historical financial metrics to the IR website for ease of reference. With that, let me turn the call over to TJ.

Thanks, Jamie, and thank you to everyone joining us on the call today. Q3 was another strong quarter for AvePoint, as we again meaningfully outperformed our guidance for both total revenue and non-GAAP operating margins while delivering total ARR growth of 25% after adjusting for the impact of FX. Jim will spend more time on our third quarter results and updated guidance, but I would like to spend today discussing the inflection point we currently face and why we are so excited about the many opportunities ahead of us. I hear this concern in every conversation with customers and partners, and more formal studies also back this up. 89% of executives say that high-quality data is essential, but 75% of them don't trust their data and 66% believe they're below average in managing the information lifecycle, properly governing the data and ensuring its compliance. For AI projects to succeed, organizations must address these data challenges by applying key strategies to better manage, clean and enrich their data. This is where the power of AvePoint Confidence platform comes in and why we believe AvePoint can be a key enabler of generative AI adoption within enterprises in the coming years. On a daily basis, we manage more than 250 petabytes of data for our customers and partners, enabling them to modernize, control and apply resilience to their data management practices. And we have a proven time-tested playbook to do so, which is only becoming more relevant with the desire to leverage AI across businesses of all sizes around the world. Specifically, these are the steps we take with the AvePoint Confidence Platform. One, we bring together data from all repositories and sources across the enterprise. Two, we ensure that the data is properly classified and intact. And three, we implement the correct lifecycle and access controls for that data. With AvePoint Opus, organizations can manage their information and ensure compliance, optimize cloud storage and streamline data management processes, all of which are essential to the AI-focused ambitions of our customers and prospects. We're excited about our roadmap for AI Power Solutions, and you'll hear more from us on new products and enhancements to our existing offerings that will drive even more customer value. Let's discuss a couple of customer wins and expansions in the third quarter that show how we are not only helping organizations establish that solid data foundation but also helping them extract more value from that data to reduce costs, improve productivity and make more informed business decisions. One of our most notable customer expansions in Q3 was a large U.S. Federal agency, a long-time AvePoint customer. They faced several challenges in meeting their stringent compliance, governance and security requirements for their 95,000 users as they moved to the cloud. With AvePoint Confidence platform the agency can address its complex record management needs including data compliance and data protection, identify and secure sensitive data and implement the proper controls over its workspace provisioning and lifecycle management of their productivity environment, including Microsoft 365 and Power Platform. This competitive win also unlocks future opportunities as we're already in talks with them to accelerate their migration of remaining self-hosted assets to Microsoft 365, implement Information Lifecycle Management with AvePoint Opus and transform analytics into workplace insights with tyGraph. One of the world's largest financial service companies has been a long-time customer of our Control and Modernization suite and in the third quarter came to us for help reducing high capacity and consumption costs for their citizen developer platform. They purchased AvePoint Power and now have better visibility into their local no-code application development and license usage of Microsoft Power platform, allowing them to optimize their resources and save on costs for their 106,000 users. In Q3, a United Kingdom-based public sector agency needed a comprehensive solution to protect its increasing amount of data for Microsoft 365. After purchasing AvePoint Secure Backup Service Solution, the customer can implement robust resilience for data generated by its 123,000 users. And this new customer is already considering extending this security to their Microsoft Azure investment in order to provide comprehensive protection across their entire digital workplace environment. I'm extremely proud of the team for another strong quarter in closing new customer wins and existing customer expansions and just want to spend a moment discussing the channel, which as you know is a key pillar of our strategy to drive profitable growth. Our investment in AI and proven ability to create a robust and secure data strategy will not only benefit our customers, but it will also provide significant value to our expanding partner network. By integrating more AI capabilities into our technology, our partners will be equipped with smarter, more automated tools to manage and protect their clients' data and collaboration environments. Ultimately, this will reduce complexity and optimize costs for our partners, enabling them to better focus on delivering strategic solutions tailored to enhance the customer experience. We're entering the next phase of generative AI where the focus is shifting from scaling models to building products that solve real business problems and transform the customer experience. The key to doing this effectively is by having a robust data management strategy, which is the core business problem AvePoint has solved throughout its 22-year history and then integrating AI to fully harness its potential. We'll continue to update you as we execute the product roadmap for AI-powered solutions that transform and enrich data to provide perfectly tailored experiences for our customers. As a whole, my remarks today make clear we are well positioned to help companies adapt and compete in today's dynamic business and technology landscape as the value provided by the AvePoint Confidence Platform is critical to the success of AI ambitions of companies around the world. With that, I'll turn it over to Jim to discuss our financial results in more detail.

Thank you, TJ, and good afternoon everyone. As we review our strong third quarter results today, let me remind you that unless otherwise noted, I'll be referring to non-GAAP metrics. For the third quarter ended September 30, 2023, total revenues were $72.8 million, up 16% year-over-year and once again above the high end of our guidance. Within total revenue, third quarter SaaS revenue was $41.9 million as our fastest growing revenue segment grew 40% year-over-year, and in Q3 SaaS comprised 58% of total revenues compared to 48% a year ago. Looking at the business geographically, our solid performance was once again driven by the growth in our SaaS business. In North America, SaaS revenues grew 28% year-over-year and represented 57% of North America revenues, which in turn grew 8% year-over-year. In EMEA, SaaS revenues grew 51% year-over-year and represented 72% of EMEA revenues, which in turn grew 14% year-over-year. In APAC, SaaS revenues grew 50% year-over-year and represented 43% of APAC revenues, which in turn grew 35% year-over-year. Total ARR surpassed the $0.25 billion mark this quarter as we ended Q3 at $250.6 million. This represents year-over-year growth of 23% and growth of 25% when adjusted for the impact of FX. Net new ARR in the third quarter was $14.4 million, representing year-over-year growth of 14% after adjusting for the $3 million of ARR that we added in the prior year period through the acquisition of tyGraph. And as we look at ARR geographically, we are pleased that year-over-year growth for all three regions was generally in line with total reported ARR growth as we saw another strong quarter of execution by our sales teams. Continuing with ARR and the metrics, we assess against several key growth strategies, we ended the third quarter with 518 customers with ARR of over $100,000. That's up 16% from the prior year period. As of the end of Q3, 50% of our total ARR came through the channel compared to 47% a year ago, and for Q3 specifically, 72% of our incremental ARR came through the channel compared to 61% for Q2. As discussed at our Investor Day in March, the channel contribution to our incremental ARR may fluctuate from quarter to quarter, but we expect the channel contribution to total ARR to continue increasing each quarter. In turn, this should continue driving ARR growth and operating efficiencies as we have seen through the first three quarters of this year. Turning now to our customer retention metrics, adjusted for the impact of FX, our trailing 12-month gross retention rate for the third quarter was 87%, in line with what we reported at the end of Q2. And looking at our net retention rate, we saw another strong contribution from our existing customer base in Q3, highlighted by several of the expansion examples TJ just discussed. This led to another improvement in NRR versus the prior quarter as this metric was 108% in Q3 compared to 107% at the end of Q2 after adjusting for the impact of FX. On a reported basis, Q3 GRR was 85% and in line with Q2 GRR, while NRR improved from 104% in Q2 to 107% in Q3. To remind you, our medium-term target for gross retention rate is 90% plus and for net retention rate is 110% to 115%. Turning back to the income statement, gross profit for the quarter was $53.7 million, representing a gross margin of 73.7% compared to 74% in Q3 of 2022 and 71.1% in Q2 of 2023. We are pleased that our gross margin remained in line with last year and improved versus the prior quarter. Going forward, we would expect to see improvements in our overall gross margin as services, which is our lowest margin business, continue to become a smaller portion of our revenue base. Moving down the income statement, we are pleased that Q3 operating expenses were flat year-over-year totaling $44.3 million or 61% of revenues. This compares to $44 million or 70% of our revenues a year ago. As a result, Q3 non-GAAP operating income was $9.3 million or an operating margin of 12.8%, well above the high end of our guidance. This compares to operating income of $2.4 million a year ago or an operating margin of 3.8%. We continue to show leverage across the business, especially in the sales and marketing and general administrative lines, which, as we discussed at our Investor Day, were the biggest areas of opportunity for us. Overall, our sustained focus on profitable growth drove year-over-year margin expansion of approximately 900 basis points in the third quarter. Turning next to the balance sheet and cash flow statement, we ended the third quarter with $209.3 million in cash and short-term investments. For the nine months ended September 30, 2023, cash generated from operations was $13.3 million while free cash flow was $11.8 million. This compares to cash used of $6.9 million and free cash flow of negative $10.3 million for the nine months ended September 30, 2022. Taken together, our strong cash balance and our ongoing cash flow generation provide ample flexibility as we constantly evaluate our capital allocation priorities, which include investing for profitable growth, M&A and share repurchases, where I'll turn next. During the nine months ended September 30, we repurchased 6 million shares for a total cost of approximately $33.6 million and through the close of trading yesterday, we have repurchased a total of 6.6 million shares for a total cost of approximately $37.7 million in 2023. I would now like to turn to our financial outlook where for the full year we are pleased to once again raise our expectations for total ARR, total revenue and operating income. For the fourth quarter, we expect total revenues of $70.5 million to $72.5 million or year-over-year growth of 12% at the midpoint. We expect non-GAAP operating income of $8.1 million to $9.1 million representing an operating margin of 12% at the midpoint and year-over-year margin expansion of more than 1000 basis points. For the full year, we now expect total ARR of $261 million to $263 million or year-over-year growth of 22% at the midpoint. We now expect total revenues of $267.7 million to $269.7 million or year-over-year growth of 16% at the midpoint. Lastly, we now expect non-GAAP operating income of $20 million to $21 million. This represents an operating margin of 7.6% and year-over-year margin expansion of nearly 900 basis points. This also represents nearly 240 basis points of improvement relative to our initial 2023 operating margin guidance in March as we continue to drive operating leverage across our business. In summary, we are pleased with our Q3 results and we are equally excited for a strong close to 2023 as our commitment to profitable growth continues to drive shareholder value.

Today's first question comes from Fatima Boolani with Citi. Please go ahead.

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

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

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

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

I appreciate that color. Thank you.

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

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

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

Got it. Thank you.

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

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

Yes, thanks for the question. So we're seeing, it's still a very challenging macro environment and pretty uncertain. We're still seeing the same scrutiny around budgets, so we see that continuing. We don't think it's gotten worse. When we think about the demand, we actually – I think last quarter we referred to it as stabilization, and I think I would continue to use that terminology when we look at our deal cycles and how long it's taking to get deals through the process, that doesn't seem to have changed much. This year is longer than the past, but it hasn't been getting worse as we've gone through the year. So I think that's kind of stabilized. And when we look at the three segments, our SMB segment is our fastest growing segment that continues to be, but all three segments have been healthy in terms of growth. So again, we're not really seeing any one particular segment overly affected. So again, we were really pleased with the quarter's performance, and it's really across all three segments.

All right, thank you.

Our next question comes from Nehal Chokshi with Northland Capital Markets. Please proceed.

Great. Thank you. Great quarter, guys. Any specific skews driving the slight improvement to the net revenue retention rate?

Yes, well, I think it's a couple of things. Right. In terms of we definitely have seen TJ pointed out a couple customer acceleration or additions in the quarter. I think those were very helpful. I think we're seeing customers really look to reduce costs. So we've seen some consolidation. We've seen some of our products that are helping them do that with existing customers. So I think that's really been the key call outs. I think we're still in this macro uncertain environment. Right. So we're pleased with the quarter's performance, but again, we're being very cautiously optimistic when we think about the rest of the year.

And if I may, for calendar 2023 ending, you're guiding to 22% ARR growth as is. What's the FX adjusted expectation with current rates?

Well, again, for us, it's interesting, right. We've got a very global business. So we've seen this year, if you look at the FX impacts around the globe, we've seen EMEA kind of come back in terms of the euro against the dollar. That's gotten stronger, but we've seen the Japanese Yen continue to get weak against the dollar. And for us, those kind of offset each other slightly. So we're going to see slight improvement on the ARR in terms of this 22 probably gets us another two points in total for the year. I mean, you can see that as we were in Q3 2023 and 2025, I think it's probably similar for the year somewhere in that 1% to 2% impact of FX.

Great, thank you.

The next question is from Derrick Wood with TD Cowen. Please proceed.

Oh, great. Thanks for taking my question, TJ, we're hearing more and more that cloud optimization efforts are something here to stay with workload governance and cost management a core part of your value proposition, just curious, is the level of the buyer that you're engaging changing at all? And how do you feel about positioning for larger budget capture? And I guess I'd ask the same thing for AI. I mean, as companies perhaps view you guys as critical in helping train models against private data, do you think that new buyers to engage with surface?

Hi Derrick. Great question. The first part of that is cloud Ops cost control really plays into our wheelhouse, our platform advantage, especially with control suite around operation management, entitlement management, and of course this whole lifecycle management, including low code, no code platforms, that's PowerApps is in high demand. So that part is really well. And with AI, I have so many conversations now with the CISOs and CIOs around, rolling out Copilot to make sure that there's copilot readiness. So that means making sure that folks don't have overprivileged access to suggestions from Copilot in terms of drafting answers and leveraging corporate data. So that's a very, very active area and topic. We actually see tremendous opportunity to expand our value-added strategic offer there. So that's why at my earlier comment, we think that that will drive a lot of the business growth in the coming quarters and years. So yes, both of those platform play, as well as the necessity around proper information management to drive a better outcome with AI is going to be the major theme going forward. And by the way, we're not a stranger to AI. We've been a long-time consumer of cognitive services on Azure, which is basically the front end to OpenAI for a number of years now. We have solutions that do these detection of ransomware attacks, for example, and auto-classification taxonomy generation, as well as data analytics services using previous paradigms in AI, of course, now infusion of Gen AI architecture. So yes, these are things are major themes that are going to carry forward in driving momentum for the business.

Got it, thanks there. And a follow-up for Jim on the ARR guidance. If I look at what it implies for net new ARR, it's down quarter-over-quarter in Q4, and I think the same thing happened last year. But could you just remind us why this is the case in a Q4? Does it have something to do with spiking government strength in Q3, or what are the dynamics that have net new ARR going down sequentially?

Yes, good question, Derrick. So yes, part of that is what you just said. That's definitely part of it. I think the second half of that really deals more with the macro environment we see. When we came into Q3, we kind of set the expectation that we'd be somewhere between $24 million and $25 million of incremental ARR in the second half of the year. And so we still feel really good about that. And obviously we're pleased with how we performed in Q3. I think some of it is a little bit of the government sector, the public sector. But again, we're just thinking about the macro environment, the uncertainties, and again, still feel very comfortable with that original set of getting somewhere between 2024 and 2025. We have a small raise for ARR for Q4, and we feel comfortable about that in light of the macro environment right now.

Thank you.

Thanks, Derrick.

The next question is from Jason Ader with William Blair. Please proceed.

Yes, thank you. Good afternoon, guys. Just wanted to ask you, on first off on the revenue growth guidance for Q4 12%, that would be quite a bit lower than where it was in the first three quarters of the year and certainly lower than where it's been historically. Is there something unique going on in Q4? Is it just macro? Maybe just help us square why the revenue growth would decelerate as much as that.

Sure. Thanks, Jason. So maybe it's two factors, right? One is what you called out in terms of the macro environment. Again, just trying to plan for uncertainties. And then the second piece might be that in Q3, even though our term license revenue is down 10% year-over-year, it is higher than what our expectation was coming into the second half of the year. And so, in essence, right, that term license revenue is going to pull a little revenue out of future periods and have it land in Q3, which helped a little bit with the beat we saw in Q3, but it also then negatively impacts Q4. So again, I think it's more the macro, but we're trying to take those factors into play.

Understood. Okay, great. And then on the gross revenue retention, you're in the mid 80s right now. You're primarily an enterprise-focused company that's definitely on the low end of companies that sell into the enterprise. Can you help us understand why your gross revenue retention isn't higher? I know you have aspirations to get it to 90% plus. What needs to happen for you to get to that 90% plus? And then also, when somebody does churn off, like what's the main reason somebody's churning off?

Yes, good question, Jason. And you're right. Our focus has been that our long-term goal here is to be 90 plus in terms of our gross retention rate. That's our stated focus. We've got multiple initiatives working on that from everything from customer engagement, all kinds of different retention scenarios around that, including some of the things that we're talking about here with AI and really looking at behavior of customers, all the way through their lifecycle with us as a customer. So I do think we have a lot of things that are in place that we're working on that are going to reap rewards and improvement for that. I do think this year in particular, we've talked about this uncertainty, and I think we are seeing it show up in terms of some of our activities. And keep in mind that most of our licensing is seat-based or employee driven. And so we are seeing that impact a little bit this year as well. And so I think when you factor in the macro and our kind of licensing base today, I think we're pleased right now that we're in that 87% range right now in terms of gross retention. But again, we are initiating a bunch of things that we anticipate over time will definitely improve that gross retention.

All right, thank you.

Jason, I would just say that in 2020, our gross retention was 83%. So we're sitting at 87% now. It's a marked improvement. Also, enterprise is about half of our business now, with mid-market being 30% and SMB being 20%. So given that mix, we're actually decently happy with the current mixture. Of course, we'll continue to work to improve that, but we do have quite a sizable non-enterprise business now.

Would you say the gross revenue retention for the 50% that's enterprise is north of 90? Would that be fair?

It is definitely higher, as you would expect the tiers are the way you would expect. Our enterprise group has the highest retention. Mid-market is slightly lower, and then SMB is the lowest. So, yes, you're directionally absolutely correct.

All right, thanks, guys. Good luck.

Thank you. First, I want to thank the entire AvePoint team for delivering another strong quarter. We're laser-focused on advancing the digital workplace, capturing growing markets, and prioritizing profitable growth. After speaking with many of our customers and partners at our #shifthappens Conference last month, I'm more energized than ever about the opportunities ahead of us to help companies harness the full potential of AI in their business processes. Thank you for joining us today.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.