Earnings Call Transcript - AVPT Q2 2022

Operator, Operator

Good afternoon, and welcome to the AvePoint, Inc. Second Quarter 2022 Earnings Conference Call. Please note, this event is being recorded. I'd now like to turn the conference over to Marc Griffin. Please go ahead. Thank you. Good afternoon, and welcome to AvePoint's second quarter 2022 Earnings Call. Today, we'll be discussing the results announced in our press release issued after the market closed. With me on the call this afternoon is the Chief Executive Officer, Dr. TJ Jiang, and Jim Caci, Chief Financial Officer. TJ will begin with a brief review of the business results for the second quarter ended June 30, 2022. Jim will then review the financial results for the second quarter, followed by the company's outlook for the third quarter and full year of 2022. We will then open up 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 material in the webcast is the sole property and copyright of AvePoint with all rights reserved. Please note that 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 the 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 and as substitutes for or superior to the financial measures prepared in accordance with the U.S. GAAP. For listeners who do not have a copy of the quarter ended June 30 press release, you may obtain one by visiting the Investor Relations section of the company's website. With that, let me turn the call over to TJ.

Tianyi Jiang, CEO

Thank you, Marc, and thank you to everyone joining us on the call today. In our last call, I closed by reinforcing how important it is to grow, while being prudent with expenditures in the highly dynamic market we're entering. Today, amidst the challenging and uncertain macroeconomic environment, I'm pleased to share AvePoint continues to show its proven ability to do just that. Our total revenue for the quarter was $55.7 million at the upper end of our guidance and would have exceeded our guidance range, if not for the strong foreign exchange headwind we faced in the quarter. This was driven by strong SaaS revenue of $27.6 million, up 34% from the same period in 2021. We grew total ARR by 28% year-over-year to $178.2 million. Technology plays an important role for organizations across every sector. Every customer I speak with believes there is a real opportunity to overcome today's challenges with technology that secures digital collaboration data, sustains connection between people, and ensures business resiliency. We transform data and collaboration so users can be more productive with the latest cloud services and drive efficiency in the delivery and management of those services for infrastructure and operations leaders. We do this through the AvePoint Confidence Platform, which helps organizations using cloud services, including Microsoft 365, Google, Salesforce, and more than a half dozen additional cloud collaboration platforms move faster, become more agile, reduce costs, and improve productivity. With Gartner predicting spending on public cloud services to grow more than 20% in 2022, the AvePoint Confidence Platform and our purpose-built industry solutions are well positioned to enable organizations to collaborate with confidence in the modern workplace. Organizations in every industry continue to choose our resilience suite to ensure business continuity and compliance with data retention and other regulatory guidelines. With AvePoint, a global leader in recruiting services can confidently accelerate adoption of its Salesforce environment by complying with GDPR and reducing the threat of downtime, which can cost the organization €5 million per day. Federal agencies like the National Endowment for the Humanities have strict retention policies to address regulations such as the Freedom of Information Act. They can quickly and confidently recover years-old Microsoft 365 files necessary for their work with AvePoint. We continue our work with the Asian Development Bank to protect its 15 terabytes of data to mitigate risks from ransomware attacks, ensure business continuity, maintain the public's trust, and protect its reputation. Our Fidelity suite preserves data integrity as organizations transform from one system to the next, capturing data for compliance or integrating SaaS applications to streamline the way users work. With AvePoint, the IRS migrated multiple workloads from legacy systems to Microsoft 365 to modernize its collaboration environment. AvePoint also worked with one of the world's most recognizable food producers with more than 20 production facilities across the U.S., Canada, and the Bahamas to migrate Microsoft 365 following the acquisition, adhering to all GDPR regulations and privacy laws, all while ensuring business continuity during the transformation. Our control suite provides differentiated value to infrastructure and operations leaders by delivering central services at scale. As a result, organizations can better maximize their digital transformation investments with greater control over their budgets, licenses, users, and workspaces. We are accelerating adoption of a digital workplace program by automating service delivery for a Fortune 250 company, specializing in engineering solutions with more than 336 manufacturing locations in 50 countries. We're also helping a large multinational manufacturing company based in Germany manage its growing SaaS operations and increase Microsoft 365 adoption for its 6,500 employee workforce spread across 40 sites. During the quarter, we reinforced our commitment to help businesses continue to mitigate risks, protect business-critical applications, and drive productivity with added support for protecting Microsoft Azure workloads, which capture more than 20% of all public cloud spend. We also added four of our existing solutions on Microsoft AppSource, an online cloud marketplace, providing tailored line of business solutions. This creates a more seamless experience for businesses, shortens their purchasing cycle, and helps them combat evolving workplace trends and challenges quicker. We also continue to garner industry recognition for our innovation. This quarter, we were named a leader in online backup software by G2 and a representative vendor in the 2022 Gartner Market Guide for backup as a service. Our work powering business transformation led to our recognition as a finalist for the 2022 Microsoft Partner of the Year awards in the education and government categories, chosen from more than 3,900 nominations across 100 countries. Our purpose-built platform powering inspiring and transformative learning experiences won the 2022 AdTech Breakthrough award, one of the world's most prestigious award programs recognizing outstanding educational products. At the end of June, we completed our acquisition of United Kingdom-based Combined Knowledge, a leader in the development and delivery of collaboration, education, and support. We're confident this move will enable us not only to bring a robust end-to-end experience to our customers to accelerate the adoption of their investments in digital transformation but also to advance our SaaS modern learning product lines, domain expertise around corporate learning and higher education. We continue to see a powerful snowball effect from our growing channel business, launched just over one year ago, which provides small and mid-sized businesses with the same enterprise-grade technology available to Fortune 500 businesses. Our channel ecosystem expansion is continuing in line with our geographic and market segment expansion. Our MSP business, primarily focused on the SMB market, continues its robust year-over-year triple-digit sales growth amidst tremendous consolidation. We're finding that as larger MSPs already invested with AvePoint acquire smaller MSPs, we continue to be chosen as a part of the choice for scale, efficiency, and security. We continue to meet the needs of our evolving channel ecosystem with the AvePoint certification program, which as of the end of the quarter has resulted in 1,100 certifications and more than 3,000 hours of training completed. This means more partner engineers, presales teams, and product specialists have been trained in our industry-leading technology to best use it to design custom solutions that enable them to source more business and exceed competitors. We also saw success with our existing customer base as they continue their cloud transformation and look to gain more value from their own cloud investments. We worked with a 10-year customer of ours, a Fortune 100 financial service organization known for serving the unique needs of nonprofits, institutions, and educators across the United States to create a secure collaboration service in its new Microsoft 365 deployment. The number of our customers with over $100,000 in ARR increased to 383 in Q2, up 34% year-over-year. Before Jim goes over the numbers, I want to touch on the share repurchase activity. Through June 30, 2022, we have repurchased approximately $10 million in shares since announcing our share repurchase plan. In summary, we continue to execute on our mission to enable organizations to collaborate with confidence in the modern workplace amidst uncertain macroeconomic times. With that, I'll turn it over to Jim to discuss our financial results in more detail.

Jim Caci, CFO

Thank you, TJ, and good afternoon, everyone. As I review our second 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 second quarter ended June 30, 2022, were $55.7 million, up 23% year-over-year and up 31% in constant currency. Within total revenue, SaaS revenue came in at $27.6 million, up 34% year-over-year and up 43% in constant currency. SaaS revenue constituted 50% of total revenue compared to 45% of total revenue last year. Term license revenue came in at $14 million, up 26% year-over-year or 33% in constant currency and constituted 25% of total revenue compared to 24% of total revenue last year. As a reminder, more than 50% of our revenue comes from international operations, which do business in currencies other than the U.S. dollar, predominantly Japanese yen, euro, and the British pound. During the quarter, we experienced a strong foreign exchange headwind due to the strength of the dollar, which affected revenue by approximately 3%. This headwind is primarily against our revenue and ARR metrics and not our profitability metrics due to the global nature of our operations. As of the quarter end, we had total ARR of $178.2 million, representing growth of 28% from a year ago and 29% adjusting for FX impacts. Our core ARR ended the quarter at $166.6 million, up 26% year-over-year. As customers continue their cloud transformation and expand their SaaS operations, our average core ARR per account continues to grow as well. At quarter end, the average core ARR per account was approximately $39,500, which represented an increase of 10% year-over-year. This growth was driven by 383 customers with ARR of over $100,000, up 34% from the prior-year period. Our core ARR dollar-based net retention rate for the quarter was 106% or 107% adjusted for FX impacts. Now let's review the income statement in more detail. Gross profit in the quarter was $41 million, representing a gross margin of 73.6% compared to 74.8% in the year-ago period. The slight margin decline is the result of our business mix and the impact of FX. Going forward, we are continuing to drive our sales efforts towards our fastest-growing revenue stream, our SaaS solutions. At the same time, we expect service revenue as a percentage of overall revenue to decline by transitioning more of these services to our channel partners, resulting in overall margin improvement. Sales and marketing expenses were $23.8 million or 43% of revenue compared to 42% of revenue a year ago. This represents an increase of $4.6 million year-over-year. This 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 media and event strategies. We have grown our sales and marketing headcount by 8% year-over-year. The increase in headcount has resulted in a $2.2 million increase in total compensation, primarily driven by salary and benefits. Programmatic spend in marketing is up $1.8 million year-over-year, primarily driven by brand awareness efforts and marketing events. R&D expense was $6.9 million or 12% of revenue compared to 8% or $3.8 million in a year-ago period, a year-over-year increase of $3.1 million or 81%. Our headcount was up 54% compared to last year as we continue to invest in the development of innovative technologies that help our customers stay competitive amidst evolving workplace trends and digital transformation. G&A expense was $11 million or 20% of revenue compared to 16% or $7.3 million in the year-ago period. This represents an increase of $3.7 million year-over-year. The increase in G&A expense largely reflects an increase in people and infrastructure-related expenses associated with being a public company in the current year versus being a private company a year ago, including an approximate 18% increase in our headcount. Non-GAAP operating loss was $1.3 million compared to an operating income of $3.3 million in the year-ago period. Turning to the balance sheet and cash flow. We ended the quarter with $246.6 million in cash and short-term investments. Cash used in operations was approximately $475,000 in the quarter, while free cash flow, which includes CapEx, was a negative $1.7 million. Our use of cash in the quarter was in line with our expectations. In Q2, we continued to purchase shares under our stock buyback program. And through June 30, 2022, we have repurchased approximately 1.9 million shares at an aggregate purchase price of approximately $10 million. I would now like to turn to our outlook for the third quarter and the full year 2022. We are confident in the long-term durability and predictability of our growth. At the same time, we want to be cautious given the recent macro headwinds we saw in the last couple of weeks of the quarter. Our revised guidance assumes these trends will continue for the remainder of the year. Since March 31, 2022, we have seen an incremental strengthening of the U.S. dollar, resulting in foreign exchange headwind in fiscal '22. We now expect the total FX impact to be approximately $4.8 million on our ARR and approximately $5 million on our revenue. For the third quarter, total revenue is expected to be in the range of $62 million to $64 million or approximately 17% year-over-year growth, 23% adjusted for constant currency. Non-GAAP operating income is expected to be in the range of $1 million to $2 million. And for the full year 2022, total revenue is expected to be in the range of $230 million to $234 million or approximately 21% year-over-year growth, 26% adjusted for constant currency. Non-GAAP operating income is expected to be in the range of a loss of $3.5 million to income of $1 million. ARR is expected to be in the range of $202 million to $206 million or approximately 28% year-over-year growth, 31% adjusted for FX impact. In summary, I am proud of our team for another strong quarter. We continue to see strong demand for our solutions as we remain focused on delivering value to organizations who continue to put their trust in us. With that, we'll open up the call for questions.

Operator, Operator

The first question is from Brian Essex with Goldman Sachs. Please go ahead.

Brian Essex, Analyst

Hi, good afternoon, and thank you for taking the question. TJ, Jim, congrats on the results. Nice consistent performance on the backdrop of a lot of macro uncertainty. And I guess on that point, could you help us understand what you're seeing from a macro perspective? I understand the FX, but what we've heard across the software landscape with regard to longer sales cycles, more scrutiny of enterprise budgets, more layers of approval needed to get deals done? And then to the extent that you might bill in U.S. currency or U.S. dollars, perhaps products becoming more expensive for some of the customers outside the U.S. Maybe if you could frame some of those points out that would be super helpful.

Jim Caci, CFO

Sure. And Brian, let me address it first, and then TJ can add some commentary on top as well. So I think partly what you just said, obviously, we're seeing some or most of all of that in various different pieces. The first, obviously, is FX. We called that out in the remarks just prior to the question. So we definitely see that as a headwind, and we're going to see that continue for the second half of the year. So for sure, that's definitely an impact. We did see at the end of the second quarter some elongation of some sales cycles. So we would expect to see that to continue into the second half of the year as well. And I think we're trying to be prudent and conscientious of that. And really, when you think about it, that's what we've built into thinking about the second half of the year. Those were two key factors in our thinking. FX obviously is a headwind on the more global macroeconomic environment that we're in right now, geopolitical influences. We are trying to be conservative to a certain degree, but also taking that into account and reflecting that in what we expect to deliver and then what obviously we're sharing in terms of guidance. And then maybe the third thing that is also influencing our kind of thinking internally, and those first two are definitely much more macro-driven. And the third one is maybe a little bit more internally focused, where we're seeing a lot more of our customers and the mix in terms of product mix. We actually sold more migration product in the first half than we were anticipating, which has an impact for us, and I think you and I have talked about this, we don't include migration in our ARR. So that product since the mix shifted, and we actually sold more which was great, our customers were demanding it, and we were there to satisfy it, but it obviously has an impact on ARR. And we saw that in really Q1 and Q2, and we're expecting to see that continue for the second half of the year. So we've also brought that into our thinking and kind of adjusted our guidance even on ARR to include both the first two macro conditions and then also the third, which is a little bit more specific to us. So we've kind of factored all of those things into our thinking.

Tianyi Jiang, CEO

Yes, thanks for the question. I just want to comment on, overall, the macro conditions that Jim outlined are things that we cannot control, but things that we can control. So I just came back from Tokyo in EMEA, our Munich office to meet with our EMEA management team as well as Japan, the first time since the COVID pandemic. The overall tenor of our sales leaders and our partners are one of bullishness and optimism. So there's still tremendous demand. There's a shift to cloud and the need for AvePoint's ability to help our customers to scale and deploy across hybrid complex scenarios, especially also in Japan, where they are a couple of years behind the Europeans in terms of going to cloud. So a lot of the partners are looking to us to help them accelerate that digital transformation. So macro side, we think that by continuing to invest in the channel, it allows us to scale and mitigate some of these macro conditions. But overall, the Microsoft cloud market is vast and the opportunity in front of us remains very, very large.

Brian Essex, Analyst

Right. No, super helpful. Thank you, TJ. And maybe if I could have you maybe follow up on that. How are CIOs thinking from a budget scrutiny perspective? I mean, a lot of enterprises are under pressure to operate more efficiently and cut costs. What is kind of the ROI framework that they're looking at when you're looking at your migration platform? Is that accelerating adoption? I mean, I certainly think that particularly as they migrate to kind of a more SaaS-centric platform that's going to enable easier deployment and consumption of the platform. But what is that initial hurdle that they have to get over in terms of is ROI a compelling driver? Or is this something that they are just already committed to, and that's what's driving the momentum?

Tianyi Jiang, CEO

There's definitely ROI drivers. There is momentum to consolidate environments. CIOs need to support both on-prem and in cloud. This plays well into our wheelhouse of being a platform provider. Not only do we make it very cost-effective and efficient for them to migrate from legacy as well as different cloud platforms into Microsoft cloud, but of course, once they're with our new Entrust product line, which is one of our fastest-growing product lines, we allow them to do license and entitlement management and delegated administration, which effectively lower the cost of running in the cloud. So ROI and platform consolidation definitely play a part. Of course, there has also been consolidation in our ecosystem as everyone knows in, especially in the MSP space there, the partners are also looking for consistent track record and steady platforms to invest in and be strategic with and AvePoint is shining through. Yes, it's really interesting, we get increased demands in migration especially in EMEA. There is quite a bit of momentum there across hybrid deployments, a lot of big migration deals across our enterprise customers. It's continued to pick up pace in consolidation platforms. We think part of that is ROI-driven. So it's a very interesting phenomenon.

Jim Caci, CFO

Yes, and unusually, Jason, we see more of it focused on new customers coming in where they're coming in as the tip of the spear being migration in a lot of cases. But in the first two quarters of this year and particularly second quarter, we saw more of our existing customers using our migration products and engaging us there, which is a little different than in the past. And I think it goes to what some of what TJ was saying again, trying to de-risk a little bit and be more focused and have a hybrid solution on their end. Migration is a key element to be able to do that.

Tianyi Jiang, CEO

Yes, and consolidation as well, so absolutely. Yes, as I mentioned, this whole Entrust product portfolio, which is part of our control suite continues to gain real good momentum. It's along the line of SaaS management. We're increasingly investing in that area to essentially help customers once they are in the cloud to better control costs and better control access patterns and delegation and also multi-tenant management. So as customers get into cloud and realize the nuances of data sprawl that becomes a very important topic. So, we continue to see control suite to be a fast growing SKU. Of course, having said that, our resiliency suite, as we mentioned before, in the last couple of quarters is 50% of our business, which is led by backup as a service, especially with the ransomware detection and recovery capabilities, so that continues to be a big piece of our revenue.

Derrick Wood, Analyst

Great and thanks, congrats on a solid quarter. I wanted to ask about the progression of the new hunter-farmer model and just trying to think of potential headwinds or tailwinds. So I guess one, how is sales retention been trending through these changes? And then two, assuming most account changes have been made. How are you feeling about setting up for kind of stronger upsell cross-sell in the second half?

Tianyi Jiang, CEO

Yes, so great question. The hunter-farmer specialization model, as we mentioned earlier, the accounts are all allocated. It does take time for the new account owners of existing patches to introduce themselves to the customers and establish relationships to do the upsell and cross-sell. So you're absolutely right. It does take time to do that and we expect that will uplift the upsell and cross-sell dollar values in the second half of the year. Of course, Jim also talked about the occurrence of migration projects that were part of the upsell into existing accounts. We see a lot more migration in existing customers. So that's part of the equation, even though that doesn't necessarily contribute to our ARR number today.

Jim Caci, CFO

Yes, so maybe the first piece of that first, in terms of thinking about Q3 and Q4. So I think, again this is where we're really trying to be conscientious and you're right that historically we would think about Q3 being a strong quarter because of our public sector and that being a key driver in Q3, and then Q4 historically being even stronger. Q4 being software industry seasonality. We're just trying to be a little bit conservative there and not get out over our skis too far. So again, that's really the pullback there is just trying to address it in that way so again, nothing more than that then really no major shift. We would still be thinking about it the same way in a longer-term environment that our Q3 would be strong and our Q4 would ultimately be stronger. But this year, based on what we're seeing in the market right now, we're just trying to be conservative.

Kirk Materne, Analyst

Yes. Thanks very much. Two questions for me. I guess, TJ, just to start, can you just talk a little bit more about some of those enterprise deals that are seeing elongated sales cycles? Is it price sensitivity from the buyer? Is it additional approval from hire up? Are there - I guess, are there things you all can do from a sales perspective to help make sure those types of deals don't get pushed out too long or don't get pushed aside for, say, three, six months?

Tianyi Jiang, CEO

Great question. Overall, we're actually pretty happy with the momentum of our enterprise continued business. The elongation in some of the accounts are due to the additional approval process. What we think actually continues to help us is our additional focus around security. So actually, recently, we just obtained another level of security certification. So those types of cloud ops and cloud security validations really help move along this approval process in large enterprises, along with obviously data sovereignty and multiple instances around the world. So yes, we're working to streamline some of the processes on our side, including click-through agreements. And also another new avenue we find to be able to accelerate the approval process is leveraging the channel. So we have leveraged the channel for medium to small businesses, but now we're looking at also leveraging the channel for large enterprise customers. What happens is when those large enterprise customers typically have a procurement through a partner, those agreements and key to this have already been pre-negotiated. So it actually abstracts out the negotiation on our side. We're going to try that as well as a way to accelerate deal cycles. We think that's a really potential good way to leverage the channel.

Jim Caci, CFO

Sure. Good question, Kirk. You were breaking up on our end a little bit there, but I think I got the gist of your question around contracts up for renewal, pricing, and so forth. So I will tell you, there's a couple of things we're doing there. One is in most of our new contracts and even going back into last year, we are building in price escalations into the contracts so that when they are up for renewal, there's effectively a feature already built in for an escalation. So that's number one. And then when we think about pricing, there are certain areas in our product suites where we can improve pricing, where it's not as competitive. And then there are other areas where it is competitive. So we look at pricing really on a product-by-product basis, not just across the board and saying, 'Hey, can we raise prices or not?' It's literally at a product-by-product basis. And then in each individual account, we're looking at them as they're up for renewal, what's the value proposition, the engagement, all of those things to consider where we can improve our pricing and margin, we're looking to do that. But again, the biggest key for us is building it into the contracts upfront. That was something we started more and more last year and it continues now. Again, having that built-in gives us the best chance when it's up for renewal.

Kirk Materne, Analyst

Thanks, I appreciate it.

Nehal Chokshi, Analyst

Yes, thanks. That's actually Northland Capital Markets. That's all right. So year-over-year growth for incremental ARR has been flat for 1H '22. And your updated guidance implies that, that incremental ARR accelerates to about 30% in 2H '22. So have you seen evidence yet that that acceleration in incremental ARR is starting to play through?

Jim Caci, CFO

Yes, we are seeing it already. So kind of alluding to some of the slowdown we saw at the end of Q2, but we are seeing in terms of the pipeline build and all of those leading indicators that we would see going into Q3 and Q4 are really strong. And so give us that confidence that those numbers you just alluded to for Q3 and Q4 are very attainable.

Brett Knoblauch, Analyst

Hi, Tianyi Jiang, how are you doing? Just a couple of questions for me. First, headcount has been pretty big increases kind of across all segments on a year-over-year basis. How do you think you're positioned now? Do you expect that pace of headcount growth to remain robust? Or do you expect that to kind of level off?

Tianyi Jiang, CEO

Yes. So a lot of the headcount growth is our investment into lower-cost regions. So we, for example, expanded our Vietnam office in terms of R&D headcount as well as our Philippines office in terms of operation support. So a lot of the headcount come from there. We are looking at creating redundancy and doing some derisking in the current macro climate here. So that would - we think it's a short-term situation as we drive towards efficiency over the longer term to potentially consolidate some of the functional roles. But yes, so - but at the same time, the business is growing at a nice clip. The market in front of us is massive. So we're not looking at slowing down our business growth. Thank you. I'd just like to say that we continue to make strong progress on our strategic priorities in this uncertain economic and geopolitical environment. Throughout our company's history, we have shown our ability to weather dynamic market environments by growing, while being prudent with expenditures. Our go-to-market strategy positions us well for new logo acquisitions, a growing partner ecosystem, and the ongoing expansion of existing customers to whom we deliver exceptional service today. This quarter, I had the opportunity to spend time in Munich with our EMEA leadership team and talk about the continued strong demand we see from our customers and partners, as well as the value we are providing with our solutions across complex deployment scenarios for their digital transformation initiatives. And as I mentioned earlier, just last week, I was in Tokyo for the first time since the COVID pandemic, where I met with all of our top Japanese partners and saw firsthand how excited they are with AvePoint being able to help advise them and accelerate their SaaS transformation. This speaks to the robustness of our growing partner ecosystem. We know it's a privilege to have our shareholder trust and faith in our ability to navigate the current market conditions, focus on consistent execution and ultimately deliver long-term shareholder value. Thank you.

Operator, Operator

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