Earnings Call
UiPath, Inc. (PATH)
Earnings Call Transcript - PATH Q3 2022
Operator, Operator
Greetings. Welcome to the UiPath’s Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. Please note, this conference is being recorded. I will now turn the conference over to your host, Kelsey Turcotte, SVP of Investor Relations. Thank you. You may begin.
Kelsey Turcotte, SVP of Investor Relations
Good afternoon and thank you for joining us today to review UiPath’s third quarter fiscal 2022 financial results, which we announced in our earnings press release issued after the close of the market today. On the call with me are Daniel Dines, UiPath’s Co-Founder and Chief Executive Officer, and Ashim Gupta, Chief Financial Officer. We will open with prepared remarks followed by a Q&A session. Our earnings press release and financial supplemental are posted on UiPath’s Investor Relations website. These materials include reconciliations of non-GAAP financial measures to the most directly comparable financial measures calculated in accordance with U.S. GAAP. We will be discussing non-GAAP metrics on today's call. The non-GAAP financial measures provided should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with U.S. GAAP. They are included as additional clarifying items to aid investors in further understanding the company’s third quarter fiscal year 2022 performance in addition to the impact these items and events have on the financial results. This afternoon’s call includes forward-looking statements about future events, including statements regarding our financial guidance for the fourth fiscal quarter and fiscal year-end 2022, our expectations regarding seasonality, our strategic plans or objectives, the estimated adjustable market opportunity for our platform and our position in the market. Actual results may differ materially from those expressed in the forward-looking statements due to many factors and therefore, investors should not place undue reliance on these statements. For a discussion on the material risks and uncertainties that could affect our actual results, please refer to the earnings release and other reports filed with the SEC. Forward-looking statements made on this call reflect our views as of today. We undertake no obligation to update them. Before I turn the call over to Daniel, I would like to highlight that this webcast is being accompanied by slides. We will post the slides and a copy of our prepared remarks to our Investor Relations website immediately following the conclusion of this call. Now, I would like to hand the call over to Daniel.
Daniel Dines, CEO
Thank you, Kelsey, and good afternoon, everyone. We continue to have very good momentum in our third quarter as ARR increased 58% year-over-year to $818 million driven by net new ARR of $92 million. Our continued growth at scale is fueled by our market-leading end-to-end automation platform. Automation fundamentally changes how employees experience work and businesses interact with customers and partners. I continue to hear from customers that UiPath's automation platform is one of the most important technologies in their digital transformation roadmap, driving operational efficiencies, generating revenue, and creating significant competitive advantages, as Forrester put it in their predictions 2022 automation report. Automation is emerging out of the back office to become a potent enabler of new business and operating models. Companies with advanced automation programs will obliterate, not merely beat, the competition. Automation also presents a truly strategic solution for the kinds of challenges presented by secular trends like the global labor shortage and supply chain constraints. For example, Hana Bank, one of the top three banks in South Korea, had the twin goal of reducing menial tasks done by employees and preparing for future labor shortages. They started by automating tasks, which yielded not only cost reduction but efficient HR management, then moved to cross-bank mega processes and have recently entered the fourth phase of deployment. All in, Hana Bank has applied automation to 80 processes, saving an estimated 1.5 million hours per year. Now, turning to the quarter, I am pleased with our results which reflect our constant focus on customer success. At the end of the third quarter, we had more than 9,630 customers, including new logos like Chegg Inc., Dr. Oetker, Colgate University, Loblaw Companies, and Aspen Medical. On the expansion side, we now have 1,363 customers that accounted for at least $100,000 in ARR, up 52% from 899 in the prior year. This includes 135 customers at $1 million plus in ARR, up 82% from 74 in the prior year. The Saudi Ministry of Tourism is a great expansion story which highlights how relevant automation is across verticals. They began their smart automation in 2020 to expedite integration and reporting on their enterprise systems platforms. In less than one year, using both attended and unattended robots, they reduced the time needed to collect, process, and analyze data by 95%, from 30 minutes per record to 40 seconds, while NRG, an energy provider in the U.S. and Canada, drives home our competitive positioning. NRG has deployed over 100 automations and achieved millions in annual savings, having expanded across finance, HR, IT, customer operations, and their contact center. They recently acquired Direct Energy and are in the process of migrating Direct Energy's automation program from a competitor to UiPath, increasing their automation count by 50% in a matter of months. Customer stories like these are inspiring, and it was great to gather approximately 2,000 automation practitioners at Forward IV, our first in-person user conference in two years. Forward strengthened relationships and resulted in new business as well as pipeline expansion. It was clear from the interaction on our show floor and attendance in breakout sessions, led by practitioners including Amazon, Chevron, Spotify, and Palo Alto Networks, that customers are enthusiastic about the power of automation and our newest platform release 2021.10, which again expands our UI, API, and AI capabilities and extends our competitive moat with the addition of more than 100 features and enhancements across every stage of the automation lifecycle. Updates to our new platform capabilities, like 21.10, first released in the cloud, give our cloud customers the benefit of a continuous two-week release cadence and a continuous feedback cycle, which results in high-quality semi-annual releases to our entire customer base. We have great excitement around our cloud offerings, particularly with the release of 21.10. Over half of our new customers chose cloud as part of their first purchase in the third quarter, and we now have more than 3,250 cloud customers. Toll Group, a leader in logistics, transport, and supply chain in Australia, is a great customer success story. They are leveraging our automation cloud for both attended and unattended robots, as well as document understanding, AI center, and test suite. To date, their rapidly growing automation program has freed up 170,000 hours, and they are on track for savings of $1.6 million annually. To continue to offer our customers adaptation optionality, we launched the Automation Suite with 21.10. The Automation Suite enables our customers to leverage the power of the full UiPath platform with the benefit of a cloud-native architecture however they choose, on-prem, public cloud, or third-party hosted with the single install on Linux. 21.10 also included the introduction of Linux-based software robots, a capability that is required to be a truly cloud-native company. This allows our customers to achieve scalability and auto-scaling in a cost-effective manner. Our focus on innovation continues to strengthen our lead in the automation market and has also won us recognition by some of the foremost industry analysts in our space. First, we are very pleased to have been named a leader in the inaugural IVC MarketScape Worldwide Robotic Process Automation Software 2021-2022 vendor assessment, which positions UiPath as the leader for overall technical capabilities and the strong capitalization structure for extending our end-to-end automation platform. We were also named robotic process automation leader and star performer in the technology vendor landscape for the fifth consecutive year according to Everest Group's Robotic Process Automation Products PEAK Matrix assessment 2021. We emerged as the only star performer and leader in this year's assessment, which analyzes the changing dynamics of the RPA landscape and assesses 23 service providers across several key dimensions. Acknowledgments like these are important for our customers and our UiPath ecosystem, which continues to grow meaningfully. In fact, last month, we announced an offering that enables our partners, community contributors, and independent automation vendors to distribute and monetize their RPA content to our more than 100,000 existing marketplace users. We are also making meaningful strategic investments in go-to-market partnerships, where we work together to drive customer success. The number of our partners is increasing, and we now have more than 4,900, and our relationships are deepening. This increased focus is driving growth, particularly with global systems integrators, where we are working to become one of the top practices in these influential and global organizations. We recently expanded our strategic collaboration with Accenture to help drive adoption of enterprise-wide automation among clients, accelerate their technology transformation efforts, and create new growth opportunities. As an Uber executive said recently, at Uber, it is about how we can apply technology and innovation to serve our customers. Partnering with UiPath and Accenture has enabled us to tap into the power of both UiPath's Intelligent Automation platform and Accenture's business and digital transformation expertise. This powerful combination has helped Uber achieve unparalleled results in its digital transformation journey, enhancing internal operations, productivity, quality, performance, and user experience. In addition, we announced that our end-to-end automation platform is being incorporated into PwC's proprietary operational improvement methodology and management system. By embedding our platform, PwC can harness the power and scope of UiPath automation products to expedite time to value for customers engaged in rapidly advancing digital transformation initiatives. Customers like Mercy, a Saint Louis-based healthcare system, also benefit from the expertise of our vertical partners, specialists like Ametek, a healthcare data analytics and automation consulting firm and UiPath diamond partner. Mercy started their automation journey in finance and continues to scale on our platform, adding test mining and test suite this quarter while steadily deploying more automations. Today, they have hundreds of automations deployed across 84 use cases, with an estimated total benefit of tens of millions of dollars, and additional time for nurses and doctors to provide better outcomes for their patients. This is our vision: to automate mundane tasks to allow employees to make a meaningful difference. All of this is about driving customer success, which includes technical integrations that make it easier to deploy automation. This quarter, we made several strategic announcements with major technology providers. We partnered with CrowdStrike to provide customers a new level of security and visibility by extending endpoint security to RPA through their CrowdStrike Falcon platform. This is the first of its kind in the industry. We integrated UiPath insights with Snowflake to provide customers with faster data processing and analytic capabilities to scale their automation programs. We expanded our strategic relationship with Alteryx to include new integrations, making it easier to invoke UiPath bots in an Alteryx workflow. Finally, we partnered with Qlik to enable Qlik Cloud Analytics users to leverage UiPath automations to drive action and prioritize tasks in downstream applications. Connectors like this make automations that combine API integrations for high-volume transactions with our comprehensive UI computer vision easy to build, govern, and manage. A comprehensive automation program requires a combination of emulation, particularly for the long tail of manual processes, and API integration for high-volume transactions, both of which are foundational to our platform. In summary, we had a strong Q3, and we continue to drive growth at scale. The market is very healthy, and we see considerable demand for our automation platform. I feel very good about what we have been able to accomplish across the business since our IPO, and we remain focused on innovation and our customers, which we believe is key to our ongoing success. With that, Ashim will take over to talk in more detail about our third quarter results and our fourth quarter guidance.
Ashim Gupta, CFO
Thank you, Daniel, and thank you everyone for joining us today. As Daniel said, we are very pleased with our third quarter as we again delivered meaningful growth at scale. We had strong adoption across our platform, including our core product portfolio and automation cloud, as well as new product offerings, and added great new customers like Prudential, Hermes, Breakthrough Beverage Group, and others. We also helped the EPA start their RPA journey at their Office of Technology Solutions. At the same time, we continued to drive market-leading expansion rates across our customer base. For example, Isbank, the largest private bank in Turkey, has successfully automated nearly 400 processes across 42 departments in two years. This has translated to 15 million transactions handled with savings of 600,000 working hours annually. They are also deploying UiPath process mining and AI technologies with chatbots. We are also working with companies like Seiko Holdings and Canon which have successfully implemented RPA and are expanding use cases to enable greater automation across their organizations. Rather than diving into the P&L, I'm going to change things up a little bit. First, I'm going to focus on the relationship between ARR and revenue. Then I'll give you some color around Q3 and provide guidance, then we will take questions. Fiscal third quarter revenue grew 50% to $220.8 million, reflecting the strength in the business. We closed the third quarter with ARR of $818.4 million, reflecting 58% year-over-year growth. Net new ARR was $91.9 million, up 42%. We have the highly recurring subscription business driven by a true land-and-expand model with customers deploying more robots, adopting more platform products, and expanding use cases as they realize the considerable value of automation. We run the business and evaluate our performance based on ARR, which is defined as annualized renewal run rate—annualized invoice amounts per solution SKU from subscription licenses and maintenance obligations, assuming no increases or reductions in their subscriptions. In other words, ARR is invoice-based, and we calculate it by taking the invoice amount divided by the subscription term multiplied by 365. We have a structured process in place to calculate and report ARR because it is invoice-based. We believe this is the most accurate and reliable measure of our true business activity, as it most closely aligns to long-term cash flow and best aligns to renewals. Given our strong dollar-based gross retention rate of 98% in the third quarter, ARR is most reflective of customer commitment, regardless of deployment model. Revenue recognition, on the other hand, is based on total contract value (TCB) under ASC 606 accounting. Unlike ARR, it is impacted by contract duration, deployment model, and license delivery, which makes revenue highly variable quarter-to-quarter. Before I move on, a quick reminder: under ASC 606, license revenue is recognized at the point in time when the customer has access to the license key, which generally occurs in the first quarter of the contract, but can vary. Subscription services revenue is recognized ratably over the duration of the contract upon licensed delivery. These next slides do a good job showing the impact that ASC 606 has on revenue, the reasons why we believe ARR is the best way to drive and measure the business, and how both metrics are ultimately connected. The first example is a one-year on-prem deal, where it takes the impact of duration out of the revenue equation and reinforces the trailing 12-month revenue equals ARR, which is also what we invoiced in that period. The next example shows the impact of multi-year contracts on revenue. In this three-year on-prem deal with a $6 million TCV, license revenue recognition is front-loaded in the first year, which sets up a decline in revenue between years one and two and no growth between years two and three. In contrast, ARR is constant for the duration of the contract. While we won't focus on trailing 12-month revenue as a metric going forward, this slide does reinforce my point. Over the last eight quarters, the CAGR of 62% for ARR and 65% for trailing 12-month revenue underscores this correlation over time. To quickly summarize before I move on, we don't manage the business to quarterly revenue growth because of the mechanics of ASC 606. We manage the business on ARR as it more accurately reflects customer commitment period-over-period, laying the right foundation for the company. Before I close, I want to make a few comments on third quarter results and provide fourth quarter guidance. I will be discussing results on a non-GAAP basis unless otherwise noted. Remaining performance obligations increased 80% to $579.5 million. Total gross margin of 85% and software gross margin of 93% reflect investments in our services and products support teams, as well as increased cloud hosting costs. Third quarter operating expenses of $179 million increased 24%, including ongoing investment across the business and expenses related to our user conference held in October. Heading into the fourth quarter, guidance assumes there will be some back to the office as we continue to monitor the impact of COVID. GAAP operating loss of $116 million included $95 million of stock-based compensation expense related to our equity program. Non-GAAP operating income was $9.1 million. Adjusted free cash flow was negative $7.7 million. Our subscription model drives considerable cash flow. While we expect to run the business to roughly cash flow neutral this year, we will continue to invest across the business including R&D, talent, sales, and customer-related activities. We also plan to make strategic investments with partners to drive further customer acceleration and success. This market is big and in its early stages, and given the opportunity in front of us, we plan to continue to lean in to drive growth. We ended the third quarter with $1.9 billion in cash, cash equivalents, and marketable securities and no debt. Turning to guidance for the fourth quarter of fiscal 2022, we expect ARR to be in the range of $901 million to $903 million, an increase from prior guidance of $876 million to $881 million. We expect revenue to be in the range of $281 million to $283 million, and we expect non-GAAP operating income to be in the range of $10 million to $20 million. We expect to be profitable in the largest revenue quarter of the year while continuing to invest meaningfully in the business. We expect basic share count for the fourth quarter to be approximately 537 million shares outstanding. Finally, we will guide to fiscal year 2023 when we announce our fourth quarter results, but I want to highlight that we expect fourth quarter to first quarter seasonality to emerge in the business in both net new ARR and revenue results. In summary, we are pleased with our third quarter results as the team's ongoing execution continues to drive meaningful growth at scale. The opportunity in front of us is enormous. We have a strong pipeline and we feel very good heading into the end of our first fiscal year as a public company. We are building a truly multi-generational company that will change how people experience work. This is what excites us and motivates the team every day. It also keeps our focus on the long-term value creation for our employees, customers, partners, and stockholders. We hope you, your family, and friends have a healthy and happy holiday season. We'll now take questions and I will turn the call over to the operator.
Operator, Operator
Thank you. At this time, we will be conducting a question-and-answer session. Our first question comes from the line of Keith Weiss with Morgan Stanley. Please proceed with your question.
Keith Weiss, Analyst
Excellent. Thank you, guys for taking the question and very nice quarter. I have one question for Ashim and maybe I get a clarification question and one broader picture question for Daniel. Ashim, thank you so much for taking this through that ARR explanation; I thought this slide was really great. It really illuminates why ARR is the right metric to look at. When we're thinking about net new ARR addition this quarter, a year ago, I believe you had some pull forwards, and you had certain really strong growth against a tough comp because you pulled forward from Q4 into Q3. Was there any one-time items or any pull forwards of ARR into this quarter that we should be aware of? Or is this quarter pretty clean? And then, on the revenue side of the equation, a good explanation of how contract durations and the like, and the type of contracts impact revenues, any particular impacts in terms of changing contract durations or billing durations that occurred this quarter that might have impacted the revenue or the billings that we should be aware of?
Ashim Gupta, CFO
Hey, Keith, great to hear from you. And I hope all's well. Just in terms of the first question, no, there was no significant item that was a pull forward in any way or that can be considered from other quarters, so it's a very clean quarter on the ARR front in particular. And then, in terms of the question around duration, billing duration will continue to contract for us. We've talked about this multiple times in terms of just our focus now with the cash in the bank, that we are going to prioritize more one-year deals and reduce our dependency on multi-year prepaid deals from a cash flow standpoint. That trend continued in the quarter, it's just gradual, every single quarter, and we're happy actually and very deliberate in the intention on it. With regard to contract duration, there was nothing significant that I would say is to be called out for this quarter. In particular, duration as a whole is going to be volatile because the way that we drive the business to ARR allows for customer choice to drive and customer economics to drive the decision on contract duration versus our internal teams pushing it. So duration moves with every single quarter, and there is no one or two deals in particular; you see just kind of a relatively normal quarter with the mix of deals falling the way customers have driven up.
Operator, Operator
Thank you. Our next question comes from a line of Phil Winslow with Credit Suisse. Please proceed with your question.
Phil Winslow, Analyst
Thanks for taking my question and congrats on the strong quarter and outlook. Question for you, Daniel. A quick question, follow up to you Ashim. Daniel, I mean, obviously, we’ve tracked your company for almost four years now. One thing that’s really jumped out at us is how you’ve expanded your platform—what you call the tapestry? Obviously, we’ve seen a lot of consolidation partnerships announced across the RPA industry process mining for the past three to six months here. Wondering if you could help us understand your competitive landscape, how this tapestry differentiates you, and how this expanded platform is helping you out with customers?
Daniel Dines, CEO
Thank you for the question. In the last quarter, we have not seen any material moves in terms of the competitive landscape. I would start by pointing to the first IDC MarketScape report that put us in a very clear leadership position. I would quote them saying that when it comes to real enterprise automation, real-scale enterprise automation, customers are choosing UiPath. This is, of course, because we offer an end-to-end platform that is suitable for small use cases as well as the most complex ones. Indeed, we have this tapestry that we believe helps our customers drive adoption from the process discovery—which is becoming a real driver of growth—to building automation for both professional developers and citizen developers, to a strong analytic platform and to our engagement layer, which is basically our low-code, no-code app platform dedicated to automation and integration use cases. So I would finish my answer by saying that automation is really becoming the critical piece of accelerating digital transformation. We are the clear leader, and we continue to win deals in very large scores because of our technology and our platform.
Operator, Operator
Thank you. Our next question comes from the line of Raimo Lenschow with Barclays. Please proceed with your question.
Raimo Lenschow, Analyst
Thank you, and congrats for me as well. Daniel, can you talk a little bit about what you see in your customer conversations around the increased need for automation just coming from the tight labor market? What we are hearing in our calls is that you just can’t hire a lot of people just to do repeatable kind of jobs, so you’re kind of forced to automate? Is that coming through already in your customer conversations? That will be interesting. And Ashim, just quickly on the dollar net retention, is there any commentary, maybe I missed it in the call, I only heard the gross retention. But any comment around how that was tracking? Thank you.
Daniel Dines, CEO
This is a great point. Even yesterday, I had a face-to-face discussion with a large investment banking company. One of the highlights was really that they are facing almost 40% attrition in the bank, which is really huge. So we talked about how can we partner in order to offer the new hires out of college the best working environments? How can we offer them the best technologies? People want to join companies that are models that put them in the driving seat, giving them the technology to help them avoid these repetitive menial tasks that drive many people to quit en masse. So I believe this is really a great opportunity for us in the coming quarters. One of the customers I mentioned during the script is Hana Bank. They have made a lot of investments in automation because they anticipated this tight talent market, and this is their approach.
Ashim Gupta, CFO
And just in terms of dollar-based net retention rate, Raimo, we see that there's really no material change from our last quarter. As we've talked about in the past, we will release the actual number periodically, we continue to feel very strong and confident about our execution and our customers' execution, and that continued expansion rate is something we feel very confident and strong about as a company.
Operator, Operator
Thank you. Our next question comes from the line of Brad Sills with Bank of America. Please proceed with your question.
Brad Sills, Analyst
Oh, great. Thanks, guys for taking my question. I’ll echo that congratulations on a nice quarter. One of the things that struck me in the press release that you just put out today on the partnership with Accenture, and also your comments on the PwC partnership is company-wide deployment. When we think of UiPath, we think of that kind of rinse-and-repeat departmental expansion that you guys have been executing so well on. Are you seeing more company-wide deals come into the pipeline? How does that global side channel help with that type of activity? Thank you.
Daniel Dines, CEO
Well, I can say that among our customers that are over a million in ARR, all of them, without exceptions, are using various products as part of our platform. This is not something marginal; we are seeing more and more of this. Our growth products, which are basically part of our tapestry, are one of the highest growth, if not the highest growth technology within our platform. So that's definitely a growth driver for us—it's the usage of the entire platform.
Ashim Gupta, CFO
And then, just Brad, the other thing we see is we continue to see momentum. I talked about our dollar-based net retention rate being very strong. One of the drivers of that is cross-company deals where multiple functions are finding automation. That is really important. As a former customer, I just want to emphasize that as people continue to learn about UiPath, our platform is horizontal. We speak with CHROs, CEOs, customer call center leaders, and CROs about how they want to use automation. Our best customers manage to replicate what they do in one function and then replicate those wins across functions, which is a core part of our dollar-based net retention rate and why we have such conviction about our total addressable market.
Operator, Operator
Thank you. Our next question comes from the line of Michael Turits with KeyBanc. Please proceed with your question.
Michael Turits, Analyst
Hey, guys, thanks. Perhaps another take on Keith's question, you commented that you’d see seasonality in net new ARR, I thought of it as really bookings, I guess in Q1. So, while the standard reason that was pretty clear, since you didn’t see it last year was the pull forward that more typically would see stronger bookings in the fourth quarter from an ARR perspective?
Ashim Gupta, CFO
Yes, generally, what we see right now is definitely momentum between the second half and first half. When I look at the pipeline today, I'm encouraged between fourth quarter in terms of the emergence of the fourth quarter seasonality that we talked about. Yes, I see that seasonality as a potential here. One thing I'll address because I anticipate the question behind the question is related to our guidance; our guidance philosophy continues to guide what I see in front of us today. We feel very bullish about our execution, the dynamics of our pipeline, and the response of our customers.
Daniel Dines, CEO
Yes, we are very pleased with what we are seeing in front of us. We are seeing a strong Q4; the demand is there, and we are seeing really very engaged partners. Overall, we are very pleased with the direction where our business is going.
Operator, Operator
Thank you. Our next question comes from the line of Alex Zukin with Wolfe Research. Please proceed with your question.
Alex Zukin, Analyst
Hey guys, thanks for taking the question. Maybe just a question around pipeline and then just a clarification on the retention rate. New business and specifically the return of in-person events, the conference in Vegas, all the things that you're doing, how has that impacted the pipeline, any material change to the pipeline now versus a year ago heading into 4Q? And then maybe just a clarification, the fact that it wasn't a material change in terms of NRR—there was a pretty wide variance between NRR in Q1 of 145% and Q2 of 144%. I just want to understand if it is within that range between those two numbers. Is it lower, is it higher? It would be good to get that.
Daniel Dines, CEO
Well, the partial return to normal, face-to-face meetings is a very welcome novelty for us. We made the bold decision to have our annual forward meeting in person, and I can tell you that besides an acceleration in pipeline, it’s been a great acceleration in the energy of the company, seeing happy customers, happy partners talking about how important this technology is for them. This gives us the real energy to push forward this Q3, and we’re really into great stuff for the Q4. I personally have started traveling quite a bit in Europe and in the U.S., and that makes a difference. In-person meetings allow us to present and articulate our vision to large customers and establish connections with C-level executives, and this is one of the particularities of our technology: We need an executive sponsor in order to go big enterprise-wide. So, the return to normal face-to-face interactions is only going to help us. Now, I let Ashim comment on NRR.
Ashim Gupta, CFO
Yes. So, Alex, just one thing I’d like to correct is, first quarter was not 131%, it was over 145%, which is how we talked about it in some of the questions and calls. So really, when you look at where we have been, that has been relatively consistent all year, and no material change. I always like to emphasize the operational pieces—we continue to execute very strongly because the demand for automation is high within our customers. High ROIs drive a lot of interest from internal executives, and we continue to see it. This speaks to our land-and-expand model. So, first quarter was in line with what we talked about at over 145%, and we have not changed materially since our numbers throughout the year.
Operator, Operator
Thank you. Our next question comes from the line of Mark Murphy with JPMorgan. Please proceed with your question.
Mark Murphy, Analyst
Yes, thank you. I'll add my congrats. So Daniel, at your user conference in Las Vegas, one of your partners was saying that this market in the past was a three-horse race and that two of the horses got broken legs. There were so many stories of Blue Prism and Automation Anywhere customers migrating to UiPath. I'm just wondering if you can shed some light on whether you have a little extra tailwind from that type of activity. Then, Ashim, just going back to Michael Turits' question, the comment about Q1 seasonality emerging in net new ARR—I believe consensus is already modeling that; I know we could certainly have lower net new ARR in Q1. Can you just clarify if any—are you signaling that some kind of change is needed, or do you think it's kind of reflected already?
Daniel Dines, CEO
Mark, indeed, we are engaging in a few replacement deals with both Automation Anywhere and Blue Prism, especially within large financial institutions. There are territories, particularly in the Nordics, Canada, and the U.S., where they are withdrawing their presence significantly. In the same time, I would not necessarily call it a tailwind. The untapped opportunity in this market is huge for us, and our growth is coming not just from replacement of our existing competitors but really by delighting our customers, evolving our platform, and getting new customers. This is really our driver of growth.
Ashim Gupta, CFO
And then, Mark, just to be very clear, I'm not signaling anything that is different from what I'm seeing out there in terms of the models that I've come across. I would say given our discussions on seasonality, especially last fourth quarter between 3Q, 4Q, and 1Q of the past 12 months, it never hurts to repeat things. This is our first cycle as a public company crossing between years, so I just want to make sure that everybody knew where I stood and how the business looks at seasonality now and what we're seeing as our business matures.
Operator, Operator
Thank you. Our next question comes from the line of Matt Hedberg with RBC Capital. Please proceed with your question.
Unidentified Analyst, Analyst
Hi, yes, this is Anisha for Matt Hedberg. Thanks for taking my question and congrats on the strong quarter. Maybe double-clicking on the question on demand environment: during the Q2 earnings call, you noted the impact on COVID thus far as neutral. With the new Omicron variant, have you baked in any conservatism in your fiscal '22 guidance?
Daniel Dines, CEO
I think it's a bit too early to tell if the new variant is having an impact on the business. We're continuing to say and see that COVID is net neutral to us. It was a bit of a headwind to new logos and a tailwind to adoption across a few other industries in existing customers. When COVID ends, we see a real market opportunity for us to drive growth across all industries and all sectors.
Ashim Gupta, CFO
In terms of our guidance, I hesitate to use the word conservatism as I talk about it. The guidance we provide is based on what I see in front of us; I don't handicap it. I have not handicapped it in any way for Omicron to answer that question directly. I just really look and evaluate the data that I have in my hands today, and that is the basis of our guidance.
Operator, Operator
Thank you. Our next question comes from the line of Bryan Bergin with Cowen. Please proceed with your question.
Bryan Bergin, Analyst
Hi, good afternoon. Thank you. A question for you on the sales force. I'm curious if you've seen any challenges caused by talent tightness in the market? And are you on plan as it relates to targeted sales force additions as you begin to plan for fiscal '23?
Daniel Dines, CEO
We have invested throughout this year in our sales force. We are not seeing significant pressure on our ability to attract talent right now. We have a great brand out there; we have a fantastic culture inside the company, and our compensation is top-notch, so we are really bullish on our capability of attracting talent.
Operator, Operator
Thank you. Our next question comes from the line of Terry Tillman with Truist. Please proceed with your question.
Joe Meares, Analyst
Hi, thanks. This is Joe Meares on for Terry. Appreciate you taking the question. There's been a lot of press releases from you and your partners in terms of working together, and you spoke at length earlier in the call about the Accenture and PwC partnerships; I think you're up to 4,900 now. So it's a two-part question. Are these partnerships more helpful with landing new customers or for expansions? The second part is where do you think you are in terms of the productivity curve of your relationships with these partners so far? Thanks so much.
Daniel Dines, CEO
I would like to start with the second question. I think this is extremely positive momentum that we are seeing with major GSIs. We're talking with a few of them about building significant practices in UiPath. What I mean by significant practices is like top five or top 10 practices for them. This is truly important. In relation to the first question, we are seeing that they are helping us in both adoption with existing customers and getting new logos. Of course, our top 20 partners are more helpful in expansion with existing customers, while the long tail of partners is somewhat more helpful in acquiring new logos. Overall, they are helpful on both fronts.
Operator, Operator
Thank you. Our next question comes from the line of Keith Bachman with Bank of Montreal. Please proceed with your question.
Keith Bachman, Analyst
Yes, many thanks. Daniel, I wanted to revisit this with you on the competitive landscape. Could you speak specifically to Microsoft and how you see Microsoft as a competitor both now and over the course of the next year or two? What I was thinking about in terms of UiPath as a pure-play vendor with cross-functionality across many different application areas versus Microsoft, more of a Microsoft-centric approach. Microsoft does have pretty deep reach. You mentioned a few times that you’re trying to get access to senior-level management. Just hoping you could speak broadly about Microsoft and some of the underlying trends as you see them unfolding over the next year or so.
Daniel Dines, CEO
Speaking about the current situation, as I said before, IDC has underscored well where we are. In terms of real enterprise traction, UiPath is really the only tangible choice for enterprises that want to go from small to complex across different divisions that want a really high level of penetration. Our own data—if we take into account the deals where Microsoft is participating versus the deals where they are not—shows that we are not seeing material changes in our winning rate. So right now, I can say that Microsoft doesn’t have a meaningful impact on our ability to win customers. In the coming years, first of all, I would like to make the case that Microsoft is focused with their RPA mostly on citizen developers and personal productivity, which is a small part of our overall total addressable market (TAM). Therefore, I don’t see that in the coming years, Microsoft’s investment and competition with us will materially derail us from our growth trajectory that we are seeing and building.
Operator, Operator
Thank you. Our next question comes from the line of Kirk Materne with Evercore. Please proceed with your question.
Kirk Materne, Analyst
Yes, thanks very much, and congrats on the quarter. Daniel, I was wondering if you could talk a little bit about your thought process on verticalization—not of the product, but of your go-to-market efforts. As you start to talk to companies about going deeper with automation, I would think having an understanding of those industries at a greater level of depth would be helpful in terms of accelerating those conversations. I realized that’s hopefully what your partners are aiding you with. But I was curious how much of that you think UiPath should take on when you think about your next steps in go-to-market—maybe not next year, but over the next few years? Thanks.
Daniel Dines, CEO
Well, one of the best business decisions we made a couple of years ago was to create our industry expertise group. We hired across a few verticals people who are capable of speaking customer language and articulating how technology is helping them. We have built also value engineering that is industry-specific. This has been instrumental for us in landing key deals across financial services, healthcare, and public sectors especially. We continue to invest particularly in these three industries and with partners specialized in these areas. It's really a good point. But at this time, we don't see a need to verticalize our products specific to industries; however, from a go-to-market perspective, we are looking closely into how we can better address customers, particularly across these three industries I mentioned.
Operator, Operator
Thank you. Our next question comes from the line of Ari Terjanian with Cleveland Research Company. Please proceed with your question.
Ari Terjanian, Analyst
Good afternoon, and thanks for taking the question. Just had a question about investments into next year; I saw it seems like OpEx decelerated a little bit more this quarter. How are you thinking about hiring into next year, both from R&D and sales and marketing, and any kind of specific areas you're prioritizing? Should we expect a similar pace of growth, or any ramp-up as you try to address this large market opportunity ahead of you? Thanks.
Daniel Dines, CEO
I can tell you that our strategy for hiring into R&D was to hire like there is no tomorrow. We joke internally saying we don’t have a budget for R&D. I’m really happy to say that despite the pressure in the market, Q3 was one of our best quarters for hiring into R&D. On more general terms, I continue to say we really invest across the company, particularly in go-to-market, where we invest in field, we invest in velocity, and velocity is one of our best-performing areas in terms of sales productivity. We invest in customer success to continue our great adoption story, and we invest in partners because we are ultimately a partner-led business. At this point, we are not seeing reasons to be very concerned about our hiring ability. As I said before, we have a great brand out there; we have a great comp, our position as the leader in the market changes how people live and work. People believe in our destiny, and we have an amazing internal culture, which is really expressed by our own employees.
Ashim Gupta, CFO
And just in terms of the metrics, when we say that OpEx is decelerating, I want to remind everybody that when you look at sales and marketing expense for the quarter, it would seem from a reported basis that we were down 13%. Please remember that there was an accounting change related to commissions, and on a pro forma basis, when you adjust for that, we are actually up 42% year-over-year, which speaks to the investments that Daniel was talking about. R&D is up 46%, and we continue to build out in support, etc. Right now, while we’re committed to long-term operating margins that we’ve talked about of 20% plus, our priority right now is investment. We’ve talked about being roughly cash flow neutral; we’re not afraid to go a little plus or minus against that. We look at the total addressable market as early, we look at our market position as leading, and with that confidence, we will continue to invest in both our go-to-market and our R&D business to scale the company. We look at that cycle to continue through next year. You can see that even with the investments we’ve talked about during our earlier call, and within this earnings call, around our partner ecosystem.
Operator, Operator
Thank you. Our next question comes from the line of Michael Turrin with Wells Fargo Securities. Please proceed with your question.
Michael Turrin, Analyst
Hey there, good afternoon. Thanks for taking the question. Ashim, just following on to some of the seasonality questions and comments, is there anything else you can add from a large deal perspective? Maybe just how you approach guiding for larger deals in particular, and as part of that, you can also just help level-set and remind us what the cadence of use case or broader expansion most often looks like. Is that typically an annual conversation, and is that also what goes into the second half versus first half seasonal shape you expect, or just any additional context on those you mentioned still relatively early in your public company journey? I think it's all useful context. Thank you.
Ashim Gupta, CFO
Yes, great, Mike. I appreciate the question. For large deals, our definition varies between revenue and incremental ARR. When I think about large deals from an incremental ARR standpoint, I continue to be pleased with the pipeline and demand. We haven't fully highlighted it, but our million-dollar-plus customers continue to grow, and we see continued momentum in large scale customers throughout fourth quarter. From a revenue standpoint, the fourth quarter is where we anticipate the most deal activity. Duration will be something we keep an eye on. I really do—we don't drive duration from a business standpoint in terms of actively from a metric standpoint; it becomes customer and economics driven. In this environment, our pipeline is dynamic, and we’ll continue to monitor that as we go through the rest of the quarter and as we enter into the final stages. I see good momentum, but I can't predict that really well. In terms of the cadence, we talked about this and we could refer back to the second quarter earnings call. We discussed the life-to-date value of our customers; many of our customers buy quarterly, and they don’t wait for their annual cycle to grow. What defines when a customer expands is when they start seeing bursts of ROI. For many of our customers, that can come two to three months out, and then continue as they go across departments. For other customers, depending on their implementation, they may use some early pieces of their purchases and wait for their renewal. We see multiple buying patterns, but multiple points in the year of when customers buy, and that again speaks to the strength of our land-and-expand model that's there.
Operator, Operator
Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now turn the call over to Ashim Gupta for closing remarks.
Ashim Gupta, CFO
Just one thing I—this is Ashim, just before I turn it over to Daniel to close, we’ve received a lot of questions about RPO. I want to clearly state the numbers for those who had questions. Total RPO for the quarter was $579.5 million, up 80% year-over-year. Current RPO was $359.3 million, up 69% year-over-year. I just wanted to clarify that. With that, I'll turn it to Daniel to close.
Daniel Dines, CEO
I want to thank you all very much for participating in this afternoon's call. I also want to thank the UiPath team for their hard work, our partners for their dedication to our customers, and our shareholders for your ongoing support. We hope you have a happy and healthy holiday season and look forward to speaking with many of you throughout the quarter. Thank you.
Operator, Operator
This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation and have a wonderful day.