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UiPath Inc. (NYSE:PATH) Cowen 50th Annual Technology, Media, and Telecom Conference Call June 2, 2022 2:10 PM ET

Company Participants

Daniel Dines - Co-Founder and Chief Executive Officer

Ashim Gupta - Chief Financial Officer

Conference Call Participants

Bryan Bergin - Cowen & Company

Bryan Bergin

My name is Bryan Bergin. I cover software and services here at Cowen. Thank you everybody for being here. We're very delighted to have UiPath with us today. UiPath is a leading enterprise automation vendor. It is a growing base of solutions around its core RPA software product.

With us today are Daniel Dines Co-founder and Co-CEO and Ashim Gupta, CFO. Thank you both.

Daniel Dines

Thank you, Bryan. Great pleasure to be here.

Bryan Bergin

All right. So, why don't we -- you reported results last night, so, we're going to start there. First quarter results, having a nice reaction today. What were the most critical, I'd say items in the quarter in your view that stood out, what areas did you feel like the company executed best in that 1Q?

Daniel Dines

Let me put things a bit in perspective for you. We -- when we guided the entire year in Q1, like two months and something ago, we were one of the first company that were seeing the macro headwinds and we always guide -- looking what's in front of us. So, we guide -- we guided prudently. As we progress well with the quarter for the outlook for automation, I think, has increased a bit. We are seeing a positive momentum. The actually -- these headwinds affects the entire industry right now, most of our customers are affected. So, in the light of inflation, labor cost, interest rates rising, the drive to become more efficient is real. And they need to increase productivity to cope with inflation. So -- and automation is clearly a natural way to increase productivity. So, I was seeing more elevated discussions during the quarter and that some of them materialized into some big deals, taking better shape, progressing through the pipeline and our optimism have increased during the quarter. And also with the way we're receiving a bit, we are seeing more of a positive environment than a couple of months ago.

Bryan Bergin

Okay. Would you say that demand progressed better than expectations, or was it just timing and that high level uncertainty, or you did see the true improvement of demand in that quarter?

Daniel Dines

Well, we see some of the deals move. It's more positive than two months ago. I would say that we are cautiously optimistic, again, in how we are seeing, and our guide reflects that positive -- positivity that we are seeing.

Bryan Bergin

Okay. And what about Europe specifically to kind of that -- most uncertainty obviously is there, what do you see specifically there?

Daniel Dines

Well, I think, if you look two months ago, we were looking at the prospect of Russia, conquering Ukraine in a couple of weeks, and with a good chance for the war to extend to other countries in Europe, becoming more Pan-European war that was could have been a terrible outcome. And many European customers were in a bit of a shock in the beginning. And when you are in shock, you don't act. Now as the war receded into very specific regional war, and even if it's long-term, and I think most businesses come to terms of exiting Russia and this is the new normal. And then the new normal have restarted a bit. So, we are seeing more of the normal behavior. And automation is a good technology, both when you -- in growth time and also in efficient time. So, it's not better right now.

Bryan Bergin

Okay. Okay. And you offered a new fiscal 2023 outlook that was raised. Kind of talk about some of the biggest swing factors that you see in hitting? I guess refreshes what those targets were and then what are some of the bigger swing factors in the updated outlook for 2023?

Ashim Gupta

Yeah. So, we -- our initial guidance, I think starting there -- just to get remind everybody, we had an impact for foreign exchange, Russia and the large deals that we talked about. So, we've actually taken our quarter outlook and put it between 1085 and 1090 of revenue. And we have talked about seeing positivity in terms of operating leverage and increasing the overall operating leverage outlook that we have there.

And then, when we think about kind of the -- what are the factors there, really the large deals progressing through the pipeline gives us more confidence to have been able to raise the guide versus our previous -- versus our previous discussions. And in terms of the operating leverage, we've got two great leaders that have entered the company and Chris Weber and Rob Enslin. We have Daniel and the experience that we've gone over the last couple years, we've invested a lot in the company, and we'll continue to invest in certain areas that we feel there. But we're also identifying pockets of efficiency that we're optimistic that we can actually run the company even more efficiently than we are today. And so that gives us positivity in terms of our overall operating margin guidance as well.

Bryan Bergin

Okay. Let's dig in some of the leadership changes. So, can you -- can we talk about the co-CEO movement? So, you recently announced co-CEO. How are you and Rob going to be splitting responsibilities? Maybe give us a sense of what your day-to-day changes will be?

Daniel Dines

I want to start by saying that between Rob and I there is really good chemistry and he is only three weeks in the company, but I'm already experiencing more fluency in our day to day flow, how we make decisions. Sometimes we will finish other sentences. So, it's really a good dynamic. And it's also across our leadership team. We are seeing an uptick in how we operate.

Look, my job going further will be focused more focus on the product innovation, on keeping the culture alive and also just talking to customers. I need to -- I'm one of the -- people in the company that can make this circle customer partners, product flying. And it's very important. We have a company that was driven by customer demand. I want to stay there. And sometimes I feel that in the product, we go a bit too distant to the customer. So, I think I feel this is really a good time to step in the product and make sure we stay customer-centric. And this is also our go-to-market strategy to be more focused, more customer-centric that will Rob will take over and make sure it happens. And also he will be in charge of day-by-day functions of the company.

Bryan Bergin

Okay. From the operational areas?

Daniel Dines

Yes.

Bryan Bergin

Okay. And then you also -- you Chief Business Officer with Chris coming, and so, I think only one quarter into that change leadership. But maybe touch on the key areas there that Chris will be focused on as CBO and any -- are we talking notable changes, tweaks to strategy? What's going on with that?

Daniel Dines

I think, Chris has already come with a great plan to kind of match our new strategy that is around key accounts, be more customer-centric, increase adoption within key accounts and also dial in better on the emerging enterprise segment, the velocity digital sales. So, what we plan to do is to also globalize and centralize some of the go-to-market functions to bring more consistency and efficiency into our operations. We're also looking differently to the partner organization. We want to align better the GSIs with key accounts while the long tail of partners will better serve the emerging enterprise segment.

We don't estimate dramatic changes. We are not changing territories, sizes of customers. We are just investing more into centralization, globalization and alignment.

Bryan Bergin

Okay. So, more blocking and tackling than it is any change in strategy there. Okay. Ashim, let's talk about kind of growth opportunity and target. So, clearly you have isolated items in fiscal 2023. We've laid those out with Russia or with Ukraine, and FX. But do those dynamics change anything in your view around the growth opportunity? How do you think about kind of the longer term sustainable ARR growth type of trajectory?

Ashim Gupta

Yeah. The fundamentals of our company feel strong. I mean, we've talked about a large -- we're in the early stages of a large and growing market. We've talked about our total -- our TAM of being $60 billion-plus, and that automation is ubiquitous. I think that's not an area of debate anymore. You can look at our 10,000 plus customers, customers greater than a million dollars and the speed at which we've scaled at crossing 155, meaning north of that number and even customers greater than a hundred thousand is showing the potential. And that is just in the last three to five years of accelerated hyper growth.

So, when we look long-term, we've got -- we started as an RPA company. We've expanded to an automation platform. They're both organic and inorganic investments. And we see that becoming more and more relevant at every level and every function of a company. So, long-term growth, we feel very good about the prospects that we see in front of us. We're investing in that way.

If you think about our engineering team, I remember entering the company four years ago, maybe 150 people in product, 400 people in total. Today, we have just -- more than that in itself in each of our core hubs. We've expanded dramatically there. And you look at the breadth of our platform. The reason why we're crossing that million dollar mark is not just the relevancy and the high ROI and the agility that the -- that RPA brings. But the fact that we now -- we now offer the right platform to be able to discover automations with process mining and task mining, and be able to go through the full life cycle, including engagement. That includes all the way to the end of testing of testing and audit -- and automating the testing both within RPA processes and larger applications. So, we feel really bullish about the platform and the go-to-market today.

Bryan Bergin

Okay. Then you started earlier talking about -- cost -- obviously inflation cost cutting is important. Automation is an obvious, so solution for that, labor and another. Labor dynamics today, seems like another obvious one, too. You have had very notable tech companies over the last several weeks. Talk about slowing hiring, labor market imbalances across all company size. But do you see many clients recognizing the potential for RPA there too yet? Is that a prevalent recognition or is still early?

Daniel Dines

Well, Bryan, we are not positioned our service on RPA company. We are a broader automation company. And our secret sources that we combine RPA, with API, with AI and in a single low code, no code offering studio. This is very powerful. And to address the needs of -- the strategic needs of our customers, both long-term, where they see more API driven and short-term where RPA can gets the best benefits. It's very important to have the same platform, addressing both.

So, right now, with the tightening that we are seeing in the labor market, of course, the opportunities to do more with the same number of people that you have, but also automation and upskilling your workforce, it's a great retention tool. And I can give you an anecdote with one of the largest public institution in Europe, maybe the largest. They hire a lot of people, like PhD people, in -- actually kind of very low entry position, like management assistance. And they want to convert all of these people in Citizen Developers to basically help automate a lot of the tasks that they are seeing in that institution.

Bryan Bergin

Okay. Ashim, let's talk about retention. So, net dollar based retention. How are you feeling about the retention sustainability? Reminds, I mean, where did you land in the quarter? How are you thinking about how that progresses?

Ashim Gupta

Yeah. So, we landed at 138%, still when you look across the peer group of software companies, whether at a smaller scale or at our scale crossing a billion dollars here this quarter, we feel great about where we stand there. That includes the absorption of FX in Russia. So, we're really closer to 140, depending which way you swing the round, right there. Expansion is a major -- is going to be the growth engine for our company. And when you look at it, it's just part of the land and expand motion of somebody coming in and really understanding our platform, plugging it in, getting a few use cases up and running, seeing the paybacks of six months, seeing ROIs like a major automotive company that in their first automation saved 2000 hours that translates to dollars that they can reallocate across the company. And then it becomes -- if the flywheel starts moving, more pipeline of automations come and more opportunities allow it. And then they go deeper and wider across our platform.

So, the land and expand motion, we see that as continuing to evolve strength. And then as the platform evolves, if you -- again, two years ago, we didn't have companies adopting process mining and process discovery, major food and beverage company started with RPA expanded into process discovery. Test automation is now making its way more into that. So, these are all upsell opportunities or chances for our sales team to sell a platform that has immense value to our customers and really drive that dollar based net intention rate.

Bryan Bergin

Okay. Sounds like they're really seeing the value of that combined solution and yeah, just the -- I guess the historical RPA product by itself, but that's good to hear. So, retention on one side of the growth, new logos on the other side. How are you thinking about, kind the go-to-market and really the new logo performance? And if you kind of help us talk about new logo acquisition over the course of the pandemic and how that has then progressed over the last several quarters, how are you feeling about the pace of new logo acquisition?

Daniel Dines

Well, pandemic for us was net neutral in terms of new logos. On one side, we got an improved interest in healthcare and public sector, but other traditional good industries for us, like transportation, retail, we're seeing more of a downwards trend in terms of new logos. So, it was -- effect was net negative. And Q1 was a choppy quarter for us. We knew upfront. We have accounted part of the reduction in net new logos is caused by Russia where we basically -- we put down to zero all the sanction entities and we are progressive for all the year when they will renew. Basically we will drop them. So, kind of this is how we are seeing Russia. So, it was a material impact to Q1. But with all our initiatives around the -- around digital sales and with the advance that we made into cloud, that we removed the friction of adoption, we are seeing really great opportunity within the mid-market to really increase the new logos in the -- few years to come.

Bryan Bergin

Okay. Let's take into that latter point, as it relates to the 22.4 release, you mentioned some things last night, but maybe including automation, cloud robots. Can you talk about how that augments the offering for clients? And then just more broadly any other aspects that you think are most critical within that release?

Daniel Dines

Yeah. I think it both -- remove the friction of adoption and also increase the number of use cases that the platform offers. So, I will tackle both. Why it remove the friction of adoption? Because this is the moment when our platform is fully cloud-based SaaS. So, especially in the mid-market where IT might be more of a bottleneck and they have not equipped to manage this sophisticated infrastructure, it's really speeding up by month the adoption. Right now, it's the first time in our history when line of businesses have the ability to configure automation themselves with auto reliance on IT. And in many instances, the center of excellences that are in charge with the automation program stay within the businesses for us, so that's really positive for them. Also, it reduces actually the total cost of ownership for our customers. IT -- the -- IT personal of the expense -- IT personal managing such a complex server software can really mount to a large amount. Right now, we manage the robots for them. It's this is a huge offering.

Now, second, in terms of expanding the use cases, we introduce now what we call serverless robots, which is -- it's a technology based on Linux containers and Kubernetes that allow us to scale efficiently in a multi-tenant environment, our cloud offering. But what allows us to do right now is to address better API integration use cases.

In some instances, our customers were using more IPOs like vendors for these API integrations. Now, combining the serverless where you can run without caring where you run. With our very powerful API integration story, we both cloud and it's fully integrated, and it's a very powerful solution. We have a world class API integration and UI automation story, and they have delivered in the same package. Again, this is very -- it's -- it address both short-term and long-term strategy of all customers.

Bryan Bergin

Okay. How does -- as you see more and more clients adoptable cloud, how do the economics change for you?

Ashim Gupta

The economics actually are not very different in the sense of we continue right now to command good gross margin rates, even with our cloud product. So, we've talked about greater than 80% gross margins as sustainable. Automation cloud robots will be an important test to that because they'll obviously use the maximum amount of compute, but so far, the early signs says, we feel really good about where they are. What I do think is cloud is always easier to control in terms of pricing power and discounting when discussing with the customer. And just you add that much more value in terms of taking the maintenance, taking the total cost of ownership away from a customer from VM provisioning, et cetera.

The other thing that I think it's there is telemetry. So, I think what's -- we're going to find more efficient ways of connecting with customers through the product, whereas on prem, you don't have that. So, our go-to-market motions and our marketing campaigns, we have addi -- we have a lower cost and a more direct channel to touch customers, and that's really exciting for us as we look forward.

Bryan Bergin

Okay. Just to clarify, when you talk about key accounts versus the mid-market what's -- is that a revenue headcount caught up? How do you segment those?

Ashim Gupta

We do it both on revenue and employees. I mean, there's many customers, there's many companies that have low revenue, but a high employee count. And automation is ubiquitous, so it can go across any employee. And then you have groups that are out there, like, state and local governments. So, we look at it both ways and what's very good for us is our emerging enterprise or our velocity motion, our digital sales motion, they're highly productive. So, we still have good land sizes there. We have good expand motions, so we can actually chew up this. We can move up on that tier and drive efficiency by putting more and more customers through that emerging enterprise that mid-market motion, but really employee and revenue, we look at it both ways.

Bryan Bergin

Okay. Okay. Daniel, let's talk a little bit longer term vision. So, you -- semantic automation is something you've discussed here. The way we understand this is really somewhat of a formal awareness of the robots on why they might be performing a task or process. But can you kind of dig in here why is this so important, and what opportunities do you think that will open up for you?

Daniel Dines

Well, let me start a bit with the high level opportunity. We believe that we can train our robots to perform more meaningful, high-level tasks. Like for instance, right now, if you delegate to a human user, a task like booking an airline ticket, right, they can go to any airline, kind of website in the world and they will figure it out, right? How to choose? But in the other way, this is not rocket science. So, we believe that we can collect a lot of data of how the actual work is done. And if you think of who is the company that can get more data about tasks, user based tasks, it's us, it's UiPath. There is no other company in the world that can collect more data. So, we believe -- based on this data, we can figure out how to train models to do higher level tasks. So, this is -- semantic automation is really all about this.

And now what are the meaningful steps to get there? We are launching a very interesting product in -- is going to be in review in the next -- in the near future. But this product aims to look at business operations through the lenses of three major tasks that you can look at any operation. One is people, whatever they do basically in operations, you can see people extract data from a system and then they transform and validate the data. And then, they load the data into another system. It's the ETL paradigm, which is not new in business in database integration. This is the way people think, but we think the same in terms of the business operations. So, we are coming with the product that simplifies these three operations for people. So, they will grow using our technology and just say, show me, I will show you, this is the data that I want to extract. This is where I want to -- that when I want to load the data, it can be anything really from a document, an image, a PDF to a website in or SAP or whatever that can be.

And then, we really use all the power of AI, computer vision, and document understanding, and then natural language mapping between concepts. So, we figure out exactly how they will do, and we can let them do some transformation. And this is where also the automation power comes. And even business users can create this type of templates of quick automations that work for them. So, this is the intermediary step to get to that level of -- high level steps where you can ask to do more meaningful. But this is something that will really let us collect a lot of data, because think about -- let's assume in the happiest case, every business user in the world will use our technology. We will get access. This is where I get the information. This is how I transform and validate. This is where I load the information. Do you imagine how powerful it is to have access to all of this, already in a high level context, because ETL it's a higher level context that where we are today. Today, we are at the level control C, control Z, control C, control Z. It's already higher level that you can create more meaningful models starting from this level.

Bryan Bergin

Okay. I want to pause here and see if there are any questions in the audience.

Daniel Dines

Okay.

Question-and-Answer Session

Q - Unidentified Analyst

Can you talk about your level of spend on sales and marketing? I think around 50% revenue. How do you think about why that's the right level, and why not spend more, why not spend less?

Daniel Dines

Okay. I think we -- I'll pass to you quickly. I think we need to look again to our level of SMM [ph] spending in perspective historically. We've been into investing more than digestion mode, so it's been a bit of a cycle for us. In the first year of pandemic and almost first quarter of 2021, we didn't invest so much. And then we went into an investment phase and now we are in a digestion phase a bit. So, we estimate that in time, this -- I'm not saying this is the right number, but this is being in digestion phase. We estimate we will see -- we will bring more efficiency in our sales and marketing expenses.

Ashim Gupta

I mean, we're committed towards 20% operating margins in terms of our long-term sustainable model. Within that model, I think, sales and marketing comes in more in line with scaled benchmarks. Two points of just added perspective. We believe we're in an early stage of the market right now. So, making sure our customers are still learning about automation, making sure that we're covering the right markets, putting the right information and the right support around our sales team to make this a strategic part of the -- of every enterprise in this early stage. That to us is a good investment in terms of what we've done and where we stand. And it shows in our results in terms of when you look at Gartner, the market share that we've been able to capture is very good. And in the land and expand mode, this is very sticky, our gross retention rate's 98%. So, for every dollar that we're bringing and with a dollar based net retention rate of 140, even if that's 130, that's a great annuity return on the investment we're making.

That being said, we crossed a billion dollars this year and one of the fastest ways to get there. And we say that -- we feel that with [indiscernible]. We also at the same time recognize that driving operating leverage is important in long-term, and sales and marketing efficiency is an area that we, we do think that there are areas that we can become more efficient as we learn, as we bring in leaders like Chris Weber and Rob Enslin into it. And we've talked about being committed to realizing that even some of that this year as we go through our digestion of the investments we put.

Bryan Bergin

Last one.

Unidentified Analyst

[Technical difficulty] talking more than a coincidence going on there. And also if you could just discuss from technical foundation, the differences or similarities with ServiceNow and Microsoft's Power Automate [technical difficulty], how are they different or similar to what you've done? And how long do you think take [technical difficulty]?

Daniel Dines

Yeah. Let me start with why API is important for an RPA company. And -- look, I was talking to one of our large banking customer and they were doing a big transformation in their contact center, for instance, and they aim to replace, to consolidate, to like three major platforms. And they are like a 10 right now and replace all legacy vendors. This is their long-term strategy, and this is going to take a few years down the road. But also part of the strategy is to let's put a layer of automation on the top of this platform. I will connect my user. So most of the repetitive tasks will delegate to this layer of automation. And that will allow me to actually replace the legacy systems with more ease, because you -- so you connect to legacy systems by RPA, right? And then you bring a new platform and then you can just change in this layer of automation. You change RPA to API. So, this is what I meant by short-term and long-term. And this is for them, it's important to be in the same package.

Now we made for many years significant investments in our API platform. So, it's not only the Cloud Elements acquisitions, but it's all our internal effort to scale. It's the server list. That is the back end now for all our API work. We are -- we have launching preview our studio web, which is a browser based offering tool where you can combine API and UI -- actually UI automation, which is also -- it's a unique offer right now in the market to. We have extremely scalable API integration story. Cloud Elements is behind really big, big software names. They are using it for scaling their own API story. So, our API story it's world class in this moment. And the combination is pretty unique to have both world class.

Now going to Microsoft and ServiceNow, they are very different type of companies in their relation to the RPA market and the automation market. Microsoft is -- Microsoft has built, technically speaking, a platform for Citizen Developers. This is what Power Automate is. It's a simpler to use platform, but it lacks the power to scale up when you really need more complex use cases. So, Microsoft is two type of technologies. One is for product where they have all the Azure suite visual studio, and then it's Citizen Developer, which is power platform. But actually they don't address well what is in between, which is more like, this technical business users that have a bit of coding concepts and they can -- and in our world, they deliver majority. They need a bit more sophisticated tools than power platform offers, but not as sophisticated as visual studios. So, it's this layer, and this is how we scale this company based on this population.

So, therefore, Microsoft competes with us in the personal productivity space, where it's driven by Citizen Developers and more on the low-end of the market, where they can penetrate better for their channels. And our big accounts, people realize the power of having the same program, even for Citizen Developers, for business users, because you can take elements of automation and then you can have a professional developer working directly on them. It's the same onboarding program. And it's frankly a much more powerful tools talking about.

Now with the ServiceNow. We have not seen yet in the material waste ServiceNow. Right now we -- it's less than 1% in the opportunities that we have in our CRM system, where we are seeing ServiceNow. Also, you need to think of ServiceNow as what is the persona their sales team is the keep to sell. So, persona is more of an IT persona, while automation and RPA requires a bit more of a business skill. So, we sell more into the CFO line of businesses rather than IT. So, we are seeing both Microsoft and ServiceNow more partners than competitors.

Bryan Bergin

Okay. Well, we're over time, but I want to really thank you, Daniel and Ashim for joining us today. Thank you all.

Ashim Gupta

Thanks.

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