Q2 2021 Avepoint Inc Earnings Call

August 10, 2021

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Good afternoon, everyone and welcome to the <unk> second quarter 2021 earnings call for opening remarks, and introductions I will now turn the call over to Erica Mannion of Sapphire Investor Relations. Please go ahead.

Thank you and good afternoon with me today.

From a point of car T J Jong Chief Executive Officer, and Sofia, Chief Financial Officer.

T J will begin with a brief review of the business results for the second quarter ended June 32021, Sofia will then review the financial results from the second quarter, followed by the company's outlook for the third quarter and full year of 2021.

We will then open the call for questions. Please note that this call will include forward looking statements that involve risks and uncertainties that could cause actual results could 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.

Please note. This presentation describes certain non-GAAP measures, including non-GAAP operating income and non-GAAP operating margin, which are not measures prepared in accordance with U S. GAAP.

The non-GAAP measures of 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 from it.

These non-GAAP measures should not be considered in isolation from as substitutes for or superior to financial measures prepared in accordance with U S. GAAP.

Listeners, who do not have a copy of the quarter ended June 30 of 2021 press release may obtain a copy by visiting the Investor Relations section of the company's website now I would like to turn the call over the T J.

Thank you Erica and thanks to everyone for joining us on the call. This afternoon.

We're excited to report our first quarter as a public company.

I want to extend the special thanks to the Outpoint team for their hard work and support during the public listing process. We're excited about this next step the company's journey.

I'll start this afternoon with a brief highlight of the quarter then because it is our first earnings call I want to take some time to discuss our business and market opportunity.

In the second quarter, we delivered record results with revenue of $45 million up 38% year over year, driven by the continued growth of Microsoft teams and strong adoption of our collaboration security technologies.

Within this <unk> revenue for the quarter reached $21 million, an increase of 76% from prior year, while subscription revenue, which we define as SaaS revenue plus term license revenue reached 32 million growing 66% year over year, and representing 70% of our total revenue in the quarter.

Hey, our annual recurring revenue an important indicator of future revenue growth also grew 33% year over year to $139 million.

We have great momentum in our business in the second quarter with customers spending more than $100000 in a are growing to 286 up 33% year over year.

While our customer success of investment initiatives continued to deliver results with a net dollar retention of 111% up 5 points from 1 year ago.

For those of you who are new to our story at the point has been the innovator in digital collaboration technologies for nearly 2 decades, we enable organizations worldwide to collaborate with confidence in the cloud by securing collaboration data sustaining the connections between people and ensuring business continuity.

<unk> offers the only full suite of SaaS solutions to migrate manage and protect data and cloud based platforms like Microsoft 365.

With the dramatic acceleration of digital transformation over the past year, the need to shift our it infrastructure and operations to the cloud in short collaboration security and protect data due to the threats like ransomware has become a strategic and tactical imperatives.

This journey at the point as being uniquely positioned to provide more efficient and secure operations through both guidance and industry proven technology.

For example, a large U S defense contractor with over 50000 employees globally had a strong desire to modernize their collaboration through their investment in Microsoft 3 spot the.

The especially Microsoft teams.

But given their need to demonstrate compliance with restricted data and contracting practices regulations. They found themselves challenged by how to align their strict data handling and axis request requirements with the more free flowing sharing model in Microsoft 365.

After deploying all of points fat ramp authorized the instance of our governance and management cloud solutions from Microsoft <unk> 5 they were able to satisfy their audit and regulatory teams and released Microsoft teams to their end users the resulting adoption by 17000 users in the first week after lunch and 30.

All of the users by early May.

And after that they are expanding their use of <unk> solutions to more critical workflows in their business.

With that point solutions organizations have the ability to enable rapid sustainable adoption of critical applications like Microsoft teams, which have recently been experiencing record growth the organizations large and small.

We provide customers with confidence in their ability of monitor manage and govern the rapid adoption of new cloud services, while saving time and money.

Customers can accelerate their cloud adoption with our point solutions by decommissioning homegrown or point solutions that failed to provide key insights and flexible automation that drive business outcomes.

While <unk> revenue and product lines. Following the overall cloud market are heavily Microsoft centric today. The solutions. We provide are built on proven best practices from management governance and compliance no matter the platform.

Apple has already made investments to capture multi call opportunities such as Salesforce and Google We believe that our cloud agnostic approach combined with projected overall growth in cloud usage will lead to a significant expansion of our points of market opportunities in the years ahead.

As we look at our core customer base today, we continue to enjoy strong momentum from enterprises across the world accelerating the transformation of their collaboration environments as they adopt immature in the cloud usage of.

Our cloud solutions are now used by more than 8 million users.

In addition to our strong position within the enterprise landscape. We have also begun to partner with managed service providers or msp's to expand our SaaS based offerings to small medium businesses or SMB customers. While early in the overall penetration of this opportunity in the long term we view this to be material as it has.

The potential to nearly double our addressable market given smb's representation across Microsoft 3 spot user base.

Looking forward, we believe the market opportunity ahead of us remain very attractive and we intend to continue ramping up our investments in market awareness technology innovation and growth, while prudently managing our expense structure.

Within our go to market organization. For example, we have growing head count by approximately 50% across our sales customer success and channel functions with these and other related investments. We aim to increase our market share of Microsoft <unk> user base boosts, our customer retention rate and continue our triple digit growth in the.

S&P market via our channel partners.

Lastly specific to our channel strategy in July we launched our first ever global partner program designed to meet the unique needs of different types of partners, including managed service providers value added resellers cloud consultants and Dev Op partners channel at the important expansion vector for <unk> in the years ahead. So we may.

A priority across our business.

2 of this partner program. It is our goal to enable partners to maximize the full economic opportunity our technology offers and capitalize on the digital collaboration wave as the only independent software vendor RSV offering a all in 1 approach to providing a full collaboration security platform.

Before turning the call over to Sofia I want to quickly highlight the recently announced the expansion of our executive leadership team with the appointment of Jim catchy to Chief Financial Officer, and Tom Link to Chief operating Officer.

The company's existing CFO, <unk>, who will now serve as chief accounting Officer, and Brian Brown will continue to serve as chief legal and compliance officer, all effective August 23rd 2021.

This is an exciting time to be at a point looking ahead, we recognize that our public listing of just 1 step in the journey of our company and while we are excited to have achieved this milestone will have much more to do.

We look forward to continue our momentum in 2021 and updating all of you in the quarters to come.

With that I'll turn it over to Sofia to discuss our financial results in more detail.

Thank you T J and good afternoon, everyone.

As I review, our second quarter results today. Please note of 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.

Given this is our first earnings call as a public company I want to start by providing some perspectives about our business model and the financial profile, then I'll walk through highlights from the second quarter, and finally, I'll close with guidance for the third quarter and full year before we open up.

The call for questions.

It's a software company, serving a wide range of customers from highly regulated fortune 500 enterprises to smbs through our MSP partners, our selling motion is to engage with our customers in the way, which best fits their needs.

Our large enterprise customers, which often have hybrid and multi cloud environments. This is often a combination of SaaS and term license deals, which have approximate duration of 2 to 5 years, while our MSP partners of 100% SaaS field.

On a monthly basis.

While from our customers' point of view, both SaaS and the term license deals are compete or the subscription due to the adoption of ASC 606, our revenue recognition of each differs our SaaS revenue is recognized ratably over the term of the deal whereas per ton.

The license, we will typically recognize 60% to 80% of the total deal value up from.

Wow all the time, we do expect the SaaS portion of our business to contribute an increasing portion of our overall revenue. It is worth noting our term license business is an important element of our offering for large enterprises and we will continue to support them as the <unk>.

And then the cloud migration initiative.

As a result of this dynamic we believe <unk> is a useful metric to track the period to period of progress of our business as it provides a more relevant comparison between growth in our SaaS and the term license revenue streams.

In addition to software revenue, we also generate revenue from professional services, which primarily consist of implementation and the support services as well as maintenance revenue carried over from our legacy perpetual license model.

All the time, we expect our professional service revenue will grow incrementally in dollar terms, but become a low of portion of our overall revenue mix as all of our software revenue growth.

As of our remaining legacy perpetual customers eventually migrate to either of SaaS and term license solution, we expect our maintenance revenue to steadily decline over time.

Moving on to our quarterly result total.

Revenue for the second quarter ended June 32021 were 45 million up 38% year over year. We think this SaaS revenue was 21 million constituting 45% of total revenue and up 76% year over year.

As of the quarter end, we had <unk> of 139 million, which included 286 customers with <unk> of over 100000.

Up from 270 customers as of March 31, 'twenty 'twenty 1.

In addition, our average corn a up of com at the end of the quarter was 36000, which represents a growth of 30% year over year.

As TJ mentioned over the last several quarters, we have increased the investment in our customer success organization to generate greater customer coverage and ultimately drive our dollar based net retention toward the best in class industry benchmark of 120 per cent.

In the second quarter, our corn dollar base of net retention rate was 111% as we have discussed previously our long term goal is drive dollar based net retention to 120% by continuing the to invest in our customer success organization and <unk>.

Pending the usage of our platform with existing customers.

Now, let's review the income statement in more detail.

Gross profit in the quarter was 34 million, representing a growth margin of 75% compare the 273% in a year ago period. This improvement in margin is due to the continued shift in mix of our revenue towards the subscription we can.

Total revenue growth margin remains strong and it was 86% in Q2.

Sales and the marketing expense were $19 million of 42% of revenue compared to 38% in a year ago period. This increase was driven by an increase in head count and personnel related expense.

As we extend our sales and customer success organizations as well as additional marketing spend as we invest in our MSP and the channel strategies, we intend to invest in sales and the marketing as we continue to drive awareness in the market and extend our sales force and a marketing effort.

To leverage our industry position and capture the significant opportunity in front of us.

R&D expense was 4 million of 8% of revenue roughly in line with the year ago period the.

The increase on a dollar basis was driven by investments in product innovation, resulting in additional day.

And then cost and additional head count.

G&A expense was <unk> 7 million of 16% of revenue compared to 13% in the year ago period Gn.

G&A reflects the increase in people and infrastructure related expense associated with our public ready efforts.

Non-GAAP operating income was 3 million of 7% of revenue.

Increases in dollar terms pharma operating profit of $4.2 million in a year ago period.

Turning to the balance sheet and cash flow.

We ended the quarter with 68 million in cash and the short term investments, which does not include the $204.5 million in net proceeds we received from the closing of our business combination on July 1st.

Adjusting for this our cash balance as of June Thirty's would have been over $270 million.

Cash provided by operations was 2 million in the quarter, while free cash flow, which includes the capex was $2 million.

I would now like to turn to our outlook for the third quarter and the full year 2021 for the third quarter. We expect revenue of 51.5 million to $53.5 million and the non-GAAP operating profit of 1.7 million to $3.2 million.

In the.

For the full year, we expect revenue of 192 million to 196 million and the non-GAAP operating profit of $4.7 million to 7.7 million.

With that well open up the call for questions.

Greater.

At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star 1 on your telephone keypad, a confirmation tone will indicate that your line is in the question queue you.

You May press Star 2 if you would like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, 1 moment, please while we poll for questions.

Our first question is from Brian Essex with Goldman Sachs. Please proceed with your question.

Hi, good afternoon, and thank you for taking the question and.

Congratulations on the results in the emerging as a public company.

Yes.

I guess for the for the first question.

T. J you noted in your prepared remarks that you achieve fed ramp status of any sort of an <unk> site.

Cited of nice defense contractor deal.

What does the pipeline look like what do you see ahead in the pipeline for fed ramp associated of business and how much.

Penetration.

And visibility into the penetration do you have in that pipeline.

Good afternoon, Brian. Thank you for the question. So public sector is our biggest vertical solution space, we have of dedicated public sector team based in Arlington, Virginia.

The fed ramp it's a very important aspect to it so we do see that.

There are opportunities that involve that ramp that we're able to close now that we're a fendt ram authorized fed ramp certification of itself is a long process. This is also why we talk about.

This of course in market first mover advantage of it took the usually takes several years to obtain the authorized status go from the initiated status.

And we continue to see robust pipeline from that.

So its important thing and it's also being cited by other software companies of their various stages of process. So as to the overall Tam. It is harder to gauge right now we know it's important and we have a robust pipeline associated with fight Gram authorized status.

Got it that's helpful. So thank you for the and then maybe just a follow up with regard to the sales force backup cloud, particularly.

With the potential penetration of incremental.

Penetration of service providers.

How does the service providers view that platform what are they using currently and how do you view the opportunity there.

We view the sales force backup.

<unk> is the service opportunity as a moderate.

The growth factor for US right now, but it is a very important aspect of our multi cloud play where we continue to expand our footprint into existing accounts. So you sales force.

The provider of themselves.

<unk> kind of gone back and forth and providing some minimum.

Backup type of services, but we all know.

Even from a very critical ransomware protection perspective customers do need third party segregated storage preferably SaaS providers to have bring your own storage, bringing on Krishna and bringing authentication type of approach that full flexibility of afforded to customers. So we see that as a moderate.

Growth vector for US there are a couple of.

The sales force backup providers in the market.

Most notably sales force themselves have backed away from providing that natively and then the only recently backup with the very very basic functionalities, which customers require more I think this.

Third party provider solution, it's a very important aspect to where the market needs today.

Alright Thats helpful color. Thank you I of more of it will hop back in the queue. Thank you very much.

Thank you Brian.

Our next question is what the Jason Ader with William Blair. Please proceed with your question.

Hi, Good afternoon, Hi, guys.

2 questions 1 for T. J, 1 for Sofia is for T. J.

T. J can you provide an update on the number of Microsoft 365 users I know you guys have been saying over 7 million but.

Is there any specific update you have there or is that something that you may provide the periodically for us.

Yes, so we just announced that it's now over a moment [laughter]. Okay. It's the metric is.

It is over now.

And it's the metric we don't intend to update on a quarterly basis.

Because of the nature of our licensing and coverage in a hybrid of licenses. We think the best reflection of our growth continued to be.

Our growth and the reoccurring revenue growth.

So, but yes. So it is now well over a million.

Great, Okay, and then Sofia.

For the operating income guidance for the year.

I noticed that it was lower than what you guys have provided.

Publicly I think you had originally provided $8 million and now you are saying.

A little bit I think $6.2 million at the midpoint can you talk us through what changed there.

Yes, Hi, Jason. So this is mainly because we increased our investment into our business.

Split between 3 Buckhead, we increased our investment in sales and marketing.

New positions in channel business, which TJ will share a little bit of more color. Later, we also increased our spending in G&A, which is a mix of a few things it's the.

Incremental public company cost.

Increased the professional fees more than we originally budgeted and also additional head count.

Hi, its hiring of Jim, which will add additional strength to the existing management team.

We also see good opportunities to increase.

Our investing in R&D to bring new products in 2020 and beyond so therefore, the increase the head count in H 2.

Okay.

Yeah, So Jason.

On the channel side, so if you're mentioning we announced our global channel program in July So we're investing very aggressively into the channel and channel initial stages are relatively expensive.

As a whole.

Priming, the pump action going on as well as.

Essentially enabling accelerating channel partners to then conduct business with us and the familiar with our products, but net.

Of course channel is the fastest way to scale our business given the massive Tam in front of us.

We have expanded channel coverage to not only our of monthly recurring side of SMB business, but also our tell ourselves mid market business selling to businesses all of the way up to $2 billion annual revenue. So it's a very aggressive investment from our side of course at the same time, we are meaningfully controlling.

To make sure that we are managing.

Our opex costs meaningfully by still maintaining aggressive growth posture.

Thank you for that in the 1 quick last 1 from me on the MSP business T J.

Is that the.

Does that meet your expectations.

Yes, so far it's it's about 5% of our right now and we're growing 3 digits. It.

It is meeting our expectations, we are investing more aggressively into it.

It's a fantastic market as we mentioned before because we've been enterprise focus, but being SaaS provider allow us to.

Be accessible far more accessible to the SMB market.

So that allow us to effectively double our Tam because again the user base that SMB market represents in the Microsoft <unk>.

<unk> ecosystem.

We define SMB as businesses with 250 million of annual revenue or 500 employees or fewer companies, that's actually a very very big space.

Great. Thank you.

Thank you.

Our next question is with Kirk <unk> with Evercore. Please proceed with your question.

Okay. Thanks, very much and the congrats on the quarter 2 day, Microsoft called you guys out as 1 of the key partners out of inspire the summer and I was wondering just could you talk about how that partnership is changing from a go to market perspective or is evolving maybe is the better word and how is that helping your attach rates that you saw.

See you know with Microsoft you know.

More recently I know you've had a long partnership of ours is kind of curious about some of the more recent changes on that front and then I have 1 follow up.

Yes, so Microsoft we continue to have a very robust relationship that has spanned out close to 2 decades, we talk about the sales relationship where we 1 of the top 5 global IP wholesale partner that Microsoft has for cloud consumption, where Microsoft reps actually get comped on our deals 10%.

Of our PCV goes towards that accounts, Microsoft reps compensation for cloud consumption retirement. So in that regard we're top 5 in the same categories of Adobe and <unk>. So <unk> metric that makes sense of important so that the sales side on the product side, we have a team of MVP. So Microsoft most valuable professionals. These of voted by the <unk>.

Immunity and selected by Microsoft as well as the team of R&D Regional directors. So these are the MVP of Mvp's.

And they actually represent the industry voice, so the actually get to see the bids the new products and innovation from Microsoft. The ahead of everyone also due to our long term relationship and a great reputation and being a.

Global top partner from Microsoft we are products of <unk> and Microsoft product team have regular things. So all of those things collectively forms. The does win win foundation, where we stay ahead of the game, we know where Microsoft of investing and we can essentially anticipate where the opportunities reside for us are good.

The example of this is for example in education with Microsoft released the Bema, which.

Just the Linkedin and teams integration to talk about.

Continuous education learning and we actually are 1 of the charter members and be able to access have API access and offer 1 of the industry's most comprehensive.

Microsoft <unk>, 5 based education, and technology solution for higher Ed and corporate which we call the Austrian Outpoint Angiotech. So that's a massive win for US we have grown that business very very rapidly in Asia Pacific region, and now we're expanding to North America, and Europe and Thats all thanks to the tremendous support we have with Microsoft <unk>.

<unk> team all the way back to corporate and the product teams. So that just the showcase. The early look ahead that we have allow us to anticipate where the investment areas will come from where to avoid and allow us to stay ahead of the current here.

The server that's very helpful. And then just 1 quick question about sort of the the trends around NR.

You guys have focused or have invested a lot of in your customer success organization do you feel like Theres still some low hanging fruit in that area in terms of helping <unk> move higher or is <unk> growth from here, you're going to have to be more either retention of our upsell driven.

Our goal is to quickly get to the industry benchmark of 120% and are right now we're at 111% we have shown meaningful improvements over the last 2 and half years of investment just year over year, it's about 5 points improvement.

It's for Us where we're very comfortable with that is the investment of technology people and process. We'll continue to do that from cross sell and upsell capabilities, we're pretty comfortable that we will get you the industry benchmark the medium term.

That sounds good thanks for answering the questions.

Thank you Kirk.

Our next question is from the Hall Cherokee with Northland Capital. Please proceed with your question.

Thank you.

Nice to see sustained 30 plus percent era of growth that's awesome congratulations.

<unk>.

Microsoft the changed up on how they are reporting teams growth.

That's not really very clear.

Teams growth of tapering or not.

In that context can you give us some perspective as far as what you think is happening there and then how does that affect your pipeline.

That's a great question the hall, so Microsoft teams previous announced number was 140 million active data users and now they just recently announced the $250 million actively monthly users interestingly. They also announced that the <unk> penetration for office was 5.8%.

So again these things are more nuanced because theres different license types different average you also have seasonal kind of coverage.

Sales for us it just continued to mean a massive tam.

Because of Microsoft team is truly the the killer App, it's really as we mentioned before.

Really integrated with the entirety of Microsoft <unk>, 5 and now, especially with Windows <unk> 5 so call PC, where every instance has the Microsoft team baked in in fact, our teams App, which caught my hub. It's the number 1 teams operating Japan and 1 of the top ones globally.

Baked in into these instances of what it does is create the evergreen motion here and as Microsoft continually update their builds and have the releases updated in real time via these kind of PC instances, our latest apps gets rollout as well. So I think that will only help increase of lower the.

The barrier to entry and the increase our ability to go to market. So it's only good from a point of that.

Business opportunity perspective.

Okay. So I sort of interpret that answer as that yes. It seems growth its not tapering it remains strong and therefore the pipeline hasnt stabilized is still growing I E.

The opportunity continues to outstrip your sales capacity is that correct interpretation of there okay. That's fine.

If you look at the reoccurring side of our business, we're growing north of 50% range. So recurring is actually growing 66% and the pure SaaS pure cloud customers are growing north of 70%. So yes, we continue to see incredible momentum in the market.

Okay, Great and then how does that color your.

Or are your of your expectations from the balance of the year then.

So.

Against this macroeconomic.

The volatility and uncertainty right now we are being constructive in our guidance. So we remain.

Consistent with our previous guidance of maintaining this 30% revenue growth.

Okay, Great and then can you disaggregate, the 111% net revenue retention rate into the gross revenue retention rate of upsell rates.

Yes, we don't disclose the growth retention rate will continue to focus on and our net retention rate and continue to improve that and we will continue to highlight on the AOR growth because we feel like those are the most meaningful metrics that we tailor our business to <unk>. So the entire organization is.

The operating along the same kpis.

Okay, great. Thank you.

Thank you.

As a reminder, please press star 1 to ask the question.

Our next question is from Brian Essex with Goldman Sachs. Please proceed with your question.

Hi, guys just thought I'd circle back with a couple follow ups I guess, 1.1 on.

On gross margin it looks.

Meaningfully better this quarter better than we expected maybe Sofia, if you could price of some puts and takes around gross margin. The margin expansion you saw in the quarter and what to expect going forward.

Yes.

Higher than expected growth margin was partially due to the revenue mix as we continue to shift towards the subscription, but it's also a result of the improvement in our service margin. So we do expect this gross margin to remain entities level some of the rest of the year.

Is that I mean subscription gross margin it looks like it improved as well like 300 basis points was that scalable over scalability of our azure or was it just incremental margins of the incremental subs.

Subscription and added to the platform of how do we how do we think about this and sustainability of this kind of these kind of margin levels on up on a per segment basis going forward.

What you said is true we would expect this to continue for the future quarters.

Okay, and then I guess.

Add on to that so that's very helpful. And then given incremental investment that you made in the platform.

To approach this market opportunity that you had.

I think before we've had some kind of visibility into.

Operating margin expansion over the next several years.

Any any shift in those expectations do we kind of think about.

Ongoing.

The expansion of after a year of investment means strategically how do we think about.

Youre kind of progression to better profitability going forward. Given obviously you are focused on growth as well, but just wondering how you're balancing the 2.

Yes.

Please go onto each of good balance between growth and provide a meaningful return to our shareholders. So a lot of long term growth margin.

75% and we expect our non-GAAP EBIT target in the long term to be at 25 per se.

Okay, I guess I'll follow up afterwards, but I'll hop back in the queue. Thank you.

Thank you Brian from <unk>.

Jay from the business perspective, we clearly have a massive tam in front of US we want to accelerate our ability to capture of that so yes, we will play in nice balanced.

Play between growth revenue growth and profitability ultimately, we want to stay north of that rule of 40 as the.

The benchmark guidance and measurements against SaaS companies, so, whether that's 30% growth versus 10% profitability or at the 40% growth versus neutral the profitability. That's something we'll continue to work on but ultimately.

We want to.

After the Tam in front of us quicker.

Yeah.

Okay.

Okay, ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back over to T. J, Jill co founder and CEO for closing remarks.

Well. Thank you everyone. Thank you for taking the time to listen to our first earnings call. Thank you for your support <unk>.

I really appreciate of the ethylene employees for your hard work and ethylene the investors for your support we continue to execute on our business as we have.

Laid out previously and we look forward to future, earning calls with you. Thank you.

This concludes today's conference you may.

Disconnect your lines at this time, thank you for your participation.

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Thank you and good afternoon with me today.

From ethylene or T J, John Chief Executive Officer, and Sofia, Lu Chief Financial Officer.

T J will begin with a brief review of the business results for the second quarter ended June 32021.

<unk> will then review the financial results for the second quarter, followed by the company's outlook for the third quarter and full year of 2021.

We encourage you to review the Safe Harbor statements contained in our press release from more complete description.

Please note. This presentation describes certain non-GAAP measures, including non-GAAP operating income and non-GAAP operating margin, which are not measures prepared in accordance with U S. GAAP.

The non-GAAP measures of presented in this presentation as we believe the provide investors with the means of evaluating and understanding how the company's management evaluates the company's operating formats.

These non-GAAP measures should not be considered in isolation from as substitutes for or superior to financial measures prepared in accordance with U S. GAAP.

Listeners, who do not have a copy of the quarter ended June 32021 press release may obtain a copy by visiting the Investor Relations section of the company's website now I would like to turn the call over to T. J.

Thank you Erica and thanks to everyone for joining us on the call. This afternoon.

We're excited to report our first quarter as a public company.

I want to extend a special thanks to the <unk> team for their hard work and support during the public listing process. We're excited about this next step in our company's journey.

I'll start this afternoon with a brief highlight of the quarter then because it is our first earnings call I want to take some time to discuss our business and market opportunity.

In the second quarter, we delivered record results with revenue of $45 million.

Up 38% year over year, driven by the continued growth of Microsoft teams and strong adoption of our collaboration security technologies.

Within this SaaS revenue for the quarter reached $21 million, an increase of 76% from prior year, while subscription revenue, which we define the SaaS revenue plus term license revenue reached 32 million growing 66% year over year, and representing 70% of our total revenue in the quarter.

Our annual recurring revenue an important indicator of future revenue growth also grew 33% year over year to $139 million.

We had great momentum in our business in the second quarter with customer spending more than $100000 in are growing to 286 up 33% year over year.

While our customer success investment initiatives continued to deliver results with a net dollar retention of 111% up 5 points from 1 year ago.

For those of you who are new to our story.

<unk> has been an innovator in digital collaboration technologies for nearly 2 decades, we enable organizations worldwide to collaborate with confidence in the cloud by securing collaboration data sustaining the connections between people and ensuring business continuity.

<unk> offers the only full suite of SaaS solutions to migrate manage and protect data and cloud based platforms like Microsoft 365.

With the dramatic acceleration of digital transformation over the past year, the need to shift infrastructure and operations to the cloud in short collaboration security and protect data due to the threats like ransomware has become a strategic and tactical imperatives through.

Through this journey <unk> has being uniquely positioned to provide more efficient and secure operations through both guidance and industry proven technology.

For example, a large U S defense contractor with over 50000 employees globally had a strong desire to modernize their collaboration through their investment in Microsoft 365 <unk>.

The especially Microsoft teams by.

But given their need to demonstrate compliance with restricted data and contracting practices regulations. They found themselves challenged by how to align their strict data handling and access request requirements with the more free flowing sharing model in Microsoft 365.

After deploying <unk> fat ramp authorized the instance of our governance and management cloud solutions from Microsoft <unk> 5 they are able to satisfy their audit and regulatory teams and released Microsoft teams to their end users, resulting adoption by 17000 users in the first week after lunch and 30.

All of the users by early May.

So not the that they are expanding their use of <unk> solutions to more critical workflows in their business.

We provide customers with confidence in their ability of monitor manage and govern the rapid adoption of new cloud services, while saving time and money.

While <unk> revenue and product lines. Following the overall cloud market are heavily Microsoft centric today. The solutions. We provide are built on our proven best practices from management governance and compliance no matter the platform.

Our cloud solutions are now used by more than 8 million users.

The potential to nearly double our addressable market given smb's representation across Microsoft 300 of spot user base.

Looking forward, we believe that market opportunity ahead of us remain very attractive and we intend to continue ramping up our investments in market awareness technology innovation and growth, while prudently managing our expense structure.

Within our go to market organization. For example, we have growth head count by approximately 50% across our sales customer success and channel functions with these and other related investments. We aim to increase our market share of Microsoft <unk> user base, most of our customer retention rate and continue our triple digit growth in the <unk>.

SMB market via our channel partners.

Channel is an important expansion vector for <unk> in the years ahead. So we made it a priority across our business through.

Through this part of program. It is our goal to enable partners to maximize the full economic opportunity our technology offers and capitalize on the digital collaboration wave as the only independent software vendor RSV offering a all in 1 approach to providing a full collaboration security platform.

The company's existing CFO Sophia, who will now serve as Chief accounting Officer, and Brian Brown will continue to serve as chief legal and compliance officer, All effective August 20, <unk> 2021.

We look forward to continue our momentum in 2021 and updating all of you in the quarters to come.

With that I'll turn it over to Sofia to discuss our financial results in more detail.

Yes.

Thank you T J and good afternoon, everyone.

The call for questions.

As a software company, serving a wide range of customers from highly regulated fortune 500 enterprises to smbs through our MSP partners. Our sales motion is to engage with our customers in a way, which best fits their needs.

On a monthly basis.

While from our customers' point of view, both SaaS and the term license deals are considered subscription due to the adoption of ASC 606, our revenue recognition of each differs our SaaS revenue is recognized ratably over the term of the deal whereas for <unk>.

The license, we will typically recognize 60% to 80% of the total deal value upfront.

While all the time, we do expect the SaaS portion of our business to contribute an increasing portion of our overall revenue. It is worth noting our term license business is an important element of our offering for large enterprises and we will continue to support them as the <unk>.

And the cloud migration initiatives.

All the time, we expect our professional service revenue will grow incrementally in dollar terms, but become a lower portion of our overall revenue mix as our software revenue growth.

As our remaining legacy perpetual customers eventually migrate to either SaaS or term license solution, we expect our maintenance revenue to steadily decline over time.

Moving on to our quarterly result total.

Revenue for the second quarter ended June 32021 were $45 million up 38% year over year within this SaaS revenue was 21 million constituting 45% of total revenue and up 76% year over year.

As of the quarter end, we had <unk> of 139 million, which included 286 customers with <unk> of over 100000.

Up from 270 customers as of March 31, 2021.

In addition, our average corn.

Com at the end of the quarter was 36000, which represents a growth of 30% year over year.

As TJ mentioned over the last several quarters, we have increased investment in our customer success organization to generate greater customer coverage and ultimately drive our dollar based net retention toward the best in class industry benchmark of 120% in the.

Second quarter, our corn dollar base of net retention rate was 111% as we have discussed previously our long term goal is drive dollar based net retention to 120% by continuing to invest in our customer success organization and expanding.

The usage of our platform with existing customers.

Now, let's review the income statement in more detail.

Gross profit in the quarter was $34 million, representing a growth margin of 75% compared to 73% in a year ago period. This improvement in margin is due to the continued shift in mix of our revenue towards the subscription Rick.

Total revenue growth margin remains strong and it was 86% in Q2.

Sales in the marketing expense will of $19 million of 42% of revenue compared to 38% in a year ago period. This increase was driven by an increase in head count and personnel related expense as we expand our sales and customer success organizations.

As well as additional marketing spend as we invest in our MSP and the channel strategies, we intend to invest in sales and the marketing as we continue to drive awareness in the market and extend our sales force and our marketing efforts to leverage our industry position and capture the significant.

The opportunity in front of us.

R&D expense was 4 million of 8% of revenue roughly in line with the year ago period.

The increase on the dollar basis was driven by investments in product innovation, resulting in additional day.

<unk> cost and additional head count.

G&A expense was <unk> 7 million of 16% of revenue compared to 13% in a year ago period.

G&A reflects the increase in people and infrastructure related expense associated with our public ready efforts.

Non-GAAP operating income was 3 million of 7% of revenue.

Decreases in dollar terms from our operating profit of $4.2 million in a year ago period.

Turning to the balance sheet and cash flow.

We ended the quarter with $68 million in cash and the short term investments, which does not include the $204.5 million in net proceeds we received from the closing of our business combination on July 1st.

Adjusting for this our cash balance as of June <unk> would have been over $270 million.

Cash provided by operations was 2 million in the quarter, while free cash flow, which includes capex was $2 million.

I would now like to turn to our outlook for the third quarter and the full year 2021.

For the third quarter, we expect revenue of 51.5 million to $53.5 million and the non-GAAP operating profit of 1.7 million to $3.2 million.

For the full year, we expect revenue of 192 million to 196 million and the non-GAAP operating profit of $4.7 million to 7.7 million.

With that well open up the call for questions.

Later.

<unk> using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, 1 moment, please while we poll for questions.

Our first question is from Brian Essex with Goldman Sachs. Please proceed with your question.

Hi, good afternoon, and thank you for taking the question and.

Congratulations on the results in the emerging as a public company.

Sure.

I guess for the for the first question.

T. J you noted in your prepared remarks that you achieve fed ramp status of any sort of on your.

Cited of nice defense contractor deal.

What does the pipeline look like what do you see ahead in the pipeline for fed ramp associated of business and how much.

Penetration.

And visibility into penetration do you have in that pipeline.

Good afternoon, Brian. Thank you for the question. So public sector is our biggest vertical solution space, we have of dedicated public sector team based in Arlington, Virginia.

The fed ramp at the very important aspect to it so we do see that.

There are opportunities that involve that ramp that we're able to close now that we're fat ramp authorized fed ramp certification itself is a long process. So this is also why we talk about.

This of course in market first mover advantage. It took the usually take several years to obtain the authorized status go from the initiated status.

And we continue to see robust pipeline from that.

Authorized status.

Got it that's helpful. So thank you for that and then maybe just to follow up with regard to the Salesforce backup cloud, particularly.

With the potential penetration of incremental.

The penetration in the service providers.

How does the service providers view that platform what are they using currently and how do you view the opportunity there.

We viewed the sales force backup.

Backup of the service opportunity as a moderate.

The growth factor for US right now, but it is a very important aspect of our multi cloud play where we continue to expand our footprint into existing accounts. So you sales force.

The provider of themselves.

Kind of gone back and forth and providing some minimum.

The backup type of services, but we all know.

Even from the very critical Ransomware protection perspective customers do need third party segregated storage preferably SaaS providers to have bring your own storage, bringing on Krishna and bringing authentication type of approach that full flexibility of afforded to customers. So we see that as a moderate.

The growth vector for us.

There are a couple of <unk>.

Sales force backup providers in the market.

Third party provider solution, it's a very important aspect to where the market is today.

Alright, that's helpful color. Thank you I have more of it will hop back in the queue. Thank you very much.

Thank you Brian.

Our next.

Question is what the Jason <unk> with William Blair. Please proceed with your question.

Hey, good afternoon guys.

2 questions 1 for T J, 1 from Sophie Us for T J.

T. J can you provide an update on the number of Microsoft 365 users I know you guys have been saying over $7 million.

Is there any specific update you have there or is that something that you may provide periodically for us.

Yes, so we just announced that is now over $8 million.

Okay, it's the metric.

Moving now and it's a metric we don't intend to update on a quarterly basis because of the nature of our licensing and coverage in a hybrid of licenses. We think the best reflection of our growth continued to be a growth annual reoccurring revenue growth.

So, but yes. So it is now well over a million.

Great. Okay, and then Sofia for the operating income guidance for the year.

I noticed that it was lower than what you guys have provided.

Publicly I think you had originally provided $8 million and now you are saying.

I think $6.2 million at the midpoint can you talk us through what changed there.

Yes, Hi, Jason. So this is mainly because we increased our investment into our business.

Split between 3 Buckhead, we increased our investment in sales and marketing.

Including new positions in channel business.

P J, we'll share a little bit of more color. Later, we also increased our spending in G&A, which is a mix of a few things.

Incremental public company cost.

Increase the professional fees more than we originally budgeted and also additional had com such as hiring of Jim which will add additional strength to the existing management team.

We also see good opportunities to increase our.

Or investing in R&D to bring new products in 2020 and beyond so therefore increase the head count in H 2.

Yes, so Jason on.

On the channel side, so if you're mentioning we announced our global channel program.

In July so we're investing very aggressively into the channel and channel initial stages are relatively expensive there is a whole.

Priming, the pump action going on as well.

Essentially enabling accelerating channel partners to then conduct business with us and the familiar with our products.

Of course channel is the fastest way to scale our business given the massive Tam in front of us.

We have expanded channel coverage to not only our of monthly recurring side of SMB business, but also our telesales mid market business selling to businesses all of the way up to $2 billion annual revenue. So it's a very aggressive investment from our side of course at the same time, we are meaningfully controlling <unk>.

To make sure that we are managing.

Our opex costs meaningfully, but still maintain aggressive growth posture.

Thank you for that in the 1 quick last 1 from me on the MSP business T J.

Yes.

Net.

Did that meet your expectations.

Yes, so far it's it's about 5% of our AAR right now and we're growing 3 digits. It.

It is meeting our expectations, we are investing more aggressively into it.

It's a fantastic market as we mentioned before because we've been enterprise focus, but being SaaS provider allow us to.

Be accessible far more accessible to the SMB market.

All of that allow us to effectively double our Tam because again the user base that SMB market represents in the Microsoft <unk>.

<unk> ecosystem.

We define also SMB businesses with 250 million of annual revenue or 500 employees or fewer companies, that's actually a very very big space.

Great. Thank you.

Thank you.

Our next question is with Kirk <unk> with Evercore. Please proceed with your question.

Okay. Thanks, very much and the congrats on the quarter. The T. J, Microsoft called you guys out as 1 of their key partners out of it inspire the summer and I was wondering just could you talk about how that partnership is changing from a go to market perspective or is evolving maybe is the better word and how is the helping your attach rates that you saw.

See with Microsoft you know.

More recently I know you've had a long partnership of ours, just kind of curious about some of the more recent changes on that front and then I have 1 follow up.

Yes, so Microsoft we continue to have a very robust relationship that has spanned out close to 2 decades, we talk about the sales relationship where we 1 of the top 5 global IP co sale partner that Microsoft has for cloud consumption, where Microsoft reps actually get Comped on our deals 10%.

Of our PCB goes towards that accounts, Microsoft reps compensation for cloud consumption of retirement. So in that regard we're top 5 in the same categories as Adobe and <unk>. So asymmetrically that makes us important so that's the sell side on the product side, we have a team of MVP. So Microsoft most valuable professionals. These of voted by the <unk>.

Munity in selected by Microsoft as well as the team of R&D Regional directors. So these are MVP of Mlps.

And they actually represent the industry voice, so the assets to get to see the bits of the new products and innovation from Microsoft. The ahead of everyone also due to our long term relationship and a great reputation and being a.

Global top partner from Microsoft we are products of <unk> and Microsoft product team have regular sinks. So all of those things collectively forms day, there's win win foundation, where we stay ahead of the game, we know where Microsoft of investing and we can essentially anticipate where the opportunities reside for us are good.

Case. The example of this is for example in education with Microsoft released the Veeva, which of their Linkedin and teams integration to talk about.

<unk> education learning and we actually are 1 of the charter members and be able to access have API access and offer 1 of the industry's most comprehensive Microsoft <unk> 5 based education technology solution for higher Ed and corporate which we call the Austrian appoint Andrew.

So that's a massive win for US we have grown that business very very rapidly in Asia Pacific region, and now we're expanding to North America, and Europe and Thats all thanks to the tremendous support we have with the Microsoft Education team all the way back to corporate and the product team. So that just the showcase the early look ahead.

That we have allow us to anticipate where the investment areas will come from where to avoid and allow us to stay ahead of the curve here.

The silver that's very helpful. And then just 1 quick question about sort of the trends around NR or I know you guys have focused or have invested a lot in your customer success organization do you feel like Theres still some low hanging fruit in that area in terms of helping <unk> move higher or is the <unk> growth from here, you're going to have to be more either written.

<unk> upsell driven.

Our goal is to quickly get to the industry benchmark of 120% and are right now we're at 111% we have shown meaningful improvements over the last 2 and half years of investments just year over year, it's about 5 points improvement.

It's for Us where we're very comfortable with that it is the investment of technology people and process.

We continue to do that from cross sell and up sell capabilities.

We're pretty comfortable of that will get you the industry benchmark and medium term.

That sounds good thanks for answering the questions.

Thank you Kirk.

Our next question is from the Hall Cherokee with Northland Capital. Please proceed with your question.

Thank you.

Nice to see sustained 30 plus percent IRR of growth that's awesome congratulations.

Microsoft the changed up on how they are reporting teams growth.

It's not really very clear.

The team's growth of tapering or not.

In that context can you give us some perspective as far as what you think is happening there and then how does that affect your pipeline.

That's a great question the hall, so Microsoft teams previous announced number was 140 million active data users and now they just recently announced the 250 million actively monthly users Interestingly, we also announced that the <unk> penetration for offices 5 is 8%.

So again these these things of more nuanced because there's different license types different average you also have seasonal kind of coverage.

So for US it just continued to mean a massive tam.

Because of Microsoft team is truly the the killer App, it's really as we mentioned before are highly integrated with the entirety of Microsoft <unk>, 5 and now, especially with Windows <unk> 5 so cloud Pcs, where every instance has the Microsoft team baked in in fact, our teams App, which caught my eye.

The number of <unk>, Japan, and 1 of the top ones globally, it's baked in into these instances. So what it does is create the evergreen.

<unk> here and as Microsoft continually update their builds and have the releases updated real time via these kind of PC instances, our latest apps gets rollout as well. So I think that will only help increase of lower the.

The barrier to entry and increase our ability to go to market. So it's only good from our point of that.

Business opportunity perspective.

Okay. So I sort of interpret that answer as that yes. It seems growth its not tapering it remains strong and therefore the pipeline hasnt stabilized is still growing I E.

The opportunity continues to outstrip your sales capacity is that correct interpretation of their okay. That's all of it.

Okay, Great and then how does that color your <unk>.

Our year of your expectations from the balance of the year then.

So.

Against this macroeconomic.

And the volatility and uncertainty right now we are being constructive in our guidance. So we remain <unk>.

Consistent with our previous guidance of maintaining this 30% revenue growth.

Okay, Great and then can you disaggregate, the 111% net revenue retention rate into the gross revenue retention rate of upsell rates.

Yeah, we don't disclose the growth retention rate will continue to focus on and our net retention rate and continue to improve that and we will continue to highlight on the AOR growth because we feel like those are the most meaningful metrics that we tailor our business to <unk>. So the entire organization.

Of the operating along the same kpis.

Okay, great. Thank you.

Thank you Tom.

As a reminder, please press star 1 to ask the question.

Our next question is from Brian Essex with Goldman Sachs. Please proceed with your question.

Hi, guys I, just thought I'd circle back with a couple follow ups I guess, 1.1 on.

Okay.

Gross margin it looks.

<unk> better this quarter better than we expected maybe Sofia, if you could price with some puts and takes around gross margin. The margin expansion you saw in the quarter and what to expect going forward.

Yes.

Higher than expected growth margin was partially due to the revenue mix as we continue to shift towards the subscription but it's also the result of the improvement in our service margin. So we do expect the gross margin to remain at this level through the rest of the year.

Is that I mean subscription gross margin it looks like it improved as well like 300 basis points was that scalable over scalability of our Azure was it just incremental margins of the incremental.

Subscription added to the platform of how do we how do we think about this and sustainability of this kind of these kind of margin levels on up on a per segment basis going forward.

What you said is true we would expect this to continue for the future quarters.

Okay, and then I guess.

To add onto that so that's very helpful. And then given incremental investment that you made in the platform.

To approach this market opportunity that you had.

I think before we've had some kind of visibility into.

Operating margin expansion over the next several years.

Any any shift in those expectations do we kind of think about.

Ongoing.

The expansion of after a year of investment means strategically how do we think about.

Youre kind of progression to better profitability going forward. Given obviously you are focused on growth as well, but just wondering how you're balancing the 2.

Yes, we are.

Always want to reach of good balance between growth and provide a meaningful return to our shareholders. So all of our long term growth margin.

75% and we expect our non-GAAP EBIT target in the long term to be at 25 per day.

Okay, I guess I'll follow up afterwards, but I'll hop back in the queue. Thank you.

Thank you Brian from a T.

Jay from the business perspective, we clearly have a massive tam in front of us we want to accelerate our ability to capture that so yes, we will play a nice balanced.

Play between growth revenue growth and profitability ultimately, we want to stay north of that rule of 40.

The benchmark guidance and measurements against SaaS companies, so, whether that's 30% growth versus 10% profitability or at the 40% growth versus neutral profitability. That's something we'll continue to work on but ultimately.

We want to.

After the Tam in front of us quicker.

Okay.

Okay, ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back over to T. J Jong co founder and CEO for closing remarks.

Well. Thank you everyone. Thank you for taking the time to listen to our first earnings call. Thank you for your support <unk>.

I really appreciate of the Apple employees for your hard work in ethylene the investors for your support we continue to execute on our business.

We have.

Laid out previously and we look forward to future, earning calls with you. Thank you.

This concludes today's conference you may.

Disconnect your lines at this time, thank you for your participation.

Q2 2021 Avepoint Inc Earnings Call

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