Q3 2022 AvePoint Inc Earnings Call

November 10, 2022

Please standby.

Good afternoon, and welcome to the F 'twenty, Inc. Third quarter 2022 earnings call.

Please note this event is being recorded.

I'd now like to turn the conference over to Jamie a rescue Vice President Investor Relations. Please go ahead Sir.

Thank you operator, good afternoon, and welcome to add points third quarter 2022 earnings call with me on the call. This afternoon is Dr. T J Jang Chief Executive Officer, and Jim Kathy Chief Financial Officer. After preliminary remarks, we will open the call for a question and answer session.

Please note that this call will include forward looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. We encourage you to review the safe Harbor statements contained in our press release for a more complete description.

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.

non-GAAP measures are presented in this presentation as we believe they provide investors with the means of evaluating and understanding how management evaluates the company's operating performance. These non-GAAP measures should not be considered in isolation from as substitutes for or superior to financial measures prepared in accordance with U S. GAAP are.

A reconciliation of these measures to the most directly comparable GAAP financial measures is available in our third quarter 2022 earnings press release as well as our updated investor presentation, both of which are available in the Investor Relations section of our website with that let me turn the call over to T. J.

Thanks, Jamie and I am happy to formally welcome you to <unk> point as our new head of Investor Relations.

Thank you to everyone joining us on the call today.

Q3 was another strong quarter for <unk> highlighted by 34% ADR growth and 26% total revenue growth both adjusted for the impact of FX. Our strong topline performance reflects the ongoing needs just to your collaboration data sustained connections between people and ensure business continuity and the same.

Time, we're laser focused on profitability, which has always been that priority five point, but it is especially important in the dynamic macroeconomic environment. We have seen develop over the past few quarters, and which we expect will continue.

Jim will provide more color on our results in a moment, but today I will discuss what we're seeing in the current environment and why our offerings continue to resonate with organizations of all sizes verticals and geographies.

I will also provide an update on our growing channel ecosystem and the associated financial improvements were beginning to realize as well as our increased R&D investments and two recent acquisitions, so let's jump in.

As we have said many times our point solutions help our diverse global customer base overcome a variety of complex challenges in the cloud to continue to innovate by transforming data and collaboration so users can be more productive with the latest cloud services. The Auckland confidence platform helps companies become more digitally resilient and build.

The right Foundation for innovation.

Whether they want to move faster reduce costs improve productivity or make more informed business decisions.

Customers Trust they can use our purpose built platform to collaborate with confidence in the modern workplace.

To remind you garner estimates that the spending on public cloud services will grow more than 20%. This year one of many tailwind we see that leave us well positioned for continued strong performance.

The alpine confidence platform is the only full suite of cloud solutions to optimize SaaS operations and secure collaboration in the workplace.

This uniquely positions us to help organizations as they adopt and mature in their cloud usage. So let's spend a moment on each of the product suites and highlight some key new and expansion wins from the quarter that demonstrate how we enable agile business transformation.

During a time when companies are taking a hard look at ROI on their digital initiatives are control suite helps them better understand and manage their data and digital operations.

Infrastructure and operations leaders can deliver central services at scale, such as provisioning and lifecycle management through automation and repeatable business templates without point, a Canadian Federal agency was able to automate user lifecycle management for the 40000 users and is Microsoft <unk> environment free.

Up resources to focus on the agency's mission to improve the standards of living and quality of life for all Canadians.

Affluent customer in the financial services industry American National reduced new workspace creation in Microsoft teams by 50% and avoid data sprawl by automating policy configuration enforcement. This has helped to increase adoption of Microsoft teams and reduce data storage costs as the company continues to scale.

<unk> is digital investments in both cases, we empower to business users to maximize their digital transformation investment with greater control over their budgets licenses users and workspace.

As companies around the world continue to move at a speed of their markets are fidelity suite accelerate time to value as they transform from one system to the next preserving data integrity, ensuring business continuity without point, a financial services organization, serving more than 13 million people modernize this digital platform.

Migrating their legacy on premises environments to Microsoft tissue, while maintaining its data privacy and governance policies and a global coffee powerhouse was able to swiftly restructure is Microsoft <unk> environment by migrating more than five terabytes of data and one month across two Microsoft 65 tenants in Boe.

Cases, we help these organizations move migrate and consolidate data transforming those assets, while minimizing impact on the businesses I'm also proud of our team's recent win to gain the confidence of the second largest investment bank in the world by revenue with our Fidelity suite, the bank would take smart inventory of which data should be transferred.

And as a result will save time and add more efficiency to their digital operations as.

As our customers transform so too does the global regulatory environment and organizations in every industry continue to turn to <unk> resiliency suite to ensure their data is protected secure and compliant in the third quarter <unk> expanded its relationship with a global manufacturer to enhance their security posture.

Sure, while reducing its cost to protect his data with multiple vendors using our centralized policy management controls. We helped the organization eliminate mis configuration risk enhance data visibility across their entire Microsoft <unk> environment. We also help the organization manage insider threats prevent data breaches.

And enforced the highest level of protection for unstructured data and without point, a global technology leader transforming how businesses manage their spend can now protect data in their salesforce and Google workspace environments, combating ransomware attacks and ensuring business resiliency across their multi cloud investment.

These are just a few example of how our proven technology provides our customers more efficient and secure operations everyday.

Additionally, we will hold a virtual deep dive on our platform and technology in a few weeks and encourage everyone to attend and learn more about the appling confidence platform a press release with more for more details will be issued next week.

Let me switch gears and turn to our efforts with the channel you have heard me say many times that our offerings apply to companies of all sizes and while our technology is enterprise grade. It is also available to help small businesses around the world. We know this customer segment offers enormous potential are expanding channel partner network not only.

Deepens, our relationships with existing partners, but also accelerates our F&B growth.

The expansion of our channel ecosystem continues in line with our geographic and market segment expansion, our MSP business, which is primarily focused on the SMB market continued to see robust growth and Mr. Environment of ongoing consolidation. This is incredible force multiplier for us.

The larger msp's with whom we have strong relationships to acquire smaller msp's. We continue to be viewed as a partner of choice, which should help drive sustained demand by small businesses for our cloud solutions.

We will continue to provide updates on these efforts as we're extremely excited about the potential here to expand our addressable market.

While we're encouraged by the financial contribution to date. We also know the strategic efforts still has some runway before being fully realized for example to encourage our expansion and scaling through the channel we implemented compensation neutrality with our global sales forces. While this serves as a drag on short term sales productivity and.

<unk>, we know that it will bring significant improvement to these measures over the medium to long term and should bring us two non-GAAP and GAAP profitability sooner before I turn the call over to Jim I just wanted to mention several highlights from the last quarter underscoring our continued growth trajectory. The first is <unk>.

<unk> of International Research and development hub in Singapore, which will act as a major hub within our worldwide R&D network and foster local talent to support the growing demand for <unk> SaaS solutions in the APAC region.

With a growth of a vibrant R&D community, Singapore Alpine will continue innovating to address modern digital challenges strengthen global cloud resilience for customers support data sovereignty strengthen multi cloud security in short regional businesses are supported at the local level as more organizations in APAC I Mb.

<unk> digital transformation, we saw a critical need to expand our local presence to support growing customer demand as well as the opportunity to recenter our presence in the region in light of the broader geopolitical environment.

We're also excited by two acquisitions, we closed in Q3 2022. The first is <unk>, who is our award winning platform allows organizations to accelerate success in the digital workplace, bringing high graph analytics to our cloud insights engine creates a blend of capabilities that expands our vision for analytics.

Simply delivering datasets and presenting dashboards.

I often speak to sea level leaders, who are making the pivot from a primarily office space working environment to a distributed enterprise who have a rapidly growing number of workplace applications and are challenged to measure employee engagement. Our goal is to deliver a contextualized experience for data insights access.

Rating organizations decision, making process by optimizing the workspace and analyzing data from variety of sources organizations can better understand employee preferences, and organizational trends, allowing them to adapt and pivot their hybrid workplace strategies. The second acquisition is essential a south Korean <unk>.

<unk> software solutions provider that will advance our ability to enable large organizations in the regions fourth largest economy to accomplish their digital transformation goals building out the expansion of our previously announced fat ramp authorized solutions, which can be components of zero Trust security implementations for federal agencies, we are.

Shipped a number of ISO and CSA FTIR security certifications in Q3. This reflects our continued prioritization of security and privacy for both our <unk> and its customers with enhanced abilities to help them mitigate access risk reduce security breaches and strengthen audit.

And compliance posture.

In summary, despite the uncertain macro environment <unk> had another strong quarter, we continue to execute against our mission to enable organizations to collaborate with confidence while positioning ourselves to provide greater long term value for shareholders with that I will turn it over to Jim to discuss our financial results in more detail.

T J and good afternoon, everyone as I review, our third quarter results. Today. Please note that I'll be referring to non-GAAP metrics unless otherwise noted for.

For the third quarter ended September 32022, total revenues were $62 $7 million up 16% year over year and up 26% in constant currency within total revenues Q3, SaaS revenue was $30 million up 34% year over year and up 44.

5% in constant currency.

SaaS revenue constituted 48% of total Q3 revenue compared to 42% of total revenue last year.

There are two observations I'd like to make on our revenue performance. This quarter. The first is regarding FX as I discussed last quarter. Our international operations are responsible for more than 50% of our revenue and primarily does business in the Japanese yen, the euro and the British pound and while our Q2 revenue guide.

<unk> included an FX headwind based on the prevailing rates at the time the U S. Dollar continued to strengthen in the quarter further impacting our total reported revenues by approximately $1 million, bringing our total revenues to the high end of our guidance range.

Second we are pleased that our strategy to drive sales efforts toward our SaaS offerings, our fastest growing revenue stream continues to be successful SaaS now makes up approximately 50% of our revenue base at the same time as we shift more services business to our channel partners, we expect our services revenue.

To decline as a percentage of total revenues, which we saw in Q3 relative to Q2 over time, we expect this mix shift to continue driving overall margin improvement looking at the business geographically. We are pleased with our performance across regions, especially as we look at the growth in our SaaS business.

In North America overall revenue grew 21% driven by SaaS revenue growth of 39% in EMEA revenues grew 50% on a constant currency basis, driven by SaaS revenue growth of 44% in APAC revenues grew 9% on a constant currency basis higher.

<unk> by SaaS revenue growth of 61%.

We are pleased with our continued SaaS revenue growth in APAC, but recognize that our total revenue performance. There may fluctuate given revenue recognition and the longer term nature of our contracts in the region.

As of September 32022, total IRR was $191 $7 million representing.

Representing growth of 30% from a year ago up 34% adjusted for the impact of FX.

<unk> ended the quarter at $177 5 million up 27% year over year and up 31% adjusted for FX Lastly, SMB <unk> ended the quarter at $14 2 million up 80% year over year as we continue to see momentum from our <unk>.

<unk> customer acquisition strategy.

We continue to see strong commitments from new enterprise customers and continued engagement from existing customers. Many of whom are in the early stages of their cloud transformation at the end of Q3 average core <unk> per account was $40285 an increase of 10% year over year, we ended the quarter.

With 418 customers with <unk> of over $100000 up 32% from the prior year period.

Our core or our dollar based net retention rate for the quarter was 106% and 108% when adjusted for the impact of FX up from 107% in Q2.

Turning back to the income statement gross profit for Q3 was $46 $6 million, representing a gross margin of 74, 2% compared to 76, 3% in Q3 2021.

Slight year over year gross margin decline is a result of the impact of FX as well as our product mix with our lower margin services business, representing a higher percentage of total revenues this quarter versus last year.

Operating expenses for Q3 totaled $44 4 million or 71% of revenues compared to $37 1 million or 69% of revenues a year ago. As a result, Q3 non-GAAP operating income was $2 2 million or an operating margin of three five <unk>.

<unk>, which was ahead of our guidance, we continued to balance our commitment to thoughtfully invest in strategic growth initiatives, while emphasizing a robust expense management across the company turning to the balance sheet and cash flow. We ended the quarter with $219 8 million in cash and short term investments for the nine months ended September 30.

2022 cash used in operations was approximately $6 9 million, while free cash flow, which includes capex was negative $10 3 million.

In Q3, we continued to buy back shares under our stock repurchase program cumulatively through September 32022, we have repurchased approximately 4 million shares at an aggregate price of approximately $19 6 million I would now like to turn to our outlook for the fourth quarter and the full.

All year 2022, and provide some color on how we're thinking about Q4.

For the fourth quarter, we expect total revenues of $63 million to $65 million or approximately 19% year over year growth, 22% adjusted for constant currency, we expect non-GAAP operating income of $1 5 million to $3 $5 million our guidance reflects.

Next the expected contribution from recent acquisitions offset by the ongoing operating cost of those acquisitions as well as the timing of certain expenses, which moved from Q3 into Q4.

As a result for the full year 2022, we now expect total revenues of $231 7 million to $233 7 million or approximately 21% year over year growth, 28% adjusted for constant currency, we now expect a non-GAAP operating.

<unk> of $3 2 million to $1 $2 million Lastly, we continue to expect total <unk> of $202 million to $206 million or approximately 28% year over year growth, 32% adjusted for FX impact our full year <unk> guidance remains unchanged.

<unk> from the prior quarter as we expect increased <unk> from recent acquisitions to largely be offset by further FX headwinds as well as higher customer demand for our migration offerings, which are not included in the IRR.

In summary, the team continues to execute despite an uneven macro environment and I'm proud of our efforts as we help organizations around the world manage digital transformation.

We're excited for a strong close to 2022, and we are well positioned to continue expansion of our market opportunities in the years ahead.

With that we'll open up the call for questions operator.

Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad.

You are using a speaker phone. Please make sure your mute function is turned off to allow your signal to reach our equipment.

Again press Star one to ask a question.

And we will take our first question from Jason Ader with William Blair.

Okay.

Yes. Thank you good afternoon, guys just wanted to do.

See if you could give us an update on your go to market strategy and just sort of the components of that and then where you are really leaning in at this point.

Hi, Jason T J.

Good to hear from you, yes go to market strategy.

Consistent as we have been executing all year, we are seeing robust demand across our APAC Europe as well.

North America regions.

Our mid market segment continue to grow very robustly.

It reminded us one thousands of 10000 employee segment, along with our SMB segment Enterprise is also growing well just not at the rate of mid market segment, because the mid market has further accelerated through channel, but yes, we haven't.

Change the.

Go to market motion and we're executing as we plan for the year.

Who are some of the mid market channels that youre working with.

So we have major global channel partners from this these two direct csp's. So we have Ingram micro Tech data center.

<unk> and then of course software one those are the global powerhouses regionally. We have also crayon and we also work with a number of very large msp's, which collectively have over 100000 alright.

Already in the SMB space, so well.

We will continue to drive more business through channel partners through our company trial or the model so that more of our even enterprise direct sellers will be able to lever channel for scaling.

Okay, Great and then one final question is just on cross sell and bundling and what do you need what do you guys need to do to get that enter our higher I know you I know you've been aiming for 120, aspirational, but youre pretty far away from that what gets you from 108 today to 120.

Yes, so we have seen.

Some improvement in Q3 versus Q2.

We're working through that.

As we talked about this a hunter farmer separation to ago, hence that we expect the current levels to continue in the near term.

Due to some increased demand for our migration services as customers seek to sunset legacy systems shifting budget from Capex to Opex. So as you know the.

The migration work, we don't count towards <unk>.

Our recurring but it.

It's also not as much in the retention side.

Sales re org into a hunter farmer model creates further focus.

But.

So the tailwind into improving NR overtime.

Anything about cross sell or bundling.

Yes, that's correct.

We continue to do that today. So I think what we have seen is sub level double click on that as we see actual upsell percentages to be quite quite impressive.

It's really some of the.

Migration projects that we're working on to improve but yes cross sell and bundling.

We actually expect some improvement also with the Thai graph and other IP acquisition that will also help us in large <unk> that with existing customers.

Great. Thank you guys.

Yes.

Our next question comes from Fatima <unk> with Citi.

Hey, good afternoon. Good evening, Thank you for taking my questions.

Jim I have two for you actually.

I wanted to unpack a little bit some of the drivers behind the acceleration in your SaaS business. So really if you can isolate some of the variables that are driving better velocity here and then a follow up as well please.

Yeah and in terms of velocity, we're seeing we're seeing demand.

Really across the board, but particularly.

Some of the numbers that I discussed in the prepared remarks, we're really seeing.

Pack, we're seeing significant growth there, we're seeing significant growth in EMEA.

So we're kind of and also in North America as well so we're seeing.

Real high demand across the board I think is in particular as people look to try and figure out how theyre going to save money and they consolidate this transformation continues and I think our offerings seem to be resonating and the demand.

Continues to increase so so we're seeing it really across the board aboard regionally.

Again, I'm really APAC being a driver in terms of the largest percentage growth.

Understood I appreciate that and then just moving down the P&L on the Opex management in the cost structure, a number of headwinds there for you just with respect to foreign exchange, but I am curious if you can just unpack for us in order of magnitude what sort of impacting your ability right now to drive maybe more than that.

Visible operating profitability improvement. So if you could help stack rank for us such as that kind of if you've got natural hedges in place. If it's the migration impact is at CEB M&A just from those lenses. So we can.

Sort of isolated set of that then sizing of what's sort of holding back.

More visible profitability expansion and that's it for me. Thank you.

Sure. Thanks for tumor so so maybe just a couple of points there because there was a lot in there. So that's really good. So I think I think maybe overall a first statement might be that that we are very focused now on driving and managing our cost structure and improving profitability going forward. So I think one thing.

To think about is if you look at our operating expense growth for the first two quarters, we grew 35% year over year in the first two quarters, but Q3's growth rate was 21% and we're guiding Q4 for only 10% growth year over year. So I think we are managing that expectation a couple of things that were due.

Doing there for US FX has an impact as you called out a little bit of a natural hedge there. The second is we implemented some.

Slowing of hiring in Q3, and then we recently announced a complete hiring freeze.

That will also have a positive impact on keeping our cost structure.

Relatively flat in terms of not accelerating like it has in the past. The other thing we're doing too is it's not just about head count. It's also about really all of the cost structures in our business, which go well beyond just people in terms of of rents and office space in all of those things I think like many others we are.

Taking a look at all of those costs and seeing what we can do to drive those costs down.

So again, we're looking at that as well, but again the focus is managing those costs driving them and then looking at increasing significantly our profitability moving forward.

I appreciate that detail. Thank you Jim.

Thanks for timber.

Next question comes from Derrick Wood of Cowen and company.

Great. Thanks for taking my questions. Congrats on a good quarter start with P. J just wanted to ask about the.

Demand trends across kind of the core product pillars governance compliance and migration and if that.

But that mix shift has changed much particularly on the migration side, obviously, that's got a little different revenue component to it we.

We did hear from some larger hyper scalar that theyre seeing a bit less workload migration from on Prem to cloud just.

Just curious if youre seeing any of that from a macro standpoint.

Yeah. That's a great question, followed <unk> perspective, we continue to see strong demand for migration is not just on Prem to cloud, there's a lot of cloud to cloud. So in the prepared remarks, we are excited.

Customer that did a tenant a tenant.

Consolidation of course, we also work with.

A very large deal with.

A very large global investment bank on legacy to cloud so.

I think migration is something that we it's part of our business we've been doing it for the last 20 years I don't ever see it go away. There's a steady mix of that has always been the tip of spear for us to get into.

Our customer relationships.

It's not something from our perspective to be <unk>.

Going down having said that clear.

Clearly, our bigger mix or in the resilience C suites.

So backup as a service and then of course, the control suites, which is the governance as well as.

Staff management, so and also interestingly we.

We are successful across all major.

Enterprise mid market SMB segment, which is not easy for software SaaS companies to do.

Each segment there are different preferences, I will say in the SMB and mid market. They focus on very straightforward data security.

And migration concerns and then when you get into the large enterprise as that plus the sophistication around governance, who has access to what when from where.

So we have that entire spectrum.

That's how we are staying resilient and being.

Very robust platform provider.

Got it and T. J, you mentioned implementing compensation neutrality of the sales force and that that was going to help bring profitability sooner could you double click on that is that is that around kind of.

Incentivizing more channel engagement and that will help with more leverage or just would love to hear a little bit more about that.

That's exactly right. So we see channel as the single most important factor to scale our business.

Effectively allow us to have a lot more indirect sellers. So we're leaning further into it so comp neutrality means that especially if our enterprise sellers, who have been used to do direct sell motion, where they have far more control of our deals.

We want to encourage them to include partners into the deals even if it just for a transaction transacting partner.

So by doing so they will.

Would give a couple of basis points of the partner for carrying paper so to speak but.

But we don't let that be any sort of deterrent from our sellers. So they will be comped. The same from a quota fulfillment compensation commission payment perspective, whether they do.

Do run the deal through the partner or not so this allow us to prime the pump so to speak get that type of behavior change going so they're used to getting partners into deals and.

When they build a relationship over time, then also partners will bringing opportunity to us. So this is a healthy way to foster and do behavior change to get all of our sellers across all three segments to use channel to scale ultimately in the short time, yes.

Extra to do comp neutrality, effectively paying compensation, even on basis points that we're giving to partners, but in the medium to long term allow the sellers to actually sell much bigger numbers by scaling through channel.

Got it and if I could one quick one for Jim just on the FX. It looks like you had a 10% delta between reported and constant currency in Q3.

You're guiding for 3% Delta in Q4, just curious why that changes so much.

Well for us, it's a little bit of the mix of where that revenue is coming from and so I think we will again, we're kind of guiding for that 3%. We think that that's probably where we'll end up.

Despite it being roughly 10 in in Q3 again, we think it's we're comfortable with the 3% guidance.

Okay. Thanks for that.

And once again, if you'd like to ask a question. Please press star one.

Now here from Nihon <unk> with Northland capital market.

Yeah. Thank you and congrats on the strong results from me as well even on an as is basis.

Double clicking there, though how much did <unk> contribute to the IRR.

Hey, Neal Thanks for the question so.

And actually the acquisitions that we did in Q3 contributed about $3 million of IRR.

Got it and there I think was another acquisition that you announced early in this quarter the central how much do you expect that to contribute.

The $3 million both combined.

Oh got you, but then you're ending <unk> 191, seven would be.

$3 million from Tiger, something a little bit less than $3 million because <unk> closed in the September quarter, which is included at 191, so but the central is not correct.

No a cent essentials included as well so again there is very little.

Our coming from essential.

So we're not picking up a lot there so essentially we're just using the $3 million.

As the total.

Gotcha, essentially a central is the same got it.

[laughter] didn't resist.

Certainly.

So <unk> is a product by product IP expansion.

Essentially it's a market expansion play for us that allow us to get into South Korea, and accelerate our expansion there so far very different purpose.

Okay understood. Thank you and then.

So your exit growth rate coming out of calendar 'twenty two.

Overall revenue basis.

Solid as well as your IRR is that how we should be thinking about.

As a good baseline for calendar 'twenty three.

Not why not.

So we haven't provided any guidance yet for 2003.

We ended with a strong Q3, we're expecting a strong Q4.

But at this point our focus right now is obviously getting through Q4.

We're obviously focused on profitability as well so really our focus now is is how do we deliver become more efficient more effective and significantly improved profitability. So so right now that's the focus obviously will be we'll be looking at guidance for the for 2023 coming up here, but.

We haven't we haven't put anything out there. So I would I would hold off on those expectations I would just say that again, we're expecting a strong Q4, and we're focused on improving profitability.

We can and that's the that's the primary focus.

Do you ascribe to the theory that profitability improve profitability does come at the expense of.

Growth in future periods.

Well I think that's what we're working through right now.

I don't know that they definitely need to be one off what we've seen in the past, though as we've we've had significant expense growth rate that you've all seen to drive that.

Look to drive serious revenue growth as well and now what we're doing is trying to manage both in terms of we want to see significant improvement in profitability and we want to see that revenue growth as well, but we're working through that now and we'll have we'll have an update on that.

That's great context, thank you very much.

And our next question will come from Kirk <unk> with Evercore ISI.

Hey, this is Charlie on for Kirk. Thanks, So much for taking the question.

First one David for T. J I wanted to ask whether you could highlight any customer examples of expansion and maybe what serves as your north star our goal for an engagement cycle with a potential customer from start to the initial contract signing and then to expand.

In an up sell opportunities.

Yes, I think for us.

The way we design our confidence platform, it's actually if you follow the natural journey of customers.

Going to cloud start with data analytics and <unk>.

Migrating and integrating into cloud in the process of helping customers classified <unk> get rid of out of their trivial redundant data integrate a lot of different legacy data systems, maintaining their fidelity and go to call it that way or cloud to cloud right.

Whether it's legacy on Prem ECM systems like a documented.

Or HP trend to two offices, five or cloud to cloud like slack to teams. So that's the first space and then of course once in cloud, we're talking about data security and business continuity ransomware attack detection and recovery, So thats backup as a service and.

Over time, when we talk about license management.

Inside to see who is using what.

And then governance to be able to sunset channels private chats.

Any manner to chase delegated administration, and ultimately to do record management, so resetting it even.

Now onto physical devices, except what types for long term storage or <unk>.

<unk> is now completely data.

From a regulatory perspective and of course now with the Tiger expansion, which we're super excited about it as a great brand within our ecosystem, we're now able to not only handle the mission critical conversation with customers around their cloud data security and governance, but also expand into.

<unk> addressing a very very topical.

Situation now all Ceos <unk> hybrid work productivity employee engagement. So we're now able to measure across eight different work work loads and data silos that we actually have a great data engine aggregating data lake from multiple sources to actually measure that productivity.

In collaboration and engagement and even do sentiment analysis across organizations across boundaries across hybrid work scenarios. So that's the difference.

Different phases for us to do.

Cross sell and upsell and expansion and we have customer examples.

Large and small customer examples doing just that.

Got it thank you and maybe just one for Jim.

You talked about.

Over time that.

Thursday.

Declining as a percentage of revenue and liquid in turn drive greater operating leverage.

Maybe just broadly speaking do you have any sort of timeline on how.

How quickly that's materializing by what magnitude.

Yeah, well, maybe we'll start with the latter first I think our target has been that services winds up being about 10% of our business. So I think I think that's the easier piece to answer I think what we saw from Q2 to Q3, we went from 18% to 17%.

So I do think it's going to take US a couple of years to get there.

But I do think we're going to continue to see the services absolute dollars, increasing but as a percentage of revenue. They continue to decline and then obviously, it's when you look at the P&L. It is obviously, our lowest margin business and so obviously as that declines it will help improve the overall margins.

Got it thanks, so much.

And we have no further questions queued at this time, so I'll turn things back over to T. J for any additional or closing remarks.

Thank you I just want to conclude by saying how excited I am about the opportunity in front of us and what a privilege. It is to work with so many talented people colleagues customers partners and shareholders as we work to expand the future of digital transformation. We recently commemorated the one year anniversary of our channel program with a global partner.

<unk> event in Singapore, the stories, I've heard and enthusiasm myself from customers and partners.

It was truly inspiring as we think about how much potential of the future holds for <unk>. I also spent time in South Korea meeting the essential team and saw firsthand how much opportunity we have to make a quantum leap in the region, which is seeing rapid adoption and investment in cloud technologies in short we have so much ahead of us and we're super.

Excited for a strong close to the year, while continuing to position <unk> for durable long term growth and increasing profitability.

Thanks, again for joining us today, and I want to wish everyone. A wonderful holiday season. Thank you.

And that does conclude today's conference once again, thanks to everyone for joining US you may now disconnect.

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Good afternoon, and welcome to the <unk>, Inc. Third quarter 2022 earnings call.

Please note this event is being recorded.

I would now like to turn the conference over to Jamie <unk>, Vice President Investor Relations. Please go ahead Sir.

Thank you operator, good afternoon, and welcome to <unk> third quarter 2022 earnings call with me on the call. This afternoon is Dr. T J Jang Chief Executive Officer, and Jim Kathy Chief Financial Officer. After preliminary remarks, we will open the call for a question and answer session.

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 are presented in this presentation as we believe they provide investors with the means of evaluating and understanding how management evaluates the company's operating performance.

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

Thanks, Jamie and I'm happy to formally welcome you to <unk> point as our new head of Investor Relations.

Thank you to everyone joining us on the call today.

Q3 was another strong quarter for <unk> highlighted by 34% growth and 26% total revenue growth both adjusted for the impact of FX. Our strong topline performance reflects the ongoing need to secure collaboration data sustained connections between people and ensure business continuity at the same.

Time, we're laser focused on profitability, which has always been that priority five point, but it is especially important in a dynamic macroeconomic environment. We have seen develop over the past few quarters, and which we expect will continue.

I will also provide an update on our growing channel ecosystem and associated financial improvements were beginning to realize as well as our increased R&D investments and two recent acquisitions, so let's jump in.

As we have said many times <unk> solutions help our diverse global customer base overcome a variety of complex challenges in the cloud to continue to innovate by transforming data and collaboration so users can be more productive with the latest cloud services to ocwen confidence platform helps companies to become more digitally resilient and bill.

The right Foundation for innovation.

Whether they want to move faster reduce costs improve productivity or make more informed business decisions.

Customers Trust they can use our purpose built platform to collaborate with confidence in the modern workplace.

The alpine confidence platform is the only full suite of cloud solutions to optimize SaaS operations and secure collaboration in the workplace. This uniquely positions us to help organizations as they adopt and mature in their cloud usage. So let's spend a moment on each of the product suites and highlight some key new and.

Expansion wins from the quarter that demonstrate how we enable agile business transformation.

During a time when companies are taking a hard look at ROI on their digital initiatives are control suite helps them better understand and manage their data and digital operations.

Infrastructure and operations leaders can deliver central services at scale, such as provisioning and lifecycle management through automation and repeatable business templates without point of Canadian Federal Agency was able to automate user lifecycle management for the 40000 users and is Microsoft <unk> environment free.

Up resources to focus on the agency's mission to improve the standards of living and quality of life for all Canadians.

<unk> is digital investments in both cases, we empowered a business users to maximize their digital transformation investment with greater control over their budgets licenses users and workspace.

As companies around the world continue to move at the speed of their markets are fidelity suite accelerate time to value as they transform from one system to the next preserving data integrity, ensuring business continuity without point, a financial services organization, serving more than 13 million people modernize this digital platform by <unk>.

Migrating their legacy on premises environments to Microsoft tissue, while maintaining his data privacy and governance policies and a global coffee powerhouse was able to swiftly restructure its Microsoft <unk> environment by migrating more than five terabytes of data and one months across to Microsoft <unk> five tenants in both.

Cases, we help these organizations move migrate and consolidate data transforming those assets, while minimizing impact on our businesses I'm also proud of our team's recent win to gain the confidence of the second largest investment banking the world by revenue with our Fidelity suite. The banquet takes smart inventory of which data should be transform.

And as a result will save time and add more efficiency to their digital operations.

Our customers transform so too does the global regulatory environment and organizations in every industry continue to turn to <unk> resiliency suite to ensure their data is protected secure and compliant in the third quarter <unk> expanded its relationship with a global manufacturer to enhance their security posture.

While reducing its cost to protect his data with multiple vendors using our centralized policy management controls, we help the organization eliminate mis configuration risk and hence data visibility across their entire Microsoft <unk> environment. We also help the organization manage insider threats prevent data breaches.

Enforced the highest level of protection for unstructured data and without point, a global technology leader transforming how businesses manage their spend can now protect data in their salesforce and Google workspace environments, combating ransomware attacks, ensuring business to resiliency across their multi cloud investment.

These are just a few example of how our proven technology provides our customers more efficient and secure operations every day.

Let me switch gears and turn to our efforts with the channel you have heard me say many times that our offerings apply to companies of all sizes and while our technology is enterprise grade and is also available to help small businesses around the world. We know this customer segment offers enormous potential are expanding channel partner network not only.

Deepens, our relationships with existing partners, but also accelerates our F&B growth.

The expansion of our channel ecosystem continues in line with our geographic and market segment expansion, our MSP business, which is primarily focused on the F&B market continued to see robust growth and missed the environment of ongoing consolidation. This is incredible force multiplier for us.

As the larger Msp's with whom we have strong relationships acquire smaller MSP, we continue to be viewed as a partner of choice, which should help drive sustained demand by small businesses for our cloud solutions.

We will continue to provide updates on these efforts as we're extremely excited about the potential here to expand our addressable market.

While we're encouraged by the financial contribution to date. We also know the strategic efforts still has some runway before being fully realized.

Apple to encourage our expansion and scaling through the channel we implemented compensation neutrality with our global sales forces. While this serves as a drag on short term sales productivity and efficiency, we know that it will bring significant improvement to these measures over the medium to long term and should bring us to <unk>.

non-GAAP and GAAP profitability sooner before I turn the call over to Jim I just wanted to mentioned several highlights from the last quarter underscoring our continued growth trajectory. The first is our establishment of international research and development hub in Singapore, which will act as a major hub within our worldwide R&D network.

And foster local talent to support the growing demand for <unk> SaaS solutions in the APAC region, where.

Racing digital transformation, we saw a critical need to expand our local presence to support growing customer demand as well as the opportunity to recenter our presence in the region in light of the broader geopolitical environment.

We're also excited by two acquisitions, we closed in Q3 2022. The first is <unk>, who is our award winning platform allows organizations to accelerate success in the digital workplace.

<unk>, hi graph analytics to our cloud insights engine creates a blend of capabilities that expands our vision for analytics beyond simply delevering datasets and presenting dashboards.

I often speak to sea level leaders, who are making the pivot from a primarily office base working environment to a distributed enterprise who have a rapidly growing number of workplace applications and are challenged to measure employee engagement.

Our goal is to deliver a contextualized experience for data insights accelerating organizations decision, making process by optimizing the workspace and analyzing data from variety of sources organizations can better understand employee preferences, and organizational trends, allowing them to adapt and pivot their hybrid workplace.

<unk> the.

The second acquisition is essential a south Korean based software solutions provider that will advance our ability to enable large organizations in the regions fourth largest economy to accomplish their digital transformation goals building out the expansion of our previously announced fat ramp authorized solutions, which can be components of zero Trust.

Acuity implementations for federal agencies, we achieved a number of ISO and CSA FTIR security certifications in Q3. This reflects our continued prioritization of security and privacy for both <unk> and its customers with enhanced abilities to help them mitigate access risk.

Reduced security breaches and strengthen audit and compliance posture in summary, despite the uncertain macro environment <unk> had another strong quarter, we continue to execute against our mission to enable organizations to collaborate with confidence while positioning ourselves to provide greater long term value for shareholders.

With that I'll turn it over to Jim to discuss our financial results in more detail. Thank you T J and good afternoon, everyone. As I review, our third quarter results. Today. Please note that I'll be referring to non-GAAP metrics unless otherwise noted.

5% in constant currency.

SAS revenue constituted 48% of total Q3 revenue compared to 42% of total revenue last year.

<unk> by SaaS revenue growth of 61%.

As of September 32022, total IRR was $191 $7 million representing.

Representing growth of 30% from a year ago up 34% adjusted for the impact of FX.

<unk> ended the quarter at $177 5 million up 27% year over year and up 31% adjusted for FX Lastly, SMB <unk> ended the quarter at $14 2 million up 80% year over year as we continued to see momentum from our <unk>.

<unk> customer acquisition strategy.

With 418 customers with <unk> of over $100000 up 32% from the prior year period.

Our core <unk> dollar based net retention rate for the quarter was 106% and 108% when adjusted for the impact of FX up from 107% in Q2.

Turning back to the income statement gross profit for Q3 was $46 $6 million, representing a gross margin of 74, 2% compared to 76, 3% in Q3 2021.

2022 cash used in operations was approximately $6 9 million, while free cash flow, which includes capex was negative $10 3 million.

Year, 2022, and provide some color on how we're thinking about Q4.

Next the expected contribution from recent acquisitions offset by the ongoing operating cost of those acquisitions as well as the timing of certain expenses, which moved from Q3 into Q4.

As a result for the full year 2022, we now expect total revenues of $231 7 million to $233 $7 million or approximately 21% year over year growth, 28% adjusted for constant currency, we now expect a non-GAAP operating.

Loss of $3 2 million to $1 2 million lastly.

Lastly, we continue to expect total IRR of $202 million to $206 million or.

<unk>, 28% year over year growth, 32% adjusted for FX impact our full year <unk> guidance remains unchanged from the prior quarter as we expect increased <unk> from recent acquisitions to largely be offset by further FX headwinds as well as higher customer demand.

Our migration offerings, which are not included in the IRR.

In summary, the team continues to execute despite an uneven macro environment and I am proud of our efforts as we help organizations around the world managed digital transformation. We're excited for a strong close to 2022, and we are well positioned to continue expansion of our market opportunities.

In the years ahead.

With that we'll open up the call for questions operator.

Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad.

If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.

Again press Star one to ask a question.

And we will take our first question from Jason Ader with William Blair.

Okay.

Yes. Thank you good afternoon guys.

Just wanted to do.

See if you could give us an update on your go to market strategy and just sort of the components of that and then where you are really leaning in at this point.

Hi, Jayson T J.

Good to hear from you, yes go to market strategy.

Consistent as we have been executing all year, we are seeing robust demand across our APAC Europe as well.

North America regions.

Our mid market segment continue to grow very robustly.

Changed.

Go to market motion and we're executing as we plan for the year.

Who are some of the mid market channels that youre working with.

So we have major global channel partners from <unk> to direct Csp's. So we have Ingram micro Tech data center.

<unk>.

And then of course software one dose or the global powerhouses regionally. We have also crayon and we also worked with a number of very large msp's, which collectively have over 100000 alright.

Already in the SMB space so what.

We will continue to drive more business through channel partners through our company quality model, so that more of our even enterprise direct sellers will be able to leverage channel for scaling.

Okay, Great and then one final question is just on cross sell and bundling and what do you need what do you guys need to do to get that NR are higher I know I know you've been aiming for 120, aspirational, but you're pretty far away from that what gets you from 108 today to 120.

Yes, so we have seen.

Some improvement in Q3 versus Q2.

We're working through that.

As we talked about this a hunter farmer separation to ago, hence that we expect the current levels to continue in the near term.

Due to some increased demand for our migration services as customers seek to sunset legacy systems.

Shifting budget from Capex to Opex, So as you know the.

<unk> work, we don't count towards <unk>.

Our recurring but.

It's also not as much in the retention side.

Sales re org into a hunter farmer model creates further focus.

But also the tailwind into improving NR overtime.

Anything about cross sell or bundling.

Yes.

Again, we continue to do that today. So I think what we have seen is sub level double click on that is we've seen actually up sell percentages to be quite quite impressive.

It's really some of the.

Migration projects that we're working on to improve but yes cross sell and bundling.

We actually expect some improvement also with the Thai graph and other IP acquisitions that will also help us enlarge that <unk> that with existing customers.

Great. Thank you guys.

Our next question comes from Fatima <unk> with Citi.

Hey, good afternoon. Good evening, Thank you for taking my questions.

Jim I have two for you actually.

Yeah and in terms of velocity, we're seeing we're seeing demand.

Really across the board, but particularly.

Some of the numbers that I discussed in the prepared remarks, we're really seeing APAC.

APAC, we're seeing significant growth there, we're seeing significant growth in EMEA.

So we're kind of and also in North America as well so we're seeing.

No real high demand across the board I think is in particular as people look to try and figure out how theyre going to save money and they consolidate this transformation continues and I think our offerings seem to be resonating and the demand continues.

Continues to increase so so we're seeing it really across the board aboard regionally with again really APAC being a driver in terms of the largest percentage growth.

Understood I appreciate that and then just moving down the P&L on the.

Opex management in the cost structure, a number of headwinds there for you just with respect to foreign exchange, but I'm curious if you can just unpack for US an order of magnitude what sort of impacting your ability right now to drive maybe more visible operating profitability improvement. So he could help stack rank for us.

Such as Sag and if you've got natural hedges in place if it's the migration impact is at CEB M&A just from those lenses. So we can.

Sort of isolate some of that then sizing of what's sort of holding back.

More visible profitability expansion and that's it for me. Thank you.

Sure. Thanks, <unk>. So maybe just a couple of points there because there was a lot in there. So that's really good. So I think I think maybe overall a first statement might be that that we are very focused now on driving and managing our cost structure and improving profitability going forward. So I think one thing.

They're for US FX has an impact as you called out a little bit of a natural hedge there. The second is we implemented some.

Slowing of hiring in Q3, and then we recently announced a complete hiring freeze.

That will also have a positive impact on keeping our cost structure.

Taking a look at all of those costs and seeing what we can do to drive those costs down.

So again, we're looking at that as well, but again the focus is managing those costs driving them and then looking at increasing significantly our profitability moving forward.

I appreciate that detail. Thank you Tim.

Thanks for timber.

Next question comes from Derrick Wood of Cowen <unk> Company.

Great. Thanks for taking my questions. Congrats on a good quarter start with P. J just wanted to ask about the.

Demand trends across kind of the core product pillars governance compliance and migration and if that.

But that mix shift has changed much particularly on the migration side, obviously, that's got a little different revenue component to it we.

We did hear from some larger hyperscale or is that they are seeing a bit less workload migration from on Prem to cloud just.

Just curious if youre seeing any of that from a macro standpoint.

Okay. That's a great question Paulo macro perspective, we continue to see strong demand for migration is not just on prem to cloud, there's a lot of cloud to cloud. So in the prepared remarks, we are excited.

Customer that did a tenant a tenant.

Consolidation of course, we also work with.

A very large deal with.

A very large global investment bank on legacy to cloud so.

I think migration is something that we as part of our business. We've been doing it for the last 20 years I don't ever see it go away. There's a steady mix of that it has always been the tip of spear for us to get into the customer relationships.

It's not something from our perspective to be.

Going down having said that.

Clearly, our bigger mix or in the resilience C suites.

So backup as a service and then of course, the control suites, which is the governance as well as SaaS management, So and also interestingly we.

We are successful across all major.

Enterprise mid market SMB segment, which is not easy for software SaaS companies to do.

Each segment there are different preferences, I would say in the SMB and mid market. They focus on very straightforward data security.

And migration concerns and then when you get into the large enterprise as that plus the sophistication around governance, who has access to what when from where.

So we have that entire spectrum.

That's how we are staying resilient and being.

Very robust platform provider.

Got it and T. J, you mentioned implementing compensation neutrality or the sales force and that that was going to help bring profitability sooner could you double click on that is that is that around kind of.

Incentivizing more channel engagement and that will help with more leverage or just would love to hear a little bit more about that.

That's exactly right. So we see channel as the single most important factor to scale our business.

We want to encourage them to include partners into the deals even if it just for a transaction transacting partner.

So by doing so they will.

Would give a couple of basis points of the partner for carrying paper so to speak but.

But we don't let that be any sort of <unk>.

<unk> from our sellers so they will be comped, the same from a quota fulfillment compensation.

<unk> payment perspective, whether they do.

Do run the deal through the partner or not so this allow us to prime the pump so to speak get that type of behavior change going so they're used to getting partners seem to deals and.

Effectively paying compensation, even on basis points that we're giving to partners, but in the medium to long term.

Now the sellers to actually sell much bigger numbers by scaling through channel.

Got it and if I could one quick one for Jim just on the FX. It looks like you had a 10% delta between reported and constant currency in Q3.

And you're guiding for 3% Delta in Q4, what just curious why that changes so much.

Well for us, it's a little bit of the mix of where that revenue is coming from.

And so I think we will again, we're kind of guiding for that 3%. We think that that's probably where we'll end up despite it being roughly 10 in in Q3.

Again, we think it's we're comfortable with the 3% guidance.

Okay. Thanks, Bob.

And once again, if you'd like to ask a question. Please press star one.

We will now hear from Nihon <unk> with Northland capital market.

Yeah. Thank you and congrats on the strong results from me as well even on an as is basis.

Double clicking there, though how much did <unk> contribute to the IRR.

Hey, Neal Thanks for the question. So so actually the acquisitions that we did in Q3 contributed about $3 million of IRR.

Got it and there I think was another acquisition that you announced early in this quarter the central how much do you expect that to contribute.

The $3 million is both combined.

Oh got you, but then you're ending <unk> 191, so it would be a three.

$3 million in <unk>, something a little bit less than $3 million because <unk> closed in the September quarter, which is included at 191. So an essential is not correct.

No <unk> essentials included as well so again there is very little.

Coming from essential.

So we're not picking up a lot there so essentially we're just using the $3 million.

As the total.

Gotcha, essentially a central is the same got it.

[laughter] didnt resist.

Certainly.

So <unk> is a product by product.

Expansion.

Essentially it's a market expansion play for us that allow us to get into South Korea and accelerate our expansion. There. So far are very different purpose.

Okay understood. Thank you and then.

Your exit growth rate coming out of calendar 'twenty two.

On an overall revenue basis.

Solid as well as your IRR is that how we should be thinking about.

As a good baseline for calendar 'twenty, three if not why not.

So we haven't provided any guidance yet for 2003.

We ended with a strong Q3, we're expecting a strong Q4.

But at this point our focus right now is obviously getting through Q4.

We're obviously focused on profitability as well so really our focus now is is how do we deliver become more efficient more effective and significantly improve profitability. So so right now thats. The focus obviously will be we'll be looking at guidance for the for 2023 coming up here, but.

We haven't we haven't put anything out there. So I would I would hold off on those expectations I would just say that again, we're expecting a strong Q4, and we're focused on improving profitability, where we can and that's the that's the primary focus.

Do you ascribe to the theory that profitability improve profitability does come at the expense of.

Growth in future periods.

Well I think that's what we're working through right now.

I don't know that they definitely need to be one off what we've seen in the past, though as we've.

We've had significant expense growth rate that you've all seen to drive that look to drive serious revenue growth as well and now what we're doing is trying to manage both in terms of we want to see significant improvement in profitability and we want to see that revenue growth as well, but we're working through that now.

And we will have we'll have an update on that.

That's great context, thank you very much.

Yeah.

And our next question will come from Kirk <unk> with Evercore ISI.

Hey, this is Charlie <unk> on for Kirk. Thanks, So much for taking the question.

<unk> and upsell opportunities.

Yeah, I think for us the way.

We design our confidence platform its actually two follow the natural journey of customers.

Going to cloud start with data analytics and.

Migrating and integrating into cloud in the process of helping customers classified tag get rid of out of the attributable redundant data integrate a lot of different legacy data and systems, maintaining their fidelity and go to call it that way or cloud to cloud right. So whether it's legacy on Prem.

<unk> systems like a documented.

Our HVAC trend two offices, five or cloud to cloud like slack teams. So that's the first space and then of course once in cloud, we're talking about data security and business continuity ransomware attack detection and recovery, So thats backup as a service.

And over time, when we talk about license management policy insight to see who is using what.

And then governance to be able to sunset channels private chats in a timely manner to chase delegate administration and ultimately to do record management, so resetting it even onto physical devices, except what types for long term storage or jet.

Jettison now completely data from.

Addressing a very very topical.

Situation now all Ceos care about hybrid work productivity employee engagement. So we're now able to measure across eight different work work loads and data silos, we actually have a great data engine aggregating data lake from multiple sources to actually measure that productivity.

In collaboration and engagement and even do sentiment analysis across organizations across boundaries across hybrid work scenarios. So that's the different phases for us to do.

Cross sell and upsell and expansion and we have customer examples.

Large and small customer examples doing just that.

Got it thank you and maybe just one for Jim.

You talked about overtime that.

The declining as a percentage of revenue and this will in turn drive greater operating leverage.

Babies that Rod was speaking do you have any sort of timeline on how quickly you can best estimate to realize and by what magnitude.

Yes, well, maybe we'll start with the latter first I think our target has been that services winds up being about 10% of our business.

So I think I think that's the easier piece to answer I think what we saw from Q2 to Q3, we went from 18% to 17%.

So I do think it's going to take US a couple of years to get there.

But I do think we're going to continue to see the services absolute dollars, increasing but as a percentage of revenue. They continued to decline and then obviously, it's when you look at the P&L. It is obviously, our lowest margin business and so obviously as that declines it will help improve the overall margins.

Got it thanks, so much.

And we have no further questions queued at this time, so I'll turn things back over to T. J for any additional or closing remarks.

<unk> event in Singapore, the stories, I've heard and enthusiasm myself from customers and partners was truly inspiring as we think about how much potential the future holds for <unk>. I also spent time in South Korea meeting the essential team and saw firsthand how much opportunity we have to make a quantum leap in the region, which is seeing rapid.

<unk> and investment in cloud technologies in short we have so much ahead of us and we're super excited for a strong close to the year, while continuing to position <unk> for durable long term growth and increasing profitability.

Thanks, again for joining us today, and I want to wish everyone. A wonderful holiday season. Thank you.

And that does conclude today's conference once again, thanks, everyone for joining US you may now disconnect.

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