AvePoint Inc. Q1 2023 Earnings Call
Good day and welcome to the half point, Inc. First quarter 2023 earnings call. All participants will be in listen only mode did you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded I would now.
Now I'd like to turn the conference over to Jamie a Rusty Vice President Investor Relations. Please go ahead.
Thank you operator, good afternoon, and welcome to add points first quarter 2023 earnings call with me on the call. This afternoon is Dr. T J Jang Chief Executive Officer, and Jim Cassie 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.
Curious in the webcast is the sole property and copyright of <unk> point with all rights reserved. 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.
A reconciliation of these measures to the most directly comparable GAAP financial measures is available in our first quarter 2023 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 thank you to everyone joining us on the call today COO.
Q1 results were a solid start to the year as we exceeded our financial guidance on both the top and bottom line we.
<unk> reported revenue of $59 $6 million were comfortably above the high end of our guidance and we're pleased that Q1 non-GAAP operating income also came in ahead of our guidance, especially in the current environment.
As we continue to be laser focused on profitability, we are well positioned for steady margin expansion in 2023 and beyond.
I want to thank those of you who attended our first ever Investor day in March.
When we shared our view of the market opportunity our strategy for capturing yet and our longer term financial outlook, it's clear that as organizations modernize their digital workplaces. They need a platform that's well governed fit for purpose easy to use and built on automation.
Appoints confidence platform capitalizes on this need by empowering organizations to optimize their SaaS operations and secure collaboration.
And then the continued uncertainty in the macro environment, our customers continue to depend on app one's confidence platform to rapidly reduce costs improve productivity and make more informed business decisions.
As the organizations, we work with continue to think long term. There are just beginning to see the opportunities to innovate their businesses amidst the proliferation of software applications relentless growth data need for optimization and evolving compliance and threat landscape.
To expand on this I want to highlight a few customer wins from Q1, which reflects some early successes tied to acquisitions, we made last year.
To remind you our M&A strategy has been focused on tuck in deals that accelerate our product roadmap expand the offerings of our core confidence platform speed, our time to market and improve the penetration of our existing customers all with the goal of bringing a robust end to end experience to organizations building too.
Digital workplace.
These examples are clear validation of that strategy.
The first is a significant new customer win in the quarter with the largest industry training and development organization in Singapore, which highlights our commitment to build industry solutions.
We were selected as the platform choice to power its new learning experience, which you will administrate learning services seamlessly manage course micro certifications and offer enhanced digital services for its 26000 partner organizations.
We secured this marquee new logo by leveraging the strength of the confidence platform in data management and governance, coupled with a domain knowledge from last year's acquisition of eye access to successfully move from the back office to the front office, while addressing a new use case.
Taking a step back we see the agitation and higher learning space as prime for digital transformation and we're honored to be recognized for innovation by winning the Microsoft part of the year Award in Singapore in the education industry category.
We also remains significantly underpenetrated with our existing customer base, regardless of which stage of their digital workplace journey. Our customers are in we have solutions that address their unique challenges our ability to offer our customers a full platform of solutions is a key differentiator and the foundation.
All of our land and expand strategy.
Ultimately our platform approach enables our sales teams and partners to capitalize on additional upsell and cross sell opportunities.
A great example of this in Q1 is our expansion win with one of the largest financial services firm catering to individual investors and small business owners.
As existing cloud governance customer with 40000 employees, the foreign needed a better way to measure the effectiveness of its internal communications a tree.
Can we hear more and more frequently from the C suite in today's hybrid world.
Our Thai graph offering, which we acquired last year provides a capability our customers needed to discover critical workplace communication insights with high grass implementation and its interoperability with our confidence back warm the firm replaces prior analytics solution for Microsoft <unk>, five and can now effectively measure employee.
The engagement, which in turn drives improved decision, making and organizational performance.
In both examples the breath of Apple and confidence platform bolstered by our acquisition of critical technologies allowed us to address compelling customer needs and we will continue to evaluate opportunities of all sizes to further expand our platform offering and provide greater value to customers and partners.
In summary, Q1 was a solid start to 2023, while we remain mindful of near term economic uncertainty. We're excited for the opportunities we see in 'twenty, three and beyond to deliver shareholder value by advancing the digital workplace, capturing large and growing markets and prioritizing profitable growth 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. Thanks for joining us.
I want to start today by recapping some of the primary takeaways from our recent Investor day as well as addressing some of the common themes in my discussions with many of you sense that.
I'll, then turn to our first quarter financial results and updated financial guidance before we open up for Q&A.
First our top financial priority over the next few years is profitable growth and we are targeting that by the end of 2025 add point is profitable on a GAAP basis as well as rule of 40 company based on the combination of air our growth and non-GAAP operating margin.
Many of you have asked how we're thinking about the mix of those two components as we move towards 2025, while we believe the mix remains flexible.
We do see a number of levers on both the top and bottom line and thus a number of ways to get to the rule of 40.
I also want to remind you that our AOR growth expectations for 2023 are not the new normal and that the go to market strategies, we discussed at the Investor day should accelerate AOR growth, while supporting steady ongoing margin expansion over the next few years.
I would also stress that we are thinking about our long term non-GAAP operating margin target of 20% to 25% as separate from the 2025 profitability contribution to the rule of 40.
Second as you look at both our top line results as well as our guidance you can see that there continues to be a delta between revenue growth and are our growth. Many of you have asked when this delta will close so let me spend a minute on this the delta is purely a function.
Of our revenue mix, which as you know includes our SaaS term license and maintenance revenues all of which are recurrent as well as our services revenue, which are not recurring and are excluded woman calculate a or are at.
At approximately 16% of our Q1 revenues services is still a meaningful component of our business, but it's 9% growth rate in Q1 is much slower than the 20% growth from a recurring revenue business.
The slower growth of services, which we are purposefully deep prioritizing from our sales mix serves as a drag on our total revenue growth, but does not impact are our growth hence the delta you see today.
As we look ahead, our long term expectation is that services will continue to decline and represent approximately 10% of our revenues. So as services becomes less of a percentage of total revenues. The delta between total revenue growth and are our growth will narrow, but it will never completely go away.
What we expect will tighten substantially over time is the delta between recurring revenue growth and a or our growth, which we saw in Q1 with recurring revenues growing 20% and a or are growing 26%.
Taken together this dynamic in our financials is why we believe that a or our growth is the best measure of our underlying performance.
The third point I'd like to make is around our three product suites were at Investor day, we disclosed the <unk> contribution from each for the last few years, while much of the question centered around the fact that our resilient suite has consistently represented nearly 60% of our air or I want to point out that our.
Teams have done a fantastic job in driving the growth of all three suites, specifically from 2019 to 2022, our control suite has grown approximately 33% per year. Our modernization suite has grown approximately 40% per year and our resilient suite has grown approximately.
<unk> <unk> 48 per cent per year, so even with our backup products serving as the largest contributor to the growth of our resilient suite, we have seen and will continue to see strong demand for our modernization and control suites as evidenced by the two examples T. J just discussed.
As such we are confident that our go to market strategies will provide for durable and well balanced growth.
Lastly share repurchases at Investor Day, we discussed the expectation that share repurchases in 2023 would be in line with 2022 levels or approximately $20 million after.
After subsequent discussions and analysis, we plan to increase our buyback levels and anticipate deploying approximately $50 million in 2023 to repurchase shares given our strong cash position and the belief that our stock remains undervalued at current levels. We believe this is an effect.
Use of capital right now.
Through the close of trading yesterday, we have repurchased a total of $1 million 25000 shares for a total cost of approximately $4.4 million so far in 2023.
Turning now to our first quarter results, where I'll be referring to non-GAAP metrics unless otherwise noted for the first quarter ended March 31, 2023, total revenues were $59 $6 million up 18% year over year and above the high end of our guidance and as T. J noted.
Total revenue growth on a constant currency basis was 23%.
Within total revenues first quarter SaaS revenue was $35.5 million up 34% year over year and up 39% on a constant currency basis in Q1, SaaS comprised 60% of total revenues compared to 53% a year ago.
Looking at the business geographically, we saw solid performance across all regions. Once again, driven by the growth in our SaaS business.
In North America, SaaS revenues grew 32%, while total revenues grew 13% in EMEA on a constant currency basis SaaS revenues grew 39%, while total revenues grew 35% and in APAC on a constant currency basis SaaS revenues grew 53 person.
While total revenues grew 25%.
As of March 31, 2023, total <unk> was $222 $4 million, representing year over year growth of 26% and growth of 31% when adjusted for the impact of FX I want to remind you that a our includes our migration products and <unk>.
Our year periods have been restated to include this as well.
We ended the first quarter with 465 customers with air our of over $100000 up 20% from the prior year period.
As we discussed at our Investor Day, we are now providing a number of new disclosures that we believe better align with our strategies and provide more visibility into our performance. One of these was our strategy of driving more business through the channel and as of the end of Q1, 48% of our air are came through the channel.
Compared to 46% a year ago and 47% at the end of 2022 and for Q1, specifically, 56% of our incremental air are came through the channel.
As we discussed we expect the channel contribution to continue increasing which in turn should support continued AOR growth and operating efficiencies.
Another new disclosure, we discussed at Investor Day is our trailing 12 month gross retention rate.
Adjusted for the impact of FX gross retention rate for the first quarter was 87% in line with what we reported at the end of 2022.
On an as reported basis Q1 gross retention rate was 84%.
Turning to net retention rate adjusted for the impact of FX, Our first quarter MLR was 106% and was 102% on an as reported basis.
Turning back to the income statement gross profit for the quarter was $42.6 million, representing a gross margin of 71.5% compared to 71.8% in Q1 2022, the slight year over year gross margin decline is the result of FX and lower <unk>.
Gross margins on services.
Q1, operating expenses totaled $42 $9 million or 72% of revenues compared to $41 6 million or 83% of revenues a year ago, representing growth of only 3% year over year.
As a result, Q1 non-GAAP operating loss was $329000 or an operating margin of just below breakeven again above the high end of our guidance. This compares to an operating loss of $5 $5 million or an operating margin of a negative 11% a year ago as we.
We continue to focus on profitability and drive meaningful operating margin expansion.
Turning to the balance sheet and cash flow, we ended the quarter with $231 $7 million in cash and short term investments for the three months ended March 31, 2023 cash generated from operations was one point to $5 million, while free cash flow was $1 million. This compare.
Ours to cash used of $6 $1 million and free cash flow of negative $7.1 million for the three months ended March 31 2022.
I would now like to turn to our outlook for the second quarter and the full year of 2023.
While we think it's appropriate to be cautious in this economy, our ability to drive continued topline growth and ongoing margin expansion provides the confidence to raise our full year expectations for total air our total revenues and operating income.
For the second quarter, we expect total revenues of $65 million to $62.5 million or 10% year over year growth. We expect non-GAAP operating income of point 8 million to $2 million, which represents a year over year margin expansion of <unk>.
More than 450 basis points for the full year, we now expect total error of 255 million to $261 million or approximately 20%.
Year over year growth.
We now expect total revenues of 256.5 million to $262.5 million or approximately 12% year over year growth.
Lastly, we now expect non-GAAP operating income of $13 9 million to $16 $2 million, which represents year over year margin expansion of more than 700 basis points.
In summary, 2023 is off to a solid start and despite today's uncertain macroeconomic environment, we remain focused on controlling the controllable and consistent steady execution.
Thanks for joining us today and with that we would be happy to take your questions operator.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Kurt mature in it with Evercore ISI. Please go ahead.
Hi, This is shrug Bud on for Kirk Congrats.
Congrats on a great quarter and thank you for taking the question.
So I wanted to ask about how you're thinking about point roll and strategic positioning as Microsoft is starting to infuse more artificial intelligence into the product suite.
How are you thinking about potential changes to your own product suite sales processes.
And customer engagement. Thank you.
Thank you that's a great question. This is T J.
We are actually very excited with the disruptive nature of generally AI.
In fact, we actually have been a long time consumer.
Azure cognitive services, which is what Microsoft uses to surface out open AI services.
We're in the I appointed in the business a business data management and governance.
Sachin Nadella.
Recently mentioned that by 2025 10 person all data generated will be done by general AI. So this means that there's going to be continue explosion of business data.
Which positions <unk> very well in that space of managing data and DARPA that data.
So as I mentioned, we have been a longtime consumer cognizant of services in our product lines.
We actually use it in our products, especially around modernization of document management record management case management solutions.
At the same time, we're actually looking at making our internal operations more efficient in terms of support in.
Term.
Case number tracking in.
Automated support.
Related to the coding and.
Essentially a case numbers.
As well as of course content marketing and now we're also trialing with co pilot with our developers.
So we're very excited about the latest disruptions generative AI.
That's great to hear and maybe one follow up to that are you.
Are you seeing any hesitation from.
Any customers in terms of engaging on longer term digital transformation.
Until.
They have a more clear idea from Microsoft on what their new AI features and offerings are so they can plan their roadmap accordingly.
The enterprise customers we engage.
Predominantly see that digital transformation as a one way street, it's the table stakes to ensure that they have the latest technology to use to leverage innovation to leverage technology to drive innovation.
And all of the innovation is happening faster and faster in a cloudy environment, where the hyperscale.
So what that means is everyone is actually.
I'm really looking at digital transformation and going to cloud.
As table Stakes, yes, there are certain amount of hesitation around AI and machine learning are in so far as data privacy.
In so far as copyrights and those are active items being looked at especially around our banking clients.
But the overarching theme of digital transformation and leveraging cloud to drive innovation is there and everyone sees that.
Alright, thank you so much.
Thank you thanks, Rob.
The next question comes from Gabriel <unk> with Goldman Sachs. Please go ahead.
Good afternoon. Thank you.
I'll follow up with a question on the demand environment and now there's a little bit.
Pat or mark, but lucky getting working her here what are you seeing by vertical pipeline.
Pipeline build and remind us the cadence of revenue growth.
Can you tell me right answer.
Give us a little more color on how you're thinking about the trajectory of government grants.
Yeah.
Hi, Gary Great question.
So from an overall demand perspective, as we discussed at Investor Day, We said our expectation for the year. We we also highlighted the macro economic uncertainties and volatilities in the environment.
So we don't see things getting worse.
So of course, you know we we.
We had a great quarter and we continue to anticipate a wider range of outcome by industry verticals are things are consistent with what we have seen previously so we haven't seen material changes of that at the same time, we are continuing to execute on the businesses.
Two again anticipate a wider range of outcome.
Hum.
I guess, the first part of that.
Question on why is 20th century, knocking me and I'll warn them, how do you think about what.
When you think about your Warmington, Brad why don't you mentioned the war 40, he mentioned that operating margin target being independent at the 2025.
So how do you think about and widespread after 2020. Thank you.
Yeah, Hi, Debra This is Jim let me, let me address that one so I think when we think about 'twenty. Three we are definitely planning as T. J mentioned for a wider range of outcomes. So when we looked at our budget and we looked at our thoughts around revenue growth and AOR growth, we definitely plan.
For some some anticipation that there would be this wider range than we actually anticipated that our growth rate would actually decline. So we built that into the plan and it's all in our expectations.
And actually so far we see that you know were in line with all of those expectations. So we feel good about that we don't think that longer term that continues to be the case.
We have seen as we mentioned and even in Q4 that this elongation of the sales cycle, we do not expect that to continue.
Into well into 24, so we expect that to be a 23 phenomenon and that we would expect to see growth rates return more to our normalized what we saw in 'twenty two.
And see those pick up beyond the 23 rates that we have.
Thank you have a car.
The next question comes from Jason Ader with William Blair. Please go ahead.
Yeah. Thanks, Good afternoon, guys just wanted to.
I don't know maybe how.
Ask you to give yourself a report card on being here in may of 'twenty three.
On the areas of the business do you feel like you're making the most progress and that maybe the areas of the business, where you still feel like you have some room for improvement.
Hi, Jason.
That's a great question. This is T J.
I think the area of business, we continue to make great progress as SMB and channel.
That's again, a space, where we we've mentioned this several times before.
Our focus on but in the last few years, we're able to build it to now 20% of our business and is the highest growth rate segment for our business and just to remind everyone SMB definition for a masters 1000 employees or fewer companies. So.
So we continue to see that.
Globally.
So.
And so that's doing well and we have more historically airplanes, a direct enterprise sales business and that has its associated kind of services and those are some things that we actually want to lessen says Jim commented on the the goal is to get it from now today, 60% down to 10% in the.
Medium term so those are going pretty well now the areas that we continue to see some elongated sales cycle as Jed mentioned continue to be in the large enterprise space.
We continue to win as a platform provider not a point solution provider.
So, but we do see some elongation of sales cycles, but that's no meaningfully different than the quarter before.
Gotcha.
If we if we look at office 365, and how resilient that business has been for Microsoft.
I guess, how should investors think about your correlation to that and.
Is it in a tougher macro environment.
Some customers are.
That's a great question, Jason what we focused on is providing more value and improve ROI customers existing investment into the Microsoft stack. So the ex ash. It include consolidation of other stacks that customers have.
And you know the market very well right. There there are many other providers out there.
Customers have multi cloud deployments, even for cloud storage providers for example, and this presents a really good opportunity for them to consolidate so 2023 is definitely a year of efficiency. So in that regard, we actually really help our customer drive economic outcome with are doing.
Some fair amount of platform consolidation actually as you know we have this migration platform data integration platform.
And even within the Microsoft license usage customers have mixed license types.
F. One E. One E three five and we're able to help them achieve consistent governance and management capabilities across license types again goes into maximize their existing investments.
Got you and so the <unk>.
Elongation of sales cycles is just.
A function of the of the budget environment and customers are still getting there with you and youre not seeing youre seeing those deals closed just is taking longer to close.
Absolutely and you're right you know offices by MCT five is mission critical so yeah, we continue to see ourselves positioned very well in the market.
Alright. Thank you good luck.
Thank you. Thank you.
The next question comes from the House Chunky with Northland. Please go ahead.
Thank you and congrats on the bedroom and guided results across the board.
And great customer case study regarding trigraph could.
Could you give us a sense as far as what percent of opportunities just tie graph now being attached to now.
Yeah, we're seeing really good traction with existing customers to expand the story from back office to front office. So this whole hybrid work environment employee engagement and employee satisfaction is on top of mind for most C suites today so in.
Now regard, we're having great conversations and it's still early days, but we're very positive.
Positive and optimistic on the trend.
That we are doing with existing customer expansion.
Okay.
Guys have a lot of skus available for customers to adopt which Skus are you. Most excited about in terms of driving up your net retention rate overtime.
So we have work too.
Significantly simplify the message.
That's now all we have many products, but its really categorize into this three suites as part of the confidence platform. So we're really.
Looking especially through channel expansion in SMB market penetration, which is not easy to do for one software company to cover all three segments of enterprise mid market SMB, we're streamlining message and clearly articulating the value proposition at a suite level, which they involves a different actual skus of deployment.
<unk> on the customers' actual environment.
The idiosyncrasy of those environment, whether they have Google or AWS or Microsoft.
But the we do track out a suite level. So the modernization suite, the control's suite and the resiliency is a suite.
So we don't really.
Look at specific down at the individual SKU level, when we actually track.
The sales performances.
Okay.
And then your trailing 12 months net retention rate did slightly index down what's the narrative behind that.
Yeah, Neal it's Jim good good to talk to you. So nothing specific to point out. There Q1. Historically is is probably our lowest quarter for adding incremental N RR to existing customers.
It is generally our lowest quarter for renewals and we see a lot of our upsell motion tied to renewals. So it has ticked down a little bit in in Q1, but literally in line with what our expectations were.
For the budget and guidance. So nothing there to report that's unusual and we would expect Q2 to actually see some improvement to that so again nothing on our side that we're concerned about.
Thank you thanks al.
Oh, great. Thanks, it's Andrew on for Derrick Congrats on the quarter.
T. J I think sales reps are now incentivized to drive higher product attach rates, you've talked about the 40% to 48% with two plus 24% with four plus we've seen the benefits of these new incentives driving drive greater attach rates this year or could we still see some of that throughout this year.
Given the kind of channel partner push and your comments about that I think you have a build out of channel partners in EMEA and APAC, how is that kind of build out are tracking versus plan and just.
Yeah. That's a great question. So EMEA is actually our most mature channel penetration territories.
That's historically the way enterprise <unk> software are sold.
And managed so in North America, historically, we were more of a direct sales organization, especially on the enterprise side.
We are making really good inroads in the SMB segment, 100% channel.
In APAC, our biggest territories, Japan, which is our largest territory outside the USA.
Going after very aggressively.
Australia has always been also a channel partner.
Partner very very operating model heavy business, that's already well channel driven.
Service business to drive innovation, that's more direct.
By mid market and channel.
It's something that we're now developing.
Great. Thanks, guys.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to T. J Jeong, our CEO for any closing remarks.
Thank you first I wanted to thank the entire alpine team for their tireless efforts to start the year strong.
The in person conversations I have been having the last several weeks with our management teams in North America, EMEA and APAC demonstrated that we have the right team and processes in place to capitalize on opportunities in front of us.
We're committed to advancing the digital workplace.
We're still in the early stages of digital transformation and profitable growth remains our top priority investing environment.
You for joining us today.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Okay.
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