Q2 2024 UiPath Inc Earnings Call
Greetings and welcome to the you Ipass second quarter fiscal year 2024 earnings conference call.
At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It's now my pleasure to turn it over to our host Kelsey Turcotte Senior Vice President Investor Relations. Thank you you may begin.
Great. Good afternoon, and thank you for joining us today to review U Ipass second quarter fiscal 'twenty 'twenty four financial results, which we announced in our earnings press release issued after the close of the market today on the call with me are Daniel Dina you I pass co founder and co Chief Executive Officer, Rob Enslin Co Chief Executive Officer.
And Ashish Gupta, Chief Finance Officer, Rob will start the discussion and then turn the call over to Daniel after that as Shane will review our results and provide guidance then we'll open the call for questions. Our earnings press release and financial supplement of materials are posted on the you Ipass Investor Relations website, IR Dot you I passed dot com.
Materials include GAAP to non-GAAP reconciliations, we will be discussing non-GAAP metrics on today's call is.
This afternoon's call includes forward looking statements about our ability to drive growth and operational efficiency and our financial guidance for the third quarter and full year fiscal 'twenty 'twenty four actual results may differ materially from those expressed in the forward looking statements due to many factors and therefore investors should not place undue reliance.
On these statements for a discussion of the material risks and uncertainties that could affect our actual results. Please refer to our annual report on Form 10-K for the year ended January 31st 2023, and our other reports filed with the SEC, including our quarterly report on Form 10-Q for the period ended July 30.
First 2023 to be filed with the SEC forward looking statements made on this call reflect our views as of today, we undertake no obligation to update them.
Finally, we invite you to join our user conference forward six next month in Las Vegas on the evening of Monday October 9th through Wednesday of the 11th please reach out to the Investor relations team for details.
I would like to highlight that this webcast is being accompanied by slides, which includes an embedded AI demonstration video, we will post the slides and a copy of our prepared comments to our Investor Relations website immediately following the conclusion of this call.
And with that I'll hand, the call over to Rob.
Thank you Chelsea and good afternoon, everyone. Thank you for joining us.
Second quarter was incredibly busy.
Highlights include the delivery of exciting new AI platform capabilities and several high energy in person customer events around the world.
All of them standing room only.
Not surprisingly I always at the top of everyone's agenda.
Digital transformation, where automation plays a strategic role has never been more important all with the laser evolutions and I are more powerful.
Customers are excited about the value, we deliver and recognize that our platform, which has been infused with AI. Since inception provides an integrated set of capabilities that combines the best of our specialized and governance, what great. What's the creative power of Gen II, making the potential of.
Automation almost limitless.
And we aren't just talking about AI, we deliver on the promise of AI and automation to date across our platform.
In particular communications mining and document understanding of generating a lot of excitement with Graham Shelton Chief product officer will demo in a few minutes.
Turning to the numbers, we ended the quarter with IRR.
1 billion $308000 net increase of 25% year over year.
By second quarter, net new <unk> of $59 million.
We have approximately 10890 customers, including new logos like Australia postal cooperation Leroy seafood harvest Murphy and associates.
<unk> pharmaceutical and food distribution costs.
Customers.
<unk> 1 million or more than a year are increased more than 30% year over year to 254.
All customers with a $100000 or more and they are increased to 1900 and study.
Second quarter revenue was $287 million, an increase of 19% year over year.
non-GAAP operating margin increased from negative 5% in the second quarter of last year to positive 10% in the second quarter of this year.
As we progress towards our 20% plus long term operating margin target.
We delivered 47 million and non-GAAP adjusted free cash flow, a continuing reflection of our growing scale and focus on efficiency.
Yeah.
Given that the macro environment continues to be favorable I am pleased with our execution and results.
Cohort of customers over $100000 or more in net new I R is performing well value selling is driving platform adoption and these deals are typically expansions, where we have a good line of sight into deal of progression.
The low end of the market has been harder to call.
Particularly in new customer acquisition.
I want to be clear, we feel good about the business and the role automation players in digital transformation, we continue to exit gate execute against our strategic initiatives and there's a nice pipeline building.
Moving to the second half of the year.
Two quarters ago, we formally launched our new go to market strategy to improve productivity sell the platform and intensified focus on customers that represents the longest and largest long term opportunities for us.
The team transitioned well try and do your segmentation model anything embracing the broader platform opportunity.
And go to market, we continue to invest in industry Verticalizing nation.
And people and enablement tools.
Which is yielding nice results.
So a particular strength in banking and financial services manufacturing and technology in the second quarter.
Including great New logos like performance healthcare solutions first city monuments back and said Peters healthcare system.
Expansion deals in the quarter included Mitsubishi Materials Corporation.
Estimates of 2017, we expand it to the full platform as they look to grow the automation program across the company.
In addition, our industry expertise gives us unique insights that we can leverage across our customer base, including tools like our solution accelerators.
We now have more than 60 available to customers.
It takes the space digital health system recently automated they claims form intake process using accelerators, they expedited their designed to deploy.
For more than eight weeks down to just two.
The foundation of every sales engagement is defining the value of our end to end platform, which helps customers accelerate their automation programs drive operational efficiencies and consolidate spend.
During the quarter, Saudi National Bank expanded to the full platform.
They plan to take the already mature automation program to the next level.
Driving rapid digital transformation and using the full range of our capabilities in our platform is a board level priority that is actively sponsored by the Chief Technology Officer, and the Chief operating officer.
Platform adoption is also driving competitive displacements.
A great example is a fortune 500 oil producer and a U ipass customers since 2018 with over 10 million in cost savings to date.
In a competitive takeout that expanded to incorporate document understanding and process mining into the automation program as they look to consolidate one AI enabled platform.
Looking forward they plan to leverage our north star value model to identify expansion opportunities across additional lines of business.
Not only is north still helping to both pipeline. It also drove several strategic deals in the quarter.
Using north Star the team delivered a comprehensive view of operational excellence and tangible value.
Automation could deliver to a financial services company and as a result, the customer expanded to the full platform including process mining.
Acumen understanding communications binding and test suite.
As part of our new segmentation, we have cost an emerging enterprise team.
It's driving both customer acquisition and early stage expansion.
And as an example, after Rio a provider of specialized solutions started their automation journey several years ago, and recently engaged with your iPad to clarified how automation can accelerate the growth trajectory.
This resulted in a multi year seven figure out full platform deal to help them achieve rapid market expansion in health care operations.
Industry analysts also recognizing our platform capabilities.
Right path was recently designated as a leader in the Everest group intelligent document processing products peak matrix assessment 2023.
This is the first time you all have passed has been named as a leader in intelligent document processing.
And the only leader recognized as a star performer for the biggest year over year advances.
We also named the leader in the Everest group process mining products peak matrix essentially about 2023.
The Everest group tasked combining products peak matrix assessment 2023.
Our partner ecosystem is key to evaluating our market leadership position growing our share of wallet across key accounts and delivering better outcomes for our customers.
One of many partner late customer success stories is with Aisling partners.
West L. A D T bolduc transformational automation program across its operations and customer service.
This quarter that program expanded to 80 keys call center to provide customer service agents with a single pane of glass to reduce data entry troubleshooting and other time intensive tasks.
We're also making great progress with ACP engaging with customers and building a joint pipeline during the quarter, a German agricultural company challenged by the S. Four migration selected you iPad and a competitive win based on our holistic integrated platform. They.
They are in the process of implementing test suite for regression testing on the S. Four migration and testing of all AC modules.
They also plan to automate processes, and they finance department and incorporate process mining and AI into the automation program.
Before I move on I want to highlight that our board of directors has authorized a 500 million stock repurchase program, which underscores the confidence we have in our business.
Ongoing cash flow generation and the strength of our balance sheet.
In summary, we delivered another solid quarter of execution against the variable economic backdrop we.
We started to see the benefits from the go to market changes, we implemented two quarters ago, and we will continue to exercise expense discipline, while investing to extend our market leadership.
And with that I'll turn the call over to Daniel.
Thanks, Rob.
Afternoon, everyone.
Before I begin I want to thank our team members for their relentless commitment to building you eyeball, serving our customers and delivering our market leading AI powered automation platform.
I believe we have now worked an inflection point, where they are and I am excited to have more time to focus on this next important evolution for the company.
This is a time.
Precedented technology advances.
Having said that he has been an integral part of our platform since inception.
Our thing with our original core capability computer vision.
Hello software robots to see and understand screens today.
Today, our entire platform is infused with AI and <unk>.
Cutting edge of the quickly evolving intersection of AI and automation.
To be effective generative AI needs context, which our software robots can deliver by gathering information.
From across the enterprise and data documents.
C. R M E R. P M beyond it.
It also means our plus one to take action and operationalize the promise of AI today with the integrated set of capabilities that combines our specialized.
Generative AI and finally it needs the governance our platform provides to help customers overcome significant barriers to adoption.
Looking ahead, we expect this next evolution of journey II to be a tailwind to the business, helping customers create better more resilient automation more quickly and opening up novel use cases for series six the automation of even more processes.
But we are enhancing.
Developer productivity by reducing barriers to development with co pilot like experiences and project wingman, which we showed you during last quarters earnings call.
That's the.
Oh I four conference in mid August .
Officially launch wingman into private preview and we are already seeing strong demand from customers.
England brings together our AI computer vision.
Understanding of computer screens with Jenny I and is designed to enhance automation creation for both business users and developers through our user friendly experience.
Second we are leveraging <unk> to make our products better for example, and document understanding and communications mining, we leveraged specialized UA bus models to classify and extract information augmented by generative.
More of those to achieve.
Foster time to value and higher accuracy for unstructured data processing.
And third.
The next wave of innovation will allow our customers to identify and enable more advanced automation is capable of handling even the most complex processes.
We'll give you a better sense of how this all comes together I'm going to share a demo.
Alright, it by Graham what this scenario has been simplified for earnings format. This is a use case that should resonate with many of you.
If you are not on the webcast. Please go to our Investor Relations website homepage for the demo link.
[noise] need Congress.
Got his heart set on the house city of Dreams, and he needs a mortgage fast.
Fortunately for counter he applies for a load with Golden their bank a fictional corporation, which uses you ipass AI powered automation to streamline the loan application process is fast accurate and incredibly efficient.
Next let's meet Linda.
She's a lending specialists that uses you ipass AI powered automation to improve as mortgage.
Let's start with taking a quick look at how things were done in the past.
Before you Ipass automation technology specialists like Linda had to manually processed each application from a centralized mailboxes review the documents validate them for accuracy and completeness and tailor our response to each application it.
It was time consuming and tedious, but now using AI powered automation from you iPad Goldner bags now automates the entire end to end process and Linda is pretty happy about that.
First using you Ipass communications mining he I classify as the incoming U S alone application in March it is urgent.
Next we can see the email contains three attachments.
Road application a photo of corners, I D card and a proof of employment letter.
With you I thought with document understanding the bank uses a combination of generally the eye and specialized AI to quickly extract information from each of these attachments.
Congress IV is a photo and we use a built in specialized model from you ipass to extract the key information.
Congress loan application is a structured document and we extract information using a specialized model that was trained specifically with golder banks data.
It's used to take months label this data, but now it only takes a moment by using generative AI to predict the labels.
Finally colors employment letter isn't unstructured document so we use the U ipass generative extractor to find the key information.
You I passed it brings together the broad capabilities of generative models with accuracy.
Our specialized models.
Yeah.
You are past starts processing the applications by submitting all this information into the loan processing system using our software robots.
The system quickly identifies missing information.
Then uses generative AI to draft, an email back to the applicant requesting the missing information in this case Conor forgot to attaches pay stubs.
At this point you ipads says all the application details and a draft of an email back to Linda for her review.
Having the capability of involving humans in the loop as critical for organizations to ensure that the use of AI is well governed and follows their policies with our AI powered automation platform Gouldner bank can easily automate complex end to end processes, just like us and basketball.
Two our fast mortgage approval Conor gets the home of his dreams.
Okay.
[music].
What you saw in the demo because our ability to first provide context.
Leverage both specialize AI and Jan AI, we've been open flexible and responsible platform.
And for a lot of customers to drive action through our built in models their own custom models and deployment of best in class external muscles.
The result is a speedy resolution and smoother experience for Conor efficiently and savings for gold in the bank and more time for Lisa to spend with customers.
Our constant innovation drives our girl and is essential to providing our customers with market leading capabilities.
Looking across the platform we have established.
Imperative mode, which is bolstered by our more than 850 patents globally.
Either granted or in the application process inside that number that I have more than 300 specific to a or.
Which we expect will grow as we continue to invest.
Finally.
We invite you to join our user conference for where six next month in Las Vegas, where you are invited to kick offs cocktails on Monday, the ninth followed by our main event on the 10th and 11th.
We will be showcasing our latest plus what we released 23 book them, which introduces new generative AI developer and user experiences.
Across our platform to help customers.
Bill real word automation faster than ever before please reach out to the Investor relations team for details.
With that I will turn it over to Ashish.
Thank you Daniel and good afternoon, everyone unless otherwise indicated I will be discussing results on a non-GAAP basis, and all growth rates are year over year.
Turning to the second quarter are our totaled $1.308 billion, an increase of 25% driven by net new <unk> of $59 million, excluding the FX headwind net new air are totaled $61 million.
Included in this total is more than $500 million in cloud are are both hybrid and SaaS, an increase of more than 125% as customers continue to adopt our cloud offerings.
For example, Scotiabank, who chose you a path to further scale their global automation program as they move to the cloud and plan to utilize our AI capabilities document understanding and unattended automation.
Our dollar based net retention rate for the quarter was 121% normalizing for FX. Our dollar based net retention rate was 125%.
Dollar based gross retention of 97% continues to be best in class.
Revenue grew to $287 million, an increase of 19% year over year.
Normalizing for FX impact, which was an approximately $3 million tailwind revenue grew 17%.
Remaining performance obligations increased to $905 million up 28% year over year.
Normalizing for FX impact, which was an approximately $4 million tailwind RP O grew 27%.
Current RPI increased to $560 million.
Turning to expenses, we delivered a second quarter total gross margin of 86%.
Software gross margin was 91%.
Second quarter operating expenses were $217 million the restructuring we announced in fiscal 2023 combined with our go to market segmentation have created an organization that is increasingly efficient and scalable and one which gives us ample room to continue to expand margins without sacrificing.
Vestments to grow the business.
GAAP operating loss of $78 million included $102 million of stock based compensation expense.
non-GAAP operating income was $30 million, resulting in a second quarter operating margin of 10%.
Second quarter non-GAAP adjusted free cash flow was $47 million.
We ended the quarter with $1 $8 billion in cash cash equivalents and marketable securities and no debt.
And as Rob mentioned, we are pleased to announce a $500 million stock repurchase program. This afternoon.
Now, let me turn to guidance, which assumes the overall macroeconomic environment continues to be global globally variable.
For the fiscal third quarter 2024, we expect a or are in the range of $1.359 billion to $1 $364 billion revenue in the range of $313 million to $318 million non.
non-GAAP operating income to be approximately $32 million.
And we expect third quarter basic share count to be approximately 567 million shares.
For the fiscal full year 2024, we expect air or in the range of $1.432 billion to $1 $43 $7 million.
Revenue in the range of one point to seven $3 billion to one point to seven $8 billion.
non-GAAP operating income to be approximately $188 million.
This translates to a non-GAAP operating margin of approximately 14, 7% and 850 basis point increase year over year.
And finally, we expect fiscal year 2024, non-GAAP adjusted free cash flow of more than $250 million or 20% adjusted free cash flow margin.
As we head into the second half of the fiscal year. The team remains focused on innovation and driving the best possible outcomes for our customers and partners customer success is at the core of everything we do and also the foundation for profitable growth and long term shareholder value. Thank you for joining us today and.
We look forward to speaking with many of you during the quarter.
With that I will now turn the call over to the operator, operator, please poll for questions.
Thank you.
Ladies and gentlemen, we will now conduct a question and answer session.
Please limit yourselves to one question and one follow up question per each time that your Q.
If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that Youre line is in the question queue.
You May press Star followed by the number two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Our first question comes from Raimo <unk> with Barclays. Please state your question.
Perfect. Thank you congrats from me.
One question on the in this new World, where AI is getting more and more important what do you see in terms of your customer conversations with budget still kind of limited from the budgeting cycle last year like how does it play out for you and how are you competing for budget dollars in this sort of environment, where you do you know what you need to spend more on AI.
But you know the money needs to come from somewhere.
How does it fit to like overall it spending thank you.
Yeah, Raimo I would say it's positive for us the discussion around AI I think it helps infuse the platform a message around specialized AI and generative AI together.
Has really come through.
Generally confused by all the announcements that happened in the market and they like our approach of showcasing.
Showcasing how we've actually bolted into the product with wing man in Java, and other solutions, which actually and document understanding which we actually showed which actually helps the platform be be more valuable to them and helps us drive the platform to more important consequences, yeah, we'd like to add more.
More customers are realizing that the automation is great for me to get more value from generative Eric actually even today I was talking to one of the largest airline in the world one of our biggest customer.
And they highlight how they plan to combine <unk> with <unk>.
Automation in their customer service, so I would say that it's.
It's a it's a great tailwind for automation adoption across most of our customers.
Yeah, Okay perfect. Thank you.
Quick follow up for a great increase on the free cash flow outlook.
Special factors in there that we should be aware of or just the better profitability is starting to play through thank you and congrats again thanks.
Right now, it's just you know what.
We feel really good about the changes that we made last year, we're continuing to see benefits of that come through and so that's.
Organic there's no special items dimension, and we feel like that is a sustainable path forward.
Perfect. Thank you.
Thank you and our next question comes from Mark Murphy with Jpmorgan. Please go ahead with your question.
So thank you so much and I'll add my congrats on on top of them.
Are you able to provide the Q3 AOR growth.
If we converted it into constant currency terms.
You know Andrew or what is implied for the fiscal year now in constant currency terms I'm not sure if any of that hasn't been drowned.
Yeah, nothing has really moved around we talked about it in the script of the headwinds right now and I I'm sorry.
Mark and so like I think that what we provided is there.
Normalized for foreign exchange, it's 26% growth in terms of year over year comparison.
And I would say very.
<unk> similar outlook here for third and fourth quarter in terms of FX. It's it's not much of an impact as we go forward.
Okay got it and then.
Rob I am curious just how commonly you see you ipass being pulled into some of the boardroom discussions out there that are maybe being led by the Accenture and Deloitte and cap Gemini is of the world when when they're sitting down with a large company and trying to formulate a generative AI road map for our customer add.
You know they they made sense, it's tomorrow P. A it would be involved as part of that tapestry do you see much volume along those lines are popping up in and took a deal pipeline because I think you had some pretty upbeat.
B commentary on that how that pipeline is developing.
Yes.
Mark what what I would say, we are having much more significant conversations with them.
The systems integrators and with customers together with the sensor systems integrator traders, we we actually are working on joint opportunities with them.
I wouldn't I would not classify it only as our P. A it is about the platform. It's about document understanding communication mining test mining the moat that makes a difference and infusing our G&A I capability, which I actually visual for customers to see and how that benefits them. So that is happening much more I mean I spoke a lot.
And almost all in in the script and I know stars having is placing us in the boardroom I mean, the value propositions that we are able to showcase with our customers even at a conservative level is very very strong and you know I mentioned, they're very large.
Insurance company, we went down to pretty pretty detailed process level on explaining how automation and a full platform can benefit them that customer he's got a replace their document the existing document understanding what's in our communication and test mining of proceeds money and go all in on the platform. So we've very Pos.
<unk> about our approach to the same size and being in the boardroom with customers and we feel like it's fulfilling the.
What we said two quarters ago that that's what we needed to do.
Excellent. Thank you so much Rob.
Mark.
Our next question comes from Bryan Bergin with Cowen. Please state your question.
Hey, guys good afternoon.
First one on just the go to market progress. So is there any additional metrics you can share that would really demonstrates that the change in our go to market and really selling down through the C. Suite is gaining that traction I think I heard 30% growth in that 1 million cohort year over year, which is certainly encouraging but just anything else. There you gave the <unk> salesforce productivity anything alike.
I think when you look at it that is the primary metric that we look at him Brian because you know the million dollar plus customers really shows the value of the platform.
In terms of what's moving.
And that is up 34% that we feel.
Customers greater than a million dollars that we feel really contend with the.
Tangible piece that you also can look at is just overall like our appeal balances growing very well, which shows continued commitment on deals.
From our top customers and then you know Rob has commented, but we really like the activity.
And the way that the sales force and the intimacy of customer relationships is happening we talked about it in the first quarter amongst some of the changes and we feel like those discussions and those discussions are progressing very well.
And that's the intangible factor that we really monitor and I would just add we feel Brian that it's we are also benefiting globally now in Asia Pacific and in Europe from the activity, we implemented as well we can see it coming through and then one last item on on that as more.
More and more differential partners I actually speaking to US partners. They typically would not not in the ISR space not in the existing space.
Trying to understand how they can how they can utilize the new iPad platform and they in their business. So we feel really strong about all the activity.
Okay I appreciate that.
Then just as it relates to pricing dynamics can you just talk about what you're seeing in market pricing for the last several quarters. It really as it relates to competitive deals as well as what youre seeing on average across renewables.
Yeah, we see it we see it relatively stable.
Theres nothing when people see the value and the Rois that we provide you can see that in many of the key studies in the stories and even in some of the demos, Brian and I think that <unk> has given us a good moat around pricing.
And so really price is not as much of a factor in deals.
For us, especially with competition.
People will try to undercut it but they can't deliver the rois that our platform delivers and that's really why we've been able to maintain our a pretty steady pricing and discounting set of metrics here, regardless of the economic conditions.
And competitive environment.
Alright, very good thank you.
Thank you and our next question comes from Keith Weiss with Morgan Stanley . Please state your question.
Excellent. Thank you guys for taking that.
You guys for taking the question.
A little bit on sort of the competitive environment around generative AI.
All of us are going around it and listening to a lot of companies talk to us about trying to infuse generative if I add to their portfolios and it seems like a big benefit they expect to accrue is automation of a lot more automation within their solutions.
Does that muddied the waters for you guys at all and is there anything you have to do in your messaging to sort of help our customers understand what they're going to get from a UI path versus I can application vendors, saying, hey, generative AI is going to help take care of all these ROE tests and do all these autonation for Ya.
Do you make sure that you ensure that clarity in the marketplace.
Well first of all I would like to make clear.
We believe generative area it doesn't change the competitive dynamic when it comes to automation platform.
And then.
Most of the use cases for generative and I are in the creative space. So you used generative ready to create artifact.
Deployed on the block four I think that plays into our advantage I think there is no secret for everyone that we have.
Best automation, plus four and most complete remove the enterprise enterprise grade platform.
Oh for governance and security to our customers generated right.
Helps us to even increase the adoption because it can appeal to a broader audience less technical people can create better automation.
Our luxury brands those automation much more reliable and much more secure than any other platform. So clearly to me. That's an advantage I wanted to also point out that there is no company that has an exclusivity to a particular gen. AI technology, we are using.
For instance, opening.
Thanks, Andrew.
Was on lump everything that is in the market. So I think that the mid to long term.
Sure.
John .
We'll be basically commoditize.
And.
The <unk> would be the best plus form is gone.
Everyone. We've.
Better chances in the market because the adoption will be able to democratize it.
Keith This is from my side I think it's given us an incredible amount of tailwind to articulate firstly, our AI story at your iPad, you can give us a platform to showcase where we all with how far we've come and I think thats really surprised a lot of customers in space in the last since we announced the summit.
I think it was March we announced the summit in.
In New York City.
We had 16 events in Asia Pacific and they were standing room, only and I can tell you from those discussions and I've spoken to a number of C level executives at actually attended in person and the comment backwards.
We are so surprised at how far you are we super excited about the opportunity that automation can bring enough where you could take it so from a go to market perspective from our team's perspective I think it's been an incredible opportunity to showcase you I passed the platform and the decisions. We made in September of last year to bring it out and I think people would be very excited at Ford.
To see how far how far we've come as well.
Excellent. Thank you guys.
Okay.
Our next question comes from Matt Hedberg with RBC capital markets. Please state your question.
Great. Thanks for taking my questions guys, Congrats as well, maybe just continuing the journey.
No questions yet a lot of good content today and I am curious, Rob how do you expect to articulate success monetarily.
Do you think and you know a couple of quarters or a year, you're going to be able to specifically call out.
The actual tailwind or benefit to growth.
From Jennie O.
Yeah.
I think we will be able to say.
Look I think our strategy that will continue to execute a game. We will continue to drive that we'll continue to look at how we benefit from Gen II.
I believe we already showcasing how it's impacting our results as part of our strategy and I think that will continue as we as we continue to drive North star and the value creation that customers of saving as we get more and more reference customers. You think will scale as we as we speak more in the boardroom and we bring their size.
So therefore, all of those will be in our favor.
And honestly when you look at communication mining document understanding of what we're doing in that space and he's a game changes for customers and the value they receive and that's kind of that's what's going to showcase and that's what we'll showcase in in terms of the return that we will get it in the next quarters and the next and then in the next years.
Got it. Thank you maybe just a quick one for Ashish.
Realizing that MLR is more of a trailing metric it did tick down a little bit here sequentially.
Do you think we're closer to a bottom in that in that number.
As we sort of think towards second half of this year.
Yeah, I mean, the way that I look at this.
Is I feel really good about the progress that we've made on the on the.
Go to market changes that we've articulated earlier this year and last year and I think as those continue to pay dividends.
Spansion right is the area that youre going to see them.
Benefit you'll see benefit come through in that area.
So we still are navigating a variable environment, but the changes that we made we just we're two quarters from having done it one quarter from stabilization. So I really look forward to.
Seeing the benefits of that come through our metrics here as we continue to execute.
Got it appreciate the color thanks, guys.
Thanks, Matt.
Our next question comes from Brad Sills with Bank of America. Please state your question.
Oh, great. Thank you so much I wanted to ask about the verticals it sounds like you're seeing some strength here in banking Manny.
Manufacturing Tech.
Any color as to.
Where youre seeing that strength or are there certain solutions customers are expanding with more use cases.
Is it new business that Youre seeing strong in those verticals and then any any commentary on perhaps a vertical with this new pivot towards solution selling that we might start to see on that list in the coming quarters.
Yeah, Brad a.
Great question.
We definitely see.
The full platform around <unk>.
<unk> mining document understanding and communication driving a lot of that is an integrated platform as customers want to expand automation from pure PAA into broader product categories, where we are able to use no store and you see that in financial services banking in particular, both in Europe and in North America insurance.
For sure across payers and providers in that space remember, we've also implemented a go.
Market, which has got an industry skill.
Skills part of it in our industry solutions team is pretty strong. So we're seeing it we're seeing it in in those industries I would also and I forgot to mention public sector.
Some really strength in public sector, that's driving that as well in federal in the federal government. So we are seeing and in multiple areas and I mentioned oil and gas as well.
Including.
Other areas of energy energy opportunities, though.
Wonderful, Thanks, and one more if I may just on.
Land versus expand I guess, where are you in that balance.
Can we start to see more.
Atlanta, you mentioned, some top of funnel softness here, but.
But just maybe in the big enterprise or even medium enterprise.
Could we see some progress with more land accounts going forward.
Yeah, we're working I mean, we see obviously, we see we likely will on the on the million IRR and above and 100000.
A R and above and we continue to work on on the distribution model and in this space and we will continue to treat some of those models that we've had previously and this place machine yeah, I feel like the quality of what we have is much better when we're looking at the customers and the logos that we're acquiring.
Our enterprise presence our enterprise connections I think we've seen meaningful progress there.
You know, we talk about kind of smaller and mid market emerging enterprise, we say that in various app, but that's I think that that particular segment is going to be more impacted by the variability of the macroeconomic conditions.
I think Brad the area for US is not a quantity play necessarily that's going to turn up and down its quality and and then you know where we want to get even better and better as then advancing those quality customers up through better and better sales specialists to increase our expansion that's kind of how we are measuring it and how we look to it.
Great to hear thank you so much.
Our next question comes from Terry Tillman with Truth Securities. Please state your question.
Yeah.
Hi, everyone. This is Joe Meares on for Terry Thanks for taking the questions.
You mentioned that the S E T relationship briefly in your prepared remarks I'm just curious.
They are helping you on the go to market side in the same way that you can quantify early benefits from the partnership.
Yeah.
Multiple aspects one is working with their size.
They are we also have joined teams working on joint accounts, we created a common architecture to present to our customers, we busy going through the enablement of both our organization and that will continue to expand through the year. So we've had multiple.
Multiple significant discussions between both companies and we feel really positive around the enablement and right now, it's all about enablement and positioning with customers and working with the insights to incorporate the automation in how they go to market is.
Well and we will see the benefits of that.
Although the SAP partnership in 'twenty five for sure in FY 'twenty five.
That's great and then just as a follow up.
Is there any way that you can quantify the impact of the 10 solution accelerators, you have out there that they're having on the implementation cycles or ROI for customers. Thanks, Ken.
We don't we don't disclose metrics around individual solutions or product lines. At this time, what I can tell you as you know we continue to monitor their applicability in the sales cycle and customer uptake.
And we're really pleased with the feedback, but we don't provide quantitative metrics or disclose them.
Thank you Scott.
Next question comes from Fred <unk> with Macquarie. Please state your question.
Okay. Thank you.
I guess have.
Single set of questions, but two parts here one for Jim one for Daniel I'm thinking.
Since we last spoke Ive had a lot of fun working with and training up various different AI models.
Convolutional one working on a workstation right now and I think what struck me through some of this experience is how many of these models are getting more and more.
<unk>, especially being deployed in degenerative AI space sufficient at being deployed on smaller and smaller set of hardware I'm curious kind of two parts here firstly, perhaps for Daniel.
Or is there an opportunity in the future perhaps for more of the generative AI workloads, we shifted towards the edge rather than using state like centralized API. It's from some of the Hyperscale or is out there and then secondly for him.
While we're in this phase right now of having generally I, primarily hosted and available through Hyperscale or is there any impact on the gross margin line and also some of the products that are being offered as there are run through these days.
Yeah.
I think that's a very interesting.
Question on the perspective of both the future of Gen II.
We are experiencing quite a bit we've landmark too but at this point.
The.
Eventually I think for some of the use cases like the one in wiegman, we'd look to be capable of deploying this.
On the edge because will significantly reduce the.
Of course, the bandwidth required.
No time to value.
It's kind of premature at this point to really understand if.
We can run a significantly large model like I don't know 13 billion parameters on the edge, but certainly it's a it's an interesting.
Wait to look forward.
And then you know Fred like when I look at it our gross margins, 88%, we talked about 85% and long term model of greater than 80% of these are numbers that we've been there I think right now with what we see in front of us.
We've.
We factored you know the uptick of both the cloud and AI capabilities in there and we're in the early days of pricing on these areas and those are going to be factors for us to consider.
In terms of workloads and where they are so we look at this is developing tremendous value and so it's not really a threat to our margins.
And from that perspective, right now and we feel very good about the way we've modeled that going forward.
Yes.
Thank you and then if I could ask one more I guess the third question here, because Rob I don't want to I don't want to forget about you at all.
I want to leave you a question I'd love to ask you know as you're having conversations with executives that are considering adoption of broader suites of AI solutions. Just how are you with your iPad, considering and addressing privacy concerns data governance concerns that like especially with respect to general debate.
Probably a question for Daniel but I would tell you that.
You know generally our security folks will take take a T cell would take and as he said security team will take you through how we deal with data security.
Data privacy had land and multi tenants, where the testing takes place and explain to them that.
How are we how we go through it.
In in a way that we would normally go through any kind of sales, but so far we handling it.
I would say not for the east, but in very detailed discussions and we have detailed roadmap to around that as well.
Yeah actually automation offer a very good way to Anonymize request too.
Public service for instance, if you wanted to.
If you want.
I understand but document we can use our on Prem services to OCR to digitize the document and then apply the AI algorithm and then another one.
Is documented and answer questions about it and then translated back to the user I think there are different approaches to to privacy and security and.
We are really well positioned to leverage our plus four two or four of these enterprises because the.
Use of generic.
Thank you all very much thank you.
Thank you and ladies and gentlemen in order to get through all the questions in the time remaining please limit yourself to one question.
For each time you queue up.
Our next question comes from Kirk <unk> with Evercore ISI. Please state your question.
Hi, This is Sean on for Kirk.
Congratulations on the strong quarter and thanks for taking the question maybe.
Maybe just one for me as you look into the deal trends through August and September .
Are you seeing more of a continuation of the seat of the same deal scrutiny, that's been prevalent through the year or conversations starting to get more constructive and do customers seem more willing to invest are there any changes in general that huge slug. Thank you.
No.
Our standpoint, when we don't really I don't want to get in quarter.
Updates I'm, correct, which I know everybody can respect I think we feel we just the environment I think Rob commented on it.
I think when you look at the environment relatively stable as variable and depending on the industry I think conversations move up or down that being said Rob talked about it earlier I think customer conversations are very constructive they have done and just having been a customer I can tell you where there is an ROI. It's the conversations are constructive and I think that's something that we've demonstrated across our.
Customer base.
But you know for a while now.
Thank you. Our next question comes from our reach or Zontian with Cleveland Research Company. Please state your question.
Oh, sorry.
You're on mute.
Sir please on mute yourself, we can't hear you.
Why don't we go to the next one please.
The next question comes from Michael Curtis with Keybanc. Please state your question.
Hi, guys. This is Billy on for Michael Thanks for taking the question.
Can you just talk a bit about the trends youre seeing in selling to Ikea and it users versus maybe the line of business and business users.
Within the context of the opportunity for generative AI to democratize that adoption of automation.
Yeah.
What I would tell you is you know when we launched the platform. We always said we needed to get into the sea level and we need to be more relevant with the CIO.
And that would also bring in <unk> and we feel like that that we're now able to actually bring the two together showcase why they need the platform. How the platform helps them consolidate software allows them to focus on areas in discovery and automation infused with AI, and then being able to take that using northstar into the boardroom and articulate the VAT.
<unk> that the CFO of the CEO or the head of our HR can actually get from automation. So that's more and more the conversations we're having all the Northstar discussions we talk about is exactly that.
I feel like the C. O cio's are really starting to understand with the platform the benefits they get and the value that they can get from it and that's why they actually want to use more and more more of the platform. When they understand how you can connect document understanding to communication mining using test suite to drive that and bolt into automation.
We see that as something that's differentiating us versus the competition.
In a significant way and the value equation, there's just.
You know that.
That's really driving the issue into the boardroom as well.
Super positive about it.
Thank you. Our next question comes from Scott Berg with Needham <unk> Company. Please state your question.
Hi, everyone congrats on the nice quarter.
I guess one question I have is one of the items that came up in our work in the quarter was all of the kind of explosion in interest in gin AI was kind of like an accelerator is certainly enhanced customer interest in some of the automation solutions that were out there specifically.
But at the same time it almost made some deals a little bit maybe more complex and helps shifts some deals around wanted to see how you thought about the balance of kind of that interest and making deals more complex versus maybe.
And generating larger deals versus maybe exploring some deals down in the quarter and thoughts on second half opportunities within that.
Yeah, I mean, what I.
I would tell you is that our customers that we've been working with the deals we spoke about throughout north star our customers have been focused on value and the value creation that we can create from them 11, you've gone through that and they they they they see whats the opportunity they want to understand the technical environment, what we're what the product does.
How it goes and that's kind of secondary to too many of them.
There's a view that we are one of the best engineering organizations in automation that we actually know we regained with Jane I I would then we know AI at an incredibly detailed level and that's why we feel like the whole movement, that's happened and it's given us.
An ability and a stage to actually showcase our differentiation in this market and otherwise customers also I'll say, they don't want to see announcements I want to actually see real benefits that they can showcase and how it can how it can showcase through automation. So we feel really good about that.
Thank you. Our next question comes from Michael Caron with Wells Fargo Securities. Please state your question.
Hey, Michael.
Great. Thanks, Hey, I appreciate you taking the question, but when that retention rate metric looks to be stabilizing and the ones. One is you have a good cadence of AI related product announcements.
That we're all digesting the Q4 guide for <unk>.
More muted than what we generally expect from a seasonally stronger period from the business or maybe I assume you can just help frame how you're incorporating some of the go to market changes.
Just some of the macro commentary and any visibility you have and deal progression between now and out of Europe , how that all stacks up into the rest of your guide and if that if there is any way to compare that at all.
I would actually just say thanks, I would just say that we're just consistency like we've been pretty consistent about getting what's in front of us, but also thinking about the factoring in the variable variability of the environment and the go to market transition, we're pleased with the progress of it.
We feel good about our guidance.
Yeah.
Thank you.
And there are no further questions at this time I'll hand, the floor back to management for closing remarks, Yeah, I just like to thank everybody for joining us for the questions and I would look forward to seeing you all at four six.
I appreciate your time, thank you have a good evening. Thank.
Thank you. This concludes today's call all parties may disconnect have a good day.
Yeah.