Q1 2025 UiPath Inc Earnings Call

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Greetings and welcome to the new iPad first quarter 'twenty 25 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.

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 is now my pleasure to introduce your host Ali Fool proof.

Ronnie Senior director of Investor Relations. Thank you I'll leave you may begin.

Good afternoon, and thank you for joining us today to review U Ipass first quarter fiscal 2025 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 died you Ipass founder and Chief Innovation Officer, and Ashish Gupta, Chief Financial officer to deliver our prepared comments and answer questions.

Our earnings press release, and financial supplemental materials are posted on the Investor Relations website IR Dot dot.

Copies of these.

These materials include GAAP to non-GAAP reconciliation will be discussing non-GAAP metrics on today's call.

This afternoon's call includes forward looking statements about our ability to drive growth and operational efficiency and grow our platform as well as our financial guidance for the second quarter and full fiscal year 'twenty to 'twenty five actual results may differ materially from those expressed in our 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 2024, and our subsequent reports filed with the SEC, including our quarterly report on Form 10-Q for the period ended April 32024.

Or 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.

I would like to highlight that this webcast is being accompanied by slides, we will post the slides and a copy of our prepared remarks to our Investor Relations website immediately following the conclusion of this call. In addition, please note that all comparisons are year over year, unless otherwise indicated now I would like to hand, the call over to Daniel.

Thank you Elyse.

Daniel: Afternoon, everyone. Thanks for joining us.

I'd like to start today by addressing the announcement, we made this afternoon and then I'll give a quick summary of our first quarter results.

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<unk> got an update on our path forward.

I will then walk through a few highlights from the quarter before I hand, it over to push them to go through our financials and guidance in more detail.

As you may have seen in our press release. This afternoon, Rob Anstey, who is leaving the company and has also resigned as a member of the board.

I played a significant role over the last two years and I know I'm speaking for the entire company when I say that we are very grateful for.

His contribution to you like that.

Yes.

We grew up leaving the company.

Daniel: I'm excited to step back into the CEO role and look forward to leading us through our next phase of profitable growth and innovation.

During the past year I had the privilege of immersing myself in our product and engineering exports. This experience gave me involved with more clarity on our path forward.

At the time when companies are looking to optimize cost and drive efficiencies without sacrificing innovation, especially around generic debate.

Our platform enables them to harness the ball a little bit to.

Daniel: To achieve actionable outcomes.

As we look to the future of this automation our focus isn't just on boosting productivity and efficiency. It's also about redefining what is possible with the breadth of our AI powered platform us capabilities.

The impact that the combination of generic debate on automation provides our customer is significant and it's expanding.

From our early customers like S. M D C at Orange.

Customers that have grown and expanded significantly over the last year like USDA and HCA. They continue to emphasize how is the combination of automation and AI.

The LIBOR plus four.

For me the business, that's enabling them to thrive in today's environment.

We view generally don't do that.

As the secular tailwind that will continue to benefit our business.

Catalysts, we're continuing to innovate across our platform to expand our competitive moat.

Turning to our first quarter results yeah.

Grew 21% year over year to $1.508 billion, driven by first quarter of net new <unk>.

A $44 million.

Excluding the FX headwind of 3 million net new <unk> totaled 47 million bolus.

Two three.

$335 million, an increase of 16% year over year normalizing for the FX headwind of approximately $8 million.

Revenue grew 18% year over year.

While our topline results were generally in line with our guidance range, we are not satisfied with our performance and I'd like to give you more color on a few key factors that impacted first quarter results.

First.

Why do we have the healthy start to the quarter, we saw the pace slow as we progress through the second half of March and into April.

This was primarily due to the impact of a challenging macroeconomic environment that we see persisting with mid market customers as well as a change in customer behavior, particularly with large multi year deals.

As a result, several large expansion opportunities closed with a reduced size or paul or pushed out of the quarter.

Second we saw inconsistent execution, which included.

Contract execution challenges on large deals and certain sales compensation changes.

Which we are working to rectify it.

While the customer behavior is often a function of the broader macroeconomic environment execution is something we can control and we recognize that we need to improve predictability large multi year deals.

Third our growth product, such as IDP and they spoke to a nation.

Producing positive results. However, there is a need to have with depot execution strategy to scale. These products to reach their full potential and lastly, the investments we have made reaccelerate growth.

Fallen short of our expectations made us less agile in responding to customers' needs and create short term pressure on operating margins all of which we are committed to rectifying.

No let me address our outlook going forward, our revised second quarter in fiscal 'twenty to 'twenty five Guy most are not where we expect them to be there.

That being said, we don't expect the macro environment to improve materially in the near term and we believe it is prudent to guide assuming variability we saw at the end of the first quarter, we'll continue.

It also takes into account the leadership transition, which can create some short term disruption.

Absolutely look to the future we are laser focused on enhancing our execution, including improved saves linearity and deal scrutiny driving higher efficiency across sales and the broader organization.

And I think a deeper and more execution oriented strategy for our growth products.

We are also shifting the way, we engage with customers to reinvigorate our line of business engagement, we've been industry tailored approach.

We plan to go back to our roots building a truly customer centric organization, we're calling innovating with our customers and partners is at the heart of everything we do.

We believe that this foundational work will help us better address customer needs accelerate adoption of our platform and position us to drive market share gains over the medium and long to us I want to be clear we are optimistic about the role of our business automation platform.

[laughter], placing digital transformation the core foundation of our business remain strong and we are making progress on our long term strategic plan, which includes releasing innovative new features and products like autopilot.

To deepen our relationships with meaningful partner like S E T and building a strong community of developers.

Lastly, despite some of the top line challenges, we are still expecting to generally.

Moving on our non-GAAP adjusted free cash flow for the full fiscal year 'twenty 'twenty five.

Turning to a few highlights from the quarter.

Daniel: I'm energized by the incredible events, we hosted including our annual Aig's, Tommy which once again proved to be a great success with over 5000 registered attendees. We introduced new innovations focused around the key factors that business leaves us I was looking for when they embed AI in there.

Automation and program business context.

Model flexibility action ability and trust.

These innovations, including our family of large language those floor lamps doctor on Kantar.

Kantar.

Which combines the best of generic division, and especially I'd say, hi to empower our customers wanted to stand them process any document and a huge.

A message types.

Neither wing the focus but retaining the vast bobble around Virginia.

Our specialized in Atlanta significantly outperformed the I would put the courtesy of currently available out of the box.

We also introduced context zoning and new feature within the UAE buffet I cross layer that helps businesses improve the accuracy of Germany, I'm awed by extracting information from company specific data sets.

And lastly, we announced exciting new updates for auto pilot, including the release of autopilot sports developed person test us into general availability in June.

We have seen tremendous interest from our customers across diverse industries, ranging from technology automotive father must stay would because advertising and including some of the largest companies in the world such as dental Wesco and Cigna.

While it's still in its early days autopilot has already Gardner positive feedback and excitement among customers in mobile at the views of General T V I to take action across application stacks.

The wording barriers to entry and accelerating time to value.

On the go to market front.

Many of them continued with our first UA Puff on tour event, Hey, it weren't public sector in Washington D C.

The energy and engagement in the room, where palpable we've over 1000 public sector leads us and implementation partners in attendance. It was truly inspiring to witness firsthand how our platform is empowering public sector agencies to mothers nice I think interest.

Daniel: And nothing gave the club, which country that we also had the opportunity to highlight our recently achieved faster than authorization. This milestone.

It's opportunities where public sector organizations to elevate the operations, who the transformative power of automation.

And we are already seeing customer interest closing several deals in the first quarter, including an existing customer we expanded as they plan to leverage further time to move to the cloud, while but you're seeing document understanding to drive efficiencies.

Speaker Change: Would that work out mutation.

Moving on to our partner ecosystem.

This continued to be a core pillar of our go to market strategy and Gsi's aren't building long term differentiated businesses with us.

During the quarter, we had the great partner supported expansion with work energy group, we constantly they think their automation efforts onto our end to end platform.

With Accenture continues strategic support Theres, no blending to leverage our AI enabled capabilities, including document understanding.

But enhancing customer care on agent productivity and driving additional operational efficiencies and insights.

Partners are also driving new logo wins, including.

Z H I group.

The largest private health insurer in Ireland.

With the help of you why we develop a plan to drive long term digital transformation across their organization.

They are in the process of leveraging document understanding to automate elements of their claims journey and core automation to drive the did you tell these they shouldn't across their organization.

The DG partnerships.

Important element of our strategy and we continue to strengthen our relationship with S. A P, which provides us with access to large transformation budgets, new buying centers and the S. H B enterprise sales machine.

During the quarter, we saw continued success, including an expansion we've done Italian eyewear conglomerate.

Who will be leveraging our platform capabilities to support their migration to <unk> S. A b S for Honeywell.

They had also in the process of expanding their usage of document understanding to optimize invoice and payment processing.

From a technical partnership perspective, just last week, we announced our expanded partnership with Microsoft.

Launching a powerful integration with goodbye, that's where Microsoft 365.

This integration enables joint customers to automate and win business processes and enhance the end user experience with you like that.

Our focus on innovation is consistently recognized by third party research analyst and over the last several months.

Speaker Change: We received multiple industry awards. This has included the recognition.

Everest group's intelligent document processing product.

Matrix assessment 'twenty 'twenty four.

We were named the leader for the second year in a row being recognized for our vision capabilities and market impact.

Our leadership position in IDP is driving demand across our customer base for example.

Schaeffler technologies custom Websense 2018.

Spanned two communications mining and document understanding in the quarter as they look to automate invoice processing quality control document shipping document.

Maintaining those records.

Our continuous discovery capabilities are also <unk>.

Building, our momentum and we were recently recognized as the leader in the 'twenty 'twenty four Gartner magic quadrant for process mining plus forums research report.

Customers recognize the transformation of outcomes they can achieve when they combine our discovery capabilities with our automation product, including a new logo. This quarter. We've one of the largest pharmaceutical companies in North America.

The customer.

I had been using cell phone. These buses realized they needed a tool that not only identifies bottlenecks, but also gives them the ability to take action.

I'll have come focused messaging and full platform of capabilities.

So nathan with the customer.

The old thing in competitive displacement.

Speaker Change: We see an opportunity to share it always experience and passion for fostering the next generation of innovative technology solutions.

And this includes our recent investment in the H company.

Founded by leading AI scientists and researchers that envision is to reach for.

Artificial general intelligence as they commercially deployed foundational action models.

In addition to our investment we are collaborating with them on a commercial partnership.

We believe.

Speaker Change: The H companies building goes beyond the capabilities of that Lance and will be helpful. As we drive a new era of it.

<unk> process automation.

Hey agents collaborate with workers dynamically to reinvent business processes firsthand knowledge I am thrilled to be working with such an exceptional founding team on their journey.

Before I turn it over to Ashish I would like to extend a warm welcome to Rocky Mountain Bonnie our new appointed Chief Technology Officer, Rago comes to us with a wealth of experience in fostering and guiding forward thinking collaborative and customer focus.

Engineering teams.

We're incredibly excited to have him on board and we are confident that his expertise will further elevate our team while delivering best in class innovative solutions to our customers I am proud of the advancements we have made over the last year, including the great talent, we've added to our D.

N E team and it gives me great confidence in their ability to drive our long term product strategy.

I am transitioning back to the CEO role.

As I said several times, we are not satisfied with our results and outlook.

As the founder of you wipe off I am energized to step back into the Seaworld improve execution and refocused the company, while not where customers and partners.

We remain committed to driving durable growth, while maintaining strong profitability.

With that I'll turn the call 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.

I also wanted to note that essentially price and sell in local currency fluctuations in FX rates impacted results.

Turning to the first quarter are our totaled $1.508 billion, an increase of 21% driven by net new <unk> of $44 million, excluding the FX headwind of $3 million net new layer, our totaled $47 million.

We ended the quarter with approximately 10800 customers, including new logos like Dooney, Flexjet Zen business true consulting and calix.

As we mentioned over the last several quarters. The vast majority of our customer attrition continues to be in smaller customers, which in aggregate represents an immaterial portion of our overall business.

Moving onto customer metrics customers with $100000 or more in <unk> increased to 2092, while customers with $1 million or more in <unk> totaled 288.

Our largest customers are also continuing to expand on our platform and we added a record number of customers with $5 million or more in error.

Dollar based gross retention of 98% continues to be best in class and our dollar based net retention rate for the quarter was 118%.

The breadth of our platform capabilities continues to drive expansion across our customer base, including Red Bull, who began with core automation and expanded in the quarter purchasing test suite and document understanding.

They plan to leverage <unk> to accelerate their S 400 migration, while utilizing document understanding to automate various use cases across their finance operations and HR departments, and Etihad Airways, who extended to the full platform this quarter as they plan to leverage our platform to support and build more AI automation across commercial.

<unk> operational functions.

Revenue grew to $335 million, an increase of 16% year over year normalizing for the FX headwind of approximately $8 million revenue grew 18%.

Remaining performance obligations increased to 110 $1 billion or 22% year over year current RPI increased to $683 million.

Turning to expenses.

We delivered a first quarter overall gross margin of 86% and software gross margin was 90%.

First quarter operating expenses were $238 million.

GAAP operating loss of $49 million included $89 million of stock based compensation expense.

non-GAAP operating income was $50 million, resulting in a first quarter non-GAAP operating margin of 15%.

Excluding the FX headwind of $6 million non-GAAP operating income was $57 million, whereas non-GAAP operating margin of 17%.

We are pleased with the progress we are making with our AI products, such as auto pilot and our new Hello lens and we plan to continue to invest in the necessary hosting costs to drive product development and adoption.

The market is evolving rapidly and we view these investments is key to unlocking growth opportunities in the future.

That said, our first half spend is timing related as we feel appropriately budgeted for the overall year, we expect to continue to drive strong cost discipline across the organization.

First quarter non-GAAP adjusted free cash flow was $101 million.

As of April 30, we had $1 $9 billion in cash cash equivalents and marketable securities and no debt.

We remain committed to our $500 million buyback program as we repurchased 938000 shares of our class a common stock at an average price of $23.46 from February one 2024 through April 32024.

Turning to guidance I'd like to provide context around our updated outlook for the second quarter and remainder of the fiscal year as Daniel mentioned in mid March we began seeing increased deal scrutiny and longer sales cycle with our large multi year deals.

Our updated guidance takes into consideration both the macroeconomic environment, our leadership transition and improved operating discipline, which will take time to implement.

Because of the complexities of the ASC 606, we run and manage our business on the IRR, which is most representative of the underlying performance of our business. We are taking a prudent view on the contribution of large multi year deals and as a result, there was an outsized impact to our revenue guidance due to ASC 606 revenue recognition.

This outsized revenue impact is the main driver of a reduction in non-GAAP operating income and non-GAAP adjusted free cash flow for the remainder of the year.

Profitability remains a core pillar of our go forward strategy and we will continue to drive efficiencies across our business to generate strong operating margins and meaningful non-GAAP adjusted free cash flow.

For the second quarter of fiscal 2025, we expect revenue in the range of $300 million to $305 million.

Speaker Change: There are in the range of $1.543 billion to $1 $548 billion now.

non-GAAP operating income of approximately breakeven.

And we expect second quarter basic share count to be approximately 574 million shares.

For the fiscal full year 2025, we now expect revenue in the range of 141 $5 billion to $1 $410 billion.

There are in the range of one 660 billion to $1 $665 billion non-GAAP operating income of approximately $145 million and finally, we now expect fiscal year 2025, non-GAAP adjusted free cash flow of approximately $300 million.

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 we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

Confirmation tone will indicate your line is in the question queue.

You May press Star 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.

So that we may address questions from as many participants as possible. We ask that you limit yourself to one question and one follow up.

If you have additional questions you may re queue on time permitting those questions will be answered.

One moment, please while we poll for questions.

Thank you.

Our first question comes from the line of Geek real bears with William Blair.

Please proceed with your question.

Speaker Change: Hi, Thanks for taking the questions I'm, just if we could just start off could you help us better understand kind of what's changed over the last few months I understand the environment has gotten worse, but when you referenced the issues for those large multiyear deals is.

Is that just scrutiny on deals are you seeing more competitive pressures that are causing customers to churn off of certain deployments or completely drop out of the pipeline I'm. Just curious if you could flush out some of those issues that you're seeing with the large deals.

Hi, Jay Thank you for the question.

Yes, I think that around six seven weeks ago, we were starting to seeing some pressure, especially on the large multiyear deals.

Some of them got shrunk some of them got postponed.

We are not seeing a cause as being from a competitive standpoint.

But it's a I think it's a it's a combination effect towards macro economical environment is variable and cost them or something a bit more cautious than they do more scrutiny into the deals.

The other factor for US was a change in the sales comp that's happened and beginning of this fiscal year and are we we incentivize a little bit less the multiyear deals which in retrospect, it's a it was an execution.

Sure.

Hmm.

Speaker Change: And also I would say put us some more late stage deal execution challenges were identified we have some to give you. Some examples some kind of a in one deal.

It was procured months Adler that's happened late.

Late into the quarter and not the deal. It was the budget reputation that we got to win a little bit too late in the quarter.

Okay helpful and then for the customers that are renewing at lower rates.

How pronounced has that that partial churn been in those contracts and to the extent that you have visibility into it.

What why are customers turning off those use cases is it just digesting what they've ever bought in prior contracts or are there are there any other issues at play there.

Hum.

This is a shame.

When you look at our churn rates actually when you look at it as a percentage of our renewable base. We've said this historically, they're relatively constant right. So I don't look at churn is something that is having an outsized impact you know versus our.

Speaker Change: Our expectations and of course, we always want to work harder to drive those numbers to be to have better benefits so to speak or have more productivity year over year with respect to those down sells them, but it is not actually a driver. So we don't see customers turning off use cases, so to speak to be clear.

Speaker Change: Thank you.

Our next question comes from the line of Mark Murphy with Jpmorgan. Please proceed with your question.

Alright, Thanks for taking the question. This is already move on for Mark Murphy. Our first question is I think you mentioned during the prepared remarks, if I understood correctly, a shift towards a sales motion that's more vertical wise well.

I'd Love to hear why you think that's the right approach and why now and what the timeline is.

Towards kind of making that happen.

Yeah. So we are we are we announced our strategy to vertical like.

Oh, our approach in go to market for quite some time Mark.

And I think we've.

Although we won't have one that's happened in the AI world, It's even a better time today for instance, we have seen some of our best return on our investments in go to market in the health care and financial services and public sector and they were driven.

Largely by our investments in AI, particularly literally in the IBP.

And it was we built more than like.

70 dedicated models in this three more of those that are really helping.

With our sales effort.

Speaker Change: Great. Thank you.

And then just some of the headwinds that you described I know you called out.

Macro versus kind of some internal things you guys are trying to improve on is there a is there any way you can help us kind of understand is it more macro more than internal challenges just to kind of get a qualitative sense of what the proportion of this.

Thanks.

Yeah it.

It really is a combination of both it's very hard to you know to quantify and give you an accurate distinction between the two that said I think we we understand the macroeconomic environment is going to be variable. So we're focused on what we can control and as Daniel talked about improving deal execution and driving increased alignment.

In terms of just across our overall teams and being closer to the customer we're confident both in our market leadership and our strategy and if we nailed those execution things those are the items that are in our control and positions us well for the long term.

Thank you.

Our next question comes from the line of Raimo <unk> with Barclays. Please proceed with your question.

Hi, This is Shaun mcmeans on for Raimo, Thanks for taking our question.

It seems like part of the issue is around lengthening sales cycles from large multi year deals and you discussed the change in sales comp incentivize to incentivize. These large deals less given the current macro is the solution to break these deals down Atlanta smaller or is it to incentivize larger deals more and do you see.

I need to change the messaging there. Thanks.

Well I think that there is a need to rectify some of all what are the.

You know the the saves come but we are not going back to the same level as last year. So I would say that the I think we kind of we are tuning right now our sales comp we went a little bit too much in the opposite direction and in rigs.

Got to incentivize the multiyear deals so I think I'm I'm positive that we can land in a middle ground that Oh.

Speaker Change: We'll will really help us.

And and our growth rates.

Towards this year and into next year.

Understood and a quick follow up can you speak to the investment in H E. I N. How does that play into your overall AI strategy and any color on the commercial relationship and maybe what's expected there and then how do you see potential success around developing these models that are capable of reasoning and performing more complex.

Our task is that do you expect that to change the automation market. Thanks.

Well I'm very excited about with all the investment into H, a company actually I was driving at directly from our from our side and I got to know.

Them pretty well, it's a it's a great team of <unk>.

Researchers, we they have previous experience into relevant.

Field in AR and AI.

Speaker Change: And we have a kind of a common goal to advance our agenda of what we call right now a gentle process automation.

And to me it's the.

It's the ability of our model tool to get the knowledge.

If a particular task.

And combined this knowledge with the ability to execute the task.

On the top of our block four.

I think if we combine.

All of the assets that we have our understanding of processes.

With their prowess into and this dedicated.

Research.

In a very good position to to build one of the most advanced.

Gentex model today.

Well I, what I feel that this model has the most applicability it's still in the personal productivity space, where people are facing a lot of tasks.

We've vetted down.

Types of complexity.

Speaker Change: But the tough selling themselves very divorce and it's not economically feasible to go to have pay developers to go and automate. These tough base a lot of things they have a lot of unstructured they thought the steps in the task are extremely diverse. So this is where in my opinion is going to be.

The sweet spot of this agenda process automation, especially in the first place if I can say I would I would I would.

I think it's more like a self driving cars that today its more of an assisted technology and it requires.

So really significant leap into getting into autonomous self driving is gonna be in my opinion, the same trajectory for a genetic models.

Thank you.

Our next question comes from the line of Kirk <unk> with Evercore ISI. Please proceed with your question.

Hi, This is tara bed on for Kirk. Thanks for taking the question I'm following up on the first question that was asked when you were thinking about large customers extending their cycle are.

Are you seeing them stay on the sidelines as they're reevaluating their journey I strategies and how do you see you ipads positioning within these companies evolve as their AI strategies mature over time. Thank you.

I wanted to start by saying that the AI engine AI is a tailwind.

Speaker Change: For us.

And we are we have invested significantly over the years and in particular over last year in journey II in June we have a gun to launch our first series of auto pilots and the NGA and there is a lot of excitement around all of the customers.

Our ball, what's using our auto pilot to drive more adoption to reduce the time to say do an overall reduce the total cost of ownership this being said.

I think that hey, I used to creating a little bit of confusion with our customers and they are evaluating.

What kind of.

Tasks are better sweep the bulk to automate via AI, what Bhaskar I better.

But we've you know using our platform, but what I hear from many of our costs that once its actually the combination between gen AI and automation is something that.

A lot of sense to them, we've said it before but it's like the human body and it's hey, I used the brain and our platform is the answer on the legs and the combination makes a lot of sense for most of our customers.

Alright, thank you.

Thank you. Our next question comes from the line of Bryan Bergin with TD Cowen. Please proceed with your question.

Hi, Thank you I wanted to ask as far as the deal scrutiny goes the smaller deal sizes. The postponement is that broad based across the business or has it been more selling particular industries or regions.

Brian It's it's broad based I don't think it's not that were zoned in on one particular area. So for multi year deal perspective, that's broad when we talk about the macroeconomic environment and the variability we definitely see a more pronounced impact on the smaller and midsized mid market customers as we've seen and been talking about historically.

Okay.

And then on the the execution issues are the strategic initiatives that were not working as intended here you mentioned the sales comp dynamic or are there. Other notable examples you've identified you could talk about and how you think about the timeframe over which somebody and attended changes may take.

Speaker Change: Well I think the the sales comp it's fixable.

Pretty quickly and we see as having a <unk>.

Impact into second part of the year.

What are the initiatives that are we are focusing on for instance, one of the big change that they want.

Bring to you wipe off right now is to come back and become fanatical customer centric company.

I think we we went to a distance to go and beach, our business to sea level, which is actually great.

But the reality is that we have to increase our adoption by taking care of all war traditional lineup. This discussed almost.

Within the CIO suite, which I think will benefit a lot more for the new rate people related customer centric.

Oh approach.

Other things that what I think was segmentation was really working on we feel positive about it.

We have a lot to do in the in the partnership for side of the business. We have also created some of our global structures that in some ways I think a slowing though in our decision making process. So I'm considering changes into.

And to bring some of our some of our global teams into the regions.

But overall.

We have a strong foundation, both in product and go to market and I'm pretty bullish on what we can execute into the D C and into subsequent years.

Thank you.

Our next question comes from the line of Matthew Hedberg with RBC capital markets. Please proceed with your question.

Hey, its Mike Richardson on for Matt. Thanks for taking the question maybe.

Maybe Daniel going off your last answer there.

Speaker Change: Maybe you could talk more to kind of what broader strategy changes youre going to make coming back in and <unk> C O and.

Be stepping more away from the product side, especially with bringing in <unk>.

But just love some more color on that thanks.

Yeah. Thank you Mike.

Yeah.

I'm <unk>.

Actually quite happy to be back in the CEO role.

I I had died.

And you know doing the product and engineering for the paucity of what's so too.

Collect on.

I am doing best.

And I.

I think that right now I would like to bring more to get the deal.

The big functional teams and you I thought I think when I say customer Centricity I don't mean only go to market.

I mean product go to market marketing.

And even HR and finance.

We for instance, I don't think we pitch enough to our customers how well our internal automation program is an expense multiple divisions you knew I pop.

And.

Also I have.

But there is something that is more maybe on the.

Speaker Change: Intangible side that they wanted to bring back in this company and.

It's more on the joy of working together I have a feeling that.

We've become maybe a little bit.

I think the mentality of a too big of a company and we've become a bit siloed. So I I wanted to bring back the ethos of our how we wanted the business. How we grew our business I think it was won all our functions collaborating really well everyone. In this company was.

Willing to help.

We communicate to each other it was I think it was more.

I've seen more fluidity. So this is another important change that I want to drive.

Thank you.

Our next question comes from the line of Terry Tillman with tourists Securities. Please proceed with your question.

Great How's it going guys. This is countercultural on for Terry I appreciate you taking the questions.

I just wanted to start one Daniel you talked about that the key pillar of your go to market strategy being partners just kind of wanted to dig into how you're working with your partners to I guess promote solid execution through a continued shift in the go to market strategies, especially as some of the bigger ones. You mentioned, Microsoft deployed just kind of curious what's kind of driving the partnership.

Ecosystem.

Yeah, I think that the we are we have emphasized in the past our.

Speaker Change: Our focus on the growing we've loved your size.

Speaker Change: Essentially it is as you name. It is one of our biggest partner and we continue to drive through deals with them. We have also named <unk>.

Why in tool.

To our burdening spun scripts and they help US you know lending sizable deals our partnership I'm, particularly bullish on our partnership with ACP. We all know we are starting to seeing signs of.

Proofs pipe and.

Also we have quite the.

It's quite a good relationship between our leadership teams and I'm seeing a positive impact for us.

Especially into next year from our ACP relationship I would also.

A little bit about the Microsoft partnership and the recently announce our cooperation with Microsoft Co pilots I think it's worth mentioning it's and to my previous point, the ball with AI and automation interacting and deliberate.

Adding together the value to the customer. This is a this is actually a great example, where the co pilot can can provides the necessary context to the automation that is taking the action and.

And the recent.

Speaker Change: Bill.

Show of Microsoft both such a Scott Godfrey mentioned us in and they cannot just to point out with how important.

Our relationship is to Microsoft.

Of course to us.

Got it that's helpful. Maybe just as a follow up.

$300 million and free cash flow guide for the year, our balance sheet remains pretty healthy just kind of curious about the continued focus on capital allocation and what the strategy might be there.

You're still buying back shares.

Curious on the appetite to continue doing that also maybe.

Some M&A I'm, just kind of curious how you're thinking about that the cash balance free cash flow for the year. Thanks guys.

Yeah look I think that where I'm very happy with the free cash flow generation that we're able to provide here we're committed to driving continuing to drive efficiency within the company. Like you mentioned, we have a strong balance sheet, which gives us a lot of optionality and so I think we're gonna be opportunistic and do what's in the best interest at the company in that.

The discussion that we had every day and every week and we'll just continue to have those discussions and make decisions as they become opportunistic for us.

Michael Turits: Thank you. Our next question comes from the line of Michael <unk> with Wells Fargo Securities. Please proceed with your question.

Hey, great. Thanks, I appreciate you taking the question maybe just a two parter for option if I may.

The free cash flow guide is down by less than the operating income guide.

First part is just.

What's driving the difference any any color. There is helpful. As were recasting our models and then just bigger picture. How you think about the trade offs between shifting more towards margin. If this more challenged environment remains more persistent versus investing into.

Adjacent product opportunities given.

You know tangential interest in AI and other areas that you're closely associated with.

Speaker Change: Which could help catalyze growth thanks.

Great questions I'll take the first one and then you mentioned an address it right off the top of the first is I want to remind everybody that we we follow ASC 606, accounting and so that when you had multi year deals that are impacted and that has a more or an outsized impact to revenue and you can see that.

Speaker Change: Even the differential between our revenue growth rate in our AOR growth rate right within our guidance. We're talking about a 14% are our growth rate, which is significantly better than the revenue growth rate for the reasons that the complexities of 606, both deployment as well as duration.

Tax our accounting so when you impact to revenue and that obviously flows through down to downtown down through operating margin and Conversely revenue does not have an impact on free cash flow. So our billings our collections, we do see some level of volume pressure as we've talked about between the macroeconomic variability.

As well as the execution items that Daniel highlighted so that has just a lesser impact when you look at the pure volume equation and we obviously run a very we continue to run with operating discipline them, which means free cash flow stands stay is front and center with regard to your second question I would I.

I'd I'd phrase it that we don't believe that there is a fundamental and.

There are oppose it forces of being able to invest in being able to generate free cash flow. So we stay committed to our long term margins that we've talked about them historically and yet we're able to invest in the company, we're able to invest within our AI strategy, we're able to invest in great opportunities like H that AI that Daniel talked about.

And we're committed to investing in our platform. We've got great response from our customers in terms of the breadth of capabilities that we continue to offer and continue to watch. So we believe that we can do that well see while continuing to drive efficiencies across.

Across our company and we believe that there are still efficiencies to be had particularly in G&A and sales and marketing and that's a discussion and an operating rhythm that we have with them.

A lot of focus within the company.

Thank you.

Our next question comes from the line of Alex Zukin with Wolfe Research.

Please proceed with your question.

Hey, guys. This is Matt Ryan Krieger on for Alex. Thanks for taking the question I just wanted to circle back to something you said in the prepared remarks, you talked about some deals getting pushed out of the corner, particularly for large contract customers.

Speaker Change: Have you started to see some of those deals close in <unk> and are they also closing.

Speaker Change: Smaller than maybe originally anticipated like you saw in one queue or have some of them been lost completely are they still in the pipeline just any more context around that would be super helpful.

Yeah.

We didn't.

Speaker Change: And you see the color that the color that I would give is its a mix bag. The only thing is we don't really see losses. When we look at the deals that customers are making decisions on our win rate continues to be very strong and consistent with what we've seen historically in terms of closure within the second quarter. Yeah. There's some deals that are closing in there.

Some deals that will continue to you know that we have a path that we're continuing to work through all of which we've contemplated in the guidance numbers that we have in front of us that being said overall, we've taken a more prudent view I'm just given the macroeconomic variability and the timing to work through the execution items regarding our overall guidance for the year.

Great. Thank you very much.

Thank you. Our next question comes from the line of Scott Berg with Needham and company. Please proceed with your question.

Hi, everyone. Thanks for taking my questions.

You can take the slightly insensitive question, because I know everyone's going to have get kind of a two parter here. I guess first is is can you give us any additional clarity in terms of Rob's departure, because it is kind of sudden at least relative to how they kept boeing's expectations.

And then Daniel.

Do you view your your current term as CEO is this a longer term endeavor or something that maybe a little more short term because I know you're excited to kind of just go back and focus on product, but obviously this is a pivotal change. Thank you.

Well they they are really good the question Scott no offense, they can see me.

Oh.

Speaker Change: Well, Rob Whoa.

Was leaving for personal reasons.

Robin and I are in good times and he will continue to be an adviser to the company.

We were partners in many of our strategic decisions.

Speaker Change: And in a way that makes it a bit easier for me to step back into the day to day.

Operational role.

Yeah, I am I had time to reflect one who I am what I am.

One from life and you wipe off is such an important it's such an important part.

Of me that.

Speaker Change: It's.

I cannot see myself separated from the company and all fitness. So I am I My intention is to stay at zero for you know.

For the foreseeable future I'm fully committed to the job.

And.

In fact, if you look back I was the CEO of this company since its inception, four like 17 years I drove the company from zero to be beyond all of plus four successful IPO I'm happy to be fully back in.

Yes.

Excellent I look forward to those continuing conversations Danielle and then just from a brief follow up with machine.

I appreciate all the 606 commentary.

Based on the model.

The short term because it's certainly unique amongst most of them are software companies, but how do we think about margin leverage kind of going forward is this really just a function of getting sales back contract are you more in the next couple of quarters in early next year, hopefully when the when the environment.

It kind of moderates and improves for Ya Wallers aside.

Speaker Change: I guess there are some opportunities maybe to further adjust their cost structures.

Okay.

Sure.

Please.

Sure.

Yeah. Thanks for the question.

The first thing I would say is I.

We have to recognize just given the accounting.

Standard that we follow I think free cash flow is a great is there is a more appropriate measure of our overall margin.

For the company, which continues to be very robust at $300 million rate that continues to be a very high margin range and free cash flow margin rate that is there that being said I think it comes both ways and we still feel excited about the market opportunity and the customer fit and the customer feedback that we see it's why we're investing within AI and continue.

You're going to invest in our platform. We've had great response from our customers that have expanded like USDA HCA and we've had great new logos and new customers that you know we're excited to see them start the journey with us. So we feel like growth is something that we you know that is we will continue to be a leverage lever for us.

And as we go forward that being said like we talked about in earlier in the Q&A I think that there is ample opportunity both within G&A and sales and marketing for us to be able to continue to drive efficiencies and we do that smartly, we don't feel like we have to make abrupt decisions.

And as we're thoughtful about our the strategic the overall strategic areas that we're investing in so I think we can both invest in the company, while continuing to drive our margins while the while the environment continues to moderate you know as you mentioned.

Thank you. Our next question comes from the line of Jason <unk> with Keybanc capital markets. Please proceed with your question.

Great. Thanks for fitting me in maybe just one for a shame.

It looks like the air our guide for the year, it's coming down by about five points and it sounds like you're baking in some extra conservatism, but.

Is there any way to unpack the impact from the macro degradation you know the execution challenges you've talked about and then the management changes.

I I I think unpacking quantitatively when you know, it's very hard to model distinctly there's obviously reinforcing factor as to all of the items and it's hard to disaggregate and as I discussed them that being said I think our commentary early really holds I think that you know the macroeconomic variability.

Impacts those larger multi year deals and I think there is opportunity to offset some of that pressure and with the actions that Daniel talked about which we're committed to correcting on the execution front. So I wouldn't disaggregate. It I think that there is a I think that there is a good opportunity where execution.

And you know can continue to help moderate moderate the impacts of the macroeconomic environment, which is what we've assumed in our guidance.

Thank you.

There are no further questions at this time I would like to turn the floor back over to management for closing comments.

Thank you so much everyone for taking the time and I'm looking forward to meeting many of you over the next few days and you know going forward.

This concludes today's teleconference. You may disconnect your lines at this time.

Thank you for your participation.

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