AVPT - NASDAQ

Good day, and welcome to the AvePoint Inc. First Quarter 2023 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] after today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jamie Arestia, Vice President Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, and welcome to AvePoint’s first quarter 2023 earnings call. With me on the call this afternoon is Dr. TJ Jiang, Chief Executive Officer; and Jim Caci, Chief Financial Officer. After preliminary remarks, we will open the call for a question and answer session. Please note that this call will include Forward-Looking Statements that involve risks and uncertainties that could cause actual results to differ materially from management’s current expectations. We encourage you to review the safe harbor statements contained in our press release for a more complete description. All material in the webcast is the sole property and copyright of AvePoint with all rights reserved. Please note, this presentation describes certain non-GAAP measures, including non-GAAP operating income and non-GAAP operating margin, which are not measures prepared in accordance with U.S. GAAP. The non-GAAP measures are presented in this presentation as we believe they provide investors with the means of evaluating and understanding how management evaluates the Company’s operating performance. These non-GAAP measures should not be considered in isolation from, as substitutes for or superior to financial measures prepared in accordance with U.S. GAAP. A reconciliation of these measures to the most directly comparable GAAP financial measures is available in our first quarter 2023 earnings press release as well as our updated investor presentation, both of which are available in the Investor Relations section of our website. With that, let me turn the call over to TJ.

Thanks, Jamie, and thank you to everyone joining us on the call today. To one results or a solid start to the year as we exceeded our financial guidance on both the top and bottom line. We continue to see healthy demand from organizations that need to address the abundance of SaaS applications and the growth and sprawl of data to deliver a seamless and enhanced digital workplace experience. First quarter highlights included 31% ARR growth and 23% total revenue growth year-over-year, both adjusted for the impact of effects. Q1 reported revenue of 59.6 million. We are comfortably above the high end of our guidance. And we are pleased that Q1 non-GAAP operating income also came in ahead of our guidance, especially in the current environment. As we continue to be laser focused on profitability, we are well positioned for steady margin expansion in 2023 and beyond. I want to thank those of you who attended our first ever Investor Day in March, where we shared our view of the market opportunity, our strategy for capturing it and our longer term financial outlook. It is clear that as organizations modernize their digital workplaces, they need a platform that is well governed, fit for purpose, easy to use, and built on automation. AvePoint, confidence platform capitalizes on this need by empowering organizations to optimize their SaaS operations, and secure collaboration. And this continued uncertainty in the macro environment. Our customers continue to depend on our AvePoint’s confidence platform to rapidly reduce costs, improve productivity, and make more informed business decisions. As the organizations we work with continue to think long-term, they are just beginning to see the opportunities to innovate their businesses, and missed the proliferation of software applications, relentless growth of data need for optimization, and evolving compliance and threat landscape. To expand on this, I want to highlight a few customer wins from Q1, which reflect some early successes tied to acquisitions we made last year. To remind you, our M&A strategy has been focused on tucking deals, to accelerate our product roadmap, expand the offering of our core confidence platform, beat are time to market and improve the penetration of our existing customers, all with a goal of bringing a robust end to end experience to organizations building today’s digital workplace. These examples are clear validation of that strategy. The first is a significant new customer when in the quarter with a largest industry training and development organization in Singapore, which highlights our commitment to build industry solutions. We were selected as the platform choice to power a new learning experience, which will administrate Learning Services seamlessly manage course micro certifications and offer enhanced digital services with 26,000 partner organizations. We secured this marquee new logo by leveraging the strength of the confidence platform in data management and governance coupled with a domain knowledge on last year’s acquisition of AI access to successfully move from the back office to the front office while addressing a new use case. Taking a step back, we see the education and higher learning space as prime for digital transformation. And we are honored to be recognized for innovation by winning the Microsoft part of the year award in Singapore in education industry category. We also remain significantly under penetrated with our existing customer base, regardless of which stage of their digital workplace journey our customers are in, we have solutions that address their unique challenges. Our ability to offer our customers a full platform solutions is a key differentiator and the foundation of our land and expand strategy. Ultimately, our platform approach enables our sales teams and partners to capitalize on additional upsell and cross sell opportunities. A great example of this in Q1 is our expansion win, with one of the largest financial services firm catering to individual investors and small business owners. As existing cloud governance customer with 40,000 employees, the firm needed a better way to measure the effectiveness of his internal communications. A trend we hear more and more frequently from the C suite in today’s hybrid world. Our tyGraph offering, which we acquired last year provides the capability our customers needed to discover critical workplace communication insight with tyGraph implementation, and interoperability with our competence platform. The firm replaces prior analytic solution for Microsoft 365, and can now effectively measure employee engagement, which in turn drives improved decision making and organizational performance. In both examples, the breath of AvePoint confidence platform bolstered by our acquisition of critical technologies allowed us to address compelling customer needs, and we will continue to evaluate opportunities of all sizes to further expand our platform offering and provide greater value to customers and partners. In summary, Q1 was a solid start to 2023, while we remain mindful of near-term economic uncertainty, we are excited for the opportunities we see in 2023 and beyond to deliver shareholder value by advancing the digital workplace, capturing large and growing market and prioritizing profitable growth. With that, I will turn it over to Jim to discuss our financial results in more detail.

Thank you, TJ and good afternoon, everyone. Thanks for joining us. I want to start today by recapping some of the primary takeaways from our recent Investor Day, as well as addressing some of the common themes in my discussions with many of you since then. I will then turn to our first quarter financial results and updated financial guidance before we open up for Q&A. First, our top financial priority over the next few years is profitable growth and we are targeting that by the end of 2025, AvePoint is profitable on a GAAP basis, as well as rule of 40 company based on the combination of ARR growth and non-GAAP operating margin. Many of you have asked how we are thinking about the mix of those two components as we move toward 2025. While, we believe the mix remains flexible, we do see a number of levers on both the top and bottom line and thus a number of ways to get to the rule of 40. I also want to remind you that our ARR growth expectations for 2023 are not the new normal and that the go to market strategies, we discussed that the Investor Day should accelerate ARR growth, while supporting steady ongoing margin expansion over the next few years. I would also stress that we are thinking about our long-term non-GAAP operating margin target of 20% to 25% as separate from the 2025 profitability contribution to the rule of 40. Second, as you look at both our top-line results as well as our guidance, you can see that there continues to be a delta between revenue growth and ARR growth. Many of you have asked when this delta will close. So let me spend a minute on it. The Delta is purely a function of our revenue mix, which as you know includes our SaaS, term license and maintenance revenues, all of which are recurring, as well as our services revenue, which are not recurring and are excluded when we calculate ARR. At approximately 16% of our q1 revenues, services is still a meaningful component of our business. But it is 9% growth rate in Q1 is much slower than the 20% growth from our recurring revenue business. The slower growth of services, which we are purposefully deprioritizing from our sales mix, serves as a drag on our total revenue growth, but does not impact ARR growth, hence the delta you see today. As we look ahead, our long-term expectation is that services will continue to decline and represent approximately 10% of our revenue. So as services becomes less a percentage of total revenues, the delta between total revenue growth and ARR growth will narrow, but it will never completely go away. What we expect will tighten substantially overtime is the delta between recurring revenue growth and ARR growth, which we saw in Q1 with recurring revenues growing 20% and ARR growing 26%. Taken together this dynamic in our financials is why we believe that ARR growth is the best measure of our underlying performance. The third point I would like to make is around our three product suites, where it Investor Day we disclose the ARR contribution from each for the last few years. While much of the questions centered around the fact that our resilience suite has consistently represented nearly 60% of our ARR, I want to point out that our teams have done a fantastic job in driving the growth of all three suites. Specifically from 2019 to 2022 our control suite has grown approximately 33% per year, our modernization suite has grown approximately 40% per year, and our resilience suite has grown approximately 48% per year. So even with our backup products, serving as the largest contributor to the growth of our resilience suite, we have seen and will continue to see strong demand for our modernization and control suite, as evidenced by the two examples TJ just discussed. As such, we are confident that our go-to-market strategies will provide for durable and well balanced growth. Lastly, share repurchases. At Investor Day we discussed the expectation that share repurchases in 2023 would be in-line with 2022 levels or approximately $20 million. After subsequent discussions and analysis, we plan to increase our buyback level and anticipate deploying approximately $50 million in 2023 to repurchase shares, given our strong cash position, and the belief that our stock remains undervalued at current levels. We believe this is an effective use of capital right now. Through the close of trading yesterday, we have repurchased a total of 1,025,000 shares for a total cost of approximately $4.4 million so far in 2023. Turning now to our first quarter results, where I will be referring to non-GAAP metrics unless otherwise noted. For the first quarter ended March 31 2023, total revenues were $59.6 million, up 18% year-over-year and above the high-end of our guidance. And as TJ noted, total revenue growth on a constant currency basis was 23%. Within total revenues, first quarter SaaS revenue was $35.5 million, up 34% year-over-year, and up 39% on a constant currency base. In Q1, SaaS comprise 60% of total revenues compared to 53% a year-ago. Looking at the business geographically, we saw solid performance across all regions, once again driven by the growth in our SaaS business. In North America, SaaS revenues grew 32%, while total revenues grew 13%. In EMEA, on a constant currency basis, SaaS revenues grew 39%, while total revenues grew 35% and in APAC on a constant currency bases, SaaS revenues grew 53%, while total revenues grew 25%. As of March 31, 2023, total ARR was $222.4 million representing year-over-year growth of 26% and growth of 31%, when adjusted for the impact of effect. I want to remind you that ARR includes our migration products, and prior year periods have been restated to include this as well. We ended the first quarter with 465 customers with ARR of over $100,000, up 20% from the prior year period. As we discussed at our Investor Day, we are now providing a number of new disclosures that we believe better align with our strategies and provide more visibility into our performance. One of these was our strategy of driving more business through the channel and as of the end of Q1 48% of our ARR came through the channel compared to 46% a year-ago, and 47% at the end of 2022. And for Q1 specifically 56% of our incremental ARR came through the channel. As we discussed, we expect the channel contribution to continue increasing, which in turn should support continued ARR growth and operating efficiencies. Another new disclosure we discussed an Investor Day is our trailing 12-month gross retention rate. Adjusted for the impact of effects, gross retention rate for the first quarter was 87% in line with what we reported at the end of 2022. On an as reported basis, Q1 gross retention rate was 84%. Turning to net retention rate, adjusted for the impact of FX, our first quarter NRR was 106% and was 102% on an as reported basis. Turning back to the income statement, gross profit for the quarter was $42.6 million, representing a gross margin of 71.5%, compared to 71.8% in Q1 2022. The slight year-over-year gross margin decline is a result of FX and lower gross margins on services. Q1 operating expenses totaled $42.9 million, or 72% of revenues, compared to 41.6 million or 83% of revenues a year-ago, representing growth of only 3% year-over-year. As a result, Q1 non-GAAP operating loss was $329,000 or an operating margin of just below breakeven, again above the high end of our guidance. This compares to an operating loss of $5.5 million or an operating margin of a negative 11% a year-ago, as we continue to focus on profitability and drive meaningful operating margin expansion. Turning to the balance sheet and cash flow, we ended the quarter with $231.7 million in cash and short-term investments. For the three-months ended March 31, 2023, cash generated from operations was $1.25 million, while free cash flow was $1 million. This compares the cash use of $6.1 million and free cash flow of negative $7.1 million for the three months ended March 31, 2022. I would now like to turn to our outlook for the second quarter and the full-year of 2023. While we think it is appropriate to be cautious in this economy, our ability to drive continued top line growth and ongoing margin expansion provides the confidence to raise our full-year expectations for total ARR, total revenues and operating income. For the second quarter, we expect total revenues of $60.5 million to $62.5 million or 10% year-over-year growth. We expect non-GAAP operating income of $0.8 million to $2 million, which represents a year-over-year margin expansion of more than 450 basis points. For the full-year, we now expect total ARR of $255 million to $261 million, or approximately 20% year-over-year growth. We now expect total revenues of $256.5 million to $262.5 million, or approximately 12% year-over-year growth. Lastly, we now expect non-GAAP operating income of $13.9 million to $16.2 million, which represents year-over-year margin expansion of more than 700 basis points. In summary, 2023 is off to a solid start and despite today’s uncertain macroeconomic environment we remain focused on controlling the controllable and consistent steady execution. Thanks for joining us today and with that, we would be happy to take your questions. Operator.

[Operator Instructions] The first question comes from Kirk Materne with Evercore ISI. Please go ahead.

Hi, this is Chirag Ved on for Kirk. Congrats on a great quarter. And thank you for taking the question. I wanted to ask about how you are thinking about AvePoint role in strategic positioning as Microsoft is starting to infuse more artificial intelligence into the product suite? How are you thinking about potential changes to your own product suite sales processes and customer engagement? Thank you.

Thank you. That is a great question. This TJ, we are actually very excited with the disruptive nature of Generative AI. In fact, we actually have been a long time consumer of Azure Cognitive Services, which is what Microsoft uses to surface out open AI services. We are in the app points in the business of business data management and governance. Satya Nadella recently mentioned that by 2025 10% of all data generated will be done by Generative AI. So this means that there’s going to be continued explosion of business data, which positions our point very well in that space of managing data and govern that data. So as I mentioned, we have been a long-term consumer of cognitive services in our product lines. We actually use it in our products, especially around modernization of document management records management, case management solutions. At the same time, we are actively looking at making our internal operations more efficient in terms of support, in terms of case number tracking and automated support, when related to the coding and essentially the case numbers, as well as of course, content marketing. And now we are also trialing with co pilot with our developers. So we are very excited about the latest disruptions in Generative AI.

And maybe one follow-up to that. Are you seeing any hesitation from any customers in terms of engaging on longer term digital transformation, until they have a more clear idea from Microsoft, on what their new AI features and offerings are, so they can plan the roadmap accordingly?

The enterprise customers we engage, I predominantly see that digital transformation as a one way street at the table stakes to ensure that they have the latest technology to use, to leverage innovation, to leverage technology to drive innovation. And all the innovations happening faster and faster in cloud environments so with the hyperscalers. So what that means is everyone is actually really looking at digital transformation and going to cloud as table stakes. Yes, there are certain amount of hesitation around AI and machine learning in so far as data privacy, in so far as copyrights and those are active items being looked at, especially around our banking clients. But the overarching theme of digital transformation and leveraging cloud to drive innovation is there and everyone sees that.

Alright thank you so much.

The next question comes from Gabriela Borges with Goldman Sachs. Please go ahead.

Good afternoon and thank you. I will follow-up with a question on the demand environment, and others a little bit on it in the prepared remarks. I would love to get more detail here. What are you seeing by vertical pipeline build and remind us the cadence or revenue for this year? Has you are decelerating the year and then I believe it already again? So give us a little more color on how you think about the structure of revenue growth?

HI Gabriela, great question. So from an overall demand perspective, as we discuss in the investor day, we set our expectation for the year. We also highlighted the macroeconomic uncertainties and volatilities in the environment. So we don’t see things getting worse, so, of course, we had a great quarter and we continue to anticipate a wider range of outcome by industry verticals, things are consistent with what we have seen previously. So we haven’t seen material changes of that. At the same time we are continue to execute on the businesses to again anticipate a wider range of outcome.

And there was a comment on 2023 not being the new normal. I guess the first question would be why is 2023 not the new normal? And then how do you think about what is when you think about your long-term gross model, you mentioned the rule 30. You mentioned the operating margin target being independent of the 2025 target. So how do you think about and why first off 2022? Thank you.

Yes, hi Gabriela this is Jim, let me let me address that one. So I think, you know, we think about 2023, we are definitely planning, as TJ mentioned, for a wider range of outcomes. So when we looked at our budget, And we looked at our thoughts around revenue growth and ARR growth, we definitely planned for some anticipation that there would be this wider range, and we actually anticipated that our growth rate would actually decline. So we built that into the plan. And it is all in our expectations that we have gotten. And actually so far, we see that, we are in line with all of those expectations. So we feel good about that. We don’t think that longer term that continues to be the case. We have seen, as we mentioned in even in Q4 that this elongation of the sales cycle, we do not expect that to continue into and well into 2024. So we expect that to be a 2023 phenomenon, and that we would expect to see growth rates return more to our normalized what we saw in 2022 and see those pickup beyond the 2023 rates that we have.

Thank you for the color.

The next question comes from Jason Ader with William Blair. Please go ahead.

Thanks. Good afternoon guys. Just wanted to, I don’t know maybe asked you to give yourself a report card on being here in May of 2023. On areas of the business, you feel like you are making the most progress and maybe the areas of the business where you still feel like you have some room for improvement?

Hi, Jason, great question, this is TJ. I think the area of business we continue to make great progress is SMB and channel. That is, again, a space where we have mentioned this several times before, historically, we had very little focus on but in the last few years, we are able to build it to now 20%, our business and as the highest growth rate segment for our business. And just to remind everyone SMB as definition for a Moses 1000 employees or fewer companies. So we continue to see that globally. And so that is doing well. And we have more historical lab points that direct enterprise sales business. And that has its associated kind of services. And those are some things that we actually want to listen to, as Jim commented on. The goal is to get it from now, today 60%, down to 10%, in the medium-term. So those are going pretty well. Now, areas that we continue to see some elongated sales cycle, as Jim mentioned, continue to be in large enterprise space. We continue to win as a platform provider, not a point solution provider. So but we do see some elongation of sales cycles, but that is no meaningfully different than the quarter before.

Got you. And if we look at Office 365, and how resilient that business has been for Microsoft, I guess how should investors think about your correlation to that and is it in a tougher macro environment? Some customers are, I guess less focused on sort of add on capabilities. Is that the right way to think about it?

That is a great question, Jason. What we focused on is providing more value and improve ROI, customers existing investment into the Microsoft stack. So this actually includes consolidation of other stacks that customers have. And you know the market very well, right. There are many other providers out there. Customers have multi cloud deployments, even for cloud storage providers, for example. And this presents a really good opportunity for them to consolidate. So 2023 is definitely your efficiency. So in that regard, we actually really help our customer drive economic outcome with doing some fair amount of platform consolidation actually. As you know, we have this migration platform data integration platform. And even within the Microsoft license usage, customers have mixed license types, F1, E1, E3, E5, and we are able to help them achieve consistent governance and management capabilities across licensed types, again, goes into maximize their existing investment.

And so the elongation on the sales cycles is just a function of the budget environment and customers are still getting there with you. And you are not seeing, you are seeing those deals closed. Just it is taking longer to close?

Absolutely and you are right. Office 365, MC 365 is mission critical. So we continue to see ourselves positioned very well in the market.

Alright, thank you. Good luck.

Thank you.

Thank you.

The next question comes from Nehal Chokshi with Northland. Please go ahead.

Thank you and congrats on the better than guided results across the board. In great customer case study regarding tyGraph. They give us a sense as far as what percent of his tyGraph now being attached to now?

We are seeing really good traction with existing customers expand the story from back office to front office. So this whole hybrid work, environment, employee engagement and employee satisfaction is on top of mine for most C suites today. So in that regard, we are having great conversations and it is still early days. But we are very positive and optimistic on the trends that we are doing with existing customer expansion.

Okay. You guys have a lot of use available for customers to adopt, which suite are you most excited about in terms of driving up your net retention rate over time?

So we have worked to significantly simplify the message. This now we have many products, but it is really categorized into these three suites as part of the confidence platform. So we are really looking, especially through channel expansion and SMB market penetration, which is not easy to do for one software company to cover all three segments of enterprise mid market SMB. We are streamlining message and clearly articulating the value proposition at the suite level, which then involves different actual SKUs of deployment depending on the customer’s actual environment, the idiosyncrasy of the environment, whether they have Google, or AWS, or Microsoft. But we do track at a suite level, so the modernization suite, the control suite and the resilience suite. So we don’t really look at specific down at the individual SKU level when we actually track the sales performance.

Okay. And then your trailing 12-month retention rate did slightly index down. What’s the narrative behind that?

Yes, Nehal. It is Jim, good, good to talk to you. So nothing specific to point out there. Q1, historically is, is probably our lowest quarter for adding incremental NRR to existing customers. It is generally our lowest quarter for renewals. And we see a lot of our upsell motion tied to renewals. So it is ticked down a little bit in Q1, but literally in line with what our expectations were for the budget and guidance, so nothing there to report that is unusual and we would expect Q2 to actually see some improvement to that. So again, nothing on our side that we are concerned about.

Okay great. Thank you very much and congrats on a good quarter.

Thank you.

Thanks Nehal.

The next question comes from Derrick Wood with TD Cowen. Please go ahead.

Oh, great. Thanks, it’s [indiscernible] for Derek, congrats on the quarter. TJ, I think sales reps are now incentivized to drive higher product attach rates. You have talked about the 48% with two plus and 24% with four plus, you have seen the benefits of these new incentives drive greater tax rate this year. Can we still see some of that throughout this year?

Yes, so we do annually contracts. So we will see this over time. But yeah, there’s definitely something that we are working hard to continue to improve on.

Great, and given the kind of channel partner push and your comments about that, I think you have you have a build out of channel partners in EMEA and APAC. How is that kind of built out tracking verse plan and talk about how aggressive you are going to push there this year?

Yes, that is a great question. So EMEA is actually our most mature channel penetration territories. That is historically the way enterprise B2B software are sold and managed. So in North America, historically, we were more of a direct sales organization, especially on the enterprise side, we are making really good inroads in the SMB segment, 100% channel, and introducing more mixing the mid market segment. In APAC, our biggest territories, Japan, which is our largest territory, outside the USA, there has historically always been channeled driven. So we are doing really well there. However, its majority enterprise and public sector. And we are now building out aggressively the mid market, SMB segment. That is a segment that Microsoft is also going after very aggressively. The Australia has always been also a channel partner very, very operating model heavy business that is already well channel driven. But lastly is really just Asia in general APAC, which we centered around Singapore, as well as South Korea. There we do a fair amount of service business to drive innovation that is more direct. But mid market and channel is something that we are now developing.

Great. Thanks guys.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to TJ Jiang, our CEO for any closing remarks.

Thank you. First, I want to thank the entire AvePoint team for their tireless efforts to start the year strong. The in-person conversations that have been having the last several weeks with our management teams in North America, EMEA and APAC, demonstrate that we have the right team and processes in place to capitalize on opportunities in front of us. We are committed to advancing the digital workplace. We are still in the early stages of digital transformation and profitable growth remains our top priority in this environment. Thank you for joining us today.