UiPath Inc. (NYSE:PATH) 25th Annual Needham Growth Conference Call January 11, 2023 3:00 PM ET
Company Participants
Rob Enslin – Co-Chief Executive Officer
Kelsey Turcotte – Senior Vice President, Investor Relations
Conference Call Participants
Scott Berg – Needham
Scott Berg
Thanks everyone for joining us today. My name is Scott Berg. I lead the enterprise software and SaaS research efforts here at Needham. Today with us, we have UiPath. We have the company’s relatively new co-CEO, Rob Enslin, with us. Rob, thanks so much for joining us.
Rob Enslin
You’re welcome. Yes.
Scott Berg
First time we met in person, so we’re going to learn all this on the fly here, it’s great.
Question-and-Answer Session
Scott Berg
I guess, how about a brief overview of UiPath, what the company’s platform does, for the few people here that might not be familiar?
Rob Enslin
Yes. I mean, the company started in RPA space, and really took off, I would say, around 2017. And since 2017, it did significant amount of investments in a broader space around UI, around automation, in general. So, the platform today — the UiPath business platform today has three major categories.
Discovery, which is process mining, task mining, and a new acquisition we did around Re:infer, which is called communication mining, but think of it as understanding email, understanding sentiment in email, understanding chat, tickets and so on. So, that’s all in the Discovery — in the Discovery process.
And then, it has a process called Automate, which is basically low-code/no-code, workflow, the ability to create apps. It’s got a studio development environment for citizen developers, for professional developers and so on to create so called automations or bots.
And then, it has an Operate capability, where it actually allows you to manage your automations. It’s got some significant, I would say, extensions when you look at the market where we actually do things like document understanding, text understanding, the ability to read documents and to process on documents.
And then, we bought a test suite, think of traditional tests, regression testing, things that are super exciting in the enterprise space. Test suite to actually do to connect actually automations to testing, so that you could actually scale automations really fast when things change, and allows us to have some significant differentiation with companies.
And I’d say, this relatively new co-CEO — what’s relative, by the way?
Scott Berg
I don’t know, we’ll go with — within a year.
Rob Enslin
Within a year, yeah. I think it’s eight months I’m into it, probably nine months or eight months.
And so, the platform, we are driving the process of defining a category of automation or hyperautomation in this space. And those all the pieces that actually put together.
Largely, we see a TAM or traditional TAM market, which we actually defined as roughly $93 billion of opportunity. Gartner has models that come up anything between, I would say, a couple of hundred billion. I mean — but we see the opportunity is significant.
Scott Berg
Okay. The last time I checked your revenue level was, we’ll call it, plus or minus $1 billion. So…
Rob Enslin
We got a lot of free runway.
Scott Berg
Yeah, exactly. That’s exactly where I was going with.
Rob Enslin
This is a freeway to ride.
Scott Berg
We’re going to start talking about the industry a little bit, because I think investors’ perception of this industry is still a little bit on the light side. When I first started doing research on you and your competitors several years ago in the space, the one comment that was made to me was every, call it, white-collar employee or higher within a company can benefit from the use of an RPA bot in their corporate life. But can you talk about how broad the use of bots within an enterprise can be? Because I think a lot of investors tend to believe that it’s really only regulated to the offices of CFO.
Rob Enslin
Look, first of all, I think it makes a lot of sense in the CFO’s office, because it does repetitive mundane task really well, right? So, when you look at any other transaction-based systems, they all end up in the finance posting in the GL. And what you find in the finance — the things that we can do really well in a finance organization are accounts payable, accounts receivable, invoice matching, invoice splitting, connecting different systems, like signing on to an Ariba system or a Coupa system, creating a split invoice payment automatically and so on to SOX compliance really well generate stock-based compensation. So, there’s a lot of pieces in the finance that creates levels of efficiency that CFOs are always trying to go after. So, it’s a natural — it’s just a natural opportunity.
But when you think about the way that companies have utilized it, and if you look at a couple of our customer cases, they’ve utilized the platform in a significant way. I mean, I would use a couple of examples, different examples, to give you some kind of an idea.
Generali, for instance, the insurance company, been around, I think, 140 years. In the last three years, they’ve saved €80 million. They have a target to get €125 million — these are public today, with — through UiPath Automation, not through anything else, through UiPath Automation. They’re doing all of their claims, payment processing automated through our automation.
A bot is simply an app. So, we use the word bot or automation. If you look at the New York State, when COVID came, I mean, they processed — they had to process 1.2 million claims in two weeks, that could not have been achieved by providing humans. They utilized the technology from automation and bots to process it. And through that process, they were able to identify possibility of 12 billion in fraudulent claims, right? So, that’s another example.
And then, when you look at a media company like Dentsu — everybody knows Dentsu. They do ads, media, they’re fourth largest in the world. And they run — they basically do automation at the citizen developer process to take away mundane task, so that their creative people are able to spend their time doing creative stuff. So, cut and pay simple stuff when they come to work in the morning, and all their tasks for the day already automated and ready for them to go and they don’t actually have to do those tasks.
Ernst & Young have over 125,000 automations running today. They do a lot of the SAP work. Their consultant advisory services actually do not want to sign on to an SAP system for a number of reasons. They don’t spend a lot of time in it. It’s once a quarter or so on, so that they’ve driven automations to actually build those processes and do the work for them, so they can spend time with their client in advisory services.
And then, Uber, I think there’s a couple of places I’ve mentioned Uber a couple times, when Uber had to bring 460,000 drivers back, they used UiPath to go and do security checks, Department of Transportation makes certain that they’re validating, and their view is that they were saving about $2 million a day doing that.
Scott Berg
Wow.
Rob Enslin
So, there’re significant use cases in different departments. We are — when you look at where we have been very successful in the last three years, it’s been in banking, financial services, insurance, health care are a couple of the areas that we’ve been really successful in.
Scott Berg
Okay. So, from an industry perspective, you have, at least in terms of revenue, one larger competitor. There’s a few smaller competitors that…
Rob Enslin
Who’s the larger competitor?
Scott Berg
The initial is AA?
Rob Enslin
They’re not bigger than us.
Scott Berg
No, not bigger than you. Just larger in general revenue, more than $100 million, certainly not larger than you. Yes, just reasonable size. But there’s also a large platform player based out of Seattle that’s been trying to get in this space at least…
Rob Enslin
Okay, that one on you.
Scott Berg
Yeah. How do you think about UiPath’s competitive positioning and differentiation relative to those other vendors?
Rob Enslin
Yes. So, when you look at the RPA environment, I don’t feel like — I think we feel like, in many cases, we replaced Blue Prism, especially in the financial services, in the banking institution on a consistent basis. We had two, we announced in our Q3 results with Bank of New York Mellon and Orica where — that we replaced the competitive — and we see that consistently. And that’s a case of innovation and technology.
We don’t see as much automation anyway in the market. We feel, in the RPA space, we continue to take market share from all of them. Specifically, in our RPA space, not in the full platform space, but in our RPA space, we feel like we continue to take market share. Gartner have basically published — it’s probably a year old, but have published that we have 36% of the market share. We’re the only one that’s growing at roughly 6 percentage points.
So, in the RPA space, we feel like we’ve differentiated ourselves significantly from the two competitors that are in this space by driving the platform play, having UI-type automation at a significantly different level. Then, we have processed mining today, task mining, communication mining. They don’t have those kind of technologies in place, so we can actually service a much broader audience than either of those competitors.
With Microsoft, we are both partners. We co-opt with them. We do a lot of technology work with them. We made an announcement that we are their preferred enterprise automation platform for their customers. That largely would tell you that the Azure salespeople actually enjoy driving UiPath into their customer base, because we drive significant amount of [commits] (ph) off the cloud platform for them. And they don’t have an enterprise platform. So, here, we actually — we live side by side when they have an ELA-type license agreement in — the Power Automate and on the Office 365 and customers. But the moment customers want to scale, then they look to UiPath to scale in the enterprise space.
Scott Berg
Okay. So, let’s talk about the UiPath product specifically. UiPath and RPA really began with larger enterprises adopting an on-premise deployment of bots. But last year, you all released your first kind of cloud-native bots, in particular. Can your cloud bots do everything that the behind-the-firewall bots could? Or are there some limitations there, because it’s new?
Rob Enslin
No. I mean, they’ve been developing the cloud-based environment for quite some time. They actually have the same capabilities between the cloud and on-premise. But we actually just — I mean, we have followed and adopted a policy of — customer can decide where to drive it, what makes sense for them. When you look at the smaller customers, really clearly, they’re driving more cloud. When you look at more regulated financial institutions, they’ve continued to drive the on-premise version. But customers can also take the on-premise version and there’s no reason why they can’t run it in a cloud environment, in an AWS, in a Google, in an Azure environment.
Our product is built on Azure, right, the full cloud product. And, yes, it has the same. It also — we also have benefits in the sense that when you have a sovereign environment or you need to position your solution set into a sovereign-type environment where they want the data or they want the thing running in a sovereign environment, we can actually run in a sovereign cloud, which allows us to support governments the way they require those kind of environments, which are quite a few today.
Scott Berg
Okay. So, what would be the maybe pushes or pulls over a period of time of why more of the market would or would not go towards a cloud deployment — or cloud bot deployment versus the current on-premise…
Rob Enslin
I’m a huge fan, [indiscernible] come from Google.
Scott Berg
I kind of knew that. So…
Rob Enslin
I have a hundred reasons why I think cloud is, for me, the preferred model, right? I think it’s scalable. It’s very secure. You have lots of flexibility with it in terms of deployments. And so, I think customers, the same thing. We take away — from a server-less point of view, you take away a lot of the management capabilities, the need to management, it’s all managed for you in that environment. It’s a lot simpler and a lot easier to scale. And I think more and more companies will be doing that in the future. I mean, it’s just easier to deploy, faster to deploy, simple to deploy in a cloud than it is in an on-premise world.
Scott Berg
Okay. At your recent Analyst Day that I attended in Vegas, you had a number of new product innovations that you announced that will help expand the TAM to the $90 billion that you talked about; new PaaS, low-code automation platforms, new business process management capabilities. How are these products complementary to your core RPA platform? And how should we think about their growth trajectory relative to what you do with…
Rob Enslin
I think it’s a great question, right? Because I think — so if you look at what we said we’re going to do at Investor Day, we said we would launch platform pricing, right, which we did. And platform pricing changes the way we price, because we were pricing previously at a line-item level. So, every product was at different sales cycle. It’s kind of tough. And we — with the platform basically gives you capabilities to do all in the management stuff, gives you document understanding, test suite is part of the platform, and ability to utilize that to create automations.
So, putting that into the platform, we believe, you need low-code/no-code. You need to have a workflow engine. You need to be able to do integration services through API management. Like you cannot — in a world of automation, you cannot only do UI, you have to do API, because API is a piece that connects only SaaS systems, SaaS application together, and it’s really what’s going to drive automation in the future. It’s critically important to have the UI piece as well. But those product sets are really important as part of the overall platform piece. And that includes things like process mining, task mining, and our communication mining and automation hub thing.
We believe that in the next couple of quarters or months or in the next year, you will see the analysts come up with a very clearer definition of automation and hyperautomation and what companies need to have in this place. We think that we have the majority of those solution sets to create an automation platform. And that’s why we actually launched the UiPath business platform at the Investor Day. So, it was very clear to everybody that we — these are [non-line-item] (ph).
And that actually — it actually accelerates the revenue growth in our customer base, because they are — we have fully integrated the utilization and the use of these products together, so that they look like one common environment — they’re all one common environment. They look like one — they’re all one common environment, and you’re able to determine which processes you should be automating and which returns you can get. You can actually see in the system. If you automate through process mining, you can go back and look and see what benefits you got. What — how much of the process is going? How much faster is it going than it was going last year? What kind of improvements you can still continue to do? So, it creates a continuous loop for customers to do automation, and to continue to have automation going.
And the companies that have done really well like Generali and Orange have really been doing that for a couple — I mean, it’s not — we didn’t — they would — they’ve been doing this because they figured it out how to do this over time.
Scott Berg
What’s the customer feedback been like on the platform pricing? I know it’s still early.
Rob Enslin
Yeah. I mean, really, surprisingly positive and it actually changes the discussion we have. So, customers have been interested because when you — I mean, you’ve been in enterprise software for a while, you know that over time things consolidate, right? At certain point, best-of-breed solutions become complex to manage because there’s too many pieces to it. So, if you look at our UiPath platform, business platform, you could probably plug in 20, 30 different product vendors into that platform.
And if you go to many of these Global 2000 companies, they’ve got 10, 15, 20 vendors running on process modeling, process mining, another one for task mining, something else for testing, right, somebody else for document understanding and so on. You can go through the whole process. And then, they have logs going to Splunk to manage the thing. And it’s just very complex for them to manage, and it’s very complex for them to bring in a systems integrator, because they don’t have somebody that has that kind of skill set. They don’t have — they don’t want to bring in 10 people, it’s just not cost effective.
So, the — it’s been really positive. What companies have — as we’ve gone through the conversation, they actually wanted us to prove out that we’re good enough. Like, how we — in our process planning, how close do we get to Celonis? Are we close enough to Celonis, where they’d say, “Look, I can get enough benefit out of UiPath. I don’t need Celonis anymore. I’m not going to go down that path. A lot of customers in that space.” In the testing environment, it’s like, if I can use it for the full automation stack, yeah, then I’m going to replace my existing testing tool. I’m not going to just use you for testing. I want to use you for the whole piece.
So, it’s been extremely positive in the larger companies, and, I would say, it’s been — we are extremely busy. It’s changed our conversation and who we’re talking to in many of these companies.
Scott Berg
Also at your customer conference, I heard of several changes to your go-to-market strategy. Fast-forward, we’ll call it, four, five months, have these changes been more subtle in nature? Have they been more significant maybe? And are you kind of through what those changes look like? Because I always think it’d take a sales cycle or two to really take effect.
Rob Enslin
Yeah, I don’t think anybody thought it was subtle.
Scott Berg
I’m trying to throw a softball on that.
Rob Enslin
I know. Look, first of all, I think if you’re going to do changes and you know what changes you need to do, and you think through it, you got to do as fast as possible, because you want your organization to get stable as quickly as possible. Having an organization constantly in change, creates disruption for a very, very long time.
So, we spent a lot of time before Investor Day, validating — Chris and I came in and we kind of looked at this and we looked and said, you can’t continue to sell the pricing the way we’re doing. It’s just — it’s too complex. Like, we will never find enough salespeople to be able to understand that. And customers are going to just take a long time to buy. Sales cycle is going to be long. And the challenge we had was when we looked at the numbers, like we shared with you our top 25. You look at our investor deck, the top 25 customers, and you can see their scale. But they scale in year three and four and five. Like, we don’t want to wait to years three, four and five, we need to bring that way upfront.
And so, when we looked at those, like, okay, what do we do really well? We acquire customers really well. Challenges, we acquire them in small departments. We don’t scale it well. And the reason we don’t scale is because we’ve got quota carriers that have 40 to 50 accounts. They’re never going to have focus. Like, they’re never going to focus on where they need to put all eight hours of a day into.
So, when we decided to actually do it, we decided, like, we’ll make the announcement at Investor Day. We’ll run it through the year, and we’ll drive the changes as we go through the year and not wait like most companies do to the next fiscal year, [do it okay] (ph), and then next fiscal. We think that would have been so disruptive, because people would have known what we’re doing. So, we did it. And we had a good Q3. I think we managed the complexity. We are, I would say, not — you’re never done with changes, but we are pretty much done with the changes. Pricing is rolled out. Solution packaging is part of [indiscernible] thing. All the segmentation has been done. And everybody knows which accounts they’re going to have at Feb. 01. We’ve got new leadership in Europe that’s doing really well. And, yes, so I would say you never done, but we are mostly complete with that, and we feel like we got a good handle on the complexity of the changes and the disruption, and we think we’ve managed the disruption pretty well.
But I would also tell you, I think our salespeople initially were very concerned. Like, whenever you take something away from salesperson, they cry, right? It’s the first thing. It’s, like, “I’m not going to make my numbers.” Like, the reality is when you show them what they can do with the platform and the pricing and when you close Bank of New York Mellon and you close HCA and you close Orica at the kind of type deals they are, salespeople then see a different world. And they say, “Oh, I can actually really get significant opportunity inside of my existing customer. And guess what? I know them. I work there every day. I go and knock on their door. I walk down the passage. I know who Johnny is. I know who Shelly is, right? I have [indiscernible] versus all I see is the name on the door. I’ve never been here. I’ve got to figure out who.” So, there’s no way that they will actually — so our salespeople today, I think, have a much more positive attitude on how they’re going to get money, how they’re going to drive their quotas, how they’re going to get commission in the future. And their task would be like most sales organization, I want the best eight accounts. I want the best 10 accounts, which is natural.
Scott Berg
So, you’re changing tiers to tiers?
Rob Enslin
Yeah.
Scott Berg
Hopefully, at least?
Rob Enslin
Yeah, exactly.
Scott Berg
Okay, good. On the go-to-market changes, you have a very robust partner ecosystem. You have for several years. You already sell large deals directly. How are you changing, if at all, your relationship or how you interact with partners as part of your overall go-to-market changes?
Rob Enslin
Yeah. We’ve put a lot of effort into driving more with partners this year, like in different ways. For instance, right at the bottom, we feel like we’ve expanded our distribution channel with prop — with distribution folks and now actually understand where their pipeline is coming from and how they’re going to get it and why they’re getting it still on the distribution side, which is in the smaller market. These companies are good at that. Like, they can afford to close a $10,000 deal and still make money. It makes sense for them and so on. So that part we continue to invest in.
The partners that have been around the ecosystem for quite some time, they are mostly local or regional-type partners, they’re super excited about the opportunity of presenting a platform and expanding their business, because they know where we’re going. So, they’re very good in RPA and so on. And in the other partners, we’ve been working with the E&Ys of the world, the Capgeminis of the world, Accentures, Deloittes, et cetera, because automation is becoming a major category as well for them to drive. And that’s very important for us to have global systems integrators that actually can work with the Global 2000 that want to work with them, that have relationships with those type of companies, because that also elevates us up into the C-suite of many of these companies.
Scott Berg
All right. I’ll ask probably two, maybe three more questions, and happy to open it to audience in Q&A, if there are any.
The company announced some cost cuts, given the more challenging macro environment. But how do you look at those cost changes relative to your ability to grow? Are you doing anything that might unnaturally change your ability over the next couple of…
Rob Enslin
Yes, we don’t want to cut — this is the way I would look at it like. We said we would drive profitable growth, like, we want to make sure the company continues to grow and I believe there’s a significant amount of innovation still ahead of it and innovation should be the way to grow. So, obviously, you don’t want to cut your engineering capabilities in a way that actually harms you, hard to get back.
I think many folks that know UiPath don’t — probably don’t realize that a lot of the loss — outside of RPA, a lot in the last three years was about getting architecture right for different type of product sets, right? The ProcessGold acquisition required a redo on the architecture to be able to standardize, that’s taken a while. That’s just — now we’ve been able to actually really drive it for process mining and task mining. Cloud Elements, we actually built into an integration, recreate the integration and so on.
So, we feel like we’ve got to a point where there’s a lot of technical depth that we don’t have, right? And when you look at the revenue streams from a product point of view and a significant portion of the revenue came from RPA and there’s a significant opportunity around document understanding, and test suite, and integration services that we actually haven’t tapped yet, and those products are mature, and they have customers, and there’s a market out there, and we’re now positioning it as a platform. So, we feel that’s really cool.
And then, when we’re looking at where we’re going with innovation and what we’re doing in the innovation spend, we continue to spend a lot of time doing a lot of work around AI and ML activity especially. We spoke a little bit to some of you folks around GPT-3 and what we’ve done with GPT-3 and what we’re doing with OpenAI. I mean, we’ve been doing that for the last 18 months, and we see that as a significant opportunity in the future.
We’ve also got a lot of research AI folks, David Bader from the UCLA. He’s actually working with us directly, because we think that’s kind of where the next generation of technology will be headed. And we think automation benefit significantly from that, because we’ve got some massive levels of information around data, how people use things, what they do with information. And together that with large language models, we think this unbelievable opportunity in this space.
So that’s where we’ve gone from a innovation point of view. We haven’t scaled back. We — in many cases, we did not — in the restructure, we did not cut a significant amount of engineers at all. We actually went to lower-cost locations and things like that. And on the sales side, we feel like we have more than — we have more of the capabilities to be much more productive with the existing organization that we have in place, that we’re going into next year.
Remember, our headcount is going to be literally basically flat year-over-year. So, we don’t feel like we need investments in — from a go-to-market point of view, because we feel like we’ve built a highly-efficient model and an engine that we think we can drive. And if we are successful in the markets that we’re going after, we believe we can expand, because we’ll be able to invest and pay for that kind of growth going forward. And I’ll just add, I think UiPath just over-invested early — too early in headcount. And so that was an opportunity to make certain we have the right scale and right size.
Scott Berg
Okay. Last question for me, and I think it’s an important financial one over the next couple of years is the company has already guided to a 5-point negative impact or headwind around revenue growth in the year fiscal ’24 based on selling cloud versus — or maybe with some cloud transitions, right? But how do we think about maybe the progression of booking mix between the delivery models more with the bots over the next two or three years? Is this kind of a — maybe it’s five years. Is this a one-time headwind in terms of around — it’s a revenue recognition basis, I get it, it’s all short term. But what does that adoption progression look like then…
Rob Enslin
What is — Kelsey, what is our progression?
Kelsey Turcotte
Well, [$215 million] (ph) in ARR now in terms of SaaS, the SaaS portion of model. The pure SaaS portion of the model is relatively small.
Rob Enslin
It’s small, right? I mean, it’s tiny. And so, we’ll have some headwinds on that, but it’s not going to be significant, in my opinion.
Scott Berg
Okay. How do you think about the adoption in other cloud bots maybe over the next three or four years in terms of like a percentage of bookings? I know your larger customers really don’t do that, aren’t going to adopt that today. But does that change one or two years out, do you think, or this mix be pretty consistent?
Rob Enslin
I don’t have the exact number on that. Do you?
Kelsey Turcotte
Yes. I think, really — so automation cloud with robots is one of our newer offerings that was offered in spring. And so, things like that starting to ramp as we’re able to really get the SaaS business going. Right now, we offer Flex SKUs for our customers. So, we give them sort of — we’re agnostic about deployment model and we give them options between cloud and on-prem and they can make into flex back and forth, [custom-made] (ph). And so, that’s where the rev rec comes into play. But the SaaS piece is small and it’s growing. We’ve seen triple digits year-over-year this last quarter.
Scott Berg
Great. With that, we have about six minutes. Happy to take any questions from the audience, if there are any.
Rob Enslin
It’s been a long day.
Scott Berg
We have a shy group, all of sudden. [Multiple Speakers]
Unidentified Analyst
Yeah. At the Analyst Day, you guys put out an initial fiscal ’24 ARR number, which under new fiscal year ’23 ARR guidance implies a pretty sharp deceleration now down to 16% growth. I guess what would have to go wrong for you guys to hit that number?
Rob Enslin
It’s a good way to ask that question. We call it an anchor point, right? And — look, I would say, we were thoughtful in how we position the anchor point to put it out there. I mean a lot of companies don’t put it out there. We just decided to put it out there. We took into account that we wouldn’t see much benefit out of Europe and the macro situation, and we would have to deal with that. We also took into account that we could have significant disruption from the changes that we were making and so on.
So, if you go back to when we put it out and we actually haven’t gone back to relook at that model, we’ll, obviously, guide when we do the announcement. But that was all built in. We built in more macro issues, tougher macro issues coming out of Europe that we would — disruption in the sales organization and so on. And so, it was, I would say, a thoughtful anchor point. So that’s the way I would look at that.
Scott Berg
Any other questions? We certainly have time for one or two more. Well, with that, I guess we’ll wrap it up.
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