AvePoint, Inc. (NASDAQ:AVPT) Q1 2023 Earnings Call Transcript

AvePoint, Inc. (NASDAQ:AVPT) Q1 2023 Earnings Call Transcript May 10, 2023

AvePoint, Inc. misses on earnings expectations. Reported EPS is $-0.05 EPS, expectations were $-0.01.

Operator: 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.

Jamie Arestia: 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.

Tianyi Jiang: 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.

James Caci: 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.

Q&A Session

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

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

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

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

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

Operator: 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.

Tianyi Jiang: 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.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.