UiPath Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
September 6, 2023

There are 14 speakers on the call.

Operator

Greetings, and welcome to the UiPath Second Quarter Fiscal Year 20 24 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. As a reminder, this conference is being recorded. It is now my pleasure to turn it over to our host, Kelsey Turcotte, Senior Vice President, Investor Relations.

Operator

Thank you. You may begin.

Speaker 1

Great. Good afternoon and thank you for joining us today to review UiPath's Q2 fiscal 2024 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 Deniz, UiPath's Co Founder and Co Chief Executive Officer Rob Enslin, Co Chief Executive Officer and Ashim Gupta, Chief Financial Officer. Rob will start the discussion and then turn the call over to Daniel. After that, Ashim will review our results and provide guidance.

Speaker 1

Then we'll open the call for questions. Our earnings press release and financial supplemental materials are posted on the UiPath's Investor Relations website, ir. Uipath.com. These materials include GAAP to non GAAP reconciliations. We will be discussing non GAAP metrics on today's call.

Speaker 1

Full year fiscal 2024. Actual results may differ materially from those expressed in the forward looking statements due to many factors, and therefore, investors should not place undue reliance on these statements. For a discussion of the material risks and uncertainties and uncertainties and uncertainties and uncertainties and uncertainties and uncertainties and uncertainties and uncertainties and uncertainties and uncertainties and uncertainties and uncertainties and uncertainties and uncertainties and uncertainties and uncertainties and July 31, 2023 should 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.

Speaker 1

Finally, we invite you to join our user conference, FORWARD VI, next I would like to highlight that this webcast is being accompanied by slides, which includes an embedded AI demonstration video. We will post the slides and a copy of our prepared comments to our Investor Relations website immediately following the conclusion of this call. And with that, I'll hand the call over to Rob.

Speaker 2

Thank you, Kelsey, and good afternoon, everyone. Thank you for joining us. 2nd quarter was incredibly busy. Highlights include the delivery of exciting new AI platform capabilities and several high energy in person customer events around the world, All of them standing room only. Not surprisingly, AI is at the top of everyone's agenda.

Speaker 2

Digital transformation, automation plays a strategic role has never been more important or with the latest evolution in AI more powerful. Customers are excited about the value we deliver and recognize that our platform, which has been infused with AI since inception provides an integrated set of capabilities that combines the best of our specialized AI and governance with the creative power of GenAI, making the potential of automation almost limitless. And we aren't just talking about AI. We deliver on the promise of AI and automation today across our platform. In particular, communications mining and document understanding are generating a lot of excitement with Graeme Sheldon, our Chief Product Officer, We'll demo in a few minutes.

Speaker 2

Turning to the numbers, we ended the quarter with ARR of $1,308,000 an increase of 25% year over year, driven by 2nd quarter net new ARR of $59,000,000 We have approximately 10,890 customers, including new logos Like Australian Postal Corporation, Leroy Seafood, Holmes Murphy and Associates, Dayong Pharmaceutical and Arrow Foods Distribution. Customers with $1,000,000 or more in ARR increased more than 30% year over year to 254, while customers with $100,000 or more in ARR increased to $1930,000,000 2nd quarter revenue was $287,000,000 an increase of 19% year over year. Non GAAP operating margin increased from negative 5% in the Q2 of last year positive 10% in the Q2 of this year. As we progress towards our 20% plus long term operating margin target And we delivered $47,000,000 in non GAAP adjusted free cash flow, a continuing reflection of our growing scale and focus on efficiency. Given that the macro environment continues to be variable, I am pleased with our execution and results.

Speaker 2

The cohort of customers of $100,000 or more in net new ARR is performing well. Value selling is driving platform adoption And these deals are typically expansion where we have a good line of sight into deal progression. The low end of the market has been harder to call, particularly in new customer acquisition. I want to be clear, We feel good about the business and the role automation plays in digital transformation. We continue to execute against our strategic initiatives And it's a nice pipeline building as we move into the second half of the year.

Speaker 2

2 quarters ago, we formally launched our new go to market strategy to improve productivity, sell the platform intensified focus on customers that represent the longest and largest long term opportunities for us. The team transitioned well to our new segmentation model and is embracing the broader platform opportunity. In go to market, we continue to invest in industry verticalization, both in people and enablement tools, which is yielding nice results. We saw particular strength in Banking and Financial Services, Manufacturing and Technology in the 2nd quarter, including great new logos like Performant Healthcare Solutions, First City, Monument Bank and St. Peter's Healthcare System.

Speaker 2

Expansion deals in the quarter included Mitsubishi Materials Corporation, a customer since 2017. We expanded to the full platform As they look to grow the automation program across the company. In addition, our industry expertise gives us unique insights That we can leverage across our customer base, including tools like our solution accelerators. We now have more than 60 available to customers. A Texas based digital health system recently automated their claims form intake process.

Speaker 2

Using our accelerators, They expedited their design to deploy time from more than 8 weeks down to just 2. The foundation of every sales engagement is defining the value of our end to end platform, which helps customers accelerate the automation programs, Drive operational efficiencies and consolidate spend. During the quarter, Saudi National Bank expanded to the full platform As they plan to take the already mature automation program to the next level, driving rapid digital transformation Using the full range of our capabilities in our platform is a board level priority that is actively sponsored by the Chief Technology Officer and the Chief Operating Officer. Platform adoption is also driving competitive displacements. A great example is a Fortune 500 oil producer and a UiPath customer since 2018 with over $10,000,000 in cost savings to date.

Speaker 2

In a competitive takeout that expanded to incorporate document understanding and process mining into the automation program as they look to consolidate 1 AI enabled platform. Looking forward, They plan to leverage our NorthStar value model to identify expansion opportunities across additional lines of business. Not only is NorthStar helping to build pipeline, it also drove several strategic deals in the quarter. Using NorthStar, the team delivered a comprehensive view of operational excellence and tangible value Automation could deliver to a financial services company. And as a result, the customer expanded to the full platform, including process mining, Document Understanding, Communications Mining and Test Suite.

Speaker 2

As part of our new segmentation, we have tasked our emerging enterprise team With driving both customer acquisition and early stage expansion. And as an example, Aphrio, A provider of specialized IT solutions started their automation journey several years ago and recently engaged with UiPath to clearly define how automation can rapid market expansion in healthcare operations. Industry analysts are also recognizing our platform capabilities. UiPath was recently designated as a leader in the Everest Group intelligent document processing products, Peak Matrix Assessment 2023. This is the first time UiPath has been named as a leader in intelligent document processing and the only leader recognized as a star performer for the biggest year over year advances.

Speaker 2

We were also named the leader in the Everest Group Process Mining Products Peak Matrix Assessment 2023 and the Everest Group Task Mining Products Peak Matrix Assessment 2023. Our partner ecosystem is key to evaluating our market leadership position, bringing our share of wallet across key accounts and delivering best outcomes for our customers. 1 of many partner led customer success stories is with Ashling Partners. We have helped ADT Called a transformational automation program across its operations and customer service. This quarter, That program expanded to ADT's call center to provide customer service agents with a single pane of glass to reduce data entry, troubleshooting and other time intensive tasks.

Speaker 2

We're also making great progress with SAP, Engaging with customers and building a joint pipeline. During the quarter, a German agricultural company challenged By the S4 migration, selected UiPath in a competitive win based on our holistic integrated platform. They are in the process of implementing TestSuite for regression testing on the S4 migration and testing of all SAP modules. They also plan to automate processes in their finance department and incorporate process mining and AI into the automation program. Before I move on, I want to highlight that our Board of Directors has authorized a $500,000,000 Stock repurchase program, which underscores the confidence we have in our business, our ongoing cash flow generation and the strength of our balance sheet.

Speaker 2

In summary, we delivered another solid quarter of execution against the variable economic backdrop. We're starting to see the benefits from the go to market changes we implemented 2 quarters ago, and we'll continue to exercise And with that, I'll turn the call over to Daniel.

Speaker 3

Thanks, Rob. Good afternoon, everyone. Before I begin, I want to thank our team members for their relentless commitment to building UiPath, serving our customers and delivering our market leading AI powered automation platform. I believe we are now at an inflection point with AI And I'm excited to have more time to focus on this next important evolution for the company. This is a time of unprecedented technology advances.

Speaker 3

Having said that, AI has been an integral part of our platform since inception, starting with our original core capability, computer vision, which allows software robots to see and understand screens. Today, our entire platform is infused with AI and we are at the cutting edge of the quickly evolving intersection of AI and automation. To be effective, generative AI needs context, which our software robots can deliver by gathering information From across the enterprise in data, documents, CRM, ERP and beyond, It also needs our platform to take action and operationalize the promise of AI today It needs the governance our platform provides to help customers overcome a significant barrier to adoption. Looking ahead, we expect this next evolution of GenAI to be a tailwind to the business, helping Customers create better, more resilient automations more quickly and opening up novel use cases that Develop our productivity by reducing barriers to development with co pilot like experiences and Project Wingman, which We showed you during last quarter's earnings call at the AI4 conference in mid August, we Officially launched Wingman into private preview and we are already seeing strong demand from customers. Wingman brings together our AI computer vision's deep understanding of computer screens with GenAI and is designed to enhance automation creation for both business users and developers through a user friendly experience.

Speaker 3

2nd, we are leveraging Jeneai to make our products better. For example, in Document Understanding and Communications Mining, we leverage specialized UiPath models Faster time to value and higher accuracy for unstructured data processing. And third, the next wave of innovation will allow our customers to identify and enable more advanced automations capable of handling even the most complex processes. To give you a better sense of how this all comes together, I'm going to Share a demo, narrated by Graham. While this scenario has been simplified for earnings format, this is a use case that What you saw in the demo is our ability to, 1st, provide context 2nd, leverage both specialized AI and Gen AI with an open, flexible and responsible platform.

Speaker 3

And 3rd, allow customers to drive action through our built in models, their own custom models and deployment of best in class external models. The result is a speedy resolution And more time for Lisa to spend with customers. Our constant innovation drives our growth and is essential to providing With market leading capabilities, looking across the platform, we have established A competitive mode, which is bolstered by our more than 850 patents globally, Either granted or in the application process, inside that number, there are more than 300 specific to AI, which we expect will grow as we continue to invest. Finally, we invite you to join our user conference, Forward VI, next month in Las Vegas, where you are invited to kick off cocktails On Monday, 9th, followed by our main event on 10th 11th, We will be showcasing our latest platform release 23.10, which introduces new generative AI, Developer and end user experiences across our platform to help customers build With that, I will turn it over to Ashim.

Speaker 4

Thank you, Daniel, and good afternoon, everyone. Unless otherwise I will be discussing results on a non GAAP basis and all growth rates are year over year. Turning to the 2nd quarter, ARR totaled $1,308,000,000 an increase of 25%, driven by net new ARR of $59,000,000 Excluding the FX headwind, net new ARR totaled $61,000,000 Included in this total is more than 5 $100,000,000 in cloud ARR, both hybrid and SaaS, an increase of more than 125% as customers continue to adopt our cloud offerings. For example, Scotiabank, who chose UiPath to further scale their global automation program as they move to the cloud and plan to utilize our AI Our dollar based net retention rate for the quarter was 121%. Normalizing for FX, our dollar based net retention rate was 125%.

Speaker 4

Dollar based gross retention of 97% Continues to be best in class. Revenue grew to $287,000,000 an increase of 19% year over year. Normalizing for FX impact, which was an approximately $3,000,000 tailwind, revenue grew 17%. Remaining performance obligations increased to $905,000,000 up 28% year over year. Normalizing for FX impact, which was an approximately $4,000,000 tailwind, RPO grew 27%.

Speaker 4

Current RPO increased to $560,000,000 Turning to expenses. We delivered a 2nd quarter total gross margin of 86%. Software gross margin was 91%. 2nd quarter operating expenses were $217,000,000 The restructurings we announced in fiscal 2023 combined with our go to market have created an organization that's increasingly efficient and scalable and one which gives us ample room to continue to expand margins without sacrificing investments to grow the business. GAAP operating loss of $78,000,000 included $102,000,000 of stock based compensation expense.

Speaker 4

Non GAAP operating income was $30,000,000 resulting in 2nd quarter operating margin of 10%. 2nd quarter non GAAP adjusted free cash flow was $47,000,000 We ended the quarter with $1,800,000,000 in cash, cash equivalents and marketable securities and no debt. And As Rob mentioned, we are pleased to announce a $500,000,000 stock repurchase program this afternoon. Now let me turn to guidance, which assumes the overall macroeconomic environment continues to be globally variable. For the fiscal Q3 2024, we expect ARR in the range of $1,359,000,000 to 1.36 $4,000,000,000 revenue in the range of $313,000,000 to $318,000,000 Non GAAP operating income to be approximately $32,000,000 and we expect 3rd quarter basic Share count to be approximately 567,000,000 shares.

Speaker 4

For the fiscal full year 2024, we expect ARR in the range of $1,432,000,000 to $1,437,000,000 Revenue in the range of $1,273,000,000 to $1,278,000,000 Non GAAP operating income to be approximately $188,000,000 This translates to a non GAAP operating margin of approximately We expect fiscal year 2024 non GAAP adjusted free cash flow of more than $250,000,000 or 20% adjusted free cash 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.

Operator

Thank you. And ladies and gentlemen, we'll now conduct our question and answer session. Our first question comes from Raimo Lenschow with Barclays. Please state your question.

Speaker 5

Perfect. Thank you. Congrats from me. One question on the in this new world where AI is getting more and more important, what do you see in terms of your Customer conversations with budgets still kind of limited from the budgeting cycle last year, like how does it play out for you And how are you competing for budget dollars in this sort of environment where you know you need to spend more on AI, but the money needs to come from somewhere? And how does it fit to like overall spending?

Speaker 5

Thank you.

Speaker 2

Yes, Raimo, I would say, it's positive for us, the discussion around AI. I think it helps infuse the Our message around specialized AI and generative AI together has really come through. Customers are generally confused by all the announcements that that's happening in the market and they like our approach of showcasing how we've actually built it into the product with Wingman and Jarvis and other solutions, which Actually and document understanding, which we actually showed, which actually helps the platform be more valuable to them And helps us drive the platform to more important consequences.

Speaker 3

Yes, I'd like to add that more customers Realizing that automation is a great means to get more value from generative AI. Actually, even today, I was talking to one of the largest airline in the world, one of our biggest customer And they highlight how they plan to combine Jeneai with automation in their customer service. So I would say that it's a great tailwind for automation adoption across most of our customers.

Speaker 5

Yes. Okay, perfect. Thank you. And a quick follow-up for Ashim, like a great increase on the free cash flow Outlook, were there any special factors in there that we should be aware of or just the better profitability is starting to play through?

Speaker 4

Are doing to see benefits of that come through. So that's organic. There's no special items to mention and we feel like that is a sustainable path forward.

Speaker 5

Perfect. Thank you.

Operator

Thank you. And our next question comes from Mark Murphy with JPMorgan. Please go ahead with your question.

Speaker 6

So thank you so much and I'll add my congrats on top of Ramos. Ashim, are you able to provide the Q3 ARR growth guidance, if we converted it into constant currency terms and or what is implied for the

Speaker 4

Yes, nothing has really moved around. We talked about it in the script of the headwinds, Raimo sorry, Mark. And so like I think that what we provided is there. Normalized for foreign exchange, it's 26% growth in terms of the year over year comparison. And I'd say Very similar outlook here for 3rd Q4 in terms of FX.

Speaker 4

It's not much of an impact as we go forward.

Speaker 6

Okay, got it. And then, Rob, I'm curious just how commonly you see UiPath being pulled into some of Boardroom discussions out there that are maybe being led by the Accentures and Deloitte's and Capgemini's of the world. When they're sitting down with a large company and Trying to formulate a generative AI roadmap for a customer and they may sense that some RPA would be involved As part of that Tapestry, do you see much volume along those lines popping up into the deal pipeline because I think you had some pretty A big commentary on that, how that pipeline is developing.

Speaker 2

Yes. Mark, what I'd say we're having much more significant conversations With the systems integrators and with customers together with the systems integrators, We actually are working on joint opportunities with them. I would not classify it only as RPA. It is about the platform, it's about document understanding, communication, mining task, mining the moat that makes a difference and in Using our Gen AI capabilities, which are actually visual for customers to see and how that benefits them. So that's happening much more.

Speaker 2

I mean, I spoke a lot about our North Star in the script and our North Star is having, it's placing us in the boardroom. I mean, the value Propositions that we are able to showcase with our customers even at a conservative level is very, very Strong and I mentioned a very large insurance company, we went down to pretty detailed process level On explaining how automation and the full platform can benefit them, that customer is going to replace the document understanding with that communication and task mining and process mining and go all in on the platform. So we're very positive About our approach to the SIs and being in the boardroom with customers and we feel like it's fulfilling the What we said 2 quarters ago that that's what we needed to do.

Speaker 6

Excellent. Thank you so much, Rob.

Speaker 2

Thank you, Mark.

Operator

Our next question comes from Bryan Bergin with Cowen. Please state your question.

Speaker 7

Hey guys, good afternoon. First one on just the go to market progress. So, is there any additional metrics you can share that would really demonstrate that the Change in the go to market and really selling down through the C suite is gaining that traction. I think I heard 30% Growth in that 1,000,000 cohort year over year, which is certainly encouraging. But just anything else there you can give KPI wise, Salesforce productivity, anything like?

Speaker 4

I think when you look at it, that is the primary metric that we look at, Brian, because the $1,000,000 plus customers really shows the value of the platform In terms of what's moving, and that is up 34% that we feel customers greater than $1,000,000 that we You'll really contend with. The intangible piece that you also can look at is just overall like our PO balance is growing very well, which shows Continued commitment on deals from our top customers. And then Rob has commented, but we really like the Activity and the way that the sales force and the intimacy of customer relationships is happening. We talked about it in the Q1 among some of the changes and We feel like those discussions and those deal discussions are progressing very well, and that's the intangible factor that we really monitor.

Speaker 2

And I would just add, we feel Brian that we're also benefiting globally now in Asia Pacific and in Europe from the activity we implemented as well. We can See it coming through. And then one last item on that is, more and more differential partners are actually speaking to us, partners that typically would Not in the SI space, not in the existing space that I'm trying to understand how they can utilize the UiPath platform in their business. So we feel really strong about all the activity.

Speaker 7

Okay. I appreciate that. And then just as it relates to pricing dynamics, can you just talk about what you're seeing in market Pricing over the last several quarters really as it relates to competitive deals as well as

Speaker 8

what you're seeing on average across renewals?

Speaker 4

Yes, we see it relatively stable. There's nothing people see the value and the ROIs that We provide, you can see that in many of the case studies and the stories and even in some of the demos. Brian and I think that ROI has given us a good moat around pricing. And so really price is not as much of a factor at deals for us, especially with competition. People will try to undercut it, but they can't deliver the ROI that our platform delivers.

Speaker 4

And that's really why we've been able to maintain a pretty steady pricing and discounting Set of metrics here regardless of the economic conditions and competitive environment.

Speaker 7

All right. Very good. Thank you.

Operator

Thank you. And our next question comes from Keith Weiss with Morgan Stanley. Please state your question.

Speaker 9

Thank you guys for taking the question. A little bit on sort of the competitive environment around generative AI. All of us are going around Listening to a lot of companies talk to us about trying to infuse generative alliance in their portfolios. And it seems like a big benefit they expect to Drew, is automation and a lot more automation within their solutions. Does that muddy the waters for And is there anything you have to do in your messaging to sort of help customers understand what they're going to get from a UiPath versus like an Generative AI is going to help take care of all these road tests and do all these automations for you.

Speaker 9

How do you make sure that you ensure that clarity in the marketplace?

Speaker 3

Well, 1st of all, I would like to make clear that we believe generative AI doesn't change the competitive dynamic When it comes to automation platform. In the end, most of the use cases for generative AI are in the creator space. So you use generative A to create artifacts that are deployed on the platform. I think That plays into our advantage. I think there is no secret for everyone that we have the Best automation platform must complete the enterprise grade platform that Offer governance and security to our customer.

Speaker 3

Generative value helps us to even increase the adoption because It can appeal to a broader audience, less technical people can create better automation. Our platform runs That was automation much more reliable, much more secure than any other platform. So clearly to me, that's an advantage. And I want to Also point out that there is no company that has an exclusivity to a particular GenAI technology. We are using, for instance, OpenAI, Google Vertex, Amazon, Lambda, Everything that is in the market.

Speaker 3

So I think that long term, mid to long term, the creator Gen AI will be basically commoditized and The essence would be that the best platform is going to win even with Better chances in the market because the adoption will be also democratized.

Speaker 2

I tell you Keith, this is from my side. Think it's given us an incredible amount of tailwind to articulate first our AI story at UiPath and give us a platform to showcase where we are with AI and how far we've come. I think that's really surprised a lot of customers in space. In the last since we announced the Summit here, I think it was March, we announced the Summit AI here in New York City. We had 16 events in Asia Pacific and they were standing room only.

Speaker 2

And I can tell you From those discussions, I've spoken to a number of C level executives that actually attended in person and the comment back was, We are so surprised at how far you were. We're super excited about the opportunity that automation can bring and how far you can take it. So from a go to market perspective, from our team's perspective, I think it's been an incredible opportunity to showcase UiPath, the platform and the decisions we made in September of last year to bring it out. I think people will be very excited at ForeSee to see how far we've come as well.

Speaker 9

Excellent. Thank you, guys.

Operator

Our next question comes from Matt Hedberg with RBC Capital Markets. Please state your question.

Speaker 6

Great. Thanks for taking my questions, guys. Congrats as well. Maybe just continuing the GenAI line of questioning, yes, a lot of good content today. And I'm curious, Rob, How do you expect to articulate success monetarily?

Speaker 6

Do you think in a couple of quarters or a year, you're going to be able to specifically call out the actual tailwind or benefit to growth

Speaker 2

from Gen I think we will be able to. So look, I think our strategy that we'll continue to execute again, we'll continue to drive that. We'll continue to look at How we benefit from GenAI? And I believe we are already showcasing how it's impacting our results as part of our strategy and I think that will continue as we continue to drive Northstar and the value creation that customers are As we get more and more reference customers, you think we'll scale as we speak more in the boardroom and we bring the SIs to the floor, all of those will be in our favor. And Honestly, when you look at communication mining document understanding and what we're doing in that space, these are game changers for customers and the value they And that's kind of that's what's going to showcase and that's what we'll showcase in terms of the return that we will get in the next quarters and the next years.

Speaker 6

Got it. Thank you. Maybe just a quick one for Ashim. Realizing that NRR is more of a trailing metric, it did tick down a little bit here sequentially. Do you think we're closer to a bottom in that number, as we sort of think towards the second half of this year?

Speaker 4

Yes. I mean, the way that I look at this is I feel really good about the progress that we've made on the go to market changes that we've articulated earlier this year And last year. And I think as those continue to pay dividends, our expansion rate is the area that you're going to see benefit. You'll see benefit come through in that area. So we still are navigating a variable environment, but the changes that we made, we just were 2 quarters From having done it, 1 quarter from stabilization.

Speaker 4

So I really look forward to seeing the benefits of that through our metrics here as we continue to execute.

Speaker 6

Got it. Appreciate the color. Thanks guys.

Operator

Thanks. Thanks. Our next question comes from Brad Sills with Bank of America.

Speaker 8

Great. Thank you so much. I wanted to ask about the verticals. It sounds like you're seeing some strength here in banking, Manufacturing Tech, any color as to where you're seeing that strength? Are there certain solutions that customers are And perhaps a vertical with this new pivot towards solution selling that we might start to see on that list in the coming quarters?

Speaker 2

Yes, Brad. Great question. We definitely see The full platform around process mining, document understanding and communication driving a lot of that is an integrated Platform as customers want to expand automation from pure RPA into broader categories, where we're able to use Northstar, You see that in Financial Services, Banking in particular, both in Europe and in North America, insurance for sure, across payers and providers In that space, remember, we've also implemented go to market, which has got industry Skills, part of it in our Industry Solutions team is pretty strong. So we're seeing it in those industries. I would also and we forgot to mention public sector, Some really strength in public sector that's driving that as well in federal government.

Speaker 2

So we're seeing it in multiple areas. And I mentioned oil and gas as well, including other areas of energy opportunities as well.

Speaker 8

Wonderful. Thanks. And one more if I may just on land versus expand. I guess where are you in that balance? Could we start to see more land?

Speaker 8

You mentioned some top of funnel softness here, but just maybe in the big enterprise or even medium enterprise, Could we see some progress with more land accounts going forward?

Speaker 2

Yes, we're working. I mean, we see obviously we see we likely we are on the $1,000,000 ARR and above and the $100,000 ARR and above, and we continue to work on the distribution model In this space and we'll continue to treat some of those models that we've had previously in that space, Vashin?

Speaker 4

Yes, I feel like the quality of what we have It's much better when we're looking at the customers and the logos that we're acquiring. So, our enterprise presence or enterprise Connections, I think we've seen meaningful progress there. We talk about kind of smaller mid market emerging enterprise, we say that in various epithets. I think That particular segment is going to be more impacted by the variability of the macroeconomic conditions. So I think Brad, The area for us is not a quantity play necessarily that's going to churn up and down, it's quality and then where we want to get even better and better is then Advancing those quality customers up through better and better sales specialists to increase our expansion.

Speaker 4

That's kind of how we are measuring it and how we look to it.

Operator

Great to hear. Thank you so much. Our next question comes from Terry Tillman with Truist Securities. Please state your question.

Speaker 6

Hi, everyone. This is Joe Mears on for Terry. Thanks for taking the questions. You mentioned that the SAP relationship In your prepared remarks, I'm just curious, how they're helping you on the go to market side and is there any way that you can quantify early benefits from the partnership?

Speaker 2

Yes. Multiple aspects. 1 is working with ASIs. We also have joint teams working on joint accounts. We've Created a common architecture to present to our customers.

Speaker 2

We're busy going through the enablement of both organizations And that will continue to expand through the year. So we've had Multiple significant discussions between both companies and we feel really positive around the enablement. And right now, it's all about enablement and positioning with customers and working with the to incorporate the automation in how they go to market as well. And we will see the benefits Of that SAP partnership in 2025 for sure, in FY 2025.

Speaker 6

That's great. And then just as a follow-up, is there any way that you can quantify the impact of the 10 solution accelerators you have out there that they're having on the implementation cycles or ROI for customers? Thanks

Speaker 4

We don't disclose metrics around individual solutions or product lines at this time. What I can tell you is, we continue to monitor their applicability in the sales cycle and customer uptake. And we're really pleased with the feedback, but we don't provide quantitative metrics or disclose them.

Operator

Thank you. Our next question comes from Fred Havemeyer with Macquarie. Please state your question.

Speaker 5

Hey, thank you.

Speaker 10

I have a single set of questions, but 2 parts here. 1 for Ashim, 1 for Daniel. I'm thinking, Dan, since we last spoke, I've had a lot of fun working with and training up various different AI models of a convolutional one Working on a workstation right now. And I think what struck me through some of this experience is how many of these models are getting more and more Efficient, especially being deployed in the generative AI space, efficient of being deployed on smaller and smaller sets of hardware. So I'm curious kind of 2 parts here.

Speaker 10

Firstly, perhaps for Daniel. Is there an opportunity in the future perhaps for more of the generative AI workloads to be shifted towards the edge rather than using say like Centralized APIs from some of the hyperscalers out there. And then secondly, for Asim, while we're in this phase right now of having Generative AI primarily hosted and available through hyperscalers. Is there any impact on the gross margin line at all to some of the products that are being offered as they're

Speaker 3

I think that's a very interesting question and perspective about The future of Gen AI. We are experiencing quite a bit with LAMA2 at this point. And eventually, I think for Some of the use cases like the one in WIGMAM, we'd love to be capable of deploying this On the Edge, because we'll significantly reduce the cost, the bandwidth required, Time to value, and it's kind of premature at this point to really understand if We can run a significantly large model like, I don't know, 13,000,000,000 parameters on the edge. But certainly, it's

Speaker 4

And then, Fred, like when I look at it, Our gross margin is 88%. We talked about 85% and long term model of greater than 80%. These are numbers that we've been there. I think right now with what we see in front of We factored the uptick of both the cloud and AI capabilities in there and we're in the early days of pricing On these areas, and those are going to be factors for us to consider, in terms of workloads and where they are. So we look at this as developing tremendous value.

Speaker 4

And so it's not really a threat to our margins, from that perspective right now. And we feel very good about the way we've modeled that going forward.

Speaker 10

Thank you. And then if I could ask one more, I guess the third question here because Rob, I don't want to forget about you at all. I don't want to leave you on question. I'd love to ask, as you're having conversations with executives that are considering adoption of broader suites of AI solutions. Just how are you with UiPath considering and addressing privacy concerns, data governance concerns and the like, Especially with respect to generative AI.

Speaker 2

Probably a question for Daniel, but I would tell you that Generally, our security folks will take our CSO will take and our CSO security team will take them through how we deal with data security, Data privacy, how it lands in multi tenant, where the testing takes place and explain to them how we go through it In a way that we would normally go through any kind of sales process. So far, we're handling it, I would say not with ease, but in very detailed discussions and we have detailed roadmaps around that as well.

Speaker 3

And actually automation offer a very good way to anonymize request to It's on a public Gen AI service. For instance, if you want to understand better Document, we can use our on prem services to OCR to digitize the document and then apply PII Algorithm and then send anonymized document to J and A and answer questions about it and then translate Back to the user, I think there are different approaches to privacy and security and We are really well positioned to leverage our platform to offer this enterprise grade use of GeniEye.

Speaker 10

Thank you all very much.

Speaker 2

Thank you.

Operator

Thank you. And ladies and gentlemen, in order to get through all the questions and the time remaining, Our next question comes from Kirk Materne with Evercore ISI. Please state your question.

Speaker 11

Hi, this is Shirov Venn on for Kirk. Congratulations on the strong quarter and thanks for taking the question. Maybe just one for me. As you look into the deal trends through August September, are you seeing more of a continuation Of the same deal, scurred me, that's been prevalent through the year, are conversations starting to get more constructive And do customers seem more willing to invest? Are there any changes in general that you'd flag?

Speaker 11

Thank you.

Speaker 4

No. Like from our standpoint, 1, we don't really I don't want to give in quarter updates, Correct, which I know everybody can respect. I think we feel just the environment, I think Rob commented on it. I think we look at the environment relatively stable as variable and depending on the industry, I think conversations move up or down. That being said, Rob talked I think customer conversations are very constructive.

Speaker 4

They have been. And just having been a customer, I can tell you where there is an ROI, It's the conversations are constructive and I think that's something that we've demonstrated across our customer base for a while now.

Operator

Thank you. Our next question comes from Ari Terzanian with Cleveland Research Company. Please state your question.

Speaker 2

Ari, you're on mute.

Operator

Sir, please unmute yourself. We can't hear you.

Speaker 1

Why don't we go to the next one, please?

Operator

Our next question comes from Michael Turits with KeyBanc. Please state your question. Hi, guys. This is Billy on for Michael. Thanks for taking the question.

Operator

Can you just talk a bit about the trends you're seeing in selling to IT and IT users versus Maybe the line of business and business users, especially within the context of the opportunity for generative AI to democratize that adoption of automation?

Speaker 2

Yes. What I would tell you is, when we launched the platform, we always said we needed to get into C level and we needed to be more relevant with IT, the CIO, And that would also bring in SIs. And we feel like that we're now able to actually bring the 2 together, showcase why they need the How the platform helps them consolidate software, allows them to focus on areas in discovery and automation Infused with AI and then we'd able to take that using NorthStar into the boardroom and articulate the value that the CFO or the CEO or the Head of HR can actually get from automation. So that's more and more the conversations we're having, all the North Star discussions we talk about exactly that. I feel like the CIOs are really starting to understand with the platform, the benefits they get and the value that they can get from it.

Speaker 2

And that's why they actually want to use more and more of When they understand how you can connect document understanding to communication mining using Test Suite to drive that and bolt into automation, We see that as something that's differentiating us versus the competition in a significant way and the value equation is just That's really driving the issue into the boardroom as well. Super positive about it.

Operator

Thank you. Our next question comes from Scott Berg with Needham and Company. Please state your question.

Speaker 12

Hi, everyone. Congrats on the nice quarter. I guess one question I have is one of the items that came up in our work in the quarter was All the kind of explosion and interest in GenAI was kind of an accelerator. It certainly enhanced customer interest in some of the Automation solutions that were out there, specifically RPA. But at the same time, it almost made some deals a little bit maybe more complex and helped shift some deals around.

Speaker 12

Wanted to see how you thought about the balance of kind of that interest in making deals more complex versus maybe In generating larger deals versus maybe slowing some deals down in the quarter and thoughts on second half opportunities within that? Thank you.

Speaker 2

Yes. I mean, what I would tell you is that our customers that we've been working with, the deals we spoke about around Northstar, Our customers have been focused on value and the value creation that we can create from them. Once you've gone through that and they See what's the opportunity. They want to understand the technical environment, what the product does, how it goes. And that's kind of secondary to many of them.

Speaker 2

There's a view that we are one of the best engineering organizations in automation that we actually know where we're going with GenAI. We know AI At an incredibly detailed level and that's why we feel like the whole movement that's happened has given us an ability and a stage to actually showcase Our differentiation in this market. And other words, customers also asked on, they don't want to see announcements, they want to actually see Real benefits that they can showcase and how it can showcase through automation. So we feel really good about that.

Operator

Thank you. Our next question comes from Michael Turrin with Wells Fargo Securities. Please state your question.

Speaker 11

Hey, Michael. Hey, great. Thanks.

Speaker 13

Hey, I appreciate you taking the question. The net retention rate metric looks to be stabilizing in the 120s. You have a good cadence AI related product announcements that we're all digesting, the Q4 guide for ARR looks More muted than what we generally expect from a seasonally stronger period from the business. So maybe Ashim, you can just help frame you're incorporating some of the go to market changes, just some of the macro commentary and any visibility you have into Deal progression between now and end of year and how it all stacks up into the rest of your guide and if that if there's any way to compare that at all to prior periods?

Speaker 4

I would actually Thanks. I would just say the word is consistency. Like we've been pretty consistent about guiding what's in front of us, but also thinking about the Factoring in the variable variability of the environment and the go to market transition, we're pleased with the progress of it. We feel good about our guidance.

Operator

Thank you. And there are no further questions at this time. I'll hand the floor back to management for closing remarks.

Speaker 2

Yes. I'd just like to thank everybody for joining us for the questions and I would look forward to seeing you all at Ford 6. I appreciate your time. Thank you. Have a good evening.

Operator

Thank you. This concludes today's call. All parties may disconnect. Have a good day.

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UiPath Q2 2024
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