AvePoint, Inc.

Good afternoon, and welcome to the AvePoint, Inc. Third Quarter 2022 Earnings Call. Please note, this event is being recorded. I'd now like to turn the conference over to Jamie Arestia, Vice President, Investor Relations. Please go ahead, sir.

Thank you, operator. Good afternoon, and welcome to AvePoint's Third Quarter 2022 Earnings Call. With me on the call this afternoon is Dr. T.J. Jang, Chief Executive Officer and Jim Cassie, 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 a 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 third quarter 2022 earnings press release, as well as our updated investor presentation, both of which are available in the investor relations section of our website. With that, let me turn the call over to TJ.

Thanks, Jamie, and I'm happy to formally welcome you to AppPoint as our new head of investor relations. Thank you to everyone joining us on the call today. Q3 was another strong quarter for AppPoint. highlighted by 34% ARR growth and 26% total revenue growth, both adjusted for the impact of FX. Our strong top-line performance reflects the ongoing need to secure collaboration data, sustain connections between people, and ensure business continuity. At the same time, we're laser-focused on profitability, which has always been a priority at AppPoint, but it is especially important in a dynamic macroeconomic environment we have seen develop over the past few quarters and which we expect will continue. Jim will provide more color on our results in a moment, but today I will discuss what we're seeing in the current environment and why our offerings continue to resonate with organizations of all sizes, verticals, and geographies. I will also provide an update on our growing channel ecosystem and the associated financial improvements we're beginning to realize, as well as our increased R&D investments and two recent acquisitions. So let's jump in. As we have said many times, AppPoint solutions help our diverse global customer base overcome a variety of complex challenges in the cloud to continue to innovate. By transforming data and collaboration so users can be more productive with the latest cloud services, the AppPoint Confidence Platform helps companies become more digitally resilient and build the right foundation for innovation. Whether they want to move faster, reduce costs, improve productivity, or make more informed business decisions, AppPoint customers trust they can use our purpose-built platform to collaborate with confidence in the modern workplace. And to remind you, Gartner estimates that the spending on public cloud services will grow more than 20% this year, one of many tailwinds we see that leave us well-positioned for continued strong performance. The AppPoint confidence platform is the only full suite of cloud solutions to optimize SaaS operations and secure collaboration in the workplace. This uniquely positions us to help organizations as they adopt and mature in their cloud usage. So let's spend a moment on each of the product suites and highlight some key new and expansion wins from the quarter that demonstrate how we enable agile business transformation. During a time when companies are taking a hard look at ROI on their digital initiatives, our control suite helps them better understand and manage their data and digital operations. Infrastructure and operations leaders can deliver central services at scale, such as provisioning and lifecycle management through automation and repeatable business templates. With that point, a Canadian federal agency was able to automate user lifecycle management for the 40,000 users in its Microsoft 365 environment. freeing up resources to focus on the agency's mission to improve the standards of living and quality of life for all Canadians. Appoint customer in the financial service industry, American National, reduced new workspace creation in Microsoft Teams by 50% and avoid data sprawl by automating policy configuration and enforcement. This has helped to increase adoption of Microsoft Teams and reduce data storage costs as the company continues to scale its digital investments. In both cases, we empowered business users to maximize their digital transformation investment with greater control over their budgets, licenses, users, and workspaces. As companies around the world continue to move at the speed of their markets, our Fidelity Suite accelerates time to value as they transform from one system to the next, preserving data integrity and ensuring business continuity. With that point, A financial service organization serving more than 13 million people modernized its digital platform by migrating their legacy on-premises environments to Microsoft 365 while maintaining its data privacy and governance policies. And a global coffee powerhouse was able to swiftly restructure its Microsoft 365 environment by migrating more than five terabytes of data in one month across two Microsoft 365 tenants. In both cases, We help these organizations move, migrate, and consolidate data, transforming those assets while minimizing impact on the businesses. I'm also proud of our team's recent win to gain the confidence of the second largest investment bank in the world by revenue. With our Fidelity Suite, the bank will take smart inventory of which data should be transformed, and as a result, will save time and add more efficiency to their digital operations. As our customers transform, so too does the global regulatory environment. and organizations in every industry continue to turn to Appoint's resiliency suite to ensure their data is protected, secure, and compliant. In the third quarter, Appoint expanded its relationship with a global manufacturer to enhance its security posture while reducing its cost to protect its data with multiple vendors. Using our centralized policy management controls, we help the organization eliminate misconfiguration risk and enhance data visibility across their entire Microsoft 365 environment. We also help the organization manage insider threats, prevent data breaches, and enforce the highest level of protection for unstructured data. And with that point, a global technology leader transforming how businesses manage their spend can now protect data in their Salesforce and Google Workspace environments, combating ransomware attacks, and ensuring business resiliency across their multi-cloud investments. These are just a few examples of how our proven technology provides our customers more efficient and secure operations every day. Additionally, we'll hold a virtual deep dive on our platform and technology in a few weeks and encourage everyone to attend and learn more about the AppPoint Confidence Platform. A press release with more formal details will be issued next week. Let me switch gears and turn to our efforts with the channel. You have heard me say many times that our offerings apply to companies of all sizes. And while our technology is enterprise grade, it is also available to help small businesses around the world. We know this customer segment offers enormous potential. Our expanding channel partner network not only deepens our relationships with existing partners, but also accelerates our SMB growth. The expansion of our channel ecosystem continues in line with our geographic and market segment expansion. Our MSP business, which is primarily focused on the SMB market, continues to see robust growth amidst the environment of ongoing consolidation. This is an incredible force multiplier for us. As the larger MSPs with whom we have strong relationships acquire smaller MSPs, we continue to be viewed as a partner of choice, which should help drive sustained demand by small businesses for our cloud solutions. We'll continue to provide updates on these efforts. as we're extremely excited about the potential here to expand our addressable market. While we're encouraged by the financial contribution to date, we also know this strategic effort still has some runway before being fully realized. For example, to encourage our expansion and scaling through the channel, we implemented compensation neutrality with our global sales forces. While this serves As a drag on short-term sales productivity and efficiency, we know that it will bring significant improvement to these measures over the medium to long term and should bring us to non-GAAP and GAAP profitability sooner. Before I turn the call over to Jim, I just wanted to mention several highlights from the last quarter underscoring our continued growth trajectory. The first is our establishment of an international research and development hub in Singapore. which will act as a major hub within our worldwide R&D network and foster local talent to support the growing demand for B2B SaaS solutions in the APAC region. With the growth of a vibrant R&D community in Singapore, Appen will continue innovating to address modern digital challenges, strengthen global cloud resilience for customers, support data sovereignty, strengthen multi-cloud security, and ensure regional businesses are supported at the local level. As more organizations in APAC are embracing digital transformation, we saw a critical need to expand our local presence to support growing customer demand, as well as the opportunity to recenter our presence in the region in light of the broader geopolitical environment. We're also excited by two acquisitions we closed in Q3 2022. The first is TyGraph, whose award-winning platform allows organizations to accelerate success in the digital workplace. Bringing TyGraphs analytics to our Cloud Insights engine creates a blend of capabilities that expands our vision for analytics beyond simply delivering data sets and presenting dashboards. I often speak to C-level leaders who are making the pivot from a primarily office-based working environment to a distributed enterprise, who have a rapidly growing number of workplace applications and are challenged to measure employee engagement. Our goal is to deliver a contextualized experience for data insights, accelerating organizations' decision-making process. By optimizing the workspace and analyzing data from a variety of sources, organizations can better understand employee preferences and organizational trends, allowing them to adapt and pivot their hybrid workplace strategies. The second acquisition is essential. a South Korean-based software solutions provider that will advance our ability to enable large organizations in the region's fourth largest economy to accomplish their digital transformation goals. Building on the expansion of our previously announced FedRAMP-authorized solutions, which can be components of zero-trust security implementations for federal agencies, we achieved a number of ISO and CSA STAR security specifications in Q3. This reflects our continued prioritization of security and privacy for both AvePoint and its customers, with enhanced abilities to help them mitigate access risk, reduce security breaches, and strengthen audit and compliance posture. In summary, despite an uncertain macro environment, AvePoint had another strong quarter. We continue to execute against our mission to enable organizations to collaborate with confidence while positioning ourselves to provide greater long-term value for shareholders. With that, I'll turn it over to Jim to discuss our financial results in more detail.

Thank you, TJ, and good afternoon, everyone. As I review our third quarter results today, please note that I'll be referring to non-GAAP metrics unless otherwise noted. For the third quarter ended September 30th, 2022, total revenues were $62.7 million, up 16% year over year, and up 26% in constant currency. Within total revenues, Q3 SaaS revenue was $30 million, up 34% year over year, and up 45% in constant currency. SaaS revenue constituted 48% of total Q3 revenue compared to 42% of total revenue last year. There are two observations I'd like to make on our revenue performance this quarter. The first is regarding FX. As I discussed last quarter, our international operations are responsible for more than 50% of our revenue and primarily does business in the Japanese Yen, the Euro, and the British Pound. And while our Q3 revenue guidance included an FX headwind based on the prevailing rates at the time, the U.S. dollar continued to strengthen in the quarter, further impacting our total reported revenues by approximately $1 million, bringing our total revenues to the high end of our guidance range. Second, we are pleased that our strategy to drive sales efforts toward our SaaS offerings, our fastest growing revenue stream, continues to be successful. as SAS now makes up approximately 50% of our revenue base. At the same time, as we shift more services business to our channel partners, we expect our services revenue to decline as a percentage of total revenues, which we saw in Q3 relative to Q2. Over time, we expect this mixed shift to continue driving overall margin improvement. Looking at the business geographically, we are pleased with our performance across regions, especially as we look at the growth in our SaaS business. In North America, overall revenue grew 21%, driven by SaaS revenue growth of 39%. In EMEA, revenues grew 50% on a constant currency basis, driven by SaaS revenue growth of 44%. In APAC, revenues grew 9% on a constant currency basis, highlighted by SaaS revenue growth of 61%. We are pleased with our continued SAS revenue growth in APAC, but recognize that our total revenue performance there may fluctuate given revenue recognition and the longer term nature of our contracts in the region. As of September 30th, 2022, total ARR was $191.7 million, representing growth of 30% from a year ago, up 34% adjusted for the impact of FX. Core ARR ended the quarter at $177.5 million, up 27% year over year, and up 31% adjusted for FX. Lastly, SMB ARR ended the quarter at $14.2 million, up 80% year over year, as we continue to see momentum from our SMB customer acquisition strategy. We continue to see strong commitments from new enterprise customers and continued engagement from existing customers. many of whom are in the early stages of their cloud transformation. At the end of Q3, average core ARR per account was $40,285, an increase of 10% year over year. We ended the quarter with 418 customers with ARR of over $100,000, up 32% from the prior year period. Our core ARR dollar-based net retention rate for the quarter was 106%, and 108% when adjusted for the impact of FX, up from 107% in Q2. Turning back to the income statement, gross profit for Q3 was $46.6 million, representing a gross margin of 74.2% compared to 76.3% in Q3 2021. The slight year-over-year gross margin decline is a result of the impact of FX as well as our product mix. with our lower margin services business representing a higher percentage of total revenues this quarter versus last year. Operating expenses for Q3 totaled 44.4 million, or 71% of revenues, compared to 37.1 million, or 69% of revenues a year ago. As a result, Q3 non-GAAP operating income was $2.2 million, or an operating margin of 3.5% which was ahead of our guidance. We continued to balance our commitment to thoughtfully invest in strategic growth initiatives while emphasizing robust expense management across the company. Turning to the balance sheet and cash flow, we ended the quarter with $219.8 million in cash and short-term investments. For the nine months ended September 30, 2022, cash used in operations was approximately $6.9 million, while free cash flow, which includes CapEx, was negative 10.3 million. In Q3, we continued to buy back shares under our stock repurchase program. Cumulatively, through September 30th, 2022, we have repurchased approximately 4 million shares at an aggregate price of approximately $19.6 million. I would now like to turn to our outlook for the fourth quarter and the full year 2022 and provide some color on how we're thinking about Q4. For the fourth quarter, we expect total revenues of $63 million to $65 million, or approximately 19% year-over-year growth, 22% adjusted for constant currency. We expect non-GAAP operating income of $1.5 million to $3.5 million. Our guidance reflects the expected contribution from recent acquisitions, offset by the ongoing operating cost of those acquisitions as well as the timing of certain expenses which moved from Q3 into Q4. As a result, for the full year 2022, we now expect total revenues of $231.7 million to $233.7 million, or approximately 21% year-over-year growth, 28% adjusted for constant currency. We now expect a non-GAAP operating loss of $3.2 million to $1.2 million. Lastly, we continue to expect total ARR of $202 million to $206 million, or approximately 28% year-over-year growth, 32% adjusted for FX impact. Our full-year ARR guidance remains unchanged from the prior quarter, as we expect increased ARR from recent acquisitions to largely be offset by further FX headwinds as well as higher customer demand for our migration offerings. which are not included in ARR. In summary, the team continues to execute despite an uneven macro environment, and I'm proud of our efforts as we help organizations around the world manage digital transformation. We're excited for a strong close to 2022, and we are well positioned to continue expansion of our market opportunities in the years ahead. With that, we'll open up the call for questions. Operator?

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. And we will take our first question from Jason Adder with William Blair.

Thank you. Good afternoon, guys. I just wanted to see if you could give us an update on your go-to-market strategy and just sort of the components of that and then where you're really leaning in at this point.

Hi, Jason and TJ. Good to hear from you. Yeah, go-to-market strategy consistent as we have been executing all year. We're seeing robust demand across our APAC, Europe, as well as North America region's. Our mid-market segment continues to grow very robustly, as reminded us, 1,000 to 10,000 employee segment, along with our SMB segment. Enterprise is also growing well, just not at the rate of mid-market segment because mid-market is further accelerated through channel. But, yeah, we haven't changed the go-to-market motion, and we're executing as we planned for the year.

Who are some of the mid-market channels that you're working with?

So we have major global channel partners from DISDs to direct CSPs. So we have Ingram Micro, Tech Data TD Cinex, and then, of course, SoftwareOne. Those are the global powerhouses. Regionally, we have also Crayon. And we also work with a number of very large MSPs, which collectively have over 100,000 AR already in the SMB space. So we'll continue to drive more business through channel partners, through our comp neutrality model, so that more of our even enterprise direct sellers will be able to leverage channel for scaling.

Okay, great. And then one final question is just on cross-sell and bundling, what do you guys need to do to get that NRR higher? I know you've been aiming for 120 aspirationally, but you're pretty far away from that. What gets you from 108 today to 120?

Yeah, so we have seen some improvement in Q3 versus Q2. We are working through that as we talked about this hunter-farmer separation to go enhance that. We expect the current levels to continue in the near term due to some increased demand for migration services as customers seek to sunset legacy systems, shifting budget from CapEx to OpEx. So as you know, the migration work, we don't count towards the... but it's also not as much in the retention side. Sales reorg into a hunter-farmer model creates further focus, but also the tailwind into improving NR over time.

Anything about cross-seller bundling?

Yeah, that's – again, we continue to do that today. So I think what we have seen is sub-level – double-click on that is we've seen actually upsell percentages to be quite impressive. It's really some of the migration projects that we're working on to improve. But, yeah, cross-sell and bundling – We actually expect some improvement also with the tie graph and other IP acquisitions that will also help us enlarge the ARPU with existing customers.

Great. Thank you, guys.

Our next question comes from Fatima Boubiani with Citi.

Hey, good afternoon, good evening. Thank you for taking my questions. Jim, I have two for you, actually. I wanted to unpack a little bit some of the drivers behind the acceleration in your SaaS business. So really, if you can isolate some of the variables that are driving, you know, better velocity here, and then a follow-up as well, please.

Yeah, in terms of velocity, we're seeing demand really across the board, but particularly, you know, some of the numbers that I discussed in the prepared remarks, we're really seeing APAC. We're seeing significant growth there. We're seeing significant growth in EMEA, you know, and also in North America as well. So we're seeing... you know, real high demand across the board. I think in particular, as people look to try and figure out how they're going to save money and they consolidate, this transformation continues. And I think our offerings seem to be resonating and the demand, you know, continues to increase. So we're seeing it really across the board regionally with, again, really APAC being a driver in terms of the largest percentage growth.

Understood, I appreciate that. And just moving down the P&L on the OpEx management and the cost structure, a number of headwinds there for you just with respect to foreign exchange. But I'm curious if you can just unpack for us in order of magnitude, what's sort of impacting your ability right now to drive maybe more visible operating profitability improvement? So if you could help stack rank for us, you know, if it's FX and if you've got natural hedges, in place, if it's the migration impact, if it's the M&A, just from those lenses so we can sort of isolate some of the sizing of what's sort of holding back more visible profitability expansion. And that's it for me. Thank you.

Sure. Thanks, Fatima. So maybe just a couple points there because there was a lot in there, so that's really good. So I think maybe overall a first statement might be that that we are very focused now on driving and managing our cost structure and improving profitability going forward. So I think one thing to think about is if you look at our operating expense growth for the first two quarters, we grew 35% year over year in the first two quarters. But Q3's growth rate was 21%, and we're guiding Q4 for only 10% growth year over year. So I think we are managing that expectation. A couple things that we're doing there for us, FX is an impact, as you called out, a little bit of a natural hedge there. The second is we implemented some slowing of hiring in Q3, and then we recently announced a complete hiring freeze that will also have a positive impact on keeping our cost structure relatively flat in terms of not accelerating like it has in the past. The other thing we're doing, too, is it's not just about headcount. It's also about really all the cost structures in our business, which go well beyond just people in terms of rent and office space and all those things. I think, like many others, we're taking a look at all of those costs and seeing what we can do to drive those costs down. So, again, we're looking at that as well. But, again, the focus is managing those costs, driving them, and then looking at increasing significantly our profitability moving forward.

I appreciate that detail. Thank you, Jim.

Thanks, Fatima.

Next question comes from Derek Wood of Cowan & Company.

Great. Thanks for taking my questions. Congrats on a good quarter. Start with PJ. Just wanted to ask about the demand trends across kind of the core product pillars, governance, compliance, and migration, and if that – If that mix shift has changed much, and particularly on the migration side, obviously that's got a little different revenue component to it. We did hear from some larger hyperscalers that they're seeing a bit less workload migration from on-prem to cloud. Just curious if you're seeing any of that from a macro standpoint.

Yeah, that's a great question. From a macro perspective, we continue to see strong demand for migration. It's not just on-prem to cloud. There's a lot of cloud to cloud. So in the prepared remarks, we cited a customer that did a tenant-to-tenant consolidation. Of course, we also work with a very large deal with a very large global investment bank on legacy to cloud. So I think migration is something that we, it's part of our business. We've been doing it for the last 20 years. I don't ever see it go away. There's a steady mix of that. It has always been the tip of the spear for us to get into the customer relationships. It's not something from our perspective to be going down. Having said that, clearly our bigger mix are in the resiliency suites. So backup is service. And then, of course, the control suites, which is the governance as well as the SaaS management. And also, interestingly, we are successful across all major enterprise mid-market SMB segments, which is not easy for software SaaS companies to do. And in each segment, there are different preferences. I would say in the SMB and mid-market, they focus on very straightforward data security, and migration concerns. And then when you get into the large enterprise, it's that plus the sophistication around governance, who has access to what, when, from where. So we have that entire spectrum. That's how we are staying resilient and being a very robust platform provider.

Got it. And TJ, you mentioned implementing compensation neutrality to the sales force and that that was going to help bring profitability sooner. Could you double click on that? Is that around kind of incentivizing more channel engagement and that'll help with more leverage or just would love to hear a little bit more about that?

That's exactly right. So we see channel as the single most important X factor to scale our business. effectively allow us to have a lot more indirect sellers. So we're leaning further into it. So comp neutrality means that, especially for our enterprise sellers who have been used to do direct sale motion, where they have far more control over deals, we want to encourage them to include partners into the deals, even if it's just for a transacting partner. So, by doing so, we would give a couple basis points to the partner for carrying paper, so to speak. But we don't let that be any sort of deterrent from our sellers, so they will be comped the same from a quota, fulfillment, compensation, commission payment perspective, whether they run the deal through the partner or not. So, this allows us to prime the pump, so to speak, get that type of behavior change going. So they're used to getting partners into deals. And when they build that relationship over time, then also partners will bring in opportunity to us. So this is a healthy way to foster and do behavior change to get all of our sellers across all three segments to use channel to scale. Ultimately, in the short time, yes, we're paying extra to do company neutrality, effectively paying compensation even on basis points that we're giving to partners. But in the medium to long term, it allows the sellers to actually sell much bigger numbers by scaling through channel.

Got it. And if I could, one quick one for Jim. Just on the FX, it looks like you had a 10% delta between reported and constant currency in Q3, and you're guiding for a 3% delta in Q4.

Just curious why that changes so much.

Well, for us, it's a little bit of the mix of where that revenue is coming from. And so I think we'll, you know, again, we're kind of guiding for that 3%. We think that's probably where we'll end up, despite it being roughly 10 in Q3. Again, we think we're comfortable with the 3% guidance.

Okay. Thanks. Well done.

And once again, if you'd like to ask a question, please press star one. We'll now hear from Nihal Chakshi with Northland Capital Markets.

Yeah, thank you. And congrats on the strong ARR results for me as well, even on an as-is basis. Double-clicking there, though, how much did TiGraph contribute to the ARR?

Hey, Nihal. Thanks for the question. So actually the acquisitions that we did in Q3 contributed about $3 million of ARR. Got it.

And there, I think, was another acquisition that you announced early in this quarter, essential. How much do you expect that to contribute?

The $3 million is both combined.

Ah, gotcha. But then your ending ARR 191.7 wouldn't be – $3 million from TyGraph, it's something a little bit less than $3 million, because TyGraph closed in the September quarter, which is included at $191.7, but Essential is not, correct?

No, Essential is included as well. So, again, there's very little ARR coming from Essential, so we're not picking up a lot there. So, essentially, we're just using the $3 million as the total.

Gotcha. Essentially, Essential is the same. Got it.

Didn't resist. So for ThaiCraft, it's a product IP expansion. Essential is it's a market expansion play for us that allow us to get into South Korea and accelerate our expansion there. So it's for a very different purpose.

Okay, understood. Thank you. And then, you know, your exit growth rate coming out of calendar 2022, on an overall revenue basis is solid, as well as your ARR. Is that how we should be thinking about as a good baseline for calendar 23? If not, why not?

So, you know, we haven't provided any guidance yet for 23. You know, we ended with a strong Q3. We're expecting a strong Q4. But at this point, our focus right now is obviously getting through Q4. We're obviously focused on profitability as well. So really, our focus now is how do we deliver, become more efficient, more effective, and significantly improve profitability. So right now, that's the focus. Obviously, we'll be looking at guidance for 2023 coming up here, but we haven't kind of put anything out there. So I would hold off on those expectations. I would just say that, again, we're expecting a strong Q4, and we're focused on that, you know, improving profitability where we can, and that's the primary focus.

Do you ascribe to the theory that profitability, improved profitability, does come at the expense of growth in future periods?

Well, I think that's what we're working through right now. You know, I don't know that they definitely need to be one-off. What we've seen in the past, though, is we've had significant expense growth, right, that you've all seen to drive that, look to drive serious revenue growth as well. And now what we're doing is trying to, you know, manage both in terms of we want to see significant improvement in profitability and we want to see that revenue growth as well. But we're working through that now, and we'll have an update on that.

That's great context. Thank you very much.

And our next question will come from Kirk Materni with Evercore ISI.

Hey, this is Chirag Vadan for Kirk. Thanks so much for taking the question. First one maybe for TJ. I wanted to ask whether you could highlight any customer examples of expansion and maybe what serves as your north star or goal for an engagement cycle with a potential customer from start to the initial contract signing and then to expansion and upsell opportunities?

Yeah, I think for us, the way we design our confidence platform is actually to follow the natural journey of customers going to cloud. Start with data analytics and migrating and integrating into cloud. in the process of helping customers classify tag, get rid of out-of-date or trivial redundant data, integrate a lot of different legacy data and systems, maintaining their fidelity and go to cloud that way or cloud to cloud, right? So whether it's legacy on-prem, ECM systems like a Documentum or HP Trim to Office 365 or cloud to cloud like a Slack to Teams. So that's the first phase. And then, of course, once in cloud, we're talking about data security and business continuity, ransomware attack detection and recovery. So that's backup and service. And over time, we talk about license management, policy insight to see who's using what, and then governance to be able to sunset channels, private chats in a timely manner to chase delegated administration, and ultimately to do record management, so resetting it even onto physical devices except for tapes for long-term storage or jettison out completely data from a regulatory perspective. And, of course, now with TiGraph expansion, which we're super excited about, it's a great brand within our ecosystem. We're now able to not only handle the mission-critical conversation with customers around their cloud data security and governance, but also expand into addressing a very, very topical situation now all CEOs care about is hybrid work, productivity, employee engagement. So we're now able to measure across different workloads and data silos. We actually have a great data engine aggregating data lake from multiple sources to actually measure the productivity and collaboration, engagement, and even do sentiment analysis across organizations, across boundaries, across hybrid work scenarios. So that's the different phases for us to do cross-sell and up-sell and expansion. And we have customer examples and large and small customer examples doing just that.

Got it. Thank you. And maybe just one for Jim. You talked about over time that services are declining as a percentage of revenue, and this would in turn drive greater operating leverage. Maybe just broadly speaking, do you have any sort of timeline on how quickly you expect that to materialize and by what magnitude?

Yeah, well, maybe we'll start with the latter first. I think our target has been that services winds up being about 10% of our business. So I think that's the easier piece to answer. I think what we saw from Q2 to Q3, we went from 18% to 17%. So I do think it's going to take us a couple of years to get there. But I do think we're going to continue to see the services absolute dollars increasing. But as a percentage of revenue, they continue to decline. And then obviously, when you look at the P&L, it's obviously our lowest margin business. And so obviously, as that declines, it will help improve the overall margins.

Got it. Thanks so much.

And we have no further questions queued at this time, so I'll turn things back over to TJ for any additional or closing remarks.

Thank you. I just want to conclude by saying how excited I am about the opportunity in front of us and what a privilege it is to work with so many talented people, colleagues, customers, partners, and shareholders as we work to expand the future of digital transformation. We recently commemorated the one-year anniversary of our channel program with a global partner appreciation event in Singapore. The stories I heard and the enthusiasm I saw from customers and partners was truly inspiring as we think about how much potential the future holds for AppPoint. I also spent time in South Korea meeting the essential team and saw firsthand how much opportunity we have to make a quantum leap in the region, which is seeing rapid adoption and investment in cloud technologies. In short, we have so much ahead of us, and we're super excited for a strong close to the year while continuing to position AppPoint for durable long-term growth and increasing profitability. Thanks again for joining us today, and I want to wish everyone a wonderful holiday season. Thank you.

And that does conclude today's conference. Once again, thanks, everyone, for joining us. You may now disconnect.