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spk05: Good day and welcome to the AvePoint, Inc. first quarter 2023 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. 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.
spk16: Thank you, Operator. Good afternoon and welcome to AvePoint's first quarter 2023 earnings call. With me on the call this afternoon is Dr. T.J. Jiang, 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 AppPoint 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 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.
spk02: Thanks, Jamie, and thank you to everyone joining us on the call today. Q1 results were a solid start to the year, as we exceeded our financial guidance on both the top and bottom lines. 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 FX. Q1 reported revenue of $59.6 million or comfortably above the high end of our guidance. and we're 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's clear that as organizations modernize their digital workplaces, they need a platform that's well-governed, fit for purpose, easy to use, and built on automation. PowerPoint's confidence platform capitalizes on this need by empowering organizations to optimize their SaaS operations and secure collaboration. Amidst the continued uncertainty in the macro environment, our customers continue to depend on AppPoint'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're just beginning to see the opportunities to innovate their businesses amidst 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 T1, 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 that accelerate our product roadmap, expand the offering of our core confidence platform, speed our time to market, and improve the penetration of our existing customers, all with the 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 win in the quarter with the 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 its new learning experience, which will administrate learning services, seamlessly manage course micro-certifications, and offer enhanced digital services for 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 the domain knowledge from last year's acquisition of iAccess 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're honored to be recognized for innovation by winning the Microsoft Partner of the Year award in Singapore in the 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 of 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 firms catering to individual investors and small business owners. As an existing cloud governance customer with 40,000 employees, the firm needed a better way to measure the effectiveness of its internal communications, a trend we hear more and more frequently from the C-suite in today's hybrid world. Our TiGraph offering, which we acquired last year, provides the capability our customers needed to discover critical workplace communication insights. With TiGraph's implementation and its interoperability with our confidence platform, the firm replaces prior analytic solution for Microsoft CC5 and can now effectively measure employee engagement, which in turn drives improved decision making and organizational performance. In both examples, the breadth of Apple and 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're excited for the opportunities we see in 2023 and beyond to deliver shareholder value by advancing the digital workplace, capturing large and growing markets, and prioritizing profitable growth. With that, I'll turn over to Jim to discuss our financial results in more detail.
spk15: Thank you, T.J., 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'll 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 margins. 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 at 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 this. The delta is purely a function of our revenue mix, which, as you know, includes our SAS, 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 its 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 revenues. 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 over time is the delta between recurring revenue growth and ARR growth, which we saw in Q1. with recurring revenues growing 20 percent and ARR growing 26 percent. 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'd like to make is around our three product suites, where at Investor Day, we disclosed the ARR contribution from each for the last few years. While much of the question 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 levels 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'll 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 basis. In Q1, SAS comprised 60 percent of total revenues compared to 53 percent a year ago. Looking at the business geographically, we saw solid performance across all regions, once again driven by the growth in our SAS business. In North America, SAS revenues grew 32 percent, while total revenues grew 13 percent. In EMEA, on a constant currency basis, SaaS revenues grew 39%, while total revenues grew 35%. And in APAC, on a constant currency basis, SaaS revenues grew 53%, while total revenues grew 25%. As of March 31st, 2023, total ARR was $222.4 million, representing year-over-year growth of 26% and growth of 31% when adjusted for the impact of FX. 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 at Investor Day is our trailing 12-month gross retention rate. Adjusted for the impact of FX, 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 break-even, 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 expansions. 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 used of $6.1 million and free cash flow of negative $7.1 million for the three months ended March 31st, 2022. I would now like to turn to our outlook for the second quarter and the full year of 2023. While we think it's 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?
spk05: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Kirk with Evercore ISI. Please go ahead.
spk11: Hi, this is Chirag Ved on for Kirk. Congrats on a great quarter and thank you for taking the question. I wanted to ask about how you're thinking about AvePoint's role in strategic positioning as Microsoft is starting to infuse more artificial intelligence into their product suite. How are you thinking about potential changes to your own product suite, sales processes, and customer engagement?
spk02: Thank you. Thank you. That's a great question. This is TJ. We are actually very excited with the disruptive nature of generative AI. In fact, we actually have been a long-time consumer of Azure Cognitive Services, which is what Microsoft uses to surface out open AI services. We're at points in the business of business data management and governance. Sasha Nadella recently mentioned that by 2025, 10% of all data generated will be done by generated AI. So this means that there's going to be continued explosion of business data, which positions AppPoint very well in that space of managing data and govern that data. So as I mentioned, we have been a long-term consumer of cognitive services in our product lines. We actually use it in our products, especially around modernization, document management, record management, case management solutions. At the same time, we're actively looking at making our internal operations more efficient in terms of support, in terms of case number tracking and automated support when related to the coding and essentially case numbers, as well as, of course, content marketing. And now we're also trialing with co-pilot with our developers. So we're very excited about the latest disruptions in generator AI.
spk11: That's great to hear. And maybe one follow-up to that. Are you seeing any hesitation from any customers in terms of engaging on longer-term digital transformation until now? they have a more clear idea from Microsoft on what their new AI features and offerings are so they can plan the roadmap accordingly.
spk02: The enterprise customers we engage, I predominantly see that digital transformation as a one-way street. It's the table stakes to ensure that they have the latest technology to use to leverage innovation, to leverage technology to drive innovation. And all the innovation is happening faster and faster in cloud environments with the hyperscalers. So what that means is everyone is actually really looking at digital transformation and going to cloud as table stakes. Yes, there are a certain amount of hesitation around AI and machine learning insofar as data privacy, insofar as copyrights, and those are active items being looked at. especially around our banking clients. But the overarching theme of digital transformation and leveraging cloud to drive innovation is there, and everyone sees that.
spk10: All right. Thank you so much.
spk02: Thank you.
spk10: Thanks, Chirag.
spk05: The next question comes from Gabrielle Borges with Goldman Sachs. Please go ahead.
spk06: Good afternoon. Thank you. I'll follow up with a question on the demand environment. I know there's a little bit on it in the prepared remarks. I would love to get more detail here. What are you seeing by vertical in terms of pipeline build? And remind us, the cadence for revenue growth this year has you all decelerating through the year and then, I believe, re-accelerating again. So give us a little more color on how you think about the structure of revenue growth as we move through the year.
spk02: Hi, Gary. Great question. So from an overall demand perspective, as we discussed in the investor day, we set our expectation for the year. We also highlighted the macro economic uncertainties and volatilities in the environment. So we don't see things getting worse. So, of course, you know, we had a great quarter and we continue to anticipate a wider range of outcome. By industry verticals, things are consistent with what we have seen previously. So we haven't seen material changes of that. At the same time, we continue to execute on the businesses to, again, anticipate a wider range of outcome.
spk06: That's fair. And there's a comment on 2023 not being the new normal. I guess the first question would be, why is 2023 not the new normal? And then how do you think about what normal is? When you think about your long-term growth model, you mentioned the Rule of 30. You mentioned the operating margin target being independent of the 2025 target. So how do you think about normalized growth after 2023? Thank you.
spk15: Yeah, hi, Gabrielle. This is Jim. Let me address that one. So I think You know, when we think about 23, we are definitely planning, as TJ mentioned, for a wider range of outcomes. So when we looked at our budget and we looked at our, you know, thoughts around revenue growth and ARR growth, we definitely planned for some anticipation that there would be this wider range, and we actually anticipated that our growth rate would actually decline. So we built that into the plan, and it's all in our expectations that we've got. And actually, so far, we see that we're in line with all of those expectations, so we feel good about that. We don't think that longer term, that continues to be the case. We have seen, as we mentioned, and even in Q4, that this elongation of the sales cycle, we do not expect that to continue into, you know, and well into 24. So we expect that to be a 23 phenomenon and that we would expect to see growth rates return more to our normalized what we saw in 22 and see those pick up beyond the 23 rates that we have.
spk08: Thank you for the call.
spk05: The next question comes from Jason Ader with William Blair. Please go ahead.
spk14: Yeah, thanks. Good afternoon, guys. Just wanted to, I don't know, maybe ask you to give yourself a report card on being here in May of 23 on the areas of the business you feel like you're making the most progress and then maybe the areas of the business where you still feel like you have some room for improvement.
spk02: Hi Jason. Um, that's a great question. This is TJ. Um, I think the area of business, we continue to make great progress as SMB and channel. Um, that's again a space where we would mention this several times before. Uh, historically we, we had very little, um, uh, focus on, but in the last few years we're able to build it to now 20% of our business and as the highest growth rate segment for our business. And just to remind everyone, SMB as definition for us is 1,000 employees or fewer companies. So we continue to see that globally. And so that's doing well. And we have more historically at points of direct enterprise sales business. And that has its associated kind of services, and those are some things that we actually want to lessen. So as Jim commented on, the goal is to get it from now today 16% down to 10% in the medium term. So those are going pretty well. Now, the areas that we continue to see some elongated sales cycle, as Jim mentioned, continue to be in the large enterprise space. We continue to win as a platform provider. not a point solution provider. But we do see some elongation of sales cycles, but that's no meaningfully different than the quarter before.
spk14: Gotcha. And if we look at Office 365 and how resilient that business has been for Microsoft, I guess, how should investors think about your correlation to that? And is it In a tougher macro environment, some customers are, I guess, less focused on sort of add-on capabilities. Is that the right way to think about it?
spk02: That's a great question, Jason. What we focus on is providing more value and improve ROI, customers' existing investment into the Microsoft stack. So this actually includes consolidation of other stacks that customers have. And you know the market very well, right? There are many other providers out there. Customers have multi-cloud deployments, even for cloud storage providers, for example. And this presents a really good opportunity for them to consolidate. So 2023 is definitely a year of efficiency. So in that regard, we actually really help our customer drive economic outcomes with doing some fair amount of platform consolidation, actually. As you know, we have this migration platform, data integration platform. And even within the Microsoft license usage, customers have mixed license types, F1, E1, E3, E5, and we're able to help them achieve consistent governance and management capabilities across license types. Again, it goes into maximize their existing investments.
spk14: Gotcha. And so the elongation on the sales cycles is just a function of the budget environment, and customers are still getting there with you, and you're seeing those deals close. It's just taking longer to close.
spk02: Absolutely. And you're right. Office 365 is mission critical. So, yeah, we continue to see ourselves positioned very well in the market.
spk14: All right, thank you. Good luck.
spk05: Thank you. Thank you. The next question comes from Nehal Chokshi with Northland. Please go ahead.
spk03: Thank you, and congrats on the better and better results across the board. And great customer case study regarding TiGraph. Can you give us a sense as far as what percent of opportunities is TiGraph now being attached to now?
spk02: Yeah, we're seeing really good traction with existing customers to expand the story from back office to front office. So this whole hybrid work environment, employee engagement, employee satisfaction is on top of mind for most C-suites today. So in that regard, we're having great conversations. And it's still early days, but we're very positive and optimistic on the trends that we are doing with existing customer expansion.
spk03: Okay. You know, you guys have a lot of SKUs available for customers to adopt. Which SKU are you most excited about in terms of driving up your net retention rate over time?
spk02: So we have worked to significantly simplify the message. You know this now, we have many products but it's really categorized into the three suites as part of the confidence platform. So we're really looking, especially through channel expansion and SMB market penetration, which is not easy to do for one software company to cover all three segments of enterprise, mid-market, SMB. We're streamlining the message and clearly articulating the value proposition at the suite level, which then involves different actual SKUs of deployment depending on the customer's actual environment, the idiosyncrasy of the environment, whether they have Google or AWS or Microsoft. But we do track at a suite level. So the modernization suite, the control suite, and the resourcing suite. So we don't really look at specific down at the individual SKU level when we actually track the sales performances.
spk03: Okay. And then Your trailing 12-month retention rate did slightly index down. What's the narrative behind that?
spk15: Yeah, Nahal, it's Jim. Good to talk to you. So nothing specific to point out there. Q1 historically is probably our lowest quarter for adding incremental NRR to existing customers. It's generally our lowest quarter for renewals, and we see a lot of our upsell motion tied to renewals. So it is ticked down a little bit in Q1, but literally in line with what our expectations were for the budget and guidance. So nothing there to report that's unusual. And we would expect Q2 to actually see some improvement to that. So, again, nothing on our side that we're concerned about.
spk03: Great. Thank you very much. And congrats on a good quarter.
spk15: Thank you. Thanks, Nahal.
spk05: The next question comes from Derek Wood with TD Cowan. Please go ahead.
spk09: Oh, great. Thanks, Andrew. I'm for Derek. Congrats on the quarter. TJ, I think sales reps are now incentivized to drive higher product to cash rates. You've talked about the 48% with 2 plus and 24% with 4 plus. Have you seen the benefits of these new incentives drive the thrive greater tax rate this year, or can we still see some of that throughout this year?
spk02: Yeah, so we do annually contracts, so we will see this over time. But yeah, this is definitely something that we're working hard to continue to improve on.
spk09: Great. And given the kind of channel partner push and your comments about that, I think you have a build-out of channel partners in EMEA and APAC. How is that kind of build out tracking verse plan and talk about how aggressive you're going to push there this year?
spk02: Yeah, that's a great question. So EMEA is actually our most mature channel penetration territories. That's historically the way enterprise B2B software are sold and managed. So in North America, historically, we were more of a direct sales organization, especially on the enterprise side. We are making really good inroads in the SMB segment, 100% channel, and introducing more mix in the mid-market segment. In APAC, our biggest territory is Japan, which is our largest territory outside of USA. There has historically always been channel-driven, so we're doing really well there. However, it's... majority enterprise and public sector. And we're now building out aggressively the mid-market SMB segment. That's a segment that Microsoft is also going after very aggressively. Australia has always been also a channel partner, very, very operating model heavy business that's already well channel driven. The lastly is really just HDN. General APAC, which we centered around Singapore as well as South Korea. There we do a fair amount of service business to drive innovation that's more direct, but mid-market and channel is something that we're now developing.
spk05: Great. Thanks, guys. Thank you. This concludes our question and answer session. I would like to turn the conference back over to T.J. Jeng, our CEO, for any closing remarks.
spk02: Thank you. First, I want to thank the entire Outpoint team for their tireless effort to start the year strong. The in-person conversations I 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're committed to advancing the digital workplace. We're still in the early stages of digital transformation, and profitable growth remains our top priority in this environment. Thank you for joining us today.
spk05: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Thank you. you Thank you.
spk00: Thank you. Thank you.
spk05: Good day and welcome to the AvePoint, Inc. First Quarter 2023 Earnings Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. 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.
spk16: Thank you, Operator. Good afternoon, and welcome to AvePoint's first quarter 2023 earnings call. With me on the call this afternoon is Dr. T.J. Jiang, 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 AppPoint 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 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.
spk02: Thanks, Jamie, and thank you to everyone joining us on the call today. 2-1 results were a solid start to the year, as we exceeded our financial guidance on both the top and bottom lines. 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 FX. Q1 reported revenue of $59.6 million, or comfortably above the high end of our guidance. And we're 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's clear that as organizations modernize their digital workplaces, they need a platform that's well-governed, fit for purpose, easy to use, and built on automation. PowerPoint's confidence platform capitalizes on this need by empowering organizations to optimize their SaaS operations and secure collaboration. Amidst the continued uncertainty in the macro environment, our customers continue to depend on AppPoint'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're just beginning to see the opportunities to innovate their businesses amidst 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 T1, 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 that accelerate our product roadmap, expand the offerings of our core confidence platform, speed our time to market, and improve the penetration of our existing customers, all with the 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 win in the quarter with the 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 its new learning experience, which will administrate learning services, seamlessly manage course micro-certifications, and offer enhanced digital services for its 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 the domain knowledge from last year's acquisition of iAccess 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're honored to be recognized for innovation by winning the Microsoft Partner of the Year award in Singapore in the 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 of 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 firms catering to individual investors and small business owners. As an existing cloud governance customer with 40,000 employees, the firm needed a better way to measure the effectiveness of its internal communications, a trend we hear more and more frequently from the C-suite in today's hybrid world. Our TiGraph offering, which we acquired last year, provides the capability our customers needed to discover critical workplace communication insights. With TiGraph's implementation and its interoperability with our confidence platform, the firm replaces prior analytic solution for Microsoft CC5 and can now effectively measure employee engagement, which in turn drives improved decision-making and organizational performance. In both examples, the breadth of Apple and 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're excited for the opportunities we see in 2023 and beyond to deliver shareholder value by advancing the digital workplace, capturing large and growing markets, and prioritizing profitable growth. With that, I'll turn over to Jim to discuss our financial results in more detail.
spk15: Thank you, T.J., 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'll 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 margins. 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 at 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 this. The delta is purely a function of our revenue mix, which, as you know, includes our SAS, term license, and maintenance revenues, all of which are recurrent, 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 its 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 revenues. 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 over time is the delta between recurring revenue growth and ARR growth, which we saw in Q1. with recurring revenues growing 20 percent and ARR growing 26 percent. 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'd like to make is around our three product suites, where at Investor Day, we disclosed the ARR contribution from each for the last few years. While much of the question 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 levels 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'll 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 basis. In Q1, SaaS comprised 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, SAS revenues grew 39%, while total revenues grew 35%. And in APAC, on a constant currency basis, SAS revenues grew 53%, while total revenues grew 25%. As of March 31st, 2023, total ARR was $222.4 million, representing year-over-year growth of 26% and growth of 31% when adjusted for the impact of FX. 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 at Investor Day is our trailing 12-month gross retention rate. Adjusted for the impact of FX, 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 percent. Turning to net retention rate, adjusted for the impact of FX, our first quarter NRR was 106 percent and was 102 percent 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 percent compared to 71.8 percent 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 break-even, 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 expansions. 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 used of $6.1 million and free cash flow of negative $7.1 million for the three months ended March 31st, 2022. I would now like to turn to our outlook for the second quarter and the full year of 2023. While we think it's 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?
spk05: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Kirk Materna with Evercore ISI. Please go ahead.
spk11: Hi, this is Chirag Ved on for Kirk. Congrats on a great quarter, and thank you for taking the question. I wanted to ask about how you're thinking about AvePoint's role in strategic positioning as Microsoft is starting to infuse more artificial intelligence into their product suite. How are you thinking about potential changes changes to your own product suite, sales processes, and customer engagement?
spk02: Thank you. Thank you. That's a great question. This is TJ. We are actually very excited with the disruptive nature of generative AI. In fact, we actually have been a longtime consumer of Azure Cognitive Services, which is what Microsoft uses to surface out open AI services. AppPoint is in the business of business data management and governance. Satya Nadella recently mentioned that by 2025, 10% of all data generated will be done by generative AI. So this means that there's going to be continued explosion of business data, which positions AppPoint very well in that space of managing data and govern that data. So, as I mentioned, we have been a long-term consumer of cognitive services in our product lines. We actually use it in our products, especially around modernization, document management, record management, case management solutions. At the same time, we're actively looking at making our internal operations more efficient in terms of support, in terms of case number tracking and automated support related to the coding and essentially case numbers, as well as, of course, content marketing. And now we're also trialing with Copilot with our developers. So we're very excited about the latest disruptions in generative AI.
spk11: That's great to hear. And maybe one follow-up to that. Are you seeing any hesitation from any customers in terms of engaging on longer-term digital transformation until they have a more clear idea from Microsoft on what their new AI features and offerings are so they can plan the roadmap accordingly?
spk02: The enterprise customers we engage, I predominantly see that digital transformation as a one-way street. It's the table stakes to ensure that they have the latest technology to leverage innovation, to leverage technology to drive innovation. And all the innovation is happening faster and faster in cloud environments with the hyperscalers. So what that means is everyone is actually really looking at digital transformation and going to cloud as table stakes. Yes, there are a certain amount of hesitation around AI and machine learning insofar as data privacy, insofar as copyrights, and those are active items being looked at, especially around our banking clients. But the overarching theme of digital transformation and leveraging cloud to drive innovation is there, and everyone sees that.
spk10: All right. Thank you so much.
spk02: Thank you.
spk10: Thanks, Chirag.
spk05: The next question comes from Gabrielle Borges with Goldman Sachs. Please go ahead.
spk06: Good afternoon. Thank you. I'll follow up with a question on the demand environment. I know there's a little bit on it in the pattern walk. I would love to get more detail here. What are you seeing by vertical in terms of pipeline build And remind us, the cadence for revenue growth this year has you all decelerating through the year and then I believe re-accelerating again. So give us a little more color on how you think about the structure of revenue growth as we move through the year.
spk02: Hi, Gary. Great question. So from an overall demand perspective, as we discussed in the investor day, we set our expectation for the year. We also highlighted the macro economic uncertainties and volatilities in the environment. So we don't see things getting worse. So, of course, you know, we had a great quarter and we continue to anticipate a wider range of outcomes. By industry verticals, things are consistent with what we have seen previously. So we haven't seen material changes of that. At the same time, we continue to execute on the businesses to, again, anticipate a wider range of outcome.
spk06: That's fair. And there's a comment on 2023 not being the new normal. I guess the first question would be, why is 2023 not the new normal? And then how do you think about what normal is? When you think about your long-term growth model, you mentioned the Rule of 40. You mentioned the operating margin target being independent of the 2025 target. So how do you think about normalized growth after 2023? Thank you.
spk15: Yeah, hi, Gabrielle. This is Jim. Let me address that one. So I think... You know, when we think about 23, we are definitely planning, as TJ mentioned, for a wider range of outcomes. So when we looked at our budget and we looked at our, you know, thoughts around revenue growth and ARR growth, we definitely planned for some anticipation that there would be this wider range, and we actually anticipated that our growth rate would actually decline. So we built that into the plan, and it's all in our expectations that we've got. And actually, so far, we see that we're in line with all of those expectations, so we feel good about that. We don't think that longer term that continues to be the case. We have seen, as we mentioned even in Q4, that this elongation of the sales cycle, we do not expect that to continue into, you know, and well into 24. So we expect that to be a 23 phenomenon and that we would expect to see growth rates return more to our normalized what we saw in 22 and see those pick up beyond the 23 rates that we have.
spk08: Thank you for the call.
spk05: The next question comes from Jason Ader with William Blair. Please go ahead.
spk14: Yeah, thanks. Good afternoon, guys. Just wanted to, I don't know, maybe ask you to give yourself a report card on being here in May of 23 on the areas of the business you feel like you're making the most progress and then maybe the areas of the business where you still feel like you have some room for improvement.
spk02: Hi Jason. Um, that's a great question. This is TJ. Um, I think the area of business, we continue to make great progress as SMB and channel. Um, that's again a space where we would mention this several times before. Uh, historically we, we had very little, um, uh, focus on, but in the last few years we're able to build it to now 20% our business and as the highest growth rate segment for our business. And just to remind everyone, SMB as definition for a mass is 1,000 employees or fewer companies. So we continue to see that globally. So that's doing well. And we have more historically outlined the direct enterprise sales business. And that has its associated kind of services. And those are some things that we actually want to lessen. So as Jim commented on, the goal is to get it from now today, 16% down to 10% in the medium term. So those are going pretty well. Now, the areas that we continue to see some elongated sales cycle, as Jim mentioned, continue to be in the large enterprise space. We continue to win as a platform provider. not a point solution provider. But we do see some elongation of sales cycles, but that's no meaningfully different than the quarter before.
spk14: Gotcha. And if we look at Office 365 and how resilient that business has been for Microsoft, I guess, how should investors think about your correlation to that? And is it in a tougher macro environment, some customers are, I guess, less focused on sort of add-on capabilities. Is that the right way to think about it?
spk02: That's a great question, Jason. What we focused on is providing more value and improve ROI, customers' existing investment into the Microsoft stack. So this actually includes consolidation of other stacks that customers have. And you know the market very well, right? There are many other providers out there. Customers have multi-cloud deployments, even for cloud storage providers, for example. And this presents a really good opportunity for them to consolidate. So 2023 is definitely a year of efficiency. So in that regard, we actually really help our customer drive economic outcomes with doing some fair amount of platform consolidation, actually. As you know, we have this migration platform, data integration platform. And even within the Microsoft license usage, customers have mixed license types, F1, E1, E3, E5, and we're able to help them achieve consistent governance and management capabilities across license types. Again, it goes into maximize their existing investments.
spk14: Gotcha. And so the elongation on the sales cycles is just a function of the budget environment, and customers are still getting there with you, and you're seeing those deals close. It's just taking longer to close.
spk02: Absolutely. And you're right. Office 365 is mission critical. So, yeah, we continue to see ourselves positioned very well in the markets.
spk14: All right, thank you. Good luck.
spk05: Thank you. Thank you. The next question comes from Nehal Chokshi with Northland. Please go ahead.
spk03: Thank you, and congrats on the better and better results across the board. And great customer case study regarding TiGraph. Can you give us a sense as far as what percent of opportunities is TiGraph now being attached to now?
spk02: Yeah, we're seeing really good traction with existing customers to expand the story from back office to front office. So this whole hybrid work environment, employee engagement, employee satisfaction is on top of mind for most C-suites today. So in that regard, we're having great conversations. And it's still early days, but we're very positive and optimistic on the trends that we are doing with existing customer expansion.
spk03: Okay. You know, you guys have a lot of SKUs available for customers to adopt. Which SKU are you most excited about in terms of driving up your net retention rate over time?
spk02: So we have worked to significantly simplify the message. You know this now, we have many products. but it's really categorized into the three suites as part of the confidence platform. So we're really looking, especially through channel expansion and SMB market penetration, which is not easy to do for one software company to cover all three segments of enterprise, mid-market, SMB. We're streamlining the message and clearly articulating the value proposition at the suite level, which then involves different actual SKUs of deployment depending on the customer's actual environment, the idiosyncrasy of the environment, whether they have Google or AWS or Microsoft. But we do track at a suite level. So the modernization suite, the control suite, and the resourcing suite. So we don't really look at specific down at the individual SKU level when we actually track the sales performances.
spk03: Okay. And then Your trailing 12-month retention rate did slightly index down. What's the narrative behind that?
spk15: Yeah, Nahal, it's Jim. Good to talk to you. So nothing specific to point out there. Q1 historically is probably our lowest quarter for adding incremental NRR to existing customers. It's generally our lowest quarter for renewals, and we see a lot of our upsell motion tied to renewals. So it is ticked down a little bit in Q1, but literally in line with what our expectations were for the budget and guidance. So nothing there to report that's unusual. And we would expect Q2 to actually see some improvement to that. So, again, nothing on our side that we're concerned about.
spk03: Great. Thank you very much. And congrats on a good quarter.
spk15: Thank you. Thanks, Nahal.
spk05: The next question comes from Derek Wood with TD Cowan. Please go ahead.
spk09: Oh, great. Thanks, Andrew. I'm for Derek. Congrats on the quarter. TJ, I think sales reps are now incentivized to drive higher product to cash rates. You've talked about the 48% with 2 plus and 24% with 4 plus. Have you seen the benefits of these new incentives drive the drive greater tax rates this year, or can we still see some of that throughout this year?
spk02: Yeah, so we do annually contracts, so we will see this over time. But yeah, this is definitely something that we're working hard to continue to improve on.
spk09: Great. And given the kind of channel partner push and your comments about that, I think you have a build-out of channel partners in EMEA and APAC. How is that kind of build out tracking verse plan and talk about how aggressive you're going to push there this year?
spk02: Yeah, that's a great question. So EMEA is actually our most mature channel penetration territories. That's historically the way enterprise B2B software are sold and managed. So in North America, historically, we were more of a direct sales organization, especially on the enterprise side. We are making really good inroads in the SMB segment, 100% channel, and introducing more mix in the mid-market segment. In APAC, our biggest territory is Japan, which is our largest territory outside of the USA. There has historically always been channel-driven, so we're doing really well there. However, it's... majority enterprise and public sector. And we're now building out aggressively the mid-market SMB segment. That's a segment that Microsoft is also going after very aggressively. Australia has always been also a channel partner, very, very operating model heavy business that's already well channel driven. The lastly is really just HDN. General APAC, which we centered around Singapore as well as South Korea. There we do a fair amount of service business to drive innovation that's more direct, but mid-market and channel is something that we're now developing.
spk05: Great. Thanks, guys. Thank you. This concludes our question and answer session. I would like to turn the conference back over to T.J. Jeng, our CEO, for any closing remarks.
spk02: Thank you. First, I want to thank the entire Outpoint team for their tireless effort to start the year strong. The in-person conversations I 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're committed to advancing the digital workplace. We're still in the early stages of digital transformation, and profitable growth remains our top priority in this environment. Thank you for joining us today.
spk05: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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