AvePoint, Inc.

And welcome to the AvePoint, Inc. second quarter 2024 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. 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 Aracia, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, and welcome to AvePoint's second quarter 2024 earnings call. With me on the call this afternoon is Dr. TJ 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 AvePoint with all rights reserved. Please note this presentation describes certain non-GAAP measures, including non-GAAP gross profit, non-GAAP gross margin, 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 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 second quarter 2024 earnings press release, as well as our updated investor presentation and financial tables, all of which are available on our investor relations website. With that, let me turn the call over to TJ. Thank you, Jamie, and thank you to everyone joining us on the call today. We're pleased to deliver another strong quarter, and our results reflect the ongoing customer demand for the AppPoint Confidence Platform, which enhances data security and cyber resilience, reduces costs, and improves decision-making. At the same time, our steady focus on execution and profitable growth once again enabled us to exceed our financial guidance for all key metrics. As organizations grapple with the tensions between the rising demand for AI tools and their current state of digital maturity, the critical role of data readiness becomes increasingly clear. Additionally, the frequency and sophistication of cyber attacks is escalating, further underscoring the need for robust data governance and security. These challenges only become more pronounced in a multi-cloud environment. which is what we typically see in our customers and prospects. Taken together, these macro trends position AppPoint exceptionally well because their problems we have solved for more than 20 years. And over that time, our platform evolution has kept pace with the proliferation of data, an increasingly dangerous threat environment, and the growing need for data security. Our technical expertise and innovation have brought us to this moment. where addressing these data management needs has never been more urgent. We see this playing out across our global business, driving our outperformance in the second quarter, and providing us the confidence to again raise our full-year expectations. I'll spend my time today discussing these trends and will share some key customer wins from the quarter. Then, Jim will cover our financial performance and updated guidance in more detail. So let's jump in. Starting with the customer demand to leverage generative AI, contrasted with the reality of where most organizations currently are in their digital workplace journey. I recently hosted a CXO event on how to navigate AI with confidence. The discussions I had with the panelists and attendees revealed a significant appetite for practical AI implementation strategies, and the knowledge that a strong data foundation is a crucial prerequisite to deploying AI. These conversations reinforce that the success of GenAI implementation is closely tied to an organization's digital workplace maturity. Specifically, effective AI strategies hinge on strong data management, which addresses the data security issues that often hinder AI adoption. And the reality is that today, most digital workplaces are woefully immature. Statistics from Gartner, which established a five-stage model assessing the maturity of digital workplaces, back this up. Gartner finds that the successful integration of generative AI happens at the fourth stage and only after organizations have modernized their infrastructure and data to keep pace with technological changes. So where are most organizations today? Gartner's recent assessment shows nearly 85% of organizations are still in the first two stages and are just starting to take action to modernize their data. And less than 2% have reached that critical fourth stage where the successful integration of generative AI can occur. This is where AppPoint comes in. Our approach manages our customers' entire data space. which often spans multiple cloud environments, ensuring their data is ready for AI and can remain competitive in a rapidly evolving digital landscape. This is why we continue to see a healthy pipeline and demand for our platform. Our unique ability to solve a wide swath of technical challenges, in turn enabling AI adoption across the enterprise, is something that no other software provider can match. And while we will remain cautious of the macro environment, we're confident in our ability to continue capitalizing on the long-term opportunity ahead of us. I want to highlight a few recent customer wins that demonstrate our resounding success in data management and addressing these data security and data governance challenges. As a team had another strong quarter acquiring high-quality new logos and selling even more of the AppPoint confidence platform to existing customers. Let's start with the financial service industry, where a recent McKinsey survey found that the quality of unstructured data, particularly the security classification of new data created, was one of the biggest challenges to scaling Gen AI. This led a Fortune 20 global financial service organization with 280,000 users to become an affluent customer in the quarter. They could not meet their legal team's requirements for secure records management, which prevented them from moving legacy data into the cloud. After purchasing products from all three suites, one of the world's largest investment banks can securely unify their data, build a scalable data governance framework, and streamline records management policies. As a result, they will realize improved data visibility and data quality and reduce the risk of breaches, positioning them to more confidently deploy Gen AI tools going forward. Another financial services win was a Fortune 500 US-based institution, which sought to deploy a co-pilot for Microsoft 365, but could not begin until they implement data governance controls to address oversharing of sensitive data for their 25,000 users. After we demonstrated our ability to mitigate these concerns, this existing customer purchased multiple products from our control suite, allowing them to quickly understand security risks across the environment and proactively prevent future oversharing of data. These are fantastic financial services customer wins, but as we have said many times, the problems we solve are not confined to particular industries. In managing vast digital workspaces, both a global automotive manufacturer and a Fortune 10 healthcare giant face challenges like the ones I just described. In order to comprehensively manage their Microsoft 365 workspaces and ensure data ownership, regulatory compliance, and proactive policy enforcement across their 75,000 users, the automotive manufacturer became a new customer in Q2, purchasing multiple products from our control and resilience suites. At the same time, we saw the healthcare organization expand their existing investment in AppPoint Q2, purchasing the entire set of solutions in our control suite. Going forward, they can quickly identify and remediate oversharing, implement effective data access policies, and ensure a secure and compliant digital environment to adopt generative AI solutions across their 200,000 users. These are just a few examples of how our platform establishes the foundational elements of data management and data governance, setting the stage for the adoption of successful AI strategies, including co-pilot for Microsoft 365 and driving transformative outcomes for organizations around the world. Before I turn it over to Jim, I want to spend a moment discussing how we continue to innovate and meet the evolving needs of our customers, many of whom have multi-cloud strategies today. And a recent Flexera survey confirmed this to be the case for nearly 90% of enterprises, which, in addition to Microsoft 365, depend on platforms such as Google and Salesforce to meet diverse business needs. While this approach makes good business sense, it also introduces significant challenges in data management and governance, such as cloud misconfiguration. Sarna reported that 60% of organizations today will prioritize addressing this risk, up from 25% in 2021. As our customers have evolved, we have expanded our multi-cloud approach, ensuring that the leading data protection solutions of the Applin Confidence Platform span the most commonly leveraged cloud ecosystems. One example is the strategic partnership we recently entered into with SADA, one of the world's top Google Workspace partners. SADA now offers our award-winning data protection solution for Google Workspace and Google Classroom. And this partnership will be especially significant for regulated industries, where security and compliance are paramount. By facilitating seamless integration and protection across cloud environments, AppCoin empowers organizations to maximize their multi-cloud strategies and confidently adopt AI technology, while maintaining the high standards for data protection and cyber resilience. For example, a leading North American grocery chain struggled to manage over 400,000 user accounts across multiple cloud ecosystems, a challenge further compounded by the recent acquisition of another major chain, To effectively manage and report on their expanded user environment, this Fortune 50 company purchased three solutions from our control suite. Going forward, they can now meet data governance and security audit requirements, realize improved security resource allocations, and more efficiently manage users and workspaces across multiple cloud environments. To conclude, AppPoint's uniquely positioned to support organizations in their journey toward AI-driven transformation. By addressing the critical challenges of data security, governance, and management, we empower our clients to mitigate the risks of Gen AI while harnessing its full potential. I want to thank the team for their tireless efforts this quarter, and I know I speak for them when I say how excited I am for a strong second half of 2024. With that, let me turn the call over to Jim. Thanks, TJ, and good afternoon, everyone. Thanks for joining us today as we review another strong set of results across the board. You have heard us discuss our commitment to profitable growth since the beginning of 2023, and today we are pleased to deliver our sixth consecutive quarter of both meaningful top-line growth and operating margin expansion, raising our full-year expectations each step of the way. In an uncertain macro environment, our focus has been on controlling the controllable, and the team's ongoing execution positions us well to continue delivering value to AvePoint shareholders as we progress toward our Rule of 40 and GAAP profitability targets in 2025. With that, let's turn to our Q2 results. For the second quarter ended June 30, 2024, total revenues were $78 million, an increase of 20% year-over-year and above the high end of our guidance. In addition, we are pleased that total revenues reached approximately $300 million on a trailing 12-month basis this quarter. Within total Q2 revenue, second quarter SAS revenue was $53.6 million, growing 40% year over year and continuing to be our fastest growing revenue segment. And in Q2, SAS comprised 69% of total revenues compared to 59% a year ago. Additionally, our other revenue lines continue to perform in line with our expectations and commentaries. term license and support, as well as maintenance revenue, declined year over year, both in dollars and as a percentage of total revenue. At the same time, services grew 4% year over year, but declined as a percentage of second quarter revenues to 13%. And because services is our only non-recurring business, 87% of our total Q2 revenues were recurring. our highest ever percentage, surpassing the 86% recurring revenue mix we called out last quarter. Our strong SAS performance is also evident as we look at our results from a regional perspective. In North America, SAS revenues grew 40% year over year and represented 74% of total North America revenues, which in turn grew 12% year over year. In EMEA, SAS revenues grew 36% year over year and represented 84% of total EMEA revenues, which in turn grew 18% year over year. And in APAC, SAS revenues grew 50% year over year and represented 46% of total APAC revenues, which in turn grew 36% year over year. The same strength is evident as we look at the year-over-year growth in regional ARR, which, as we have said, provides a better view of the underlying momentum of the business everywhere we operate. Each region was, again, a strong contributor to our overall performance. As North America and EMEA, ARR each grew 23%, and APAC ARR grew 22%. Lastly, our EMEA region's ARR surpassed $100 million this quarter, and I want to congratulate the entire EMEA team for their efforts in achieving this milestone. Continuing now with total ARR and other key metrics we assess on a quarterly basis. As of June 30, 2024, total ARR was $290.1 million, representing year-over-year growth of 23%. As a result, net new ARR in Q2 was $15.6 million and grew 13% year over year. Additionally, we ended the second quarter with 594 customers with ARR of over $100,000, an increase of 20% from the prior year. As of the end of Q2, 52% of our total ARR came through the channel compared to 49% a year ago. And for Q2 specifically, 61% of our incremental ARR came through the channel compared to 62% for Q1 of 2024 and 61% in Q2 of 2023. Turning now to our customer retention rates. Adjusted for the impact of FX, our trailing 12-month gross retention rate for the second quarter was 87%, consistent with our performance in Q1 and throughout 2023. At the same time, our FX-adjusted net retention rate for the second quarter was 110%, an improvement from the 107 we delivered a year ago and in line with Q1. On a reported basis, Q2 GRR was 86% compared to 85% in Q2 of 23 and in line with Q1. Q2 reported NRR was 109% compared to 104% in Q2 of 23 and 110% in Q1. Turning back to the income statement, gross profit for Q2 was $59.4 million, representing a gross margin of 76.2% compared to 71.1% in Q2 of 2023. The improvement in our gross margin is the result of our product mix, as we again had more SAS revenue and less services revenue as a percentage of our overall revenue. In addition, we saw improved services and SAS margins this quarter compared to last year. Moving down the income statement, operating expenses for Q2 totaled $50.6 million or 65% of revenues compared to $43.3 million or 67% of revenues a year ago. As a result, Q2 operating income was $8.7 million or an operating margin of 11.2%, a year-over-year improvement of nearly 700 basis points. Our Q2 operating income was well ahead of our guidance, and the outperformance was primarily driven by two factors. First, the meaningful revenue beat, most of which flowed to the bottom line, and second, improved sales efficiency and proven expense management across the business. In addition, Approximately $1 million of expenses that we had originally planned for Q2 are now expected in the second half of the year in an early 2025. Taken together, our ongoing commitment to profitable growth resulted in another quarter of margin expansion and was another step on our path to gap profitability. Turning to the balance sheet and cash flow statement, we ended the second quarter with $230.8 million in cash and short-term investments. And for the six months ended June 30 of 2024, cash generated from operations was $23.9 million, while free cash flow was $23 million. This compared to cash generated from operations of $9.3 million and free cash flow of $8.5 million in the first six months of 2023. During the three months ended June 30th, we repurchased 653,000 shares for a total cost of approximately $5.4 million. I would now like to turn to our financial outlook, where for the full year, we are pleased to again raise our expectations for total ARR, total revenue, and non-GAAP operating income. For the third quarter, we expect total revenues of $82 million to $84 million or approximately 14% year-over-year growth at the midpoint. We expect non-GAAP operating income of $11 million to $12 million. And for the full year, we now expect total ARR of $319 million to $323 million or approximately 21% year over year growth at the midpoint. We now expect total revenues of $320.2 million to $324.2 million, or approximately 19% year over year growth at the midpoint. And given these higher top line expectations, coupled with our outperformance on profitability this quarter, we now expect full year non-GAAP operating income of $38.3 million to $39.8 million, or an operating margin of 11.9 to 12.3%. Lastly, on a rule of 40 basis, which for AvePoint is the sum of ARR growth and non-GAAP operating margin, Our updated guidance today reflects a 33 compared to the 29 that we initially guided for the year in February and to the 31 we guided to in May. In summary, Q2 was an outstanding quarter for AvePoint, and the team remains laser focused on profitable growth and continued execution. Thanks for joining us today, and with that, we would be happy to take your questions. Operator?

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you were 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 2. At this time, we will pause momentarily to assemble our roster.