Operator
Greetings and welcome to the UiPath third quarter fiscal 2023 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow a formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note that this conference is being recorded. I will now turn the conference over to our host, Kelsey Turcotte of Investor Relations. Thank you. You may begin.
Kelsey Turcotte
Good afternoon, and thank you for joining us today to review UiPath's third quarter fiscal 2023 financial results, which we announced in our earnings press release issued after the close of the market today. On the call with me are Daniel Dines, UiPath's co-founder and co-chief executive officer, Rob Enslin, co-chief executive officer, and Ashim Gupta, chief financial officer. Rob will start the discussion and then turn the call over to Daniel. After that, Ashim will review our results and provide guidance. Then we will open the call for questions. Our earnings press release and financial supplemental material are posted on the UiPath investor relations website, ir.uipath.com. These materials include gap to non-gap reconciliations. We will be discussing non-gap metrics on today's call. This afternoon's call includes forward-looking statements about our ability to drive growth and operational efficiency and our financial guidance for the fiscal fourth quarter 2023. Actual results may differ materially from those expressed in the forward-looking statements due to many factors, and therefore, investors should not place undue reliance on these statements. For our discussion of the material risks and uncertainties that could affect our actual results, please refer to our annual report on Form 10-K for the year ended January 31, 2022, and our other reports filed with the SEC, including our quarterly report on Form 10-Q for the period ended October 31st, 2022, to be filed with the SEC. Forward-looking statements made on this call reflect our views as of today. We undertake no obligation to update them. I would like to highlight that this webcast is being accompanied by slides. We will post the slides and a copy of our prepared comments to our investor relations website immediately following the conclusion of this call. As a reminder, we price in local currencies and have experienced a significant foreign exchange headwind as we have progressed through the fiscal year. Now I would like to hand the call over to Rob.
Daniel Dines
Thank you, Kelsey, and good afternoon, everyone. Thank you for joining us. We are pleased with third quarter results, which delivered both top line growth and margin expansion. ARR was $1.110 billion, driven by a net new ARR of $67 million. Excluding the FX headwind of $22 million, total ARR grew 38% year-over-year. Revenue was $263 million. Excluding the FX headwind of $22 million, revenue grew 29% year-over-year. Non-GAAP operating income was $18 million, a third quarter record, reflecting our focus on disciplined capital allocation and cost management. During the quarter, we added new logos like Petco, Nautilus, and Wisconsin Energy, and saw particular strength in our healthcare and telecommunications verticals. A great new logo in the quarter was Arika, one of the world's leading mining and infrastructure solution providers. In a competitive win over two standalone vendors, one in enterprise automation and one in test automation, and working with Accenture as an advisor Arika selected UiPath because of our ability to deliver both enterprise and test automation in one platform. With C-suite sponsorship, Arika is planning to migrate and scale the existing enterprise automation program with UiPath and utilize test suite to enable successful upgrades of their SAP S4 HANA. Third quarter is also the federal year-end And under new leadership, we are very pleased to report that we delivered a strong quarter in that vertical, including expansions with the US Air Force and the US Department of Homeland Security. Customers appreciate both the quantifiable and intangible business outcomes that our automation platform can deliver, including business risk reduction, improved customer and employee experience, profitable growth, and the ability to more effectively allocate resources. These are outcomes that resonate across lines of business and up to the C-suite. For example, one of North America's largest third-party logistics firms, Total Quality Logistics, is using document understanding, software robots, and task mining across the organization. In just two years, automation has delivered both strong ROI and help them grow, including driving revenue in a new line of business without adding headcount. Going forward, Total Quality Logistics also plans to implement process mining to identify macro processes that can benefit from automation. It has been a busy few months for the team, and we're executing well across all the key strategic initiatives that we laid out at iInvest today. These include extending our market leadership with our largest platform release, 2210, which Daniel will talk about in more detail. Driving platform adoption with our market-leading capabilities in every stage of the automation lifecycle. Making significant progress up-leveling our go-to-market model, which I will talk about in more detail next. Announcing some great technical and go-to-market partnerships. And lastly, to build out our world-class team with the addition of Lee Hawksley, who will lead our APAC go-to-market team. Now, I would like to take a few minutes to update you on the progress we've made on our go-to-market initiatives. All of this work is designed to enable our teams to sell higher into organizations, to find business outcomes that resonate with C-level executives, and accelerate customer time to value. To make sure we are on the right track, we tested many of these new approaches in our North American market, and we're very pleased to see they played an important role in several notable third quarter wins. Next tip is the formal rollout across the GEOs, much of which we started at the beginning of the fourth quarter when we launched new packaging and pricing designed to simplify our go-to-market motion. This approach brings together the solutions necessary to more quickly realize the advantages of broader platform adoption in one line item SKU. We also expect this pricing model to reduce friction in the purchasing process. We formally introduced Northstar, our new value-based selling tool. This prescriptive and predictive model helps our sales reps position the value of automation to customers through an engagement framework that defines economic value. the execution roadmap, and best practices. It is a great tool to clearly position the differentiated long-term benefits of automation delivered through our platform of capabilities. We're also leveraging our extensive industry insights to align sales teams around verticals like financial services, healthcare, and TMTs. where we've had good success to date and identified considerable white space to continue to grow in both new and existing customers. The focus helped us close a third quarter expansion deal in the financial services vertical with Bank of New York Mellon Pershing, a UiPath customer since 2020. Through their implementation of UiPath, the automation program scaled quickly, improving both efficiency and risk mitigation across the firm. as well as the client experience by leveraging UiPath software robots to process transactions more consistently. As a result of these positive outcomes, Bank of New York Mellon is now rapidly expanding to the full platform across the organization. And to give customers in these verticals even more tools for success, we are piloting our first solution accelerator to provide them a starting point for their automation journey. We are excited about solution accelerators and believe they will provide our customers with the technical know-how to help them complete the implementations significantly faster. With customer success always in mind, we continue to deepen our relationships with global GSIs and automation experts. At Ford 5, we announced our expanded partnership with EY, also one of the largest UiPath customers. that puts the partnership on par and at scale with their largest ecosystem partners. The strengthening of this global alliance is a testament to the trust we've developed and their belief in the massive growth potential that UiPath Automation Platform presents for global organizations. We also continue to expand our technical ecosystem. During the quarter, we announced several strategic partnerships with major technology providers, including Microsoft, which named UiPath as their preferred enterprise automation partner, while we announced Microsoft Azure as a preferred cloud platform for UiPath. We plan to continue to collaborate and innovate together to bring automation solutions powered by Microsoft Azure to market. And OutSystems, to combine the power of the UiPath business automation platform with OutSystems high performance low code. Together, We expect to enable customers to securely and intelligently automate core processes and applications. One of the best proof points of our execution is the growth of our larger customer cohorts. And this quarter, we are very pleased that our cohort of customers over $100,000 in ARR increased to 1,711, including customers over 1 million of 201. For these customers, automation isn't just a tool they can use to reduce or eliminate tedious work. It is part of their strategy, growth plans, and operating model. I feel good about where we are in our journey to take this company beyond $1 billion. We have the market-leading automation technology and platform, the right leaders putting the right go-to-market structure in place, and we are making the disciplined decisions that allow us to drive growth, increase productivity, and expand operating margins. We are already seeing the positive impact of our work as we're heading to the fourth quarter. And the team is focused on a strong close. I'll turn the call over to Daniel to talk about 2210 platform release and our newest innovation. Daniel.
Kelsey
Thank you, Rob. Good afternoon, everyone. Before I get started, I'd like to thank the UiPath team for their hard work and commitment to our customers and partners who recognize and appreciate your dedication to their success. In fact, one of the things I enjoy most about my role at UiPath is spending time with customers to understand where they are in their digital transformation journey and talk to them about the role automation can play in that evolution. Given today's unpredictable operating environment, and tightening budgets. Automation is a powerful engine that directly addresses these challenges and changes the way organizations of all sizes operate and innovate. We had great platform expansions in the quarter, such as Manpower Group, a UiPath customer for four years. and successfully deploying automations in their finance department. They expanded to use our full platform in the quarter as they look to scale their automation program internally and deliver workforce solutions to their clients. Ultimately, platforms win because integrated technology is easier to manage and drive faster time to value. With market-leading capabilities in every stage of the automation lifecycle, our platform outcomes resonate with the C-suite and are a huge competitive advantage for us. A great example of platform adoption is the deal we closed with HCA Healthcare, one of the nation's leading healthcare providers. HCA has been a UiPath customer for two years with numerous software automations in production. In the quarter, they expanded our partnership by adopting the entire UiPath platform in a multi-year agreement. Coming out of our four or five user conference and our most important platform release this fall, 22.10, Momentum is building across the business. This release allows customers to automate more, faster, and with less friction, expand user and builder bases, and operate it all more efficiently and effectively. This recent platform release includes a preview of Studio Web, the latest member of our Studio family. which completes our cloud offering, further reduces the friction in ramping cities and developers, and provides a cross-platform developer experience. 22.10 also delivers the ability to build public-facing applications with UiPath apps, enhance capabilities in process and test mining, and platform intelligence to help our software robots understand both structured data with document understanding and unstructured data with the acquisition of reInfer. There is a massive amount of value to be captured by automating processes involving unstructured data. During the quarter, several customers added reInfer which we recently acquired and have renamed Communications Mining to their automation program. This includes a leading UK fund administrator and UiPath customer since 2019 that is planning to leverage, reinforce, to drive efficiencies and improve customer experiences by automating tickets in their case management system for their HR, payroll, accounting, and tax departments. 22.10 also delivered enhanced capabilities for both Automation Suite and Automation Cloud, both of which helped drive triple-digit year-over-year growth in Cloud AMR. One of our core tenets is flexibility of deployment to meet the customer wherever they are on their automation journey. This constant focus on innovation has won us recognition by thought leaders and industry analysts and we are proud of the recent reports from Everest Group and ISG. According to Everest Group's Robotic Process Automation Products Peak Matrix Assessment 2022. We were named an RPA leader for the sixth consecutive year and star performer in the technology provider landscape. ISG named UiPath a leader in their latest application development research. focused on low-code, no-code software companies. This recognition reflects our commitment to category leadership and innovation across the platform. I am proud of what we accomplished in the third quarter and excited about the massive opportunity ahead. The need for automation is greater than ever before, and I believe UiPath will continue to play a leading role in helping organizations not only fly, but increase their competitive advantage. With that, I will turn it over to Ashim.
Rob
Thank you, Daniel, and good afternoon, everyone. Unless otherwise indicated, I will be discussing results on a non-GAAP basis, and all growth rates are year-over-year. I also want to note that FX was a significant headwind to our results again this quarter. I'll start by running through our third quarter and then provide fourth quarter guidance. Third quarter ARR totaled $1.110 billion, driven by net new ARR of $67 million. Because we sell in local currency, foreign currency fluctuations do not impact demand for our product, but do impact the translation of our results. On a year-over-year basis, FX was an approximately $10 million headwind to net new ARR. And for total ARR, FX was an approximately $22 million headwind. Excluding FX, total ARR grew 38%. We now serve approximately 10,650 customers. As we shared at Investor Day, we are positioning the company to land and grow customers with a high propensity to invest in automation, while distributors will serve the lower end of the market. Moving on, our dollar-based net retention rate was 126%. Normalizing for FX and excluding the impact of Russian sanctions, our dollar-based net retention rate was 130%. Americas continues to show strength as our dollar-based net retention rate outperformed relative to the rest of the world. Dollar-based gross retention of 98% continues to be best in class, underscoring the transformational business outcomes that customers achieve with our platform. Revenue grew to $263 million, Normalizing for the year-over-year FX headwind of approximately $22 million, revenue grew 29% year-over-year. Remaining performance obligations increased to $759 million. Normalizing for the year-over-year FX headwind of approximately $50 million, RPO grew 40% year-over-year. Current RPO increased to $441 million. Total gross margin was 86%, reflecting ongoing investments in support and cloud infrastructure as we scaled that business. Software gross margin was 92%. Third quarter operating expenses were $209 million. We continue to focus on operational efficiency, including our restructuring actions, hiring freeze, and tighter control of discretionary spend. GAAP operating loss of $67 million included $81 million of stock-based compensation expense. Non-GAAP operating income was $18 million, our strongest third quarter non-GAAP operating margin to date. Third quarter non-GAAP adjusted free cash flow was negative $24 million, reflecting timing of collections and prepaid vendor contracts that allow us to lock in favorable terms for UiPath in an inflationary environment. We have a very strong balance sheet, which is an important asset in the current operating environment, with $1.7 billion in cash, cash equivalents, and marketable securities, and no debt. Now, let me turn to guidance. We guide what we see in the pipeline and assume that the current choppy macro environment and pressure from foreign exchange continue. Turning to the numbers, first, for fiscal fourth quarter 2023, We expect ARR in the range of $1.174 billion to $1.176 billion. This is an increase from prior guidance of $1.153 billion to $1.158 billion. We expect revenue in the range of $277 million to $279 million. We expect non-GAAP operating income to be approximately $35 million. And we expect fourth quarter basic share count to be approximately 554 million shares outstanding. Finally, we will guide to first quarter and full year fiscal 2024 when we announce our fourth quarter results. But I want to highlight that we expect typical enterprise seasonality from the fourth quarter to first quarter in both net new ARR and revenue results. We delivered a solid third quarter as our durable financial model and strong balance sheet gives us the resources to invest in long-term growth and drive sustainable profitability. both of which are core to our go-forward strategy. The team is focused on delivering meaningful outcomes for our customers, and we look forward to a strong close to fiscal year 2023. Finally, I would like to wish our employees and all of you a healthy and happy holiday season, and we look forward to speaking with many of you in the coming weeks. With that, I will turn the call over to the operator. Operator, please poll for questions.
Operator
Thank you. And at this time, we'll conduct a question and answer session. Please limit yourself to one question and one follow-up question. To ask a question, simply press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Phil Winslow with Credit Suisse. Please go ahead.
Phil Winslow
Hi, thanks for taking my question. I appreciate the color, particularly on the go-to-market changes, which is really where I want to focus my question. Rob, obviously you made some changes when you joined. I'm wondering if you could walk us through your thoughts on productivity versus just capacity in the sales force. How do you think with these changes you're making, productivity should start to inflect And then similarly, how do you feel about just sort of the capacity of the go-to-market push right now? And then just one follow-up.
Daniel Dines
Yeah, thanks, Phil. We feel good about the capacity we got and the lines of the strategy we outlined at Investor Day. And we started to see real proof points around our strategy and how we're delivering that. And the team is actually focused on really good delivery. So if you look at, like, what I would say is one of the best proof points of execution is the growth of our customer cohorts. When you look at 100,000, in ARR. We've increased that to 1,711. And when you look at customers over a million now, it's up to 201. So we feel good about the go-to-market, the segmentation, and our execution and how far we've come in a relatively short period of time.
Phil Winslow
Great. And then, Daniel, you highlighted just efficiency and the need to drive productivity as a as a catalyst for automation for companies. Obviously, the dollar-based net retention continues to remain strong, and it feels like that's resonating with existing customers that already have proof points of success. When you go to new customers that are maybe just starting their automation journey, what makes the light bulb go off of why automation, why RPA, and just your full hybrid automation suite is something they should lean into from a productivity standpoint?
Kelsey
I think this is kind of the same motivation as for existing customers. They drive, you know, close down, they improve employees' productivity, they improve also customer satisfaction. And we are seeing meaningful new customers that are getting into automation by buying the entire platform. And I can, for instance, in the case of Orica that I think Rob mentioned, the power of our testing was instrumental into driving the adoption of the entire platform. And it was a competitive takeout of two of our competitors. So I would say that the benefit of Orica Automation is even more relevant in this environment for the new customers.
Operator
Thank you. Our next question comes from Brad Sills with Bank of America Securities. Please go ahead.
Brad Sills
Oh, great. Thanks so much. And it's great to see some of the early success with the changes in go-to-market. Maybe on that topic, please, Rob, if you could expand a little bit on where you've seen some success. I know it's early, but, you know, with some of these verticals you called out, some of these solution accelerators, are there any ones in particular you'd call out, and are there any learnings from your success in those areas that you might be able to apply more broadly?
Daniel Dines
Yeah, Brad. You know, some of it's anecdotal because we, you know, we're very early into actually the numbers. But I think, first of all, I think the proof points around HCA – Bank of New York Mellon and Orica are proof points of the North Star approach, the value selling around North Star and then driving significant value and the speed to value is showing progress. We also have seen our solution packages. We've started to launch them. Significant interest. We don't have actually clear KPIs, but we're seeing significant interest. And I think our sales organization has more tools. in the bag to deal with the environments we're operating in, and they're doing really well around that. We see significant progress, obviously continue to see significant progress in the United States around that, and we're starting to see with the team in Europe that's having benefit as well. Look, I mean, Arika is a world-class leading energy company based out of Singapore operating globally, and it shows that we're starting to see progress with our strategy globally as well.
Brad Sills
Wonderful. Thanks. And then one for you, Ashim, if I may, please, on just the outlook that you provided at the Analyst Day for next year, ARR growth exiting the year at 20%. It's down quite a bit. I mean, this quarter, you're at 38% constant currency. You're guiding to 20, it looks like 27%, maybe 29% constant currency for Q4. So a pretty big deceleration. Are you assuming a worsening macro in that outlook? Or if you could just remind us, what are you assuming in that number? Thank you.
Rob
Yeah, Brad, like we discussed at Investor Day, the anchor points that we provided for next year assumes the current macro environment that we've been talking about as well as the FX or the foreign exchange environment that we've also been seeing. We really see this as consistent from forward in our Investor Day until now. We'll provide more of an update as we get into next year and report fourth quarter earnings.
Operator
Our next question comes from Mark Murphy with JP Morgan. Please go ahead.
Mark Murphy
Thank you, and congrats on the great margin progress. So, Ashim, I don't think you actually spent quite as much time on talking about macro issues tonight, and so I'm wondering if it would be logical to think that this period of Q3 and Q4 could represent the trough for the net new ARR. What I mean is if it's declining here in this 25% to 40% range, and then maybe there'd be an opportunity to kind of improve on that as you get farther into the repositioning and the repackaging and the go-to-market changes in the first half of next year. As a general framework, is that a fair way to be thinking about the trending of the business? And then I have a quick follow-up.
Rob
Yeah, Mark, it's very consistent with what we've talked at Investor Day and Analyst Day. We look at the environment as consistent, so we probably have talked less about it just in terms of the environment between Europe, APAC, and America as we feel relatively the same environment as we talked about just a few months ago. In terms of our commitment to executing on the strategy that we laid out at Investor at Investor Day, we are all committed and actually excited about the progress that we're making around segmentation, solutioning, focus, identifying high propensity customers. All of those factors in our mind, we feel are going to yield positive results, and that's what we're executing to. I would remind everybody, we're going to see typical seasonality as we get into next year between first quarter we mentioned in the script, but also first half, second half. But overall, we're pleased with the execution of the strategy and we're executing that strategy because we believe it will yield positive results.
Mark Murphy
Okay, understood. Maybe as a quick follow up for Rob and Daniel, could you touch a little on the expanded Microsoft Azure relationship? I believe Microsoft said that UiPath is gonna be one of their largest partners that's built on Microsoft technology. I think they refer to it that way. What type of opportunity do you see with Microsoft, and is that something that's helping you win business out there incrementally at this point?
Kelsey
Thanks for the question. Let me start, and then Rob might add more color to it. I feel that we made a good bet on having our technology built on the top of Microsoft Azure Cloud that help us drive, you know, create a cloud offering that resonates with most of our customers. It really help us to reduce the sales cycle when it comes to the cloud. It reduces the sales cost and it increase time to value to our customers. Microsoft has been has been really a good partner for us, both on the technology innovation and partnering on the go-to-market side. So we are really looking at positive development on this front. Rob?
Daniel Dines
I think that's good. Thanks, Mark.
Operator
Thank you. And our next question comes from Raymond Lenshow with Barclays. Please, take your question.
Raymond Lenshow
Thank you. Two quick questions. One on staying on partners, competitors, et cetera. And, Rob, you have spent, obviously, a lot of years at SAP. Like, how do we have to think about that SAP relationship? A lot of your business is in that SAP install base, helping on process optimization, et cetera. SAP is making more noise about doing it themselves. Like, how is that relationship evolving? That's my first question. And then I have one for Apoorashim.
Daniel Dines
Yeah, look, I mean, we... First of all, I would say... You've got to look at our portfolio. Our portfolio, we're very strong in financials and healthcare, so we have a broad portfolio that we go after. So it's not only our partnership with SAP that we're working on, and we have got a partnership. They utilize some of our technology. We obviously work closely with them, and we continue to work closely with them because we believe we have a mutual benefit in helping customers add value, and together with the customer base and the customer system, they have, we think there's incredible value for our customers. But that also includes other companies in that space as well. So we continue to progress. You know, key partnerships are clearly part of the strategy we laid out at Invest Today, and we continue to evolve that every quarter.
Raymond Lenshow
Okay, perfect. Thank you. And then, Ashim, obviously a lot of investors look at net new ARR added, and you had a really strong $67 million this quarter. If I look at the implied number for Q4, It does seem different than what we saw Q4 last year. Could you just kind of speak a little bit if there are specific factors that might drive that? I remember like a couple of years ago we had the change in the year end, et cetera. Like just anything that we should know about or remember about Q4. Thank you.
Rob
So in Q4 we have a more pronounced impact from foreign exchange. I think that's the first notable point. Raimo, the reason for that is a lot of our renewable base, which obviously will renew at a potentially lower FX rate, at the current FX rate, I should say, that has a $20 million impact year over year. So when you look at what we've implicitly guided at around $66 million and you add 20 back for that, that takes you to $86 million. And then you take into account the macro, the impact from the macro environment. And, you know, we've been consistent in our guidance philosophies in terms of guiding what we see in front of us. That's kind of how you think about the components of the guide and the factor for why it's 66 right now.
Operator
Thank you. Our next question comes from Matthew Hedberg with RBC Capital Markets. Please go ahead.
Matthew Hedberg
Hey, this is Simran on for Matt Hedberg. Thanks for taking our question. So with the uncertainty you noted earlier about the current environment, Has the tone of your customer conversations changed at all and do you see more hesitancy with customers or are experiencing longer sales cycles?
Daniel Dines
Yes. What we've been very clear about is we see a consistency between the quarters that we saw in Q2 into Q3 and we believe that we're actually managing it really well right now. got it and then also earlier you announced an additional reduction in your in your workforce how are you thinking about the reallocation of those budgets towards greater efficiency and execution and customer strategies yeah good question so another restructuring was that that we announced uh two weeks ago i think um you know part of the strategic uh discussions we had it invested in the rollout that is a cross-functional um restructuring that we have it does it has very little impact, a minimum impact on our quota carriers and our go-to-market, and we continue to execute the go-to-market as we designed it around the strategic initiative.
Operator
Thank you. And our next question comes from Keith Weiss with Morgan Stanley. Please go ahead.
Keith
Excellent. Thank you guys for taking the question. Ashim, on the operating margins, you guys really outperformed kind of what the original guide was there. Is that all coming from the headcount reductions, or is there more efficiency kind of improvements that are coming from other parts of the business? And how should we think about that kind of the potential for further progression there into FY24, perhaps?
Rob
Yeah, so not, you know, the headcount reduction, just to answer directly, and then I'll walk you through the operating margin, Keith. The headcount reduction was announced on November 15th, so what we announced had very little impact, no impact on our third quarter results. When you break down and you look at how the operating margin beat came together, the first is the top line. The team did a great job on executing in the environment, and so we outperformed the top line, and of course that flows through and falls through to the bottom line. The second is while we know we were in a period of reorganization, we had a hiring freeze that we put in place And we instilled a lot of operate. We, you know, in, in this environment, our entire employee base, I think understands the environment and we're operating with a lot of discipline. Um, so you, you just take those two factors in there. That's really explains the beat in terms of the go forward. Um, you know, I point you back to kind of our discussions at investor day and the anchor points that were provided. We're committed to margin expansion. We see a path to be able to grow durably and profitably. And we're going to operate with discipline but still execute a strategy for growth that we've laid out together.