Operator
Greetings and welcome to the UiPath second quarter fiscal year 2024 earnings conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to turn it over to our host, Kelsey Turcotte, Senior Vice President, Investor Relations. Thank you. You may begin.
Kelsey Turcotte
Great. Good afternoon, and thank you for joining us today to review UiPath's second quarter fiscal 2024 financial results, which we announced in our earnings press release issued after the close of the market today. On the call with me are Daniel 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'll open the call for questions.
Daniel Dines
Earnings press releases and financial supplemental materials 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 track growth in operational efficiency and our financial situation in the full year fiscal 2024.
Kelsey Turcotte
Actual results may differ materially from those expressed in the forward-looking statements due to many factors, and therefore, investors should not place undue reliance on these statements. For a discussion of the material risks and uncertainties,
Brian
for the year ended January 31st, 2023, and our other reports... July 31st, 2023, to be filed with the SEC.
Kelsey Turcotte
Forward-looking statements made on this call reflect our views as of today. We undertake no obligation to update them. Finally, we invite you to join our user conference, Forward Six, next month in Las Vegas from the evening of Monday, October 9th through Wednesday, the 11th. Please reach out to the investor relations team for details. I would like to highlight that this webcast is being accompanied by slides, which includes an embedded AI demonstration video. We will post the slides and a copy of our prepared comments to our investor relations website immediately following the conclusion of this call. And with that, I'll hand the call over to Rob.
Rob
Thank you, Kelsey, and good afternoon, everyone. Thank you for joining us. Second quarter was incredibly busy. Highlights include the delivery of exciting new AI platform capabilities and several high-energy in-person customer events around the world. All of them standing room only. Not surprisingly, AI is at the top of everyone's agenda. Digital transformation, the automation plays a strategic role, has never been more important or with the latest evolutions in AI more powerful. Customers are excited about the value we deliver and recognize that our platform, which has been infused with AI since inception, provides an integrated set of capabilities that combines the best of our specialized AI and governance with the creative power of Gen AI, making the potential of automation almost limitless. And we aren't just talking about AI. We deliver on the promise of AI and automation today across our platform. In particular, communications mining and document understanding are generating a lot of excitement with Graham Sheldon, our Chief Product Officer, will demo in a few minutes. Turning to the numbers, we ended the quarter with ARR of $1,308,000 and an increase of 25% year over year. driven by second quarter net new ARR of $59 million. We have approximately 10,890 customers, including new logos like Australian Postal Corporation, Leroy Seafood, Holmes Murphy & Associates, Dayong Pharmaceutical, and Arrow Foods Distribution. Customers with $1 million or more in ARR increased more than 30% year-over-year to $254, while customers with $100,000 or more in ARR increased to $1,930. Second quarter revenue was $287 million, an increase of 19% year-over-year. Non-GAAP operating margin increased from negative 5% in the second quarter of last year to positive 10% in the second quarter of this year. As we progress towards our 20% plus long-term operating margin target and we delivered $47 million in non-GAAP adjusted free cash flow, a continuing reflection of our growing scale and focus on efficiency. Given that the macro environment continues to be variable, I am pleased with our execution and results. The cohort of customers of $100,000 or more in net new AR is performing well. Value selling is driving platform adoption, and these deals are typically expansions where we have a good line of sight into deal progression. The low end of the market has been harder to call, particularly in new customer acquisition. I want to be clear, we feel good about the business and the role automation plays in digital transformation. We continue to execute against our strategic initiatives and there's a nice pipeline building as we move into the second half of the year. Two quarters ago, we formally launched our new go-to-market strategy to improve productivity, sell the platform, and intensify focus on customers that represent the longest and largest long-term opportunities for us. The team transitioned well to our new segmentation model and is embracing the broader platform opportunity. In go-to-market, we continue to invest in industry verticalization, both in people and enablement tools, which is yielding nice results. We saw particular strength in banking and financial services, manufacturing, and technology in the second quarter, including great new logos like Performant Healthcare Solutions, First City, Monument Bank, and St. Peter's Healthcare System. Expansion deals in the quarter included Mitsubishi Materials Corporation, a customer since 2017. They expanded to the full platform as they look to grow the automation program across the company. In addition, our industry expertise gives us unique insights that we can leverage across our customer base, including tools like our solution accelerators. We now have more than 60 available to customers. A Texas-based digital health system recently automated their claims form intake process. Using our accelerators, they expedited their design to deploy time from more than eight weeks down to just two. The foundation of every sales engagement is defining the value of our end-to-end platform, which helps customers accelerate their automation programs, drive operational efficiencies, and consolidate spend. During the quarter, Saudi National Bank expanded to the full platform as they plan to take their already mature automation program to the next level. Driving rapid digital transformation and using the full range of our capabilities in our platform, is a board-level priority that is actively sponsored by the chief technology officer and the chief operating officer. Platform adoption is also driving competitive displacements. A great example is a Fortune 500 oil producer and a UiPath customer since 2018, with over $10 million in cost savings to date. In a competitive takeout that expanded to incorporate document understanding, and process mining into the automation program as they look to consolidate one AI-enabled platform. Looking forward, they plan to leverage our Northstar value model to identify expansion opportunities across additional lines of business. Not only is Northstar helping to build pipeline, it also draws several strategic deals in the quarter. Using Northstar, the team delivered a comprehensive view of operational excellence and tangible value automation could deliver to a financial services company. And as a result, the customer expanded to the full platform, including process mining, document understanding, communications mining, and test suite. As part of our new segmentation, we have tasked our emerging enterprise team with driving both customer acquisition and early stage expansion. And as an example, Aprio, a provider of specialized IT solutions, started their automation journey several years ago and recently engaged with UiPath to clearly define how automation can accelerate their growth trajectory. This resulted in a multi-year, seven-figure full platform deal to help them achieve rapid market expansion in healthcare operations. Industry analysts are also recognizing our platform capabilities. UiPath was recently designated as a leader in the Everest Group Intelligent Document Processing Products Peak Matrix Assessment 2023. This is the first time UiPath has been named as a leader in intelligent document processing and the only leader recognized as a star performer for the biggest year-over-year advances. We also named the leader in the Everest Group Process Mining Products Peak Matrix Assessment 2023 and the Everest Group Task Mining Products Peak Matrix Assessment 2023. Our partner ecosystem is key to evaluating our market leadership position, growing our share of wallet across key accounts and delivering best outcomes for our customers. One of many partner-led customer success stories is with Ashling Partners. was help ADT build a transformational automation program across its operations and customer service. This quarter, that program expanded to ADT's call center to provide customer service agents with a single plane of glass to reduce data entry, troubleshooting, and other time-intensive tasks. We're also making great progress with SAP, engaging with customers and building a joint pipeline. During the quarter, a German agricultural company challenged by the S4 migration selected UiPath in a competitive win based on our holistic integrated platform. They are in the process of implementing test suite for regression testing on the S4 migration and testing of all SAP modules. They also plan to automate processes in their finance department and incorporate process mining and AI into the automation program. Before I move on, I want to highlight that our board of directors has authorized a $500 million stock repurchase program, which underscores the confidence we have in our business, our ongoing cash flow generation, and the strength of our balance sheet. In summary, we delivered another solid quarter of execution against a variable economic backdrop. We started to see the benefits from the go-to-market changes we implemented two quarters ago, And we'll continue to exercise expense discipline while investing to extend our market leadership. And with that, I'll turn the call over to Daniel.
Kelsey
Thanks, Rob. Good afternoon, everyone. Before I begin, I want to thank our team members for their relentless commitment to building UiPath, serving our customers, and delivering our market-leading AI-powered automation platform. I believe we are now at an inflection point with AI and I am excited to have more time to focus on this next important evolution for the company. This is a time of unprecedented technology advances. Having said that, AI has been an integral part of our platform since inception, starting with our original core capability, computer vision. which allows software robots to see and understand screens. Today, our entire platform is infused with AI, and we are at the cutting edge of the quickly evolving intersection of AI and automation. To be effective, generative AI needs context, which our software robots can deliver by gathering information from across the enterprise in data, documents, CRM, ERP, and beyond. It also needs our platform to take action and operationalize the promise of AI today with an integrated set of capabilities that combines our specialized AI with generative AI. And finally, it needs the governance our platform provides to help customers overcome a significant barrier to adoption. Looking ahead, we expect this next evolution of GenAI to be a tailwind to the business, helping customers create better, more resilient automations more quickly and opening up novel use cases that facilitate the automation of even more processes. First, we are enhancing developer productivity by reducing barriers to development with copilot-like experiences, and project Wingman, which we showed you during last quarter's earnings call. At the AI4 conference in mid-August, we officially launched Wingman into private preview, and we are already seeing strong demand from customers. Wingman brings together our AI computer vision's deep understanding of computer screens with GenAI, and is designed to enhance automation creation for both business users and developers through a user-friendly experience. Second, we are leveraging GenAI to make our products better. For example, in document understanding and communications mining, we leverage specialized UI path models to classify and extract information augmented by generative models to achieve faster time to value and higher accuracy for unstructured data processing. And third, the next wave of innovation will allow our customers to identify and enable more advanced automations capable of handling even the most complex processes. To give you a better sense of how this all comes together, I'm going to share a demo narrated by Graham. While this scenario has been simplified for earnings format, this is a use case that should resonate with many of you. If you are not on the webcast, please go to our investor relations website homepage for the demo link.
Rob
Meet Connor. He's got his heart set on the house of his dreams, and he needs a mortgage fast. Fortunately for Connor, he applies for a loan with Goldner Bank, a fictional corporation which uses UiPath AI-powered automation to streamline the loan application process. It's fast, accurate, and incredibly efficient. Next, let's meet Linda. She's a lending specialist that uses UiPath AI-powered automation to approve his mortgage. We'll start with taking a quick look at how things were done in the past. Before UiPath automation technology, specialists like Linda had to manually process each application from a centralized mailbox, review the documents, validate them for accuracy and completeness, and tailor a response to each applicant. It was time-consuming and tedious. But now, using AI-powered automation from UiPath, Goldner Bank now automates the entire end-to-end process, and Linda is pretty happy about that. First, using UiPath communications mining, AI classifies the incoming email as a loan application and marks it as urgent. Next, we can see the email contains three attachments, the loan application, a photo of Connor's ID card, and a proof of employment letter. With UiPath Document Understanding, the bank uses a combination of generative AI and specialized AI to quickly extract information from each of these attachments. Connor's ID is a photo, and we use a built-in specialized model from UiPath to extract key information. Connor's loan application is a structured document, and we extract information using a specialized model that was trained specifically with Goldner Bank's data. It used to take months to label this data, but now it only takes a moment by using generative AI to predict the labels. Finally, Connor's employment letter is an unstructured document, so we use the UiPath generative extractor to find the key information. UiPath brings together the broad capabilities of generative models with the accuracy of our specialized models. UiPath starts processing the application by submitting all of this information into the loan processing system using our software robots. The system quickly identifies missing information then uses generative AI to draft an email back to the applicant requesting the missing information. In this case, Connor forgot to attach his pay stubs. At this point, UiPath sends all the application details and a draft of an email back to Linda for her review. Having the capability of involving humans in the loop is critical for organizations. So ensure that the use of AI is well governed and follows their policies. With our AI-powered automation platform, Goldner Bank can easily automate complex end-to-end processes just like this. And best of all, thanks to our fast mortgage approval, Connor gets the home of his dreams.
Kelsey
What you saw in the demo is our ability to, first, provide context. Second, leverage both specialized AI and gen AI with an open, flexible, and responsible platform. And third, allow customers to drive action through our built-in models, their own custom models, and deployment of best-in-class external models. The result? is a speedy resolution and smoother experience for Connor, efficiently and savings for Gallner Bank and more time for Lisa to spend with customers. Our constant innovation drives our growth and is essential to providing our customers with market-leading capabilities. Looking across the platform, we have established a competitive mode which is bolstered by our more than 850 patents globally, either granted or in the application process. Inside that number, there are more than 300 specific to AI, which we expect will grow as we continue to invest. Finally, we invite you to join our user conference, 4 or 6, next month, in Las Vegas, where you are invited to kick off Cocktails on Monday, the 9th, followed by our main event on the 10th and 11th. We will be showcasing our latest platform release, 23.10, which introduces new generative AI developer and end user experiences across our platform to help customers build real-world automations faster than ever before. Please reach out to the investor relations team for details. With that, I will turn it over to Ashim.
Connor
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. Turning to the second quarter, ARR totaled $1.308 billion, an increase of 25%, driven by net new ARR of $59 million. Excluding the FX headwind, net new ARR totaled $61 million. Included in this total is more than $500 million in cloud ARR, both hybrid and SaaS, an increase of more than 125%, as customers continue to adopt our cloud offerings. For example, Scotiabank, who chose UiPath to further scale their global automation program as they move to the cloud and plan to utilize our AI capabilities, document understanding, and unattended automation. Our dollar-based net retention rate for the quarter was 121%. Normalizing for FX, our dollar-based net retention rate was 125%. Dollar-based gross retention of 97% continues to be best in class. Revenue grew to $287 million, an increase of 19% year-over-year. Normalizing for FX impact, which was an approximately $3 million tailwind, revenue grew 17%. Remaining performance obligations increased to $905 million, up 28% year-over-year. Normalizing for FX impact, which was an approximately $4 million tailwind, RPO grew 27%. Current RPO increased to $560 million. Turning to expenses, we delivered a second quarter total gross margin of 86%. Software gross margin was 91%. Second quarter operating expenses were $217 million. The restructurings we announced in fiscal 2023, combined with our go-to market segmentation, have created an organization that's increasingly efficient and scalable. and one which gives us ample room to continue to expand margins without sacrificing investments to grow the business. GAAP operating loss of $78 million included $102 million of stock-based compensation expense. Non-GAAP operating income was $30 million, resulting in a second quarter operating margin of 10%. Second quarter non-GAAP adjusted free cash flow was $47 million. We ended the quarter with $1.8 billion in cash, cash equivalents, and marketable securities, and no debt. And, as Rob mentioned, we are pleased to announce a $500 million stock repurchase program this afternoon. Now, let me turn to guidance, which assumes the overall macroeconomic environment continues to be globally variable. For the fiscal third quarter 2024, we expect ARR in the range of $1.359 billion to $1.364 billion. Revenue in the range of $313 million to $318 million. Non-GAAP operating income to be approximately $32 million. And we expect third quarter basic share count to be approximately 567 million shares. For the fiscal full year 2024, we expect ARR in the range of $1.432 billion to $1.437 billion. Revenue in the range of $1.273 billion to $1.278 billion. Non-GAAP operating income to be approximately $188 million. This translates to a non-GAAP operating margin of approximately 14.7%. an 850 basis point increase year over year. And finally, we expect fiscal year 2024 non-GAAP adjusted free cash flow of more than $250 million, or 20% adjusted free cash flow margin. As we head into the second half of the fiscal year, the team remains focused on innovation and driving the best possible outcomes for our customers and partners. Customer success is at the core of everything we do, and also the foundation for profitable growth and long-term shareholder value. Thank you for joining us today, and we look forward to speaking with many of you during the quarter. With that, I will now turn the call over to the operator. Operator, please poll for questions.
Operator
Thank you. And ladies and gentlemen, we'll now conduct our question and answer session. Please limit yourselves to one question and one follow-up question per each time that you queue. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star followed by the number 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 Remo Lenschel with Barclays. Please state your question.
Remo Lenschel
Perfect. Thank you. Congrats from me. One question on the, in this new world where AI is getting more and more important, what do you see in terms of your customer conversations with budgets still kind of limited from the budgeting cycle last year? Like how does it play out for you and how are you competing for budget dollars in this sort of environment where you know you need to spend more on AI, but you know the money needs to come from somewhere else? And how does it fit to overall spending? Thank you.
Rob
Yeah, Remo, I would say it's positive for us, the discussion around AI. I think it helps infuse the platform. Our message around specialized AI and generative AI together has really come through. Customers are generally confused by all the announcements that happen in the market, and they like our approach of AI. showcasing how we've actually bolted into the product with Wingman and Jarvis and other solutions, and document understanding, which we actually showed, which actually helps the platform be more valuable to them and helps us drive the platform to more important consequences.
Kelsey
Yeah, I'd like to add that more customers are realizing that automation is a great means to get more value from generative AI. Actually, even today, I was talking to one of the largest airlines in the world, one of our biggest customers, and they highlight how they plan to combine Gen AI with automation in their customer service. So I would say that it's a great tailwind for automation adoption across most of our customers.
Remo Lenschel
Yeah, okay, perfect. Thank you. And a quick follow-up for Hashim, like a great increase on the free cash flow outlook. Were there any special factors in there that we should be aware of, or just the better profitability is starting to play through? Thank you, and congrats again.
Connor
Thanks, Raimo. No, just, you know, we feel really good about the changes that we made last year. We're continuing to see benefits of that come through. So that's organic. There's no special items to mention, and we feel like that is a sustainable path forward. Thank you.
Operator
Thank you. And our next question comes from Mark Murphy with J.P. Morgan. Please go ahead with your question.
Mark Murphy
Thank you so much, and I'll add my congrats on top of Ramos. Hashim, are you able to provide the Q3 ARR growth guidance if we converted it into constant currency terms and or what is implied for the fiscal year now in constant currency terms? I'm not sure if any of that has moved around.
Connor
Yeah, nothing's really moved around. You know, we talked about it in the script of the headwinds, Raimo. Sorry, Mark. And so, like, I think that what we provided is there. You know, normalized for foreign exchange, it's 26% growth in terms of the year-over-year comparison. And I'd say very, you know, similar outlook here for third and fourth quarter in terms of FX. It's not much of an impact as we go forward.
Mark Murphy
Okay, got it. And then, Rob, I'm curious just how commonly you see UiPath being pulled into some of the boardroom discussions out there that are maybe being led by the Accentures and Deloittes and Capgeminis of the world. When they're sitting down with a large company and trying to formulate a generative AI roadmap for a customer and they may sense that some RPA would be involved as part of that tapestry, Do you see much volume along those lines popping up into the deal pipeline? Because I think you had some pretty upbeat commentary on how that pipeline is developing.
Rob
Yes. Mark, what I say, we're having much more significant conversations with the systems integrators and with customers together with the systems integrators where we actually are working on joint opportunities with them. I would not classify it only as RPA. It is about the platform. It's about document understanding, communication, mining tasks, mining the moat that makes a difference, and infusing our Gen AI capabilities, which are actually visual for customers to see and how that benefits them. So that's happening much more. I mean, I spoke a lot about our North Star in the script, and our North Star is having – It's placing us in the boardroom. I mean the value Propositions that we are able to showcase with our customers even at a conservative level is very very strong And you know I mentioned a very large Insurance company we went out to pretty pretty Detailed process level on explaining how automation and the full platform can benefit them that customer is He's going to replace the existing document understanding with the communication and task mining and process mining and go all in on the platform. So we're very positive about our approach to the SIs and being in the boardroom with customers, and we feel like it's fulfilling what we said two quarters ago, that that's what we needed to do.
Mark
Excellent. Thank you so much, Rob.
Operator
Thank you, Michael. Our next question comes from Brian Bergen with Callen. Please state your question.
Michael
Hey, guys. Good afternoon. First one on just the go-to-market progress. So any additional metrics you can share that would really demonstrate that the change in the go-to-market and really selling down through the C-suite is gaining that traction? I think I heard 30% growth in that 1 million cohort year-over-year, which is certainly encouraging. But just anything else there you can give KPI-wise, sales, productivity, anything you like?
Connor
I think when you look at it, that is the primary metric that we look at, Brian, because the million-dollar-plus customers really shows the value of the platform in terms of what's moving. And that is up 34% that we feel customers greater than a million dollars that we feel really content with. The intangible piece that you also can look at is just overall, like our RPO balance is growing very well, which shows continued commitment on deals. you know, from our top customers. And then, you know, Rob has commented, but we really like the activity and the way that the sales force and the intimacy of customer relationships is happening. You know, we talked about it in first quarter among some of the changes, and we feel like those discussions and those deal discussions are progressing very well. And, you know, that's the intangible factor that we really monitor.
Rob
And I would just add, we feel, Brian, that we're also benefiting globally now in Asia Pacific and in Europe. form the activity we implemented as well. We can see it coming through. And then one last item on that is, you know, more and more differential partners are actually speaking to us, partners that typically would not in the SI space, not in the existing space, that are trying to understand how they can utilize the UiPath platform in their business. So we feel really strong about all the activity.
Michael
Okay. I appreciate that. And then just as it relates to pricing dynamics, can you just talk about what you're seeing in market pricing over the last several quarters really as it relates to competitive deals as well as what you're seeing on average across renewals?
Connor
Yeah, we see it relatively stable. You know, there's nothing – people see the value and the ROIs that we provide. You can see that in many of the case studies and the stories and even in some of the demos, Brian, and I think that ROI has given us a good moat around pricing. And so really price is not as much of a factor in deals for us, especially with competition. People will try to undercut it, but they can't deliver the ROI that our platform delivers. And that's really why we've been able to maintain a pretty steady pricing and discounting set of metrics here, regardless of the economic conditions and competitive environment.
Brian
Very good. Thank you.
Mark
Thank you. And our next question comes from Keith Weiss with Morgan Stanley. Please see your question.
spk09
Thank you guys for taking the question. A little bit on sort of the competitive environment around generative AI. All of us are going around and listening to a lot of companies talk to us about trying to infuse generative AI into their portfolios. And It seems like a big benefit they expect to accrue is automation and a lot more automation within their solutions. Does that muddy the waters for you guys at all? And is there anything you have to do in your messaging to sort of help customers understand what they're going to get from a UI path versus an application vendor saying, hey, generative AI is going to help take care of all these road tasks and do all these automations for you? How do you make sure that you ensure that clarity in the marketplace?
Kelsey