Good afternoon, everyone, and welcome to the Appoint Second Quarter 2021 Earnings Call. For opening remarks and introductions, I will now turn the call over to Erica Amanion at Sapphire Investor Relations. Please go ahead.
Thank
you, and good afternoon. With me today to you. From At Point are TJ Jang, Chief Executive Officer and Sofia Wu, Chief Financial Officer. To T. J.
Will begin with a brief review of the business results for the Q2 ended June 30, 2021. Sophia will then review the financial results for the to the Q3, followed by the company's outlook for the Q3 and full year of 2021. We will then open the call for to Ms. 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 to expectations. We encourage you to review the Safe Harbor statements contained in our press release for a more complete description.
To 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, to you, including non GAAP operating income and non GAAP operating margin, which are not measures prepared in accordance with U. S. GAAP. To the non GAAP measures that are presented in this presentation as we believe they provide investors with the means of evaluating and understanding to how the company's management evaluates the company's operating performance.
These non GAAP measures should not be considered in isolation from, to you as substitutes for or superior to financial measures prepared in accordance with U. S. GAAP. Listeners who do not have to a copy of the quarter ended June 30, 2021 press release may obtain a copy by visiting the Investor Relations section of the company's website. Now,
to T. J.
J. Muse:]
Thank you, Erica, and thanks to everyone for joining us to the call this afternoon. We're excited to report our Q1 as a public company. I want to extend special thanks to the Appoint team for their hard work and support during the public listing process. We're excited about this next step in our company's journey. I'll start this afternoon with a brief highlight of the quarter.
Then because it is our first earnings call, I want to take some time to discuss our business and market opportunity. To In the Q2, we delivered record results with revenue of $45,000,000 up 38% year over year, to you, driven by the continued growth of Microsoft Teams and strong adoption of our collaboration security technologies. Within this, to SaaS revenue for the quarter reached $21,000,000 an increase of 76% from prior year, while subscription revenue, which we define as SaaS revenue to our Q1 results. Plus term license revenue reached $32,000,000 growing 66% year over year and representing 70% of our total to revenue in the quarter. ARR annual recurring revenue, an important indicator of future revenue growth, to also grew 33% year over year to $139,000,000 We had great momentum in our business in the second quarter to customers spending more than $100,000 in ARR growing to 286, up 33% year over year.
To our customer success investment initiatives continue to deliver results with a net dollar retention of 111%, up 5 points to from 1 year ago. For those of you who are new to our story, Appoint has been an innovator in digital collaboration technologies to our next speaker for nearly 2 decades. We enable organizations worldwide to collaborate with confidence in the cloud by securing collaboration data, to sustaining the connections between people and ensuring business continuity. Appoint offers the only full suite of SaaS solutions to migrate, to manage and protect data in cloud based platforms like Microsoft 365. With the dramatic acceleration of digital transformation over the past year, to the need to shift IT infrastructure and operations to the cloud, ensure collaboration security and protect data due to threats like ransomware to has become a strategic and tactical imperative.
Through this journey, Appoint has been uniquely positioned to provide more efficient and secure operations through both guidance and industry proven technology. For example, a large U. S. Defense contractor to With over 50,000 employees globally and a strong desire to modernize their collaboration through their investment in Microsoft 365, to especially Microsoft Teams. But given their need to demonstrate compliance with restricted data and contracting practices regulations, to They found themselves challenged by how to align their strict data handling and access request requirements with a more free flowing sharing model to Microsoft 365.
After deploying Appoint's FedRAMP authorized instance of our governance to management cloud solutions for Microsoft 365. They are able to satisfy their audit and regulatory teams
to the call and release Microsoft Teams to their end users, resulting
in adoption by 17,000 users in the 1st week after launch to 30,000 users by early May. Soon after that, they're expanding their use of Appoint solutions to more critical workflows in their business. To With Appoint Solutions, organizations have the ability to enable rapid, sustainable adoption of critical applications to like Microsoft Teams, which have recently been experiencing record growth in organizations large and small. To We provide customers with confidence in their ability to monitor, manage and govern the rapid adoption of new cloud services, while saving time and money. To customers can accelerate their cloud adoption with Appoint solutions by decommissioning homegrown or point solutions that fail to provide key insights to our financial results and flexible automation that drive business outcomes.
While Appoint's revenue and product lines following the overall cloud market are heavily Microsoft centric today, to the next question. The solutions we provide are built on proven best practices for management, governance and compliance, no matter the platform. To Appoint has already made investments to capture multi cloud opportunities such as Salesforce and Google. We believe that our cloud agnostic approach
to you, combined with
projected overall growth in cloud
usage, will lead to significant expansion of Appoint's market opportunities to the next few quarters. As we look at our core customer base today, we continue to enjoy strong momentum from enterprises across the world, to accelerating the transformation of their collaboration environments as they adopt and mature in their cloud usage. Our cloud solutions to our customers. In addition to our strong position within the enterprise landscape, to our next call. We have also begun to partner with managed service providers or MSPs to expand our SaaS based offerings to smallmediumbusinesses or SMB customers.
To you. While early in the overall penetration of this opportunity, in the long term, we view this to be material as it has the potential to nearly double to our addressable market given SMBs representation across Microsoft 365 user base. Looking forward, to Mr. President. We believe that market opportunity ahead of us remains very attractive and we intend to continue ramping up our investments in market awareness, to technology innovation and growth, while prudently managing our expense structure.
Within our go to market organization, for example, to We have grown headcount by approximately 50% across our sales, customer success and channel functions. To With these and other related investments, we aim to increase our market share of Microsoft 365 user base, boost our customer retention rate to and continue our triple digit growth in the SMB market via our channel partners. Lastly, specific to our channel strategy, in July, we launched to our first ever global partner program designed to meet the unique needs of different types of partners, including managed service providers, value added resellers, to cloud consultants and DevOp partners. Channel is an important expansion vector for Appoint in the years ahead, so we made it a priority to our business. Through this partner program, it is our goal to enable partners to maximize the full economic opportunity our technology offers to Anne Capitalize on the digital collaboration wave as the only independent software vendor or ISV offering an all in one approach to providing a full collaboration security platform.
Before turning the call over to Sofia, I want to quickly highlight the recently announced expansion to our executive leadership team with the appointment of Jim Kasey to Chief Financial Officer and Tom Ling to Chief Operating Officer. To the company's existing CFO, Sophia Wu, will now serve as Chief Accounting Officer and Brian Brown will continue to serve as Chief Legal and Compliance Officer, to all effective August 23, 2021. This is an exciting time to be at Appoint. Looking ahead, to We recognize that our public listing is just one step in the journey of our company. And while we're excited to have achieved this milestone, we have much more to do.
To you. We look forward to continuing our momentum in 2021 and updating all of you in the quarters to come. To Sophia. With that, I'll turn over to Sophia to discuss our financial results in more detail.
Thank you, TJ, and good afternoon, everyone. To you. As I review our Q2 results today, please note that I'll be referring to non GAAP metrics to you unless otherwise noted. A reconciliation of GAAP to non GAAP financials is included in today's earnings release, to you, which is available on our website. Given this is our first earnings call as a public company, I want to start by providing some perspectives to about our business model and financial profile.
Then I'll walk through highlights from the Q2.
To the operator.
And finally, I'll close with guidance for the Q3 and full year before we open up the call for questions. To as a software company serving a wide range of customers from highly regulated Fortune 500 Enterprises to SMBs to our MSP partners. Our steady motion is to engage with our customers in a way which benefits their needs. To our large enterprise customers, which often have hybrid and multi cloud IT environments, to this is often a combination of SaaS and term license deals, which have approximate duration of 2.25 years, to our MSP partners are 100% SaaS built on a monthly basis. To you.
While from our customers' point of view, both SaaS and the term license deals are considered subscription to you. Due to the adoption of ASC 606, our revenue recognition of each differs. To our SaaS revenue is recognized ratably over the term of the deal, whereas for term license, to we will typically recognize 60% to 80% of the total deal value upfront. While over time, we do expect to the SaaS portion of our business to contribute an increasing portion of our overall revenue. It is worth noting our term license business to the operator.
It's an important element of our offering for large enterprises, and we will continue to support them to you as they implement their cloud
migration initiatives.
As a result of this dynamic, we believe ARR to our financial results. It's a useful metric to track the period to period progress of our business as it provides a more relevant comparison to between growth in our SaaS and the term license revenue streams. In addition to software revenue, We also generate revenue from professional services, which primarily consist of implementation to support services as well as maintenance revenue carried over from our legacy perpetual license model. To you. Over time, we expect our professional service revenue will grow incrementally in dollar terms, but to become a lower portion of our overall revenue mix as our software revenue grows.
To you. As our remaining legacy perpetual customers eventually migrate to either a SaaS or term license solution, to our quarterly results. To Total revenue for the Q2 ended June 30, 2021 were $45,000,000 up 38% year over year. To you. Within this, SaaS revenue was $21,000,000 constituting 45% of total revenue and up 76% year over year.
To you. As of the quarter end, we had ARR of 139,000,000, which included 286 to customers with ARR of over 100,000, up from 270 customers as of March 31, 2021. To you. In addition, our average horn ARR per account at the end of the quarter was 36,000, to which represents a growth of 30% year over year. As TJ mentioned, over the last several quarters, to our customers.
We have increased investment in our customer success organization to generate greater customer coverage and ultimately drive our dollar based net retention towards the best in class industry benchmark of 120%. To you. In the Q2, our core and dollar based net retention rate was 111%. As we have discussed previously, to our long term goal is drive dollar based net retention to 120% by continually to invest in our customer success organization and expanding the usage of our platform with existing customers. To Nicole.
Now let's review the income statement in more detail. Gross profit in the quarter was 34,000,000 to you, representing a gross margin of 75% compared to 73% in the year ago period. To this improvement in margin is due to the continued shift in mix of our revenue towards subscription. To the call. Recurring revenue gross margin remains strong and was 86% in Q2.
To the call. Sales and marketing expense were $19,000,000 or 42% of revenue compared to 38% in the year ago period. To you. This increase was driven by an increase in headcount and personnel related expense as we expand our sales and customer success to organizations as well as additional marketing spend as we invest in our MSP and channel strategies. We intend to invest in sales and marketing as we continue to drive awareness in the market and expand our sales force and marketing efforts to leverage our industry position and capture the significant opportunity in front of us.
R and D to the financial results. Expense was $4,000,000 or 8 percent of revenue, roughly in line with the year ago period. The increase on a dollar basis to was driven by investment in product innovation, resulting in additional development costs and additional headcount. To G and A expense was $7,000,000 or 16% of revenue compared to 13% in the year ago period. To G and A reflects an increase in people and infrastructure related expense associated with our public ready efforts.
To the operator. Non GAAP operating income was $3,000,000 or 7% of revenue, decreasing in dollar terms to Pharma operating profit of $4,200,000 in the year ago period. Turning to the balance sheet and cash flow. To to the CNY204,500,000 in net proceeds we received from the closing of our business combination on July 1. To you.
Adjusting for this, our cash balance as of June 30 would have been over 270,000,000 to the financial results. Cash provided by operations was $2,000,000 in the quarter, while free cash flow, which includes CapEx, was 2,000,000 to I would now like to turn to our outlook for the Q3 and the full year 2021. For the Q3, we expect revenue of $51,500,000 to $53,500,000 to the non GAAP operating profit of $1,700,000 to $3,200,000 For the full year, to our
next call.
We expect revenue of $192,000,000 to $196,000,000 and a non GAAP operating profit of to $4,700,000 to $7,700,000 With that, we'll open up the call for questions. Operator?
To on your telephone keypad. A confirmation tone will indicate that your line is in the question for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. To our first question is from Brian Essex with Goldman Sachs. Please proceed with your question.
To you.
Hi, good afternoon and thank you for taking the question and congratulations on the results and emerging as a public company. To. I guess for the first question, TJ, you noted in your prepared remarks that you achieved FedRAMP status and to So you cited a nice defense contractor deal. What does the pipeline look like? What do you see ahead in the pipeline for FedRAMP associated business?
And how much to penetration and visibility into penetration do you have in that pipeline?
Good afternoon, Brian. Thank you for the question. To So public sector is our biggest vertical solution space. We have a dedicated public sector team based in Arlington, Virginia. To The FedRAMP is a very important aspect to it.
So we do see that there are opportunities to that involve FedRAMP that we're able to close now that were FedRAMP authorized. FedRAMP certification itself is a long process. This is also why we talk about to This first in market, first mover advantage, it took it usually takes several years to obtain the authorized status go from the initiated status. To And we continue to see robust pipeline from that. So it's important thing and it's also being cited by other software to companies of their various stage of process.
So as to the overall TAM, it is harder to gauge right now. We know it's important to And we have a robust pipeline associated with FedRAMP authorized status.
Got it. That's helpful. So thank you for that. And then maybe just a follow-up. To with regard to the Salesforce Backup Cloud, particularly with the potential penetration incremental penetration in the service providers, to How do the service providers view that platform?
What are they using currently? And how do you view the opportunity there?
To Yes. We view the sales force backup as a service opportunity as a moderate growth factor for us right now, to But it is a very important aspect of our multi cloud play where we continue to expand our footprint into existing accounts. So you Salesforce is to the provider themselves have kind of gone back and forth in providing some minimum backup type of services, but we all know to Even from a very critical ransomware protection perspective, customers do need 3rd party segregated storage, to preferably SaaS providers to have bring your own storage, bring your own encryption, bring your own authentication type approach, to that full flexibility afforded to customers. So we see that as a moderate growth vector for us. To There are a couple of Salesforce backup providers in the market.
Most notably, Salesforce themselves have backed away to providing that natively and then only recently backup with very, very basic functionalities, which customers require more. I think this to 3rd party provider solution. It's a very important aspect to what the market needs today.
To All right. That's helpful color. Thank you. I have more of it, I'll hop back in the queue. Thank you very much.
Thank you, Brian. To
you. Our next question is with Jason Ader with William Blair. Please proceed with your question.
To Yes, good afternoon. Hi, guys. Two questions, one for TJ, one for Sofia. For TJ, to TJ, can you provide an update on the number of Microsoft 365 users? I know you guys have been saying over 7,000,000, but to Is there any specific update you have there?
Or is that something that you may provide periodically for us?
Yes. So we just announced that it's now over $8,000,000 It's a metric yes, it's over $8,000,000 now. And It's a metric we don't intend to update on a quarterly basis because the nature of our licensing and coverage and hybrid licenses, to We think the best reflection of our growth continue to be ARR growth, annual recurring revenue growth. So But yes, so it is now well over $8,000,000
Great. Okay. And then Sofia, for the operating income guidance to For the year, I noticed that it was lower than what you guys have provided publicly. I think you to You originally provided $8,000,000 and now you're saying, a little bit, I think $6,200,000 at the midpoint. Can you talk us through what changed there?
To Yes. Hi, Jason. So this is mainly because we increased our investment into our business, to split it between 3 buckets. We increased our investment in sales and marketing, including new positions in channel business, to T. J.
Will share a little bit more color later. We also increased our spending in G and A, which is a mix of to a few things. It's incremental public company cost, increased professional fees more than we originally budgeted and also additional headcount to such as hiring of Jim, which will add additional strength to the existing management team. We also see good opportunities to to increase our investment in R and D to bring new products in 2020 and beyond. So therefore, we increased the headcount in H2.
To you.
Got you.
Yes. So Jason, on the channel side, Sofia mentioning, we to announce our global channel program in July. So we're investing very aggressively into the channel and channel initial stages to our relative expensive. There's a whole priming the pump action going on as well as essentially enabling accelerating to channel partners to then conduct business with us and be familiar with our products. But of course, channel is the fastest way to scale our business given the massive to Pam in front of us.
We have expanded channel coverage to not only our monthly recurring side of SMB business, but also our to Telesales mid market business selling to businesses all the way up to $2,000,000,000 annual revenue. So it's a very aggressive investment from our side. Of course, at the same time, we are meaningfully controlling to make sure that we are managing our OpEx costs meaningfully, to But still maintain aggressive growth posture.
Thank you for that. And one quick last one for me on the MSP business, to you. Yes. Does that meet your expectations?
Yes. So far, it's about 5% of our AR right now, to And we're growing 3 digits. It is meeting our expectations. We're investing more aggressively into it. It's a fantastic market as we mentioned before, to you.
Because we've been enterprise focused, but being SaaS provider allow us to be accessible, far more accessible to the SMB market. So that allow us to effectively double our TAM because again the user base that SMB market represents to in the Microsoft 365 Ecosystem. We define also SMB as businesses with $250,000,000 annual revenue to 500 employees or fewer companies. That's actually a very, very big space.
Great. Thank you.
To
you. Our next question is with Kirk Materne with Evercore. Please proceed with your question.
Okay. Thanks very much and congrats on the quarter. TJ, Microsoft called you guys out as one of their key partners out at Inspire this summer. And I I was wondering just could you talk about how that partnership is changing from a go to market perspective or is evolving maybe is the better word? And how is that helping your to catch rates that you see with Microsoft more recently.
I know you've had a long partnership, but I was just kind of curious about some of the more recent changes on that front.
And I have one follow-up.
Yes. So Microsoft, we continue to have a very robust relationship that has spanned out close to 2 decades. We talk about the sales relationship where we're one of the top 5 global IP co sale partner that Microsoft has for cloud consumption, to where Microsoft reps actually get comped on our deals, 10% of our TCV goes towards that accounts Microsoft reps compensation for to cloud consumption retirement. So in that regard, we're top 5 in the same categories as Adobe and DocuSign. So asymmetrically that makes us important.
So that's the sell side. To On the product side, we have a team of MVPs, so Microsoft Most Valuable Professionals. These are voted by the community and selected by to So as well as a team of RDs, Regional Directors. So these are MVP of MVPs, and they actually represent the industry voice. To So they actually get to see the bits, the new products and innovation from Microsoft ahead of everyone.
Also due to our long term relationship to patient and being a global top partner for Microsoft. We our product team and Microsoft product team have regular syncs. To you. So all those things collectively forms this win win foundation where we stay ahead of the game. We know where Microsoft is investing to And we can essentially anticipate where the opportunity reside for us.
A good case example of this to for example, in education when Microsoft released Veeva, which is their LinkedIn and Teams integration to talk about continuous education, learning and we actually are one of the charter members to and be able to access have API access and offer one of the industry's most comprehensive Microsoft 365 based to Education Technology Solution for Higher Ed and Corporate, which we call it actually Appoint EduTech. So that's a massive win for us. We have grown that business to very, very rapidly in Asia Pacific region and now we're expanding to North America and Europe. And that's all thanks to the tremendous support we have to the Microsoft Education team all the way back to corporate and the product team. So that just showcase the early look ahead that we have to allow us to anticipate where the investment areas will come from, where to avoid and allow us to stay ahead of the curve here.
To That's super. That's very helpful. And then just one quick question about sort of the trends around NRR. I know you guys have focused to Stuart. Sure.
I have invested a lot in your customer success organization. Do you feel like there's still some low hanging fruit in that area in terms of helping NRR to move higher or is NRR growth from here going to have to be more either retention and or upsell driven?
Our goal is to quickly get to the industry benchmark of 120 percent and right now we're at 111%. To we have shown meaningful improvements over the last two and a half years of investment. Just year over year, it's about 5 points improvement. To For us, we're very comfortable with that. It's an investment of technology, people and process.
We'll continue to do that from cross sell and up sell capabilities. To We're pretty comfortable that we will get to the industry benchmark in medium term.
That sounds good. Thanks for answering the questions.
To you.
Thank you, Kirk.
Our next question is from Nehal Chokshi with Northland Capital. Please proceed with your question.
To you.
Thank you. And nice to see sustained 30 plus percent ARR growth. That's awesome. Congratulations. To Microsoft changed up on how they are reporting Teams growth.
It's not really very clear if to Teams growth is tapering or not. In that context, can you give us some perspective as far as what you think is happening there? And then to how does that
affect your pipeline?
That's a great question, Nehal. So Microsoft Teams' previous announced number was to 140,000,000 active e data users and now they just recently announced 250,000,000 active e monthly users. Interestingly, we also announced that the E5 penetration for Office E5 is 8%. So again, these things are more nuanced to you because there's different license types, different coverage. You also have seasonal kind of coverage.
To So for us, it just continue to be a massive TAM because Microsoft team is truly to the Killer app. It's really as we mentioned before highly integrated with the entirety of Microsoft 3C5 and now especially with Windows to 365. So Cloud PC, where every instance has Microsoft Teams baked in. In fact, our Teams app, which is called MyHub, to the number one Teams app in Japan and one of the top ones globally. It's baked in into these instances.
So what it does is create an evergreen to Mohsen here. And as Microsoft continually update their builds and have the releases updated in real time via these cloud PC instances, to our latest apps gets rollout as well. So I think that will only help increase lower the barrier to entry And increase our ability to go to market. So it's only good from Appoint's business opportunity perspective.
To you. Okay. So I sort of interpret that answer as that, yes, Teams growth is not tapering. It remains strong And therefore, your pipeline hasn't stabilized, it's still growing, I. E, the opportunity continues to outstrip your sales capacity.
Is to That's more of the correct interpretation there? Okay.
That's fine. If you look at the reoccurring side of our business, we're growing north of 50 to right. So reoccurring is actually growing 66% and the pure SaaS, pure cloud customers are growing north of 70 plus percent. To So yes, we continue to see incredible momentum in
the market.
Okay, great. And then how does that color your ARR to year over year expectations for the balance of the year then.
So against this macroeconomic to In the volatility and uncertainty right now, we are being constructive in our guidance. So we remain consistent with our previous guidance of maintaining this 30% revenue growth.
Okay, to Great. And then can you disaggregate that 111% net revenue retention rate into gross revenue retention rate and upsell rates?
Yes. We don't disclose growth retention rate. We'll continue to focus on NRR, net retention rate and continue to improve that. To And we'll continue to highlight on the ARR growth because we feel like those are the most meaningful metrics that we tailor our business towards. So the entire organization is essentially operating along the same KPIs.
Okay, great. Thank you.
To
to the question. Our next question is from Brian Essex with Goldman Sachs. Please proceed with your question.
Hi, guys. I just thought I'd circle back with a couple follow ups. I guess one on gross margin, it looks to meaningfully better this quarter, better than we expected. Maybe Sofia, if you could provide us with some puts and takes around to gross margin, the margin expansion you saw in the quarter and what to expect going forward?
Yes. Our higher than expected gross margin was to partially due to the revenue mix as we continue to shift towards subscription, but it's also a result of improvement in our service margin. To the next question. So we do expect this gross margin to remain at this level through the rest of the year.
Is that I mean subscription gross margin looks like it improved as well, to Like 300 basis points. Was that scalable over scalability over Azure? Was it just incremental margins or incremental to subscription added to the platform. How do we think about this in sustainability of this kind of these kind of margin levels to On a per segment basis going forward.
What you said is true. We would expect this to continue for the future quarters.
To you. Okay. And then I guess to add on to that, so that's very helpful. And given incremental investment that you made in the platform to approach this market opportunity that you had. I think before we've had some kind of visibility into to operating margin expansion over the next several years.
Any shift in those expectations? Do we kind of think about to ongoing expansion after a year of investment, I mean, strategically, how do we think about your kind of progression to better profitability going forward, given obviously you're focused on growth as well, but just wondering how you're balancing the 2?
Yes. We always want to reach to a good balance between growth and provide a meaningful return to our shareholders. So our long term gross margin to 75%. And we expect our non GAAP EBIT target in the long term to be at 25%.
To you.
Okay. I guess I'll follow-up afterwards, but I'll hop back in the queue. Thank you.
To Thank you, Brian. Yes, this
is from T. J. From the business perspective, we clearly have a massive to Pam in front of us. We want to accelerate our ability to capture that. So yes, we will play a nice balanced to the replay between growth revenue growth and profitability.
Ultimately, we want to stay north of that rule of 40 to as the benchmark guidance and measurements against SaaS companies. So whether that's 30% growth to versus 10% profitability or 40% growth versus neutral profitability. That's something we'll continue to work on, but ultimately, to We want to go after the TAM in front of us quicker.
To Mr. President.
Okay. Ladies and gentlemen, we have reached the end of the question and answer session. And I would like to turn the back over to TJ Jeong, Co Founder and CEO for closing remarks.
Well, thank you everyone. Thank you for taking the time to listen to our first earnings call. To Thank you for your support. I really appreciate Appoint employees for your hard work and Appoint investors for your support. We continue to execute on our business to you as we have laid out previously and we look forward to future earnings calls with you.
Thank you. To you.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.