All right, let's get started. I'm Sitikantha Panigrahi, Research Analyst here at Mizuho. We're fortunate to have Ashim Gupta, CFO, UiPath. Ashim, welcome to the conference.
Thanks, Siti.
Well, probably a lot of you know about Ashim. He has been with the company since 2018, and before that, he spent time in GE. But Ashim, I want to start with a recent event. You reported Fiscal Q1 recently. We have been getting questions, and your Fiscal '25 guidance was a bit lower. You lowered that. So could you talk about the puts and takes in what is impacting that lower growth rate? Let's kick off with that.
Yeah, thanks, Siti. So look, I think in our earnings, you know we talked about we're not happy with the quarter. We feel like there's a number of items that both are macroeconomically driven, but also some things within our control. So when you look at our guidance for the fiscal year, we've factored three factors into it. The first is macroeconomic variability. The second is execution. And the third is the transition that we have with our leadership team in terms of Rob and Daniel, and Daniel stepping back into the CEO job. So I'll double-click very quickly on each one.
So macroeconomic variability, around six weeks into the quarter, mid-March, you know we definitely saw tension in the deal, in the system around elongated deal cycles, approvals, more scrutiny on the size and duration of the deals from our customers. In talking to our customers, that felt more macroeconomic. You know they're still very committed to the platform, really around their own budgetary questions that they were working through. And then post-quarter close, of course, we're not the only ones that have felt similar trends out in the marketplace.
The second is execution. I mean, what does execution mean? We talk about a few things that are more strategic, but we think about tactical things. The tactical things are our sales compensation change that we talked about. You know when you kind of become a little bit of a larger corporation, losing touch with the field is a risk, and we lost touch with the field. So we made some changes that took away incentives on multi-year deals. We don't have those incentives for revenue. We have those incentives because we don't want renewals every single year. You know, we like a mix of different of that portfolio.
But in changing that plan, we had the unintended consequence of having less multi-year deals, which impacts our revenue number, does not impact ARR. And then there could have been better inspection on a number of our deals that are out there, especially in a tougher macroeconomic environment. And then the transition with Rob, I think, goes without saying. I think anytime you go through a leadership transition, you have to assess the time that employees and leadership are going to spend making sure that we're aligned, kind of connected, and aligned on the path forward. And that takes away time from the field.
Yeah. Look, macro, it's not just you. There are other companies who talked about macro pressure as well. But when you look at that elongated deal cycle, more scrutiny, is there any particular segment of customer, vertical, or geography that you've seen?
No, it was really broad. It's really broad. I mean, I think that's why we feel it is more macro than distinct. What we do notice is it definitely disproportionately impacts your larger deals, right? I think if somebody is themselves going through uncertainty, they're not going to take the largest bite at the apple today. They'd rather take a bite at the apple now and a bite at the apple later. There's actually one particular deal that was $X million. And from there, it got divided into two. One half that contractually will happen this year, one half that contractually happens next year, just as an example of deals that are there.
Yeah, right, right. But are you seeing anything like investment-wise? Customers are taking a pause in terms of, hey, let me look at, wait for how AI is going to evolve. Maybe I'll do that, or maybe I'll divert some of the spending towards AI. Are you seeing anything like that?
I would not characterize it as a pause. How do I phrase this? Are customers wading through a lot of information that slows their gait on certain items? Yes, right? What does that mean? When you're inundated, if I just ask the community here, how much do you hear about AI, and how much are you spending time trying to figure out what's fact, what's fiction for your own portfolios?
Now, imagine that for a customer and a strategy on a multi-year plan. Of course, there's noise, and there's added scrutiny, added questions that go into it. A pause? No. No one's saying, in September, I'm going to figure out my AI strategy, and I'll come back to you. It is more just really questioning and trying to understand and placing the appropriate level and duration of bets given how fast the cycles are changing.
Yeah, yeah. And one thing I've seen, UiPath, you guys have been investing on AI as well. I remember going to your conference last year. You talked about some of the AI products as well. So when you think of AI, do you see for the RPA market is more complementary? And how does that open up more opportunity for UiPath?
100%. I would use two adjectives to describe it: complementary and synergistic. Let me define what that means. AI and automation, for us, are two sides of the same coin. If I give you an insight, but I don't give you the ability to act efficiently, how valuable is the insight, right? So complementary from a purpose standpoint, it's huge. Second, from a synergy standpoint, the technologies are synergistic. I'm going to give you two simple examples. There's a number of automations that our customers are trying to get to.
Copilot for Microsoft helps people get and do easier development. We have for our platform, Autopilot. So Autopilot takes away friction, lowers TCO, and allows people to develop automations faster and getting faster time to value. But that is AI-based, similar to Copilot. Second piece is we're no longer an RPA company. If there's one message I want everybody to kind of go away with, UiPath is a full-fledged automation platform.
Our roots are in RPA, but we are not RPA. It would be like defining the U.S. as 13 colonies, where the United States in grand total. So we have IDP, test automation, et cetera. In document processing, the difference between our document processing and other technologies is we've used the general LLMs that have been developed- GPT-4, LaMDA, et cetera, but we've specialized on top of it. And that brings faster time to value. So there's technology synergies as well.
In terms of the product you guys talked about on the very specific AI SKUs and layering, so when should we expect that generally available, and how are you thinking about monetization?
Yeah, we're making great progress on it. So I'm going to answer it in two parts. Let me answer first the progress that we're making on our SKUs, the second piece around monetization and value generation. From a progress standpoint, we already have 1,000+ customers on Autopilot for Studio, right? The second piece is test automation, automated test for DevOps. We have 300+ customers that are already using that product. The feedback is great. The acceptance rate on the code that is generated is 70+% . That's an incredible acceptance rate.
As you look at it, we're really pleased with the productivity benefits that we're seeing. The one other note is we had been monetizing GenAI, as I bridged to the monetization point, for many years. IDP, we launched back in 2022, right? Daniel was talking about semantic automation in 2019. So we've already been working through, or 2021, sorry, for semantic automation. We've already been monetizing some of that. What is our monetization platform?
Continue to what we're doing, IDP, Comms Mining. We're going to be talking about our monetization strategy here over the summer as our products are coming very close to that milestone, being able to be full GA. What I would say is we're going to value adoption first and see how we can monetize without prohibiting adoption. And because the value is really a long-term game with our 11,000+ customers.
OK. And going back to the execution issues talked about, sales incentive, has it already been addressed, or we should see if you want to give us some on that?
Yeah. So let me just clarify it because I think many people had questions. So I'm just going to do it really quick. First, our sales team retires quota based on net new ARR. Historically, we had uplifts for every dollar of quota. If it's a multi-year deal, illustrative, these are not real numbers, you get 1.5 of a quota reduction. We reduced that incentive, again, illustratively for good intention, to 1.01, much less incentive, right? It is very easy, which has already been done, for us to be able to move back the incentive to a reasonable level.
We don't have to go all the way back to where it was because we felt we maybe it wasn't leading to the right efficiency, but we should have the right incentivization. That has been done. It takes time now to move through the sales team, move to the customer negotiations, and moves back into the pipeline. That's the way we think about that topic today.
OK. And then last, the third topic you mentioned about management changes, CEO changes. Daniel is back. It's good that Daniel, who's the founder, was there coming back. But how should we think about some of the go-to-market changes that Rob talked about, enterprise? And definitely, you are not focusing on the SMB side of it. And you guys are kind of the platform for small to large enterprises. Any changes we should expect?
Yeah, I want to actually clarify one thing. It's very important. Daniel's not back. Daniel never left.
Yeah.
So I think he was the Co-CEO throughout. He moved into that CIO role, Chief Innovation Officer role, where he really focused on P&E, where he was able to solidify the organization, hire a CTO that is there, right? Again, none of the transition was planned. Rob left for personal reasons. But Daniel has been deeply engaged in the business. And for those who don't know UiPath, he was the CEO for 17 years, growing the company from zero to a billion. And he's been deeply engaged, including all of the hiring and go-to-market over the last years on the key roles. So I think that's very important.
Now, valid question, Rob's transition, what stays, what goes, right? There's a lot of great things that Rob brought to the company. Selling to the C-level, selling the platform, those are great changes that are there. What changes is we've over-rotated. Having a C-level conversation is critical. Not driving the deep connection with the grassroots in a company is very hard. I'm the CFO of a company. If you have a piece of software, if you sell me on it, but my chief accounting officer doesn't find great value in it, or the HR leader, I can tell you to look at it, but I can't say you shall buy it, right?
We need to have both connections. So I think what I would say is we're bringing back balance into the company is the major area to change. We're going to take those elements of good C-level, but we got to be intimate with the customers. We have a customer advisory board tomorrow, right? And we're really in the depths of the COE leaders, but also the users that are there. Second area, pricing. Great that we've made simplification. But we got to prioritize how do we use packaging and bundling as an offensive weapon for growth, right?
Not just kind of like SKU reduction. So those are things that we can say there's many good things, and there's things we have to go. The one thing I can tell you that we'll categorically change is there is efficiency opportunity. I think the large-scale structures that have been built, they thwart the signals from the field. And I think that is something that we want to take away that has both a cultural and execution, and it also has an efficiency benefit. And those are things that we are actively looking at changing.
And I was getting a question like when you lower your guidance, you know, of course, you talked about you're very transparent about the impact there. But how much you have factored in kind of, let's say, macro getting worse and further, what have you seen right now? And even the impact from any kind of execution changes or the go-to-market changes or any kind of impact from trickle-down from the CEO changes, how much have you factored in? And is this lowered enough, or do you see still?
Our intention is always to provide our investor community and everybody who's looking at UiPath with the best view of the company, all things considered. So I can't sit here and make a promise of X, Y, Z, but what I can tell you is the amount of time and diligence that we put in to making sure we appropriately factor it is tremendous. But maybe I double-click and give you guys a sense for how we factor in guidance. One is we really look at three things as we evaluate our pipeline. The first is we have field input, sales signals. We know the major renewals. That's not a mystery. That doesn't need something that's there.
So we are very deeply connected with the field and our customer base. Second, data science. A good chunk of our business is statistical. You can see trends ahead of time, right, in terms of just the flow and where we are on the run rate. We're able to look at that and then make appropriate adjustments on the factors that we said. The third is our traditional FP&A forecast, really starting with where we are, pipeline, conversion rates, and those types of things. I feel very comfortable about the guidance that we've provided, of course. That hopefully gives you a double-click into how we think about it.
Yeah. So one thing on UiPath was very impressive, your partner strategy, like how you have built the ecosystem around it. Help us understand how is that working. And the changes also you made recently are also partnership like SAP. How is that helping you?
Yeah. There's tons of good. So we're really happy with the connections, again, at the C-levels of our major GSIs. We're very happy with kind of strategically their belief and understanding of our platform. I think being connected executionally at the field level, that can use improvement, right? Second is stability of strategy and stability and clarity with the partners. I think that is something that we're going to continue to focus on. You can't change things too often without kind of creating a little bit of disruption. And we want to stabilize that.
With regard to SAP, I think we've done. It's an incredible accomplishment for the company and the progress that we've made. The partnership continues to deepen. We've seen kind of spots of the power, like Arnotts, like an eyeglass manufacturer that we were able to have sign in first quarter. But that partnership is deepening. Sapphire, if you go and you see our presentations, you see the level of executive sponsorship. It's huge. I'm really excited about what's ahead for us there.
And in terms of go-to-market, how do you see the opportunity in the more small-mid market base? I know you talked about the enterprise CEO level, your product. Where do you see that traction? Where's the sweet spot?
I think there's areas of really good examples of the power of commercial has the equal power of enterprise. Aprio is a customer that we talked about last year, 300 employees using our technology to integrate into their product to drive customer outcomes and drive growth for them. It's incredible, as an example. So I think we look at commercial as a very opportunistic area to work on. I think our shift is from quantity to quality.
So do we need to win 10,000 logos, more logos in the commercial space so we can drive a customer number higher? Pardon me. No. But do we want those logos out there who are going to naturally expand and provide the right payback? Yes. That's how we've aligned our and segmented our teams. What we need to do, what we are going to work on executionally, is really connecting that strategy across all of our functions to make sure that we serve them appropriately.
Also, I want to dig into your expansion strategy, like NRR expansion rate within the company. Help us understand how you drive that expansion within the company and how sticky the product is. Of course, it's not easy to rip and replace once you're part of the process.
The product is extremely sticky. If you look at our gross retention rate, it's 98%. Yeah. So what percentage of people who have invested a dollar on a dollar basis go to zero? 2%, which is actually a world-class metric at our scale, frankly, at most scales that are there. And that obviously speaks to the stickiness of the product. How do we drive expansion internally? One is cross-platform.
You look at Etihad Airways, 300+ automations, but expanding across multiple elements of our platform. Vhi Healthcare, buying multiple elements of our platform, starting with RPA and moving across. So really, major bank moving and tripling down on IDP, document processing. The IRS Commissioner started with RPA, standing on stage, talking about the power of what we can do with paper. Who knew there was so much paper in the government? Kidding. There's tons, tons of opportunity.
We're seen as a solution for that. That's kind of like how we drive is aligning where we are in those areas. The last piece is continuing with our partners to expand use cases. Why are we excited about AI? Now we can even, our automations can integrate with large language models to not just schedule a service call automatically, but send that email to a customer. Those are things that are really powerful.
OK. I'm going to ask one more question and open it up for Q&A if you have any question. But Ashim, margin, you've done an impressive job when growth was struggling. You deliver margin. Help us understand how you balance growth versus profitability and how should we think about the operating leverage in the business.
Look, our business model is really powerful. So let me give you a $1.9 billion of cash generating $300 million of free cash flow, even with a reduced guidance, right? So just that is, if you go across software, that's very good in terms of where we are. We have very significant gross margins. So we have the opportunity from a business model standpoint between that and our expansion. Every dollar of expansion essentially should turn into cash.
That's the first step. When you accept that part of your business model, there's no contradictory behavior between growth and margins. What is the question is your discipline on investment and returns. If you're disciplined on investment and returns, which we have been, but we feel like there's even more opportunity to do, you can invest for growth. We can invest in GPUs that helps our AI strategy in terms of model specialization without impacting margins. We can go and have the right sales capacity in the field.
What we have to be more conscious of is making sure that every person in the company and every investment is tied to a dollar of return. That is what our focus is. And when you look at the opportunity, we still see opportunity in go-to-market and G&A. So I would actually argue we have inefficiency, some of which we can return back and some of which, as we realize it, and some of it we can invest for further growth in the right areas.
Should we expect similar kind of margin expansion going forward?
I think we'll update our long-term models at the right time. That is something that we'll provide at the right moment. But when you look at our business model, when you look at the areas and you listen to how we're thinking about the company, I think growth and profitability are not contradictory for us going forward.
OK. Let's see if there is any question. You can raise your hand.
One pushback we hear from. And that, of course, gets into weeds of the technology, not the financials we are all trained for. So maybe you can, in simple, easy-to-understand English, maybe you can just give us. So the pushback is you will get a lot of competition from people like Microsoft. But they want to go after you, but just as part of their new AI-centric business, you will get hit, loosely talking. And therefore, you need to spend more money and improve your AI capabilities. And that, of course, costs money.
And the question is, do you agree with that pushback? And two, if so, how much that will impact your free cash flow? Up to now, whatever you said is correct. Some people believe the investment you need to make just to keep up with the developments in the AI. They may pay off in the future. For the near future, your free cash flow will not be the same as you are known to deliver.
I understand. Let me address it. I clearly do not agree with it. But let me try to break it down as to why. Because there is some validity in the question on Microsoft, but I want to define it before that soundbite moves. There's two elements of our space: personal productivity and enterprise productivity, personal automation and enterprise automation. Personal automation is you get an email, download the attachment, and store it to a folder. Enterprise productivity is automating the process of delivering aircraft engines across lines and complying with export controls that have military regulations, giving you a very complex use case.
That second one I actually implemented as a customer. That's one of the reasons why I came to UiPath. Claims processing, mortgage applications, industry in terms of supply chain verification for bill of materials and updates of bill of materials, right? On the personal productivity front, Microsoft has capabilities and are bringing capabilities to the market. But that is, if you look at our ARR, that is a fractional percentage of what our ARR is.
So Microsoft's capabilities and the AI-centric move, tell me an enterprise process Microsoft owns. I love Microsoft, and I hate Microsoft. But it's personal productivity that is really in focus for Microsoft, right? Everything you do on your desktop. Now, let's go to the second level of the question. Can you go and apply those technologies into enterprise? It takes years. It takes governance. It's not just about AI. It takes know-how. It takes computer vision and understanding the 11,000 applications that exist in a Fortune 500 customer, right, to be able to do that.
That's a second piece that's really important. So when you break that down, now your next question is, well, do we have to chase AI and put a lot of free cash flow? And our free cash flow margins are going to be diluted in terms of defense. I think it's a misnomer to think that AI investment is today. AI investment's been happening. When I joined the company, we had 400 people. We now have over 3,800-4,000 people is what we have right today. Much of that is in R&D. And if you look at our platform, we have IDP, test automation. We've expanded.
So we've moved from a traditional margin, low margin, burn company pre-IPO to generating $300 million in cash while investing. So do we have to continue to make AI investments? Yes. But we have been. Now, do we want to make sure that we continue to realize other efficiencies to drive even a higher level of investment? Yes. The last point I would make is we are the ones being chased. If you look at Gartner, Forrester, and Everest Group, we are in first place.
So if you put gas in a car, and you're putting on accelerator, where do you burn the most amount of gas? It's getting from first gear to fourth gear. We're in fourth gear. So that area for us, I think we can continue to invest, continue to play offense, not degrade free cash flow margins. That's kind of the way I'd answer it, both technologically, market-wise, and financially.
Any other questions? Here.
Ashim, it feels like you've always been educating the market. I remember the time of the IPO, Hyperautomation, new concept, took people a while. Microsoft question was always there. And it took the market a little while to understand. Back then, it was not a billion-dollar-plus top line. Now you have it. How should the world see it? Is it a foundational platform as the world evolves and GenAI capabilities that enterprises are adopting or in the process of adopting? How's that? Is that an accelerant to your business versus an impediment to the business?
Yeah. I think the first thing is, let's define—I think—great question. If you look at a stack, a tech stack, and you go application down to infrastructure; to me, AI is a stack that runs alongside every single layer of the stack. It is not in competition of each element. It's an enabler of every element of the stack, right? So do I think AI destroys, in a hardware example, do I think AI destroys PCs? No. Are there AI laptops that are starting to come? My kids' schools are marketing them, so I have to go and buy something, apparently.
But it doesn't mean that the laptop goes away. It's really how fast you integrate its power and capability into your part of that stack. Is it an accelerant? Yes. Why? It enhances. If you're going to invest in AI, how do you not invest in automation? So if you say that it's going to run across the stack, how do you not invest in automation? If before I could automate 10 parts of a process with AI, can I now automate 12? Yes. And does that enhance ROI? Yes.
If without AI, without Autopilot, if I can do 20 automations a year, but now I can do a multiple of that, does that accelerate automation? Yes. I think for me, it is a clear accelerant. I think the question is the time frame and the patience that's out there, right? You look at all the announcements in the last year and a half. You guys know this better than me. Tell me somebody who said, this is the return outside of infrastructure right away. It doesn't mean that all those failures. It takes time. And I think everybody's working through that. We're very positive about the long-term synergy between them.
OK. Maybe one more question here, Ashim. You have definitely moved from an RPA to an automation platform. And you are and always the leader or pioneer in that space. As you see in this world doing it, there are a lot of adjacent modular products as startups have come. Do you see any kind of investment opportunity to make maybe to the acquisition? Basically, I'm asking of the capital allocation strategy. How are you thinking about that to evolve that platform?
I'll give you kind of a standard answer. I'll try to double-click a little bit. Look, we're opportunistic. I think the good news is we have $1.9 billion in cash. We are generating free cash flow substantially. So we have the ability to play offense where we want to. Do we feel good about our current market? Yes. And our current technology? 100%. I think we've shown our ability to execute on M&A. Re:infer, which has now become Communications Mining, right, is a great example of that. Cloud Elements, which gave us enhanced API capability. We've done several acqui-hires to make sure that we can get the right talent level and expand our R&D at the right place. So the answer is opportunistically, of course, it's something there. Large scale, we don't feel the need. I think the tuck-in, the complementary acquisitions that we feel very good about.
That's great. Ashim, thank you so much for joining us. Thank you. Let's give a big round of applause.
Thanks so much.