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Industry Tailwinds
Automation is not new. From the agricultural revolution to the industrial revolution, and the information age, automation has played a key role throughout history. Automation has freed humans from tedious tasks allowing them to focus on providing more value and being more productive.
Typically, automation is a priority due to potential cost savings. However, a study by Bain & Company shows that companies also plan on adopting automation to create capacity for growth, build resilience into operations, and enhance the customer experience. Companies are planning on adopting a broader range of technologies to derive more value and achieve their automation goals.
COVID-19, labor shortages, and supply chain disruptions have all exacerbated the need for automation. There’s no doubt automation is a secular tailwind and UiPath (NYSE:PATH) is leading the charge through its Robotic Process Automation (RPA) platform.
What is UiPath and What Do They Do?
UiPath is the leading RPA company in the world today. The company offers an end-to-end automation platform that primarily uses Artificial Intelligence and Machine Learning to address the complete lifecycle of automation:
- Identifying specific tasks and processes to automate
- Building and managing automation robots
- Deploying the robots to execute processes
- Tracking and measuring the robots’ impact
- Providing governance capabilities to ensure compliance with business standards
UiPath is offering these solutions through the UiPath Cloud, Public & Private Cloud, On-Premises, or in a Hybrid environment. The ability to have flexible deployment models is critical to UiPath’s success.
More businesses are moving to the cloud and so far UiPath is handling that growth smoothly. ~33% of UiPath’s customers have adopted the automation cloud as of 3Q 2022. However, there are companies, particularly those in the government, insurance, and banking industries that cannot fully move to the cloud due to compliance. Ironically, these types of industries are ripe with manual and repetitive tasks that need automation and UiPath is positioned well to take advantage.
I love the flywheel model of the end-to-end automation platform, which leads to more robots and product expansion, ultimately providing some network effects. UiPath shares the example of Nielsen, which started with 20 robots in 2018 and now has greater than 200 robots while increasing the use of UiPath’s products over time.
Product expansion is critical to the success of growth companies and UiPath is innovating at a rapid pace. Since 2015, the company has constantly added new products (orchestration, studio x, task mining) or additional features to its automation platform. The below slide is slightly reminiscent of Shopify (SHOP) and its product innovation (slide 12 in the link).
Market Opportunity
I'm impressed with UiPath’s rate of innovation and it will need to continue to capture its market opportunity. International Data Corporation or IDC estimates UiPath’s Total Addressable Market at $30 billion by 2024. However, UiPath is estimating its TAM at ~$60 billion encompassing their vision of the fully automated enterprise. As always, TAM estimates should be taken with a grain of salt. Nonetheless, it’s hard to deny the opportunity ahead with only $818M in Annualized Renewal Run Rate in fiscal year 3Q 2022.
Business Model
Like most SaaS companies, UiPath makes money using a land-and-expand model. Their platform is free to try and users expand use over time depending on their need.
UiPath is a subscription model, with primarily 1-year contracts that are billed annually. Pricing is based on the number of robots and users. Management believes Annualized Renewal Run-rate or ARR is the best metric to measure the business’ performance over time. You can find the definition of ARR on slide 31 here.
Business Metrics
UiPath boasts a large and diverse customer base from a variety of geographies and industries. There is no customer concentration to worry about.
As of 3Q 2022:
- UiPath had 9,630 customers: +23% YoY and +6% QoQ.
- Large customers (> $100K ARR) at 1,363: +52% YoY and +9% QoQ.
- C-Suite customers (> $1M ARR) at 135: +82% YoY and +14% QoQ.
I have no doubt UiPath will continue to grow customers as the need for automation ramps up over the next decade. But it will also need to cross-sell and upsell to its current customers to drive growth.
As of 2Q 2022, UiPath’s Dollar Based Net Revenue Retention or DBNRR was 144%, one of the highest in the SaaS industry. This shows UiPath customers are spending 44% more on average with UiPath every year. The willingness to spend more by adopting more products over time highlights customers’ satisfaction and high switching costs.
It’s important to note that UiPath did not provide a DBNRR for the most recent quarter, but it indicated there was no material change and management plans to provide the number periodically. If history is any indication, the DBNRR should remain high. The below graph illustrates ARR from each customer cohort over time.
Historically, once UiPath is deployed, customers significantly expand their use of the automation platform. For example, the 2016 cohort includes customers that made an initial purchase in fiscal year 2016. This cohort increased their ARR by ~57X ($395K to $23M) as of January 2021.
Given the stickiness of the product and customer satisfaction, UiPath has a large runway ahead to capitalize on its existing customers and new customers.
Financials
Let’s dive deeper into the 3Q 2022 numbers starting with the top line:
- ARR (the best metric) grew +58% YoY to $818M (vs +60% YoY in 2Q 2022)
- Net new ARR grew +42% YoY to $92M (vs. +33% YoY in 2Q 2022)
- Revenue grew +50% YoY to 221M (vs. guidance of +41% YoY)
Top line is growing fast but let’s look at the margin trends:
- Gross margin is stable at 80% but fluctuates depending on maintenance costs.
- S&M costs are very high at 78% of revenue.
- R&D costs are increasing, most recently at 28% of revenue.
- Operating margin is negative at -53%.
Author (using earnings call data)
UiPath is spending most of its gross profit on S&M. Over time, these costs should trend lower as existing customers spend more. Overall, GAAP margin trends are tainted by Stock-Based-Compensation or SBC, particularly related to the IPO in 1Q22. This trend should improve over time.
On a non-GAAP basis, the company is already profitable. Non-GAAP operating margin was 4% in 3Q22 and Non-GAAP free cash flow was mostly breakeven at -3%.
As UiPath customers spend more on the platform, I believe it’s a matter of when, not if we see GAAP profitability. In the interim, the company has the balance sheet to fund growth with $1.9B in cash and no debt as of 3Q 2022.
Competition & Partners
Competition is a fact of life and that’s no different for UiPath. UiPath breaks down its competitors into three categories:
- RPA software providers.
- Automation lifecycle enhancing technology providers, such as low-code, iBPMS, iPaaS, process mining, and test automation vendors, which provide additional features that can be useful for automations.
- Enterprise platform vendors.
UiPath is a leader in end-to-end RPA as shown by G2, Gartner, and IDC. UiPath’s biggest RPA competitor is Automation Anywhere, which is currently private.
Some might consider the likes of Microsoft (MSFT), Salesforce (CRM), and Adobe (ADBE) competitors. Although that is true to an extent, UiPath has partnerships with these companies and others.
UiPath can easily integrate with its technology partners like Amazon Web Services (AMZN), Adobe, Microsoft, DocuSign (DOCU), Alteryx (AYX), and more. On the business side, UiPath is partnering with the big four (Deloitte, Ernst & Young, PWC, KPMG), and the likes of Accenture (ACN) and Cognizant (CTSH). These firms act as a sales funnel for UiPath and UiPath helps these organizations automate (a win-win).
Valuation
I always note that valuations are subjective by nature and can differ based on multiple factors. Nonetheless, I would argue that UiPath is currently favorably valued. Since the company’s IPO in April 2021, it’s enterprise value has been cut in half from ~$35B to ~16B today.
It’s tougher to value UiPath since its direct competitor Automation Anywhere is still a private company. However, we can look at UiPath vs other SaaS companies to make an assessment. UiPath has a growth and margin profile similar to the following:
Author (Using company data)
When comparing EV/NTM Revenue to this peer group, only C3.ai (AI) has a lower multiple than UiPath. With UiPath trading lower than its IPO valuation and at a reasonable 15X NTM sales, I believe this is a timely opportunity.
Culture & Management
UiPath was founded in 2005 in Romania and Daniel Dines is the co-founder and CEO of UiPath. He is joined by Marius Tirca, another co-founder and now CTO. I love to see businesses where the founder(s) are still involved and UiPath ticks that box.
Culture is of uttermost importance to UiPath. Daniel Dines put it best in the company's S-1:
Our humble beginnings guided us to find the most important value for us: humility. I am not saying we are humble; humility is an aspiration, and it is our operational framework. When you put humility at the core of your decision-making and communication process, it forces you to listen and adapt quickly. Being customer-centric is a natural progression. And customer-centricity keeps our humility in check and our work environment healthy. If there is one thing I am proud of, it is our culture. If anything, this is going to be our legacy–a company built on the foundation of humility.
The proof is in the pudding. Comparably and Glassdoor both rank UiPath and its CEO highly with the company winning multiple awards.
Comparably
Glassdoor
Conclusion
UiPath is at the forefront of the RPA industry fueled by multiple tailwinds with a large addressable market. The company is offering a sticky platform that continues to innovate over time. Despite tremendous growth, UiPath is showing it can be capital efficient with non-GAAP margins headed in the right direction. With a favorable valuation and a great culture that gives me confidence in the company over the longer-term, I'm bullish on the company’s prospects over the next decade.
Let me know in the comments what your view is, notably the following aspects:
What do you think about UiPath?
Do you plan on taking advantage of the RPA Industry?
