 From theCUBE Studios in Palo Alto in Boston, bringing you data-driven insights from theCUBE and ETR. This is Breaking Analysis with Dave Vellante. UiPath has always been an unconventional company. You know, it started with Humble Beginnings. It was essentially a software development shop. And then it caught lightning in a bottle with its computer vision technology. It's really its simplification mantra and it created a very easy to deploy software robot system for bespoke departments so they could automate mundane tasks. You know the story. The company grew rapidly, was able to go public early this year. Now consistent with its out of the ordinary approach, while other firms are shutting down travel and physical events, UiPath is moving ahead with Forward 4, its annual user conference next week, with a live audience. They're at the Bellagio in Las Vegas. It's also fast-forwarding as a company, determined to lead the charge beyond RPA and execute on a more all-encompassing enterprise automation agenda. Hello everyone and welcome to this week's Wikibon Cube Insights, powered by ETR. In this Breaking Analysis and ahead of Forward 4 will update you in the RPA market the progress that UiPath has made since its IPO and bring in some ETR customer survey data that can textualize the company's position in the overall market and relative to the competition. Here's a quick rundown of today's agenda. First, I want to tell you the Cube is going to be at Forward 4 at the Bellagio next week. UiPaths, this is their big customer event. It's live. It's a physical event. It's primarily outdoors. You have to be vaccinated to attend. Now, it's not completely out of the ordinary. John Furrier and the Cube were at AWS Public Sector this past week and we were at Mobile World Congress in one of the first big hybrid events of the year at Barcelona. We thought that event would kick off the fall event season live event in earnest but the COVID crisis has caused many tech firms most tech firms actually to hit the pause button not UiPath, they're moving ahead they're going forward and we see a growing trend for smaller VIP events with a virtual component topic maybe for another day. Now we've talked extensively about the productivity challenges and the automation mandate the pandemic has thrust upon us. Now, we've seen pretty dramatic productivity improvements as remote work kicked in but it's brought new stresses. For example, according to Qualtrics 32% of working moms said their mental health has declined since the pandemic hit. 15% of working dads said the same by the way. So one has to question the sustainability of this perpetual work day and we're seeing a continuum of automation solutions emerging and we'll talk about that today. We're seeing tons of M&A as well but now in that continuum on the left side of the spectrum there's Microsoft who in some ways they stand alone and that Azure is becoming ubiquitous as a SaaS cloud collaboration and productivity platform. Microsoft is everywhere and in virtually every market with their video conferencing security database, clouds, CRM, analytics you name it, Microsoft is pretty much there and RPA is no different. With the acquisition of soft emotive last year Microsoft entered the RTA market in earnest and is penetrating very deeply into the space particularly as it pertains to personal productivity building on its software estate. Now in the middle of that spectrum if you will, we're seeing more M&A and that's defined really by the big software giants. Think of this domain as integrated software plays. SAP, they acquired Contextor they also acquired a company called Process Insights ServiceNow acquired Intellibot Salesforce Service Trace. We see N4 entering the fray and I would put even PEGA systems in this camp. Software companies focused on integrating RPA into their broader workflows into their software platforms and this is important because these platforms are entrenched. They're walled gardens of sorts and complicated with lots of touch points and integration points and frankly they're much harder to automate because of their entrenched legacy. Now on the far side of that spectrum are the horizontal automation players and that's being led by UiPath with automation anywhere as the number two player in this domain. And I didn't even put blue prism in there more M&A recently announced that Vista is going to acquire them. Vista also owns TIPCO. They're going to merge those two companies. You know, TIPCO is kind of an integration play. And so again, I would put them in that horizontal piece of the spectrum. So with that as background, we're going to look at how UiPath has performed since we last covered them at IPO and then we'll bring in some ETR survey data to get the spending view from customers and then we'll wrap up. Now, just to emphasize the importance of automation, the automation mandate, we talk about it all the time in this program, we use this ETR chart. It's a two dimensional view with net score which is a measure of spending momentum on the vertical axis and market share which is a proxy for pervasiveness in the data set. That's on the horizontal axis. Now note that red dotted line it signifies companies with an elevated position on the net score vertical axis. Anything over that is considered pretty good. Very good. Now this shows every spending segment within the ETR taxonomy. And the four spending categories with the greatest velocity are AI, cloud, containers and RPA. And they've topped the charts for quite a while now. They're the only four categories which have sustained above that 40% line consistently throughout the pandemic and even before. Now the impressive thing about cloud of course is it has both spending momentum on the vertical axis and a very large share of the market share of presence in the data set. The point is RPA is nascent still. It has an affinity with AI as a means of more intelligently identifying and streamlining process improvements. And so we expect those two to remain elevated and grow to the right together. UiPath pegs its TAM total available market at 60 billion and the reality is that could be understated. Okay, as we reported from the UiPath S1 analysis we did pre IPO, the company at that time had an AR annual recurring revenue of $580 million and was growing at 65% annually. It had nearly 8,000 customers at the time, a thousand of which had an ARR in excess of 100K and a net revenue retention the company had of 145%. So let's take a look at the picture six months forward. We mentioned the $60 billion TAM, ARR now up over 725 million on its way to a billion. ARR holding pretty steady at 60% growth as is NRR, net revenue retention and more than 1,000 new customers and 200 more with over 100,000 in ARR. And a small operating profit which by the way exceeded the consensus pretty substantially. Profitability is not shown here and no one seems to care anyway these days. It's all about growing into that TAM. Well, that's a pretty good looking picture, isn't it? The company had a beat and a raise for the quarter earlier this month. So looking good, right? Well, you ask, how come the stock's not doing better? That's an interesting question. So let's first look at the stock's performance on a relative basis. Here we show UiPath's performance against PEGA systems and Blue Prism, the other two publicly traded automation pure plays sort of in the case of PEGA. So UiPath outperformed post its IPO but since the early summer, PEGA has been the big winner. Well, UiPath slowly decelerated. You see Blue Prism was the laggard until it was announced it was in an acquisition talks with a couple of PE firms and the prospects of a bidding war sent that yellow line up, as you can see. UiPath, as you can see on the inset has a much higher valuation than PEGA and way higher than Blue Prism. PEGA interestingly is growing revenues nicely at around 40% and I think what's happening is the street simply wants more. Even though UiPath beat and raised, Wall Street's still getting comfortable with management which is new to the public market game and the company just needs to demonstrate the track record and build trust. There's also some education around billings and multi-year contracts that the company addressed on its last earnings call but the street was concerned about ARR from new logos. It appears to be slowing down sequentially in a notable decline in billing's momentum which UiPath CFO addressed on the earnings call saying look they don't need to trade margin for prepaid multi-year deals given the strong cash position. Why give anything up? And even though I said nobody cares about profitability, well I guess that's true until you guide for an operating loss when you've been showing a small profit in recent quarters which UiPath did, then all of a sudden people care. So UiPath is in a bit of an unknown territory to the street and it has a valuation that's pretty rich, very rich actually at 30 times revenue multiple, greater than 30 times revenue multiple so that's why in my view, investors are being cautious but I want to address a dynamic that we've seen with these high growth rocket ship companies. Something we talked about with Snowflake and I think you're seeing some of that here with UiPath. Different model in the sense that Snowflake is pure cloud but I'm talking about concerns around ARR from new logos and that growth on a sequential basis and here's what's happening in my view with UiPath. You have a company that started within departments with a small average contract size, ACV maybe 25,000 and maybe 50,000 but not deep six figure deals. That wasn't UiPath's play and because the company focused so heavily on simplicity and made it really easy to adopt, customers saw a really fast ROI, I mean break even in months. So you very quickly saw expansion into other departments. So when ACV started to rise and installations expanded within each customer, UiPath realized it had to move beyond being a point product and it started thinking about a platform and making acquisitions like Process Gold and others and this marked a much deeper expansion into the customer base and you can see that here in this UiPath chart that they shared at their investor deck. Customers that bought in 2016 and 2017 they've expanded their spend 15, 13, 15, 18, 20 X. So the LTV, the lifetime value of the customer is growing dramatically and because UiPath is focused on simplicity and has a very facile freemium model much easier to try before you buy than its competitors its CAC, its customer acquisition costs are likely much lower than some of its peers and that's a key dynamic. So don't get freaked out by some of those concerns that we raised earlier because just like Snowflake what's happening is the company for sure is gaining new customers maybe just not at the same rate but don't miss the forest through the trees i.e. they're getting more money from their existing customers which means retention, loyalty and growth. Now speaking of forests, this chart is the dynamic I'm talking about it's an ETR graphic that shows the components of NetScore or again spending momentum. NetScore breaks down into five areas that lime green at the top is new additions. Okay so that's only 11% of the customer mentions by the way we're talking about more than 125 responses for UiPath so it's meaningful it's actually larger in this survey or certainly comparable to Microsoft so that says something right there. The next bar is the forest green. Forest green is where I want you to focus that's customer spending 6% or more in the second half of the year relative to the first half. The gray is flat spending which is quite large the pink or light red that's spending customer spending 6% or worse that's a 4% number but look at the bottom bar there is no bar that's churn 0% of the respondents in the survey are churning and churn is the silent killer of SaaS companies. 0% defections so you got 46% spending more nobody leaving that's the dynamic that is powering UiPath right now and I would take this picture any day over a larger lime green and a smaller forest green and a bigger churn number. Okay so it's pretty good it's not snowflake good but it's solid so how does this picture compare to UiPath's peers? Well let's take a look at that so this is ETR data same data showing the granularity net score for Microsoft Power Automate UiPath Automation Anywhere Blue Prism and PEGA so as we said before Microsoft is ubiquitous what can we say about that but UiPath is right there with a more robust platform not to overlook Microsoft you can't but UiPath they'll tell you that they don't compete head to head for enterprise automation deals with Microsoft and maybe they will over time they do however compete head to head with Automation Anywhere and their picture is quite strong as you can see here you know as is Blue Prism's picture and even PEGA although Blue Prism Automation Anywhere UiPath and Power Automate all have net scores on this chart as you can see the table in the upper right over 40% PEGA does not but again we don't see PEGA as a pure play RPA vendor it's a little bit of sort of apples and oranges there but they do sell RPA and ETR captures in their taxonomy so why not include them also note that UiPath has as I said before more mentions in the survey than Power Automate which is actually quite interesting given the ubiquity of Microsoft now one other notable notable note is the bright red that's defections and only UiPath is showing zero defections everybody else has at least even the slim some defections okay so take that as you will but it's another data point and one that's powerful not only for UiPath but really for the entire sector now the last ETR data point that we want to share is our famous two dimensional view like the sector chart we showed earlier this graphic shows net score on the vertical axis that's again spending velocity and market share or pervasiveness on the horizontal axis so as we said earlier UiPath actually has greater presence in the survey than the ever presence of Microsoft remember this is the July survey we don't have full results from the September-October survey yet and we can't release them until ETR is out of its quiet period but I expect the entire sector like everything is going to be slightly down because as we reported last week tech spending is moderated slightly in the second half of this year but we don't expect the picture to change dramatically UiPath and Power Automate we think are going to lead in market presence and those two plus automation anywhere are going to show strength and spending momentum as will most of the sector and we'll see who comes in above the 40% line okay what to watch at forward four so in summary I'll be looking for a few things one UiPath is hinted toward a big platform announcement that will deepen its capabilities to go beyond being an RPA point tool into much more of an enterprise automation platform rewriting a lot of the code Linux, cloud, better automation of the UI you're going to hear all kinds of new product announcements that are coming so I'll be listening for those details I want to hear more from customers to further confirm what I've been hearing from them over the last couple of years and get more data especially on that ROI, on that land and expand I want to understand that dynamic and that true enterprise automation it's going to be good to get an update face to face and test some of our assumptions here and see where the gaps are and where UiPath can improve third I want to talk to ecosystem players to see where they are in participating in the value chain here what kind of partner has UiPath become since it's IPO are they investing more in the ecosystem how do partners fit into that flywheel fourth I want to hear from UiPath management Daniel Deneze and other UiPath leaders they're exiting toddlerville and coming into an adolescent phase early adulthood and what does that progression look like how does it feel what's the vibe at the show and finally I'm very excited to participate in a live in-person event to see what's working see how hybrid events are evolving we got a good glimpse at Mobile World Congress and this week in DC at Public Sector Summit as you know the Cube has been doing hybrid events for years and we intend to continue to lead in this regard and bring you the best real time information that's possible okay that's it for today remember these episodes are all available as podcast wherever you listen all you do is search breaking analysis podcast we publish each week on wikibon.com and siliconangle.com and you can always connect on Twitter at D-Valante or email me at david.valante at siliconangle.com appreciate the comments on LinkedIn and don't forget to check out ETR.plus for all the survey data this is Dave Vellante for the Cube Insights powered by ETR working well and we'll see you next time