AvePoint, Inc. (AVPT) Earnings Call Transcript & Summary

Everyone. Fatima Boolani. I jointly head up the software equity research effort here at Citi. And I am delighted to be sharing the stage with the AvePoint team in full force. We've got Founder, CEO, Dr. TJ Jiang; got CFO, James Caci; and Chief Strategy Officer and Marketing Officer and everything in between Mario Carvajal. Thank you so much for being here.

Exactly.

I think let's get right into it because we're on the clock here. So look, I think you've been public for four years, but surprisingly, I think there's still a lot of folks who are newer to the story. So I think a great place to start for us would be just to kind of level set with the AvePoint story and the evolution.

Sure. Thank you for having us here, Fatima. Always good to be at Citi conference. Yes. So AvePoint, we've been around for 20-plus years. We started in New Jersey, in this space called Microsoft SharePoint, which is Microsoft enterprise content management platform. And then we were the first to go to cloud when Microsoft first went to SharePoint Online. We recognized very early on the 2010 days that SharePoint will become the substrate for entirety of Microsoft Office. So -- and we were correct in that forecast. So today, we're the largest Microsoft Office cloud data management and governance player globally. What we do is we help enterprises large and small, Fortune 50s down to five man consulting companies around the world to manage their unstructured data. So 90% of our business is within the Microsoft Cloud stack. So that's e-mails, that's chats, that's contracts, videos, audio files around life cycle management, around backup as a service, ransomware detection, ransom attack detection and recovery around license management, entitlement management and life cycle management as well as data integration and migration. So we're quite global. We're in major geos, North America, EMEA as well as APAC.

But you're atypically global.

We're atypically global. We're profitable. We're generating cash and GAAP profitable this year as well. And we are as successfully selling into Fortune 50s as we are to small business. That's also atypical. So, yes, that's really our story. Fundamentally, it boils down to this, every business today, the top 2 concerns at the Board level, one is security, one is AI. And we play very well in both spaces. They're actually very, very related in terms of good data leads to good AI. and also good data management and governance practice lead to good security.

We'll definitely get into AI because I wouldn't be a good software analyst if we didn't talk about AI, right? But before we do that, I do want to start at the highest level of, okay, the main pain point that you're solving is data security, right? Data being the crown jewel of an organization. AI is going to have an absolute force multiplying effect on how data is created, disseminated, proliferated, exfiltrated, all of the things, right? But even at the core, core enterprise data, data security has been your bread and butter, right? And it's almost that you were doing all this data security and putting guardrails around data assets before it was cool, right? So thinking about that and how much data security has come into the mainstream consciousness of most organizations, how has the competitive landscape and the market landscape evolved where it's finally getting the attention it deserves. But at the same time, you have lots more companies that are talking the talk, right? And maybe they're not walking the walk, but they're talking the talk. So I would love to get your perspectives on that market landscape and competitive landscape implications.

That's a great question. I also got a PhD in data mining and machine learning before it was cool. Before it became the big data that McKinsey calls it. But you're absolutely right. So I think as an investor, we completely can relate. It seems like all the companies marketing materials start to sound the same. On the macro level, there's definitely a convergence. So you have backup players getting into security space. You have governance players now pivoting towards what Gartner calls data security posture management. And then, of course, you have data connector services are now morphing into management. At the same time, you have software houses that's resell houses are getting compressing margins by the hyperscalers, and they're going to managed services just to eke out profitability. So there's all kinds of different macro trends and forces at play. So it's a highly competitive environment. What we say is you really have to look at the technical details. All the vendors come from their own competitive strength. We came from -- if you -- if any customers view Office Cloud as their mission-critical platform, we are the #1 vendor to go to. So in the bake-offs, 9 out of 10 times, we will win if Office Cloud is their #1 high priority mission-critical platform. If not, if they want to cover everything under the sun, they may choose another player that covers more stuff. So Microsoft Office Cloud is 90% of our revenue, 10% as in Google, AWS and Salesforce. But overall, I think to really understand where the vendors' competitive strength and weaknesses are, it's important to look at what the customers are using and where they're deploying because customers today are much smarter. They are not only reading marketing materials, they are doing POCs, they're doing bake-offs. The enterprise segment, in the SMB segment, they have a lot more way to get educated and to do piloting. So this is where we also deploy AI capability into our products. So in the latest quarter, we deployed a number of command centers. So the new phrase in our industry is AI is a new UI. So we leverage AI capabilities in the UI to highlight the power of our platform. We don't have a single competitor. We have point competitor in different space. So for example, in the backup space in the enterprise segment, which is we consider 5,000 employees and above, we will run into the likes of Commvault or Rubrik or Cohesity. In the SMB segment, we run into the likes of Veeam. In the control side governance, in the enterprise segment, we sometimes run into Varonis. We actually -- they come from the file share space. We obviously come from the office space. And then in the SMB, it's a much smaller, more so structured data-focused DSPM players, many of the Israeli start-up companies. And then in the modernization, data integration analytics, you would -- in the enterprise space, we run into legacy player like Informatica or even Quest Software, in SMB, smaller players. So we don't have a singular competitor. Our competitive strength, obviously is, first and foremost, Office cloud. And second is our platform play. We don't just do one thing. We think data security, data governance, data compliance, data integration is actually one contiguous problem set that enterprise have to solve in order to get better security and better AI deployments.

TJ, you mentioned AI is a new UI. But even taking a step back from that, you servicing the Microsoft cloud environment for your customers, necessarily, a lot of the data that you're protecting is sitting in the productivity apps of enterprise employees and information workers, right? So how -- what do you say to investors who are rightly concerned about this notion of seat-based business models coming under duress, if you're hiring fewer entry-level workers and you're maybe rationalizing headcount, right, what does that do to that protection state if it's on a per seat modality? And how are you mitigating that risk in the financial model and the business model?

That's a great question. First, I'll highlight that, later Jim will get into the NRR and GRR side of the equation. Majority of our NRR net increases, net retention rate has come from upselling more additional capabilities and licensing because companies are not enlarging seat counts that fast. Having said that, we do have -- some of our products are capacity based, such as migration, such as in the border boundary cases of backup where a small customer could have petabytes of data. If we were to do a seat-based licensing, we will literally lose money. So there, we go capacity-based. And now increasingly with Agentic governance, because the way folks are deploying AI is no longer an all-employee type of deployment. So that's typically known as Copilot. And we all know Copilot deployment for Office Copilots are in general, anemic because at $30 per user per month, it's -- business are not seeing the kind of return. So what you're seeing is actually purpose-built AI deployments for specific use cases. So even then they need to get their AI estate and curation done properly. So we actually see opportunity there. So there, it's increasingly a capacity-based conversation. So we have done the -- before it's power platforms, Microsoft low-code platforms. So we've done Power Apps governance. And now we do agent governance, basically guardrails around how autonomously acting agents, how they talk to other agents, how they talk to other humans and what kind of data sets they have and how long do these agents live for. And in this world, a consumption-based model works, makes sense. I think the entire industry is moving towards more of a consumption-based model, and we're no different. We have to also transition. But we're watching, obviously, the markets very closely, the Googles and Microsoft of the world. They are still predominantly subscription-based when it comes to productivity. So they are introducing consumption-based model, for example, Copilot chats. So we are also introducing with agent and governance. So we'll see. I think it's going to be a shift over the next few years.

Jim, anything to chime in with? And I think I'll pose a leading question. You gave us a lot of granular information from your customer segmentation standpoint. I think that dovetails with some of what TJ was talking about with respect to, hey, you're doing a little bit more consumption and capacity at the lower end, more seats in the top end. So any quantitative color that you can help add to that discussion?

Yes. I think maybe just dovetailing what TJ just said, I do think it's early stages in terms of what we're expecting to see in the marketplace. So I think maybe going forward, we will start to disclose more and more about even our modeling for how we're doing licensing. So I do think we would expect to see that, but I would still say it's very early in terms of the experimentation. I do think we are observing what other folks are doing. I do think consumption is probably the way we're headed, but people are tinkering with different models as well. So I think it is evolving, and I think it will probably change slightly over the next couple of years. But again, we'll start to provide a little more guidance as to what we're doing internally, maybe how much of our business is going one way or the other. And really, the analysts that cover us are going to probably want that so they can rebuild their models and align with us as well. So I do think it will continue to evolve. And again, we're participating in all kinds of groups as well to see what others are doing and want to be at the forefront, but also being responsive as well.

Mario, maybe a question for you again, continuing on this thread. This whole notion of adding more capabilities, upselling more functional enhancements to kind of the core on data classification. You had a mammoth repackaging effort that's been underway and that's been out in market over the course of this year. And I think you talked a lot about it at Analyst Day. Would love to give -- have you give us kind of a recap and then also an update on how the good, better, best spectrum of capabilities that you're now offering, how that's resonating in the market, the types of ASP uplifts that you're seeing from customers moving from the good version to the best version. And yes, customer feedback and how that's resonating.

Yes, great question. So building on what TJ mentioned before. So first, we have a platform story. And the platform story over the years has been about showing customers that when we have interoperability in the platform, they get more return in their investment. And so we started first by making it very simple to understand that we're building a platform with themes. The first theme was resilience, make sure there's continuity to your information so that you can trust that when you get hit with a ransomware attack or you get challenged by any kind of anomalies in your data set, you have the tools and the system that's monitoring the environment. So that's the first. We then introduced a lot of capability in the control suite, which is, again, another theme that's really meant to say, you can control the environment without it being intrusive. We don't want to disrupt the end user behavior. It's very important when we speak to a lot of executives that we don't create a bad experience of adoption. So frictionless. And the way we do that is by employing a policy framework, a governance framework. We've done a lot to help organizations provision digital workspaces where many workers, in fact, many of you probably use a lot of the productivity apps are working and collaborating and you don't have to worry about what policy is my company behind the scenes deploying. So I don't inadvertently share with someone a document that I share or so that I can trust, for example, if I'm using a generative AI product. So the control suite thematically plays hand-in-hand with resilience, and it's really helped us do a lot of cross-selling, upsell discussions. And so that packaging, we went out to market and people started to understand the story. We also had the third, which was the modernization. Over the many years, we built a connector framework that allows us to ingest data from different legacy systems, but also help companies that are moving data in and out of providers. But then we also felt that, well, we want a more intuitive experience to showcase the power of the platform. So this year, we introduced command centers and command centers were a way for us to stitch together all of that capability and start showcasing that we could see all the signals of your data. As TJ mentioned, unstructured data, which is data that changes all the time, is one of the most challenging data sets to really govern and to manage. It's 80% of today's data that we create. And so the command centers are really designed to show you the signals of risk and very quickly help you start to remediate the environment. And that encourages organizations because they feel like, well, when they use the AvePoint product, it's not a heavy burden, it's not a heavy lift, a long deployment cycle. We can very quickly start to experience the value of the solution. So those have been great, and we bundled them with package pricing bundles, which is what we talked about at Investor Day. And the bundles were meant to say, look, you can start with us very easily. You don't have to buy the entire platform. It's very modular. There's a basic setup. And then if you're looking for some more advanced, we have the plus package. They have been working quite well. They're removing friction from that point of sale and discussion. And I think because of the recent points that both Jim and TJ made on the licensing mechanism, which is primarily a user base, it's really allowing us to take that journey with clients, which is a journey where they want to be able to turn on these mechanisms that are global for the entire environment, but at the same time, make sure that they're getting a good return for the investment. So we do a lot in terms of managing -- helping them manage cost on the storage side as well as entitlements. So many will use our platform not only to ensure they have protection on the environment, but also figure out how to run it at an optimal cost model. And so all of this has been working quite well. I think our story will continue. We have -- we're planning to introduce more AI capabilities into the platform later this year and next year. And of course, all the multi-cloud pieces that we've done. Another thing we were excited about was bringing the entire platform to be available in Google Cloud. This is really a signal to showcase that we have a lot of customers. I was sharing earlier today a story. We had a customer say, listen, my executives are on Outlook, Microsoft Outlook, but the rest of the organization is using Google Workspace. So how can you guys help me deploy a mechanism of policy and governance that can work across both productivity systems. So I think our story is digital complexity is there, but we believe we can be the central pane of glass that really helps them manage that and do it in a very intuitive way with these bundles.

Jim, you've worked really hard in concert with the team and the business to really materially shift up the net retention rates from low 100s to now 110 aspirations, 115, right? How much of what Mario has been talking about of, hey, you've just made it so much more intuitive for customers to graduate from their capabilities and the usage and help expand, just make it dead easy for them to do that. How much of that is and has been and will be factored into how that net retention rate hydrates and expands further?

So great point. And just for clarity, we're 112% this quarter not 110, not 112, every point counts. But yes, I think you hit it spot on. I do think making it much easier for customers to not only know the capabilities we have, but in some instances, actually be able to utilize and get information from those capabilities before purchasing. And so I think that's some of the things that Mario was alluding to with the command centers is being able to provide some of that information holistically and available even before they purchase. And we all know that if you can get insights into a product or into a service before you actually have to buy it, you're going to be that much more likely to consume it if those insights are helpful. And so I think that's been a nice lift already in terms of what we've seen, and we expect that to continue. I think the other key driver for our NRR really has been engagement across the platform in our products. And I think as you make the products easier to consume, as you make them much more intuitive, which we've done over the past couple of years, I think people are engaging. They're getting full value from those products that they've currently consumed. And if you do that, then they're more apt to then consume additional products. It's when people don't get full value from the products they purchased, they're obviously not inclined to purchase. So we've seen really good engagement on the products that people start with, and that leads to, obviously, additional products that they're consuming.

When a customer graduates out of Resilience and into the next tier, what has typically been the rate of upsell? Because I understand even as you explained, the bundles themselves underneath the hood have more modularity, right? But on average, when you see that graduation from resilience into the next tier, what has been the realized kind of uplift to the customer lifetime wallet?

Yes. It's -- I mean, it's significant, right? In terms of -- if we think about our customer base, on average, we've got customers consuming about two products, a little over two products which is a massive opportunity for us because that means there's still almost half the population that can be consuming more than just the one product. And the beauty of our solutions right now are -- you mentioned coming in through Resilience, but we have many customers that maybe they start in our Resilience Suite, let's say, a backup product, but many more are now coming through our control suite, where really governance is a key driver in terms of even new customer acquisition. So we have many kind of tips of spear, if you will, in terms of how customers enter the platform. And that is the beauty of the platform is that they can come in through many different really doors. And then there's opportunities for them to consume more and more of the product. And generally, what we see is as somebody comes in and consumes more of the product, we can see really upwards of doubling in terms of the current spend that they have with us as they consume that second generation of products, not uncommon for them to be doubling in terms of the wallet share. And obviously, also what we've seen, as you would expect, that the more products customers consume, the more stickier they are to retain. So the lifetime value of a customer who goes from one product to two products is that much more and obviously much more valuable to us.