Good day, and welcome to the AvePoint Inc. First Quarter 2023 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] after today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jamie Arestia, Vice President Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, and welcome to AvePoint’s first quarter 2023 earnings call. With me on the call this afternoon is Dr. TJ Jiang, Chief Executive Officer; and Jim Caci, Chief Financial Officer. After preliminary remarks, we will open the call for a question and answer session. 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 expectations. We encourage you to review the safe harbor statements contained in our press release for a more complete description. 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, including non-GAAP operating income and non-GAAP operating margin, which are not measures prepared in accordance with U.S. GAAP. The non-GAAP measures are presented in this presentation as we believe they provide investors with the means of evaluating and understanding how management evaluates the Company’s operating performance. These non-GAAP measures should not be considered in isolation from, as substitutes for or superior to financial measures prepared in accordance with U.S. GAAP. A reconciliation of these measures to the most directly comparable GAAP financial measures is available in our first quarter 2023 earnings press release as well as our updated investor presentation, both of which are available in the Investor Relations section of our website. With that, let me turn the call over to TJ.

Thanks, Jamie, and thank you to everyone joining us on the call today. To one results or a solid start to the year as we exceeded our financial guidance on both the top and bottom line. We continue to see healthy demand from organizations that need to address the abundance of SaaS applications and the growth and sprawl of data to deliver a seamless and enhanced digital workplace experience. First quarter highlights included 31% ARR growth and 23% total revenue growth year-over-year, both adjusted for the impact of effects. Q1 reported revenue of 59.6 million. We are comfortably above the high end of our guidance. And we are pleased that Q1 non-GAAP operating income also came in ahead of our guidance, especially in the current environment. As we continue to be laser focused on profitability, we are well positioned for steady margin expansion in 2023 and beyond. I want to thank those of you who attended our first ever Investor Day in March, where we shared our view of the market opportunity, our strategy for capturing it and our longer term financial outlook. It is clear that as organizations modernize their digital workplaces, they need a platform that is well governed, fit for purpose, easy to use, and built on automation. AvePoint, confidence platform capitalizes on this need by empowering organizations to optimize their SaaS operations, and secure collaboration. And this continued uncertainty in the macro environment. Our customers continue to depend on our AvePoint’s confidence platform to rapidly reduce costs, improve productivity, and make more informed business decisions. As the organizations we work with continue to think long-term, they are just beginning to see the opportunities to innovate their businesses, and missed the proliferation of software applications, relentless growth of data need for optimization, and evolving compliance and threat…

Thank you, TJ and good afternoon, everyone. Thanks for joining us. I want to start today by recapping some of the primary takeaways from our recent Investor Day, as well as addressing some of the common themes in my discussions with many of you since then. I will then turn to our first quarter financial results and updated financial guidance before we open up for Q&A. First, our top financial priority over the next few years is profitable growth and we are targeting that by the end of 2025, AvePoint is profitable on a GAAP basis, as well as rule of 40 company based on the combination of ARR growth and non-GAAP operating margin. Many of you have asked how we are thinking about the mix of those two components as we move toward 2025. While, we believe the mix remains flexible, we do see a number of levers on both the top and bottom line and thus a number of ways to get to the rule of 40. I also want to remind you that our ARR growth expectations for 2023 are not the new normal and that the go to market strategies, we discussed that the Investor Day should accelerate ARR growth, while supporting steady ongoing margin expansion over the next few years. I would also stress that we are thinking about our long-term non-GAAP operating margin target of 20% to 25% as separate from the 2025 profitability contribution to the rule of 40. Second, as you look at both our top-line results as well as our guidance, you can see that there continues to be a delta between revenue growth and ARR growth. Many of you have asked when this delta will close. So let me spend a minute on it. The Delta is purely a function…

[Operator Instructions] The first question comes from Kirk Materne with Evercore ISI. Please go ahead.

Hi, this is Chirag Ved on for Kirk. Congrats on a great quarter. And thank you for taking the question. I wanted to ask about how you are thinking about AvePoint role in strategic positioning as Microsoft is starting to infuse more artificial intelligence into the product suite? How are you thinking about potential changes to your own product suite sales processes and customer engagement? Thank you.

Thank you. That is a great question. This TJ, we are actually very excited with the disruptive nature of Generative AI. In fact, we actually have been a long time consumer of Azure Cognitive Services, which is what Microsoft uses to surface out open AI services. We are in the app points in the business of business data management and governance. Satya Nadella recently mentioned that by 2025 10% of all data generated will be done by Generative AI. So this means that there’s going to be continued explosion of business data, which positions our point very well in that space of managing data and govern that data. So as I mentioned, we have been a long-term consumer of cognitive services in our product lines. We actually use it in our products, especially around modernization of document management records management, case management solutions. At the same time, we are actively looking at making our internal operations more efficient in terms of support, in terms of case number tracking and automated support, when related to the coding and essentially the case numbers, as well as of course, content marketing. And now we are also trialing with co pilot with our developers. So we are very excited about the latest disruptions in Generative AI.

And maybe one follow-up to that. Are you seeing any hesitation from any customers in terms of engaging on longer term digital transformation, until they have a more clear idea from Microsoft, on what their new AI features and offerings are, so they can plan the roadmap accordingly?

The enterprise customers we engage, I predominantly see that digital transformation as a one way street at the table stakes to ensure that they have the latest technology to use, to leverage innovation, to leverage technology to drive innovation. And all the innovations happening faster and faster in cloud environments so with the hyperscalers. So what that means is everyone is actually really looking at digital transformation and going to cloud as table stakes. Yes, there are certain amount of hesitation around AI and machine learning in so far as data privacy, in so far as copyrights and those are active items being looked at, especially around our banking clients. But the overarching theme of digital transformation and leveraging cloud to drive innovation is there and everyone sees that.

Alright thank you so much.

The next question comes from Gabriela Borges with Goldman Sachs. Please go ahead.

Good afternoon and thank you. I will follow-up with a question on the demand environment, and others a little bit on it in the prepared remarks. I would love to get more detail here. What are you seeing by vertical pipeline build and remind us the cadence or revenue for this year? Has you are decelerating the year and then I believe it already again? So give us a little more color on how you think about the structure of revenue growth?

HI Gabriela, great question. So from an overall demand perspective, as we discuss in the investor day, we set our expectation for the year. We also highlighted the macroeconomic uncertainties and volatilities in the environment. So we don’t see things getting worse, so, of course, we had a great quarter and we continue to anticipate a wider range of outcome by industry verticals, things are consistent with what we have seen previously. So we haven’t seen material changes of that. At the same time we are continue to execute on the businesses to again anticipate a wider range of outcome.

And there was a comment on 2023 not being the new normal. I guess the first question would be why is 2023 not the new normal? And then how do you think about what is when you think about your long-term gross model, you mentioned the rule 30. You mentioned the operating margin target being independent of the 2025 target. So how do you think about and why first off 2022? Thank you.

Yes, hi Gabriela this is Jim, let me let me address that one. So I think, you know, we think about 2023, we are definitely planning, as TJ mentioned, for a wider range of outcomes. So when we looked at our budget, And we looked at our thoughts around revenue growth and ARR growth, we definitely planned for some anticipation that there would be this wider range, and we actually anticipated that our growth rate would actually decline. So we built that into the plan. And it is all in our expectations that we have gotten. And actually so far, we see that, we are in line with all of those expectations. So we feel good about that. We don’t think that longer term that continues to be the case. We have seen, as we mentioned in even in Q4 that this elongation of the sales cycle, we do not expect that to continue into and well into 2024. So we expect that to be a 2023 phenomenon, and that we would expect to see growth rates return more to our normalized what we saw in 2022 and see those pickup beyond the 2023 rates that we have.

Thank you for the color.

The next question comes from Jason Ader with William Blair. Please go ahead.

Thanks. Good afternoon guys. Just wanted to, I don’t know maybe asked you to give yourself a report card on being here in May of 2023. On areas of the business, you feel like you are making the most progress and maybe the areas of the business where you still feel like you have some room for improvement?

Hi, Jason, great question, this is TJ. I think the area of business we continue to make great progress is SMB and channel. That is, again, a space where we have mentioned this several times before, historically, we had very little focus on but in the last few years, we are able to build it to now 20%, our business and as the highest growth rate segment for our business. And just to remind everyone SMB as definition for a Moses 1000 employees or fewer companies. So we continue to see that globally. And so that is doing well. And we have more historical lab points that direct enterprise sales business. And that has its associated kind of services. And those are some things that we actually want to listen to, as Jim commented on. The goal is to get it from now, today 60%, down to 10%, in the medium-term. So those are going pretty well. Now, areas that we continue to see some elongated sales cycle, as Jim mentioned, continue to be in large enterprise space. We continue to win as a platform provider, not a point solution provider. So but we do see some elongation of sales cycles, but that is no meaningfully different than the quarter before.

Got you. And if we look at Office 365, and how resilient that business has been for Microsoft, I guess how should investors think about your correlation to that and is it in a tougher macro environment? Some customers are, I guess less focused on sort of add on capabilities. Is that the right way to think about it?

That is a great question, Jason. What we focused on is providing more value and improve ROI, customers existing investment into the Microsoft stack. So this actually includes consolidation of other stacks that customers have. And you know the market very well, right. There are many other providers out there. Customers have multi cloud deployments, even for cloud storage providers, for example. And this presents a really good opportunity for them to consolidate. So 2023 is definitely your efficiency. So in that regard, we actually really help our customer drive economic outcome with doing some fair amount of platform consolidation actually. As you know, we have this migration platform data integration platform. And even within the Microsoft license usage, customers have mixed license types, F1, E1, E3, E5, and we are able to help them achieve consistent governance and management capabilities across licensed types, again, goes into maximize their existing investment.

And so the elongation on the sales cycles is just a function of the budget environment and customers are still getting there with you. And you are not seeing, you are seeing those deals closed. Just it is taking longer to close?

Absolutely and you are right. Office 365, MC 365 is mission critical. So we continue to see ourselves positioned very well in the market.

Alright, thank you. Good luck.

Thank you.

Thank you.

The next question comes from Nehal Chokshi with Northland. Please go ahead.

Thank you and congrats on the better than guided results across the board. In great customer case study regarding tyGraph. They give us a sense as far as what percent of his tyGraph now being attached to now?

We are seeing really good traction with existing customers expand the story from back office to front office. So this whole hybrid work, environment, employee engagement and employee satisfaction is on top of mine for most C suites today. So in that regard, we are having great conversations and it is still early days. But we are very positive and optimistic on the trends that we are doing with existing customer expansion.

Okay. You guys have a lot of use available for customers to adopt, which suite are you most excited about in terms of driving up your net retention rate over time?

So we have worked to significantly simplify the message. This now we have many products, but it is really categorized into these three suites as part of the confidence platform. So we are really looking, especially through channel expansion and SMB market penetration, which is not easy to do for one software company to cover all three segments of enterprise mid market SMB. We are streamlining message and clearly articulating the value proposition at the suite level, which then involves different actual SKUs of deployment depending on the customer’s actual environment, the idiosyncrasy of the environment, whether they have Google, or AWS, or Microsoft. But we do track at a suite level, so the modernization suite, the control suite and the resilience suite. So we don’t really look at specific down at the individual SKU level when we actually track the sales performance.

Okay. And then your trailing 12-month retention rate did slightly index down. What’s the narrative behind that?

Yes, Nehal. It is Jim, good, good to talk to you. So nothing specific to point out there. Q1, historically is, is probably our lowest quarter for adding incremental NRR to existing customers. It is generally our lowest quarter for renewals. And we see a lot of our upsell motion tied to renewals. So it is ticked down a little bit in Q1, but literally in line with what our expectations were for the budget and guidance, so nothing there to report that is unusual and we would expect Q2 to actually see some improvement to that. So again, nothing on our side that we are concerned about.

Okay great. Thank you very much and congrats on a good quarter.

Thank you.

Thanks Nehal.

The next question comes from Derrick Wood with TD Cowen. Please go ahead.

Oh, great. Thanks, it’s [indiscernible] for Derek, congrats on the quarter. TJ, I think sales reps are now incentivized to drive higher product attach rates. You have talked about the 48% with two plus and 24% with four plus, you have seen the benefits of these new incentives drive greater tax rate this year. Can we still see some of that throughout this year?

Yes, so we do annually contracts. So we will see this over time. But yeah, there’s definitely something that we are working hard to continue to improve on.

Great, and given the kind of channel partner push and your comments about that, I think you have you have a build out of channel partners in EMEA and APAC. How is that kind of built out tracking verse plan and talk about how aggressive you are going to push there this year?

Yes, that is a great question. So EMEA is actually our most mature channel penetration territories. That is historically the way enterprise B2B software are sold and managed. So in North America, historically, we were more of a direct sales organization, especially on the enterprise side, we are making really good inroads in the SMB segment, 100% channel, and introducing more mixing the mid market segment. In APAC, our biggest territories, Japan, which is our largest territory, outside the USA, there has historically always been channeled driven. So we are doing really well there. However, its majority enterprise and public sector. And we are now building out aggressively the mid market, SMB segment. That is a segment that Microsoft is also going after very aggressively. The Australia has always been also a channel partner very, very operating model heavy business that is already well channel driven. But lastly is really just Asia in general APAC, which we centered around Singapore, as well as South Korea. There we do a fair amount of service business to drive innovation that is more direct. But mid market and channel is something that we are now developing.

Great. Thanks guys.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to TJ Jiang, our CEO for any closing remarks.

Thank you. First, I want to thank the entire AvePoint team for their tireless efforts to start the year strong. The in-person conversations that have been having the last several weeks with our management teams in North America, EMEA and APAC, demonstrate that we have the right team and processes in place to capitalize on opportunities in front of us. We are committed to advancing the digital workplace. We are still in the early stages of digital transformation and profitable growth remains our top priority in this environment. Thank you for joining us today.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.