2225

UiPath (NYSE:PATH) Surprises With Q2 Sales But Stock Drops 11.4% On Weak Guidance


Full Report / September 16, 2022
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Automation software company UiPath (NYSE:PATH) announced better-than-expected results in the Q2 FY2023 quarter, with revenue up 23.8% year on year to $242.2 million. However, guidance for the next quarter was less impressive, coming in at $244 million at the midpoint, being 9.47% below analyst estimates. UiPath made a GAAP loss of $120.3 million, down on its loss of $100 million, in the same quarter last year.

UiPath (PATH) Q2 FY2023 Highlights:

  • Revenue: $242.2 million vs analyst estimates of $230.6 million (5% beat)
  • EPS (non-GAAP): -$0.02 vs analyst estimates of -$0.11
  • Revenue guidance for Q3 2023 is $244 million at the midpoint, below analyst estimates of $269.5 million
  • The company dropped revenue guidance for the full year, from $1.08 billion to $1 billion at the midpoint, a 7.63% decrease
  • Free cash flow was negative $30.3 million, compared to negative free cash flow of $62.5 million in previous quarter
  • Gross Margin (GAAP): 81.5%, in line with same quarter last year

Started in 2005 in Romania as a tech outsourcing company, UiPath (NYSE:PATH) makes software that helps companies automate repetitive computer tasks.

A lot of jobs involve repeating the same rules-based tasks, requiring only simple decision making and little creativity. Not only do these tasks become tedious over time, resulting in a loss of productivity and errors but with the rising cost of labour are also becoming more expensive to perform.

UiPath’s robotic process automation (RPA) software uses technologies such as artificial intelligence and machine learning to learn how users perform regular tasks. Then, the software creates bots that replicate these tasks such as copying and pasting data, filling out forms, and clicking through user interfaces. For example, using UiPath’s software, a bookkeeper can automatically extract financial data from digital invoices, attach any other necessary information, arrange the output in a folder and send it to his manager at a specific time daily. Given the many tasks that can be automated with UiPath, it drives significant value to businesses by cutting down processing time, reducing errors, and enabling workers to focus on higher value (and more engaging) work.

UiPath became Romania's first technology unicorn, despite several challenges in its early years. Its rapid pace of innovation has led to a lot of success in the automation software space, with founder Daniel Dines being nicknamed the “first bot billionaire” by Forbes. The initial seed round investment in the company by the Czech VC firm Credo Ventures was called the greatest ever European venture bet.

The whole purpose of software is to automate tasks to increase productivity. Today, innovative new software techniques, often involving AI and machine learning, are finally allowing automation that has graduated from simple one- or two-step workflows to more complex processes integral to enterprises. The result is surging demand for modern automation software.

Other players in the automation software space include Microsoft (NASDAQ: MSFT), Blue Prism, IBM (NYSE: IBM), and SAP (NYSE: SAP).

Sales Growth

As you can see below, UiPath's revenue growth has been very strong over the last year, growing from quarterly revenue of $195.5 million, to $242.2 million.

UiPath Total Revenue

This quarter, UiPath's quarterly revenue was once again up a very solid 23.8% year on year. But the revenue actually decreased again in Q2 by $2.84 million, compared to $44.6 million decrease in Q1 2023. While one-off fluctuations don't always have to be concerning, we have no doubt that shareholders would like to see the revenue rebound soon.

Guidance for the next quarter indicates UiPath is expecting revenue to grow 10.4% year on year to $244 million, slowing down from the 49.9% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 22.6% over the next twelve months.

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. UiPath's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 81.5% in Q2.

UiPath Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.81 left to spend on developing new products, marketing & sales and the general administrative overhead. This is a great gross margin, that allows companies like UiPath to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity. It is good to see that the gross margin is staying stable which indicates that UiPath is doing a good job controlling costs and is not under pressure from competition to lower prices.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. UiPath burned through $30.3 million in Q2, increasing the cash burn by 775% year on year.

UiPath Free Cash Flow

UiPath has burned through $90.8 million in cash over the last twelve months, a negative 9.1% free cash flow margin. This low FCF margin is a result of UiPath's need to still heavily invest in the business.

Key Takeaways from UiPath's Q2 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on UiPath’s balance sheet, but we note that with a market capitalization of $8.77 billion and more than $1.72 billion in cash, the company has the capacity to continue to prioritise growth over profitability.

We liked to see that UiPath beat analysts’ revenue expectations pretty strongly this quarter. On the other hand, it was unfortunate to see that UiPath's revenue guidance for the full year missed analysts' expectations and that cash burn increased. Overall, this quarter's results were not the best we've seen from UiPath. The company currently trades at $15 per share.

Is Now The Time?

UiPath may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. We think UiPath is a good business. We would expect growth rates to moderate from here, but its revenue growth has been strong, over the last two years. And while its cash burn raises the question if it can sustainably maintain its growth, the good news is its impressive gross margins are indicative of excellent business economics, and its very efficient customer acquisition hints at the potential for strong profitability.

UiPath's price to sales ratio based on the next twelve months is 7.0x, suggesting that the market is expecting more moderate growth, relative to the hottest tech stocks. There is definitely a lot of things to like about UiPath and looking at the tech landscape right now, it seems that the company trades at a pretty interesting price point.

The Wall St analysts covering the company had a one year price target of $28.5 per share right before these results, implying that they saw upside in buying UiPath even in the short term.

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