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UiPath (NYSE:PATH) Beats Q3 Sales Targets, Stock Soars


Full Report / December 01, 2022
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Automation software company UiPath (NYSE:PATH) announced better-than-expected results in the Q3 FY2023 quarter, with revenue up 18.9% year on year to $262.7 million. The company expects that next quarter's revenue would be around $278 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. UiPath made a GAAP loss of $57.7 million, improving on its loss of $122.7 million, in the same quarter last year.

UiPath (PATH) Q3 FY2023 Highlights:

  • Revenue: $262.7 million vs analyst estimates of $255.9 million (2.65% beat)
  • EPS (non-GAAP): $0.05 vs analyst estimates of -$0.01 ($0.06 beat)
  • Revenue guidance for Q4 2023 is $278 million at the midpoint, below analyst estimates of $279.3 million
  • Free cash flow was negative $32.6 million, compared to negative free cash flow of $30.3 million in previous quarter
  • Gross Margin (GAAP): 83.7%, up from 80.4% 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 impressive over the last two years, growing from quarterly revenue of $147.2 million in Q3 FY2021, to $262.7 million.

UiPath Total Revenue

This quarter, UiPath's quarterly revenue was once again up 18.9% year on year. On top of that, revenue increased $20.5 million quarter on quarter, a strong improvement on the $2.84 million decrease in Q2 2023, and a sign of re-acceleration of growth, which is very nice to see indeed.

UiPath is guiding for revenue to decline next quarter 4.03% year on year to $278 million, a further deceleration on the 39.3% year-over-year decrease 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 9.44% 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 83.7% in Q3.

UiPath Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.83 left to spend on developing new products, marketing & sales and the general administrative overhead. Significantly up from the last quarter, 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.

Cash Is King

If you have followed 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 $32.6 million in Q3, increasing the cash burn by 18.6% year on year.

UiPath Free Cash Flow

UiPath has burned through $134.7 million in cash over the last twelve months, a negative 12.9% 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 Q3 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 $6.85 billion and more than $1.67 billion in cash, the company has the capacity to continue to prioritise growth over profitability.

It was good to see UiPath improve their gross margin this quarter. And we were also excited to see that it outperformed analysts' revenue expectations. On the other hand, revenue guidance for the next quarter slightly missed analysts' expectations. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The company is up 6.72% on the results and currently trades at $13.8 per share.

Is Now The Time?

When considering UiPath, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. Although we have other favorites, we understand the arguments that UiPath is not a bad business. We would expect growth rates to moderate from here, but its revenue growth has been impressive, 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.

The market is certainly expecting long term growth from UiPath given its price to sales ratio based on the next twelve months is 6.2x. There are things to like about UiPath and there's no doubt it is a bit of a market darling, at least for some. But we are wondering whether there might be better opportunities elsewhere right now.

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