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UiPath (NYSE:PATH) Beats Q1 Sales Targets, Stock Soars


Full Report / July 15, 2022
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Automation software company UiPath (NYSE:PATH) reported Q1 FY2023 results topping analyst expectations, with revenue up 31.6% year on year to $245 million. The company expects that next quarter's revenue would be around $230 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. UiPath made a GAAP loss of $122.5 million, improving on its loss of $239.6 million, in the same quarter last year.

UiPath (PATH) Q1 FY2023 Highlights:

  • Revenue: $245 million vs analyst estimates of $225.3 million (8.73% beat)
  • EPS (non-GAAP): -$0.03 vs analyst estimates of -$0.06 (45.8% beat)
  • Revenue guidance for Q2 2023 is $230 million at the midpoint, roughly in line with what analysts were expecting
  • The company reconfirmed revenue guidance for the full year, at $1.08 billion at the midpoint
  • Free cash flow was negative $62.5 million, down from positive free cash flow of $9.78 million in previous quarter
  • Gross Margin (GAAP): 81.6%, up from 73.6% 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 year, growing from quarterly revenue of $186.2 million, to $245 million.

UiPath Total Revenue

And unsurprisingly, this was another great quarter for UiPath with revenue up 31.6% year on year. But the revenue actually decreased by $44.6 million in Q1, compared to $68.8 million increase in Q4 2022. UiPath's sales do seem to have a seasonal pattern to them, however the management is guiding for a further drop in revenue in the next quarter, so we think it is worth keeping an eye on the situation.

Guidance for the next quarter indicates UiPath is expecting revenue to grow 17.6% year on year to $230 million, slowing down from the 40.2% 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 21% 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 81.6% in Q1.

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. Despite the recent drop that is still 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 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 $62.5 million in Q1, increasing the cash burn by 210% year on year.

UiPath Free Cash Flow

UiPath has burned through $63.9 million in cash over the last twelve months, resulting in a negative 6.72% free cash flow margin. This below average FCF margin is a result of UiPath's need to invest in the business to continue penetrating its market.

Key Takeaways from UiPath's Q1 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 $9.3 billion and more than $1.79 billion in cash, the company has the capacity to continue to prioritise growth over profitability.

We were impressed by how strongly UiPath outperformed analysts’ revenue expectations this quarter. And we were also glad to see good revenue growth. On the other hand, it was less good to see the pretty significant deterioration in gross margin. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The company currently trades at $18.5 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.

UiPath's price to sales ratio based on the next twelve months is 7.9x, suggesting that the market is expecting more moderate growth, relative to the hottest tech stocks. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that UiPath doesn't trade at a completely unreasonable price point.

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