Deep Dive: UiPath
(Ryan) What they do: UIPath is an enterprise automation software vendor. So they provide a platform to help automate monotonous, menial tasks for employees. It’s hard to name clear examples because the solutions differ so much, but if you’re copying and pasting stuff from one place to another. Or uploading data/files you can use UIpath to automate that process.
And the UIpath platform has 7 basic pillars. 1.) Discover: Identifying problems that could use automation. 2.) Build: This is a low-code, drag and drop platform so that any employees can help fix those processes. 3.) Manage: This is a centralized spot to deploy automations across the whole enterprise. 4.) Run: This is basically deploying the software robots that are built for automation. Can be attended or unattended. 5.) Engage: Engaging w/ automations used to be limited to those who built them, this tool helps basic employees use them as well. 6.) Measure: This helps users measure the success of UIpath’s products basically. 7.) Govern: This is basically allowing a centralized place for a company to see how all the tools are being used.
And you can select tools by industry. Typically, if there’s a bank that wants one system automated, there’s another bank with that same problem. 61% of fortune 500 companies use them.
(Ryan) History: The company was started in 2005 in Bucharest, Romania. It was originally called DeskOver and was just a 10 person team in an apartment. And it started just by outsourcing automation libraries. But they started to sort of pivot in 2013 and by 2015 were focused on what their core business is today. And that’s when their first seed round came.
They’ve had a lot of venture money invested into the business. Went all the way to a series E. And they went global fast. Mentioned this in the S-1. They did not care to conquer one market and expand, they went after customers everywhere and all at the same time. Went public about a month ago (late April).
Internal estimates are that they are going after a $60 billion market opportunity
Competitors include Automation Anywhere, EdgeVerge (subsidiary of Infosys), Blue Prism, Softomotive, WorkFusion
Hard to tell who is truly the best, but tons of competition. Looks like UI Path is currently the leader among large enterprises
(Brad) Management and Ownership:
Dines started this in 2005 and tried to build this thing for 10 years before pivoting to robotic process automation (RPA) & finding success determination!
previously a software engineer at Microsoft
89% Glassdoor rating
CFO a former GE SVP & executive
Legal officer is the former general counsel at SAP
Former SVP at Carbon Black
Dual class share structure
Class B comes with all he voting power
dines had 91% of this before the offering with 94.6% spoken for by directors & execs
Class A share class
Dine owns virtually 0 of this (but has option packages to exercise)
Accel Partners has 29% of these shares with directors & officers owning 38.4% total
Market cap of $44.4 billion, ticker PATH
P/S of 73 based on last fiscal year numbers
P/GP of 82
With heavy-ish def revenue, bookings would give it a slightly better multiple
Just barely cash flow positive so no relevant multiple there
Looks like lots of SBC last few years but we will see what share count does over the next few years
$580M in ARR, growing 65% YoY
Total gross margin in 2021 was 89%
They have almost 8,000 customers, and almost 13% of them are contributing more than $100k in ARR
DBNRR was 145%
Operating margin was -18% vs -154% the year before (There’s clear operating leverage)
Spending lots on S&M and R&D. Hopefully R&D is the largest expense in the long-run.
$26M in FCF, small but the sky is kinda the limit for operating margins in this business.
(Brad) Balance sheet and liquidity:
– raised $1.3 billion in the IPO
– 357M in cash on hand already + 100M in marketable securities $1.65B in liquidity
– Another untapped $300M in credit facilities
– Has another $1.2 billion in convertible preferred stock
– Has about $20 million in lease liabilities… $2 million in non-current liabilities
Anecdotal Evidence/Customer Stories:
(Brett) Solid customer reviews https://www.gartner.com/reviews/market/robotic-process-automation-software/vendor/uipath/product/uipath-platform#:~:text=Most%20Helpful%20UiPath%20Platform%20Reviews&text=One%20of%20the%20Best%20Automation,provides%20very%20good%20customer%20…
(Brad) Didn’t know anything about this company until the IPO
(Ryan) Could be wrong here. I think there’s a huge time cost for both the customer and for UIpath. You’re basically building out solutions for various use cases and the more you encounter the better your solutions become. Being in the leading position, that success must compound.
(Brett) Without knowing the space well, it looks like something with fairly high switching costs, where employees get used to the system and the system gets used to the employees
(Brad) Competition for labor is about as intense as it has ever been right now. Integrating a company like this into the workflow makes a job easier & more enjoyable. This should help UIPath users attract talent more effectively & gives UIpath a unique value proposition to offer enterprises.
Future growth opportunities:
(Ryan) Expansion capabilities within existing customers. Or at least increasing spend. There are so many different use-cases and processes within employees’ daily operations that could benefit from automation, that it isn’t surprising customers tend to spend more each year. Getting into small parts of organizations, then expanding from there.
(Brett) There isn’t a lot here, except moving down market into SMBs. This is likely more difficult due to the heavy onboarding process of UI Path (from what I’ve read), but opens up a larger market opportunity for them. The product could provide value to most businesses, even sole proprietors.
(Brad) Continue to pursue Government clients. There is more waste & inefficiency within various governments than any private market sector. This field seems ripe for the continued picking for UIPath
Highlights and lowlights:
(Ryan) Highlights: They really preach humility and listening to interviews it sounds like something they really practice as well. And the more customers use UIpath the more value they get out of it, which creates high switching costs. Lowlights: If there’s a lower cost provider, would SMB’s go for them? These things always seem like a sure bet, but eventually disruptors get disrupted by forthcoming disruptors.
(Brett) Highlights: Margin expansion has been strong, there looks to be a clear path to steady cash flow generation and cash flow margin expansion, and product works and provides a ton of value to customers, at least from reading reviews, lock-in with Fortune 500 (how many SaaS products do these mege corps pay for?). Lowlights: Hard to understand competitive positioning, would worry about high S&M spend and the fact this is a high tech industry with tons of brain power competing (putting the company at more risk of disruption then, say, Sherwin Williams or something like that)
(Brad) Highlights. When you are attracting companies like CrowdStrike and Applied Materials I think that speaks to the value creation and product quality UIpath brings. Low light is hard to pick other than valuation. I’d go with Dines having such an overwhelming majority of voting control. I like the ownership but I think UIpath relies on him sticking around & leading effectively
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Disclosure: The authors and podcast guests are not financial advisors. Brett Schafer and Ryan Henderson are portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this podcast.