UiPath (NYSE: PATH) specializes in robotic process automation (RPA), a technology that seeks to increase the efficiency of the workplace with software robots. Notably, RPA is the fastest growing software market segment, and UiPath has been recognized as the industry leader by both Gartner and Forrester Research.
In this Backstage Pass video, which was registered on November 8, 2021Motley Fool analyst Asit Sharma shares her thoughts on the tech company. Motley Fool contributor Danny Vena is also in this clip.
Asit Sharma: I mean UiPath. It is the PATH symbol. I’ll bring up some slides here in a second. Make sure I have them lined up. In fact, I’ll start with just one PowerPoint slide here.
What is UiPath? It is a leader in the automation of robotic processes. This doesn’t mean that the company is physically making robots and learning how to automate them. These are robots in virtual space. Basically if you think about the processes that we all go through in our day to day work, this company helps automate these tasks, they use computer vision to understand what we are doing while we are working. It creates robots that can take over these tasks.
Now, that maybe seems on some level to those of you who are in Excel, something like macros in Excel. Perhaps these are the precursor concepts for those of you who remember the times in a Microsoft product, ask the computer to record a few steps, then press the macro button and have those steps performed themselves. It’s something like that, but it has a layer of artificial intelligence and machine learning that the old macros we might have been used to years ago don’t have. What I like about the business, just a few big dots that you can see on my screen. It has a very fast income growth rate. Not a small business. It is the component of annualized recurring income, that is, the part of integrated and predictable cash flows. That businesses are growing at a rate of 60%. The total of this annualized recurring revenue currently stands at over $ 700 million. It is not a small business either. I like that it has a very high gross margin, but you have to take it with care, because we’ll take a look at it in a moment. I just want to quickly flip through a few financial pages.
Gross margins, just a part of the game when you are growing your business, you want to keep that gross profit margin high. At some point, this has to translate into net profitability. This company is looking for market share. Gross margin is useful as this profile is a bit higher than you might expect given that there are a few competitors in the space. Microsoft will increasingly be a competitor in the years to come. Even a big company that I love Service now, which is an extremely disciplined team led by a great team of people and very fierce competitors in the business. They bought a company called Intellibot last year. Maybe it was earlier this year, trying to remember it. They’re also playing in this space now.
I had the chance to speak to an analyst at Gartner – this is the research company – of UiPath. This person who is an expert in this related field said, listen, there are only two companies that could push UiPath out of its leadership position. One is Microsoft, the other is ServiceNow. I’m almost less worried about Microsoft than I am about ServiceNow, because ServiceNow is one of the largest Software as a Service (SaaS) companies in the world, pure SaaS companies. They could be a great competitor. But apart from that, UiPath has placed quite a trail. I love that its CEO led by founder Daniel Dines has a great history. He was a Microsoft executive, left the company and practically returned to his native Bulgaria, and founded this company, developed it there, isolated from the typical Silicon Valley environment. I worked on various iterations and stumbled upon the idea of RPA, which at the time of the creation of the company, which is about 10 years old now, I think, was not as important in the world of processes.
Yeah, I like it. I think the strategic advantage, if you’re looking for it, is that it focuses on what’s called the assisted part of the PR market. You have unattended bots coming out and doing their job once they learn more about you. Then you have witnessed robots following you much closer to try to learn more about what you are doing. It’s more intensive in terms of capital requirements. The road will be longer for them, but that is what they are focusing on now. That’s why I think for anyone saying there is a lot of competition in this space. It will be just like a commodity business and UiPath cannot compete. But I would say you have to be careful what they put in the harder of the two types of RPA tasks.
See if I could just quickly go over two things about their presentation to investors. Next, I will explain some financial aspects to us. Do I have a few minutes left, Danny? Is it correct? I’m trying to keep this to two minutes.
Danny Vena: Sure.
Asit Sharma: Costs. It’s just from their most recent investor presentation. I think it’ll do a better job of trying to explain what they’re doing than I do. Their software bots mimic you and me. See, computer vision. He reads what’s going on. The machine itself has what is called a thinklayer. It’s really more like a layer of computation, but it’s based on understanding what I need to do. Imagine myself as an accounting clerk, which I was a long time ago in my career, trying to process purchase orders, which I was doing manually by hand at the time.
Danny Vena: At the time. [laughs]
Asit Sharma: This software, if I had had it then, would have watched me do what I was doing. Once I tried to translate this on a computer, let’s say I built it on a spreadsheet for my boss at the time. It would have looked at that and then helped me extract the data that was coming in from the vendors and also as I was communicating with my accounting department it would automate these tasks for me so I could move on so there is a weird side to this AI. This is a question we must answer as we go. Does this totally take people out of work? Does it help them take on better tasks that are perhaps more meaningful? I now lean towards the side that helps to work better. It eliminates boring, manual and repetitive tasks that only stress the routine and drafts of office work. They help us focus on the past where we can add value to a business.
Now does that mean some jobs will be lost as companies integrate software like this. I think this is also true and we have to be careful. I wouldn’t want to be an investor in the business that used software like UiPath software just to weed out people and just make a profit. I try to avoid doing this anyway. Finally, think about how RPA interacts with other apps using app program interfaces – I never manage to get this acronym correctly on the first try. It has this whole layer that is automated, not just in the context of the worker, but trying to communicate with other applications that the worker might be using. Let’s say I check my Slack; it sees me doing that. It can integrate with other software. Now let’s take a quick look at some financial aspects that I wanted to show you didn’t want to overlook. It’s a business that’s losing money right now and it’s a business that’s burning money.
You see they have very high income growth. I mentioned this 40% growth rate on turnover. But at the same time, the gross margin is not increasing as quickly. That’s a nice increase in gross profit. I have to say that looks pretty good to me. What we have here, however, are huge expenses on the sales and marketing side. R&D tripled from one period to the next, general and administrative expenses more than doubled. Now, part of that has to do with the residue being always made public. But you see, it’s had a massive operating loss in the first six months of this year.
Now, on the other hand, I have to say that going back to some statistics that they give in their presentation to investors, this is actually not a bad strategy. This clientele is huge and growing. The company has very high net dollar retention rates, so customers spend more with it every year. When you think of these two stats together and add to that component of annualized recurring income, I was talking. The fact that they are selling more and more to Fortune 50 type companies. Second, it is a type of organization that is already showing its promises. You can agree with this operating loss; it is something to watch out for. Before I stop sharing my screen, let me see if I can go to the balance sheet just to show that due to their IPO they’re already in pretty decent financial shape, but even more so now. They have about $ 2.2 billion in short-term assets versus $ 400 million in short-term liabilities. So $ 1.8 billion in working capital with no debt on the books. They have a lot of resources to spend profit and money as they gain that market share. As I mentioned, negative net cash, so taking a little bit of cash flow, not producing it. I expect this to gradually improve over the next few quarters.
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