UiPath is a pioneer of the Robotic Process Automation industry. The company filed its first S-1/A this week, setting an initial price range for its shares. Shares are going to be listed in the price range of $52 — $54 bringing the valuation to $26.90 Bn — $27.90 Bn. It is all set to launch the IPO under the ticker ‘PATH’ on the New York Stock Exchange.
Incorporated in 2015 and headquartered in New York, UiPath develops computerized workflows to build, manage, measure, and engage with processes. Customers benefit from the platform’s innovative capabilities by eliminating work spent on time-consuming, repetitive, and tedious tasks.
The company’s products have become increasingly attractive for companies looking to boost productivity. This is especially true amid the global pandemic that has enforced technology and automation adoptions. The demand is much higher than initially expected. This has been driving the demand for IPO and the investors are bullish on the ‘PATH’ stock.
- Annualised Renewal Rate (ARR): $580 Mn
- Annualised Renewal Rate growth Yoy: 65%
- Total Customers: 7,968
- Customers ≥ $100k
- ARR: 1002
- Dollar based net retention rate: 145%
- Net Loss: $92 Mn
So how does UiPath make money?
Product Offering: The end-to-end platform provides a whole range of robotic process automation via a suite of interrelated software offerings. The flagship product offering, the UiPath Studio is an easy to use, drag-and-drop development platform designed for RPA developers engineering complex process automation. Other offerings include the UiPath Robot which emulates human behavior to execute the processes built-in Studio and the UiPath Orchestrator that tracks and logs Robot activity.
Market Model: UiPath has an efficient go-to-market model, which consists primarily of an enterprise field sales force supplemented by a high velocity inside sales team focused on small and mid-sized customers, as well as a global strategic sales team focused on the largest global customers.
Revenue Model: UiPath generates revenue from the sale of licenses for its proprietary software, its maintenance and support, and professional services. The license fees are based primarily on the number of users who access the software and the number of automation running on their platform. The license agreements have annual terms, and/or multi-year terms. Additionally, UiPath provides maintenance and support for its software as well as non-recurring professional services such as training and implementation services.
License (57% of revenue): UiPath’s primary business model is selling licenses through annual and multi-year subscription contracts. Being 57% of its business it shows a vibrant business model and the right product mix which is well received by the market.
Maintenance and Support (38% of revenue): The relatively large amount of maintenance and support revenue suggests that the customer base is being retained.
Services (<5% of revenue): A small part of its business is customer education and technical services likely around their UiPath academy.
UiPath’s Road to Dominance
UiPath is at the forefront of technology innovation and thought leadership in automation.
Companies such as UiPath have two ways to grow: either blasting through the market and acquiring more and more customers or be more docile and focus more on retention than expansion. UiPath chose the former. The company expanded internationally very early on, acquiring more and more customers from different nations. The growth was absolutely out of control.
Surprisingly, this does not mean that UiPath compromised on customer retention, the killer of all SaaS companies. UiPath managed to find the middle ground between blatant expansion and customer retention. The S-1 reveals an extremely high 96% “gross retention rate” and a dollar-based net retention rate of 145%. So, this says UiPath’s existing customers are spending more with the company and also sticking with it.
The Robotic Process Automation Landscape
According to an estimate by Bain & Company the size of the market for automation software will grow to approximately $65 Bn.
The market for automation is super-hot right now with the COVID pandemic making automation a dire necessity. UiPath is the clear market leader in this category. The S-1 puts their Total Addressable Market (TAM) at $60 Bn. Pre pandemic this figure stood at $30 Bn. Double the market size, in just under a year. That’s some serious growth.
It is clear that UiPath wishes to tap into the red-hot IPO market and rightly so. It needs to pad its balance sheet with as much cash as it can muster for the massive opportunity and the competitor risk it faces ranging from its peers such as Automation Anywhere to the giants like Microsoft. The principal purposes of this offering are to increase its capitalization and financial flexibility.
This is data from the Brookings Institution and the Organization for Economic Co-Development that depicts productivity statistics for the U.S. The smaller charts on the right are for Germany and Japan.
Source: Brookings Institution and the Organization for Economic Co-Development
The US showed productivity growth in ’95-’04, but that slacked off later. Similar is the case with Germany and Japan where the productivity levels have been falling continuously.
Humans are slowly reaching the very limit of what they can do alone to solve the most pressing challenges around the globe. Automation is what can free up labor and divert human intelligence and creativity into more engaging and worthwhile problems. The market is ready for automation and the post-pandemic world will witness never seen before levels of automation.
Key Industry Risks
- Barriers to Entry: Robotic process automation is very difficult to implement and therefore many organizations will not able to implement it thereby affecting the industry growth.
- Sustainability: Any automation, no matter how advanced is not capable of perfectly emulating human behavior.
- Affordability: The entire automation process is a costly proposition and affordability is an issue.
Key Company Risks
- Growth Opportunity: The revenue growth rate of above 80% YoY may not be sustainable in the future due to the maturation of the business, increased competition, and changes to technology.
- Limitations to Scalability: While the UiPath platform is intuitive and beginner-friendly, intra-organizational scalability poses an issue. Also, many features offered by UiPath are offered for free by other productivity platforms.
- Pitfalls of Constant Innovation: Automation and Productivity Software is a fast-changing landscape. UiPath will need to disrupt itself to stay relevant.
Revenue: Total Revenue of $336 Mn in 2020 grew to $607 Mn in 2021, a YoY growth of more than 80%. Most of the increase was fuelled by the maintenance fees and other incomes. A 71% increase in license fees indicates a very fast-growing customer base.
UiPath has gone from making $169 Mn in the last quarter of FY 2019 to $580 Mn in the last quarter of FY 2021.
Gross-profit Margin: The gross profit margin stands at 90% and has increased from 72% in 2019 to 90% in 2021. This comes on the back of reduced travel costs due to the COVID pandemic and rapid international expansion which generated 66% and 61% of the revenue in 2019 and 2020 respectively.
Net-profit Margin: The Net Loss has also been improving over time, in spite of the break neck speed that UiPath seems to be growing at. This is explained by the Operating Expenses Line Item where all the three viz. licensing costs, maintenance costs, and other costs should have gone up, keeping in line with the revenue growth. On the contrary, all the three went down, while as the revenues shot up.
Cash Flow: Unlike a lot of other growth startups going public, UiPath has a positive free cash flow, saving cash on the operational front. This is rare for a rapidly growing company. Other growth stage companies to go public such as Snowflake and CrowdStrike had negative free cash flows. Quite a few haven’t made money, even months after listing.
This may pose a concern for investors who view UiPath to be a rapidly growing, disruptive startup. Generating cash may be interpreted as a sign of UiPath transitioning into its mature stage.
Alternatively, the plan may be, to slow down the growth, settle down, consolidate the customer base and the product offering, and then continue explosive growth. Daniel Dines, the founder of UiPath has been an unconventional CEO on many fronts, this may as well be a part of the bigger picture.
Other Interesting Tid-bits
Annualized Renewal Rate (ARR) is the key metric UiPath uses to gauge its business. It illustrates the ability to acquire new subscription customers and to maintaining the existing subscription customers. The ARR may fluctuate as a result of a number of factors, including customers’ satisfaction, pricing, competitive offerings, economic conditions, or overall changes in customers’ spending levels.
UiPath’s “ARR” rose by 65% over the last year, indicating a massive jump in the number of new consumers using UiPath. This again highlights UiPath’s ‘expanding, yet retaining’ value proposition.
- Number of Customers: 6,300
- Number of Enterprise Customers: 1,500. As of January 31, 2021, UiPath had 7,968 customers, including 80% of the Fortune 10 and 63% of the Fortune Global 500.
- Number of Developers on the UiPath platform: 200,000
- Number of People enrolled in UiPath Courses: 100,000
Is UiPath prepared to handle the competition?
The platform addresses the market for Intelligent Process Automation, which International Data Corporation, estimated would have a value of $17 billion by the end of 2020 and is expected to grow at a four-year compound annual growth rate of approximately 16% to $30 billion by the end of 2024. According to an estimate by Bain & Company the size of the market for automation software will grow to approximately $65 billion.
UiPath is a market leader in the Automation industry commanding a whopping 44% of the entire market.
Nearly every company’s a winner that gets to feature in the RPA Magic Quadrant from Gartner, and even just getting on the chart is a win for some companies. UiPath ranks very high, at the very top right of the matrix, strongly positioned as an industry leader as well as a visionary, with only Automation Anywhere coming close.
Source: Gartner’s RPA Magic Quadrant
The UiPath IPO will be a decisive moment for not just UiPath itself, but also Automation Anywhere. A tie-breaker between the two, the UiPath IPO will either force Automation Anywhere to respond with an IPO or simply perish.
Are the Valuations on the Right Path?
The NASDAQ 100 Technology Index is up by 62%, this year alone. This coupled with the high demand for the RPA products worldwide, and you get a red-hot market for the UiPath IPO. This is likely to benefit UiPath massively but is the valuation justified or the financials go for a toss?
UiPath was valued at $35 Bn following its last financing round in February. Based on a recently released statement by the management UiPath is likely to launch IPO with shares in the price range of $52-$54 bringing the valuation in the range of $26.90 — $27.90 Bn. This brings the EV/Revenue multiple to 45.88x.
How well do the Peers Fare?
Being the market leader with a 44% market share and its colossal size relative to the peers it is difficult comparing the company to its peers. However, we have compared it to its direct competitors Automation Anywhere (Private Company) and Blue Prism (London Stock Exchange: PRSM).
Taking the Taking EV/Revenue multiple into account and weighted average calculation of the comparable companies, we arrive at an NTM multiple of 12.33x which gives us an intrinsic valuation of $8.96 Billion.
The UiPath IPO in any case is highly anticipated, being a market leader in the red-hot Robotic Process Automation market. The company has a strong reputation and a substantial client base. Despite that, it was a bit of shock that the IPO price range failed to reach the valuation company garnered in private funding. This might be caused by the general cooling of IPOs over the past few months.
Going public in a dynamic market like RPA is tricky. However, UiPath has demonstrated strong performance and growth potential and this should be an extremely successful IPO only cementing its leadership position. We forecast a strong performance and growth for the share and recommend a long-term positive outlook.
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