UiPath's One Billion Dollar IPO

A low-code IPO

Another billion-dollar tech IPO. But this time with robotics.

UiPath is a 15 year old robotics software business planning to IPO this month. The company is a leader in robotics process automation to be specific.

Robotic process...what?

Yeah it’s another buzzword for technology. In this case, low code software. A popular and easier way to create a minimum viable software product.

It starts in Romania

UiPath was founded in Bucharest, Romania in 2005. Not exactly Silicon Valley.

The company had no revenue for 7 years and is about to raise $1 billion.

In fact this past February, UiPath raised $750m at a $35b valuation, making it one of the most valuable privately held tech companies in the U.S.

UiPath has now received at least $1.2 billion from investors including Accel Partners and CapitalG (Google).

The Robotic Background

Look, we don't need to talk about intelligent software.

All software is intelligent and provides automation. So what's different about UIPath?

Well the company was founded in 2005 as an outsourcing company for Microsoft Windows software. The co-founder, Daniel Dines, was previously a software engineer at Microsoft.

He built automated scripts for complex functions and eventually integrated it with the cloud and on-premise hardware. They only had 10 full-time employees until 2015.

And didn't make any revenue until 2014.

With its first $1.6m seed round in 2015, UiPath made $500k in revenue.

Then jumped to $3.5m in 2016. Then $30m in 2017.

Last year the company did $607m in revenue!

More than doubling the revenue every year for the past decade.

So why raise capital?

Software companies are asset-light but people heavy. You need manpower to make a successful business.

Software is a high gross margin business but high sales and marketing costs can make it very unprofitable. UiPath is working on changing this. But how exactly?

UIPath’s sales and marketing expenses as a percentage of revenue have declined in the last 12 months. From 143.8% to 62.6% expenses as of total sales. Woah!

Here’s why that’s important...

Buying growth, at a cost

Technology investors use the Rule of 40 as a rule of thumb.

If the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth trajectory.

UiPath hit 63% in January. Well ahead the industry average.

The second element is net retention. If your customer churn rate is too high, your business revenue will go to zero over time. But not for UiPath. The company had 145% net revenue retention rate, indicating healthy organic growth.

UiPath’s secret to High Growth

It’s easy to get lost behind the metrics. Now let’s discuss quality.

UiPath is now based in New York City. It expects to dominate the banking and insurance industry with process automation. Reducing costs and regulatory burdens are its primary motives.

UiPath’s customer count is growing 33%, now at 7,968 as of January 2021. What’s more impressive is the 65% revenue growth. The company is operating like a fighter jet with net customer bookings on autopilot.

Since 2016, the top 50 customers grew bookings by 81x!

That’s when I realized the company unlocked its growth engine. And it wont stop after the IPO.

Key growth drivers to win the long game

Software companies need channel partners to win. And UiPath has 3,700 total partners.

This is an important driver for growth. Top channel partners like Cognizant and Accenture will pay UiPath for software licenses and charge big consulting fees to enterprise clients.

And the real money in software is in maintenance. UiPath makes 38% of its revenue from maintenance and support. A very high margin, sustainable cash flow business that can be used to calculate its intrinsic value.

But here’s the problem with enterprise sales.

It has long sales cycles. Million dollar deals can take 18-24 months to close. However that hasn’t stopped UiPath.

The company has watched top $1m paying customers increase from 21 in 2019 to 89 in 2020!

A note on ownership

The CEO controls 91% of voting stock and still owns 30% of the company. The second largest shareholder is Accel with 28% ownership. But CEO Daniel Dines gave up zero control during the initial capital raise. So if you believe in the CEO then you will be investing alongside his vision.

A Robotic Wrap-up

Let’s summarize UiPath’s recent financial results. The company has:

  • Strong top line revenue growth
  • Increasing gross profit and high gross margin products
  • Reduced operating losses with lower sales & marketing

But my main concern is the robotic process industry will see a lot of competition. The low-code/no-code industry is hot. New competitors will enter and eat UiPath’s high margin business. Also relying on channel partners can work against you if they are building similar products.

However the company is resilient enough to withstand competition. Remember they didn’t make any revenue for the first seven years in business.

Add UiPath to your watchlist

UiPath will raise $1 billion from its IPO. The proceeds will be used for working capital, operating expenses, and capital expenditures. They may acquire complementary businesses, products, services, or technologies as well.

Check out the company’s S-1 investment prospectus if you want more details on the business.

P.S. Watch my video reviewing Coinbase’s Direct Listing next week. I breakdown the details of this high margin crypto wallet business will go public on April 14th.

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