>> From theCUBE Studios in Palo Alto in Boston, bringing you data-driven insights from theCUBE and ETR. This is Breaking Analysis with Dave Vellante. >> Like a marathon runner pumped up on adrenaline, UiPath sprinted to the lead in what is surely going to be a long journey toward enabling the modern automated enterprise. Now, in doing so the company has established itself as a leader in enterprise automation while at the same time, it got out over its skis on critical execution items and it disappointed investors along the way. In our view, the company has plenty of upside potential, but will have to slog through its current challenges, including restructuring its go-to market, prioritizing investments, balancing growth with profitability and dealing with a very difficult macro environment. Hello and welcome to this week's Wikibon Cube insights powered by ETR. In this Breaking Analysis and ahead of Forward 5, UiPath's big customer event, we once again dig into RPA and automation leader, UiPath, to share our most current data and view of the company's prospects relative to the competition and the market overall. Now, since the pandemic, four sectors have consistently outperformed in the overall spending landscape in the ETR dataset, cloud, containers, machine learning/AI, and robotic process automation. For the first time in a long time ML and AI and RPA have dropped below the elevated 40% line shown in this ETR graph with the red dotted line. The data here plots the net score or spending momentum for each sector with we put in video conferencing, we added it in simply to provide height to the vertical access. Now, you see those squiggly lines, they show the pattern for ML/AI and RPA, and they demonstrate the downward trajectory over time with only the most current period dropping below the 40% net score mark. While this is not surprising, it underscores one component of the macro headwinds facing all companies generally and UiPath specifically, that is the discretionary nature of certain technology investments. This has been a topic of conversation on theCUBE since the spring spanning data players like Mongo and Snowflake, the cloud, security, and other sectors. The point is ML/AI and RPA appear to be more discretionary than certain sectors, including cloud. Containers most likely benefit from the fact that much of the activity is spending on internal resources, staff like developers as much of the action in containers is free and open source. Now, security is not shown on this graphic, but as we've reported extensively in the last week at CrowdStrike's Falcon conference, security is somewhat less discretionary than other sectors. Now, as it relates to the big four that we've been highlighting since the pandemic hit, we're starting to see priorities shift from strategic investments like AI and automation to more tactical areas to keep the lights on. UiPath has not been immune to this downward pressure, but the company is still able to show some impressive metrics. Here's a snapshot chart from its investor deck. For the first time UiPath's ARR has surpassed $1 billion. The company now has more than 10,000 customers with a large number generating more than $100,000 in ARR. While not shown in this data, UiPath reported this month in its second quarter close that it had $191 million plus ARR customers, which is up 13% sequentially from its Q1. As well, the company's NRR is over 130%, which is very solid and underscores the low churn that we've previously reported for the company. But with that increased ARR comes slower growth. Here's some data we compiled that shows the dramatic growth in ARR, the blue bars, compared with the rapid deceleration and growth. That's the orange line on the right hand access there. For the first time UiPath's ARR growth dipped below 50% last quarter. Now, we've projected 34% and 25% respectively for the company's Q3 in Q4, which is slightly higher than the upper range of UiPath's CFO, Ashim Gupta's guidance from the last earnings call. That still puts UiPath exiting its fiscal year at a 25% ARR growth rate. While it's not unexpected that a company reaching $1 billion in ARR, that milestone, will begin to show lower, slower growth, net new ARR is well off its fiscal year '22 levels. The other perhaps more concerning factor is the company, despite strong 80% gross margins, remains unprofitable and free cash flow negative. New CEO, Rob Enslin, has emphasized the focus on profitability, and we'd like to see a consistent and more disciplined Rule of 40 or Rule of 45 to 50 type of performance going forward. As a result of this decelerating growth and lowered guidance stemming from significant macro challenges including currency fluctuations and weaker demand, especially in Europe and EP and inconsistent performance, the stock, as shown here, has been on a steady decline. What all growth stocks are facing, you know, challenges relative to inflation, rising interest rates, and looming recession, but as seen here, UiPath has significantly underperformed relative to the tech-heavy NASDAQ. UiPath has admitted to execution challenges, and it has brought in an expanded management team to facilitate its sales transition and desire to become a more strategic platform play versus a tactical point product. Now, adding to this challenge of foreign exchange issues, as we've previously reported unlike most high flying tech companies from Silicon Valley, UiPath has a much larger proportion of its business coming from locations outside of the United States, around 50% of its revenue, in fact. Because it prices in local currencies, when you convert back to appreciated dollars, there are less of them, and that weighs down on revenue. Now, we asked Breaking Analysis contributor, Chip Simonton, for his take on this stock, and he told us, "From a technical standpoint, there's really not much you can say, it just looks like a falling knife. It's trading at an all time low but that doesn't mean it can't go lower. New management with a good product is always a positive with a stock like this, but this is just a bad environment for UiPath and all growth stocks really, and," he added, "95% of money managers have never operated in this type of environment before. So that creates more uncertainty. There will be a bottom, but picking it in this high-inflation, high-interest rate world hasn't worked too well lately. There's really no floor to these stocks that don't have earnings, until you start to trade to cash levels." Well, okay, let's see, UiPath has $1.6 billion in cash in the balance sheet and no debt, so we're a long ways off from that target, the cash value with its current $7 billion valuation. You have to go back to April 2019 to UiPaths Series D to find a $7 billion valuation. So Simonton says, "The stock still could go lower." The valuation range for this stock has been quite remarkable from around $50 billion last May to $7 billion today. That's quite a swing. And the spending data from ETR sort of supports this story. This graphic here shows the net score or spending momentum granularity for UiPath. The lime green is new additions to the platform. The forest green is spending 6% or more. The gray is flat spending. The pink is spending down 6% or worse. And the bright red is churn. Subtract the red from the green and you get net score, which is that blue line. The yellow line is pervasiveness within the data set. Now, that yellow line is skewed somewhat because of Microsoft citations. There's a belief from some that competition from Microsoft is the reason for UiPath's troubles, but Microsoft is really delivering RPA for individuals and isn't an enterprise automation platform at least not today, but it's Microsoft, so you can't discount their presence in the market. And it probably is having some impact, but we think there are many other factors weighing on UiPath. Now, this is data through the July survey but taking a glimpse at the early October returns they're trending with the arrows, meaning less green more gray and red, which is going to lower UiPath's overall net score, which is consistent with the macro headwinds and the business performance that it's been seeing. Now, nonetheless, UiPath continues to get high marks from its customers, and relative to it's peers it maintains a leadership position. So this chart from ETR, shows net score or spending velocity in the vertical access, an overlap or presence in the dataset on the horizontal access. Microsoft continues to have a big presence, and as we mentioned, somewhat skews the data. UiPath has maintained its lead relative to automation anywhere on the horizontal access, and remains ahead of the legacy pack of business process and other RPA vendors. Solonis has popped up in the ETR data set recently as a process mining player and has a pretty high net score. It's a critical space UiPath has entered, via its acquisition of ProcessGold back in October 2019. Now, you can also see what we did is we added in the Gartner Magic Quadrant for robotic process automation. We didn't blow it up here but we circled the position of UiPath. You can see it's leading in both the vertical and the horizontal access, ahead of automation anywhere as well as Microsoft and others. Now, we're still not seeing the likes of SAP, Service Now, and Salesforce showing up in the ETR data, but these enterprise software vendors are in a reasonable position to capitalize on automation opportunities within their installed basis. This is why it's so important that UiPath transitions to an enterprise-wide horizontal play that can cut across multiple ERP, CRM, HCM, and service management platforms. While the big software companies can add automation to their respective stovepipes, and they're doing that, UiPath's opportunity is to bring automation to enable enterprises to build on top of and across these SaaS platforms that most companies are running. Now, on the chart, you see the red arrows slanting down. That signifies the expected trend from the upcoming October ETR survey, which is currently in the field and will run through early next month. Suffice it to say that there is downward spending pressure across the board, and we would expect most of these names, including UiPath, to dip below the 40% dotted line. Now, as it relates to the conversation about platform versus product, let's dig into that a bit more. Here's a graphic from UiPath's investor deck that underscores the move from product to platform. UiPath has expanded its platform from its initial on-prem point product to focus on automating tasks for individuals and back offices to a cloud-first platform approach. The company has added in technology from a number of acquisitions and added organically to those. These include, the previously mentioned, ProcessGold for process discovery, process documentation from the acquisition of StepShot, API automation via the acquisition of Cloud Elements, to its more recent acquisition of Re:infer, a natural language processing specialist. Now, we expect the platform to be a big focus of discussion at Forward 5 next week in Las Vegas. So let's close in on our expectations for the three-day event next week at the Venetian. UiPath's user conference has grown over the years and the Venetian should be by far be the biggest and most heavily attended in the company's history. We expect UiPath to really emphasize the role of automation, specifically in the context of digital transformation, and how UiPath has evolved, again, from point product to platform to support digital transformation. Expect to focus on platform maturity. When UiPath announced its platform intentions back in 2019, which was the last physical face-to-face customer event prior to COVID, it essentially was laying out a statement of direction. And over the past three years, it has matured the platform and taken it from vision to reality. You know, I said the last event, actually, the last event was 2021. Of course, theCUBE was there at the Bellagio in Las Vegas. But prior to that, 2019 is when they laid out that platform vision. Now, in a conjunction with this evolution, the company has evolved its partnerships, pairing up with the likes of Snowflake and the data cloud, CrowdStrike, to provide better security, and, of course, the big Global System Integrators, to help implement enterprise automation. And this is where we expect to hear a lot from customers. I've heard, there'll be over 100 speaking at the show about the outcomes and how they're digitally transforming. Now, I mentioned earlier that we haven't seen the big ERP and enterprise software companies show up yet in the ETR data, but believe me they're out there and they're selling automation and RPA and they're competing. So expect UiPath to position themselves and deposition those companies. Position UiPath as a layer above these bespoke platforms shown here on number four. With process discovery and task discovery, building automation across enterprise apps, and operationalizing process workflows as a horizontal play. And I'm sure there'll be some new graphics on this platform that we can share after the event that will emphasize this positioning. And finally, as we showed earlier in the platform discussion, we expect to hear a lot about the new platform capabilities and use cases, and not just RPA, but process mining, testing, testing automation, which is a new vector of growth for UiPath, document processing. And also, we expect UiPath to address its low code development capabilities to expand the number of people in the organization that can create automation capabilities and automations. Those domain experts is what we're talking about here that deeply understand the business but aren't software engineers. Enabling them is going to be really important, and we expect to hear more about that. And we expect this conference to set the tone for a new chapter in UiPath's history. The company's second in-person gathering, but the first one was last October. So really this is going to be sort of a build upon that, and many in-person events. For the first time this year, UiPath was one of the first to bring back its physical event, but we expect it to be bigger than what was at the Bellagio, and a lot of people were concerned about traveling. Although UiPath got a lot of customers there, but I think they're going to really up the game in terms of attendance this year. And really, that comparison is unfair because UiPath, again, it was sort of the middle of COVID last year. But anyway, we expect this new operations and go-to-market oriented focus from co-CEO, Rob Enslin, and new sales management, we're going to be, you know, hearing from them. And the so-called adult supervision has really been lacking at UiPath, historically. Daniel Dines will no doubt continue to have a big presence at the event and at the company. He's not a figurehead by any means. He's got a deep understanding of the product and the market and we'll be interviewing both Daniel and Rob Enslin on theCUBE to find out how they see the future. So tune in next week, or if you're in Las Vegas, definitely stop by theCUBE. If you're not go to thecube.net, you'll be able to watch all of our coverage. Okay, we're going to leave it there today. I want to thank Chip Simonton again for his input to today's episode. Thanks to Alex Morrison who's on production and manages our podcasts. Ken Schiffman, as well, from our Boston office, our Boston studio. Kristen Martin, and Cheryl Knight, they helped get the word out on social media and in our newsletters. And Rob Hof is our editor in chief over at SiliconANGLE that does some great editing. Thanks all. Remember, these episodes are all available as podcasts wherever you listen. All you got to do is search Breaking Analysis Podcasts. I publish each week on wikibon.com and siliconangle.com, and you could email me at david.vellante@siliconangle.com or DM me @dvellante. If you got anything interesting, I'll respond. If not, please keep trying, or comment on my LinkedIn post and please do check out etr.ai for the best survey data in the enterprise tech business. This is Dave Vellante for theCUBE insights powered by ETR. Thanks for watching, and we'll see you next time on Breaking Analysis. (gentle techno music)