5 conclusions of the company’s S-1
Robotic process automation The UiPath platform added its name to the list of companies seeking public market deals this morning with the launch of its S-1 presentation. The document details a fast-growing software company with significantly improving profitability performance. The company also went from burning cash to generating cash in both operating and free cash flow terms in its most recent fiscal year.
Companies that produce robotic process automation (RPA) software help companies reduce labor costs and errors. Instead of a human performing repetitive tasks such as data entry, credit card application processing, and cable installation appointment scheduling, RPA tools employ software robots.
Given that UiPath has multiple lines of business, including a services effort that has doubled in size over the last 12 months of operations, its combined gross margins are expected to wane. They do not.
The phrase that matters most when digesting this IPO presentation is operating lever, what Investopedia defines as “the degree to which a company or project can increase operating income by increasing revenue.” In simpler terms, we can think of operating leverage as how quickly a company can drive profitability by increasing its revenue.
The higher a company’s operating leverage, the more profitable it becomes as its top line increases; in contrast, companies that see their profitability profile erode as their revenue scales have poor operating leverage.
Among early stage companies in growth mode, losing money is not a sin; After all, startups raise capital to implement it, which often makes their short-term financial results a bit dodgy from a traditionalist perspective. But for later-stage companies, the ability to demonstrate operating leverage is a great way to indicate future profitability, or at least future cash flow generation.
Therefore, the UiPath S-1 presentation is both an interesting picture of a company growing rapidly while reducing deficits rapidly, and a look at what a high-growth company can do to show investors that, at some point, it will generate net income.
There are caveats, however: UiPath had some particular cost decreases in its most recent fiscal year that make its profitability outlook a bit more optimistic than it might have otherwise shown, thanks to the COVID-19 pandemic. This morning, now that we’ve broken down into the big numbers, let’s dig a little deeper and find out if UiPath is as strong in terms of operating leverage as a casual observer of its presentation might guess.
Then we’ll dive into four other things that stood out from his IPO presentation. To the data!
Operating leverage, cost control, and COVID-19
To avoid forcing you to switch between the presentation and this piece, here is the UiPath income statement for your fiscal years that roughly correlate to the 2019 calendar and the 2020 calendar:
From top to bottom, it is clear that UiPath is growing rapidly. We can see that your gross profit grew faster than your total income in your most recent 12-month period. As you can imagine, that combination led to an increase in gross margins at the company, from 82% in its fiscal year ending January 31, 2020, to 89% in its next fiscal year.
That’s very good, frankly; Given that UiPath has a number of business lines, including a services effort that has doubled in size during the last 12 months of operations, its combined gross margins are expected to wane. They do not.
But it’s the next section, the company’s cost profile, that brings us to our first real lesson from the UiPath S-1:
UiPath’s operating leverage looks good, even if COVID helped
All of the company’s operating expense categories fell from the previous fiscal year to the most recent. That’s an impressive result, and one that’s key when it comes to understanding where UiPath’s recent operating leverage came from. But it’s just as important to understand how the declines came about.