AvePoint (NASDAQ:AVPT) reported impressive first quarter results, exceeding expectations in growth and profitability. The company's broad suite of products stands to capitalize on the rising adoption of AI across organizations. Underlying metrics continue to improve, reinforcing a positive outlook for future growth. Although management's guidance points to a growth deceleration in upcoming quarters, margins are expected to substantially improve. However, with shares trading at 61 times non-GAAP earnings and an EV/Sales multiple of 5.3, I am inclined to assign a Neutral rating to the stock due to its current valuation.

Company Overview

AvePoint provides a data management solution, which includes data migration and protection to all organisations that use the Microsoft (MSFT) platform. The company's suite of software offerings help organisations globally in enhancing the capabilities of their Microsoft products such as Microsoft 365 and SharePoint. Furthermore AvePoint's solutions can help with ensuring that regulatory compliance and certain governance measures are met within an organisation.

Nearly 86% of the company's revenue is recurring in nature, with SaaS revenue comprising of 62% of total revenue. The company's sales are well diversified globally and includes organizations of all sizes.

Earnings highlights

The company delivered strong Q1 results where both revenue and non-GAAP operating income came in above the high-end of management's guidance. This subsequently fueled a strong appreciation in its share price. Revenue was up 25% year-over-over in the quarter, while the operating margin was at 8.9%, compared to a margin of -0.6% in the prior year period. Notably SaaS revenue was up 44% and ARR grew 23%, benefitting from strong net new ARR as well as high net retention rates. During the earnings call, the company's co-founder and CEO Tianyi Jiang described the industry tailwinds due to the increased use of AI by its customers and the opportunity it provided for the company. He stated:

Successful AI deployments require a strong and healthy data estate, which in turn mandates a robust data management strategy. As companies become increasingly aware of this, we have a massive opportunity to drive AI adoption in the years to come, underpinned by our platform technology and our experience solving the most urgent challenges facing organizations around the world.

Expectations for the remainder of the year

Guiding for decelerating growth with higher margins

Management's guidance, which is likely conservative, calls for revenue deceleration in Q2. Following the 25% year-over-year increase in Q1, revenue growth is expected to be close to 16% in Q2 and around 17% for the full year. Non-GAAP operating margins are expected to be around 5.5% in Q2, with the dip in margins compared to Q1 being due to certain expenses getting pushed from Q1 to Q2. However, full-year margin is expected to be closer to 10%, which is even above the margin in Q1, thus highlighting the scalability in the business model. Full year margin guidance points to a 200 basis point improvement compared to the prior year as the company moves closer towards achieving its target of GAAP profitability next year.

Improving retention rates

As depicted above, the company has maintained gross retention at 87%, while its Net Retention Rate (NRR) has risen to 110% since dipping to 107% in 2022. The company's gross retention rates do not compare favorably to the best of breed B2B SaaS companies, which typically have rates above gross retention rates above 97%. The lower value for AvePoint can be attributed to its significant exposure to SMEs, which typically experience higher churn rates compared to larger enterprises.

Following headwinds from lower per-seat licenses as a result of headcount reductions in the tech industry in 2022, NRR has risen to 110% in Q1. This was driven by successfully upselling its products to existing customers as explained by its CEO when he said:

We are seeing nice growth from new customers, but specifically in Q1 too, we saw some nice real expansion with our existing customer base. So to touch on your point and getting to that, 110% of NRR, that was a nice driver and also drove some of that SaaS expansion as well. So I think we're seeing it really across the platform.

With the headwinds mostly behind them, in coming quarters I expect gross retention and NRR to gradually increase towards managements targets of 90% and 110% to 115% respectively.

Rollout of tyGraph for Copilot

The company has recently introduced advanced analytics capabilities for copilot for Microsoft 365 through its tyGraph product which it acquired in 2022. AvePoint's CEO further elaborated on this unique offering which is expected to help its customers with using Generative AI, as he stated:

And what tyGraph for Copilot does is actually allow you to not just look at their entire data estate, which could well be over 500 petabytes for a lot of customers, zoom into the specific areas and user groups that you start with and to get the bigger ROI right away. So it's a very unique product set and you're right, we see robust pipeline building from all these information management requirements.

Opportunities for capital allocation

The company's solid balance sheet with $220 in net cash gives management ample flexibility with regard to capital allocation. Besides share repurchases, which amounted to $13.7 million during Q1, management is keen on accretive inorganic opportunities similar to the acquisitions of tyGraph and Essential in 2022. Despite the lack of acquisitions last year, management allocated some of its cash towards anchoring a growth equity fund, aimed at investing in B2B software companies.

Valuation

The company is in a phase where it continues to invest for growth and therefore expects to be unprofitable on a GAAP basis this year. On a non-GAAP basis, management expects $31 million in net income this year. At today's share price of $10.25, this translates to a corresponding earnings multiple of 61. The major difference between the company's GAAP and non-GAAP metrics stems from stock based compensation which has an annual run-rate of around $37 million.

I believe it is appropriate to also consider the company's valuation based on an EV/Sales multiple. With net cash of $220 million, shares are valued at an EV/S multiple of 5.3, based on management's revenue guidance of $317 million. This is in-line with analyst estimates for the company. Industry peer Jamf Holding (JAMF) which has a similar product offering for the Apple (AAPL) ecosystem, trades at an EV/S multiple of 3.8. It is however noteworthy that AvePoint is growing significantly faster than Jamf's low double-digit growth rate. Nonetheless AvePoint's shares appear to be fully valued as investors need to balance the company's lack of profitability with its strong growth outlook.

Risks to consider

Multiple compression

In addition to strong revenue growth and improved profitability, a significant reason behind the company's share price doubling over the past year is the expansion of its valuation multiple. If the company fails to live up to its growth forecasts, future investor returns could face a significant headwind due to multiple compression.

Macro headwinds

Since most of the company's products are sold as per-seat licenses, reductions in headcount at client organisations due to unfavorable economic conditions could significantly hinder the company's growth.

Dependence on Microsoft

The company relies heavily on Microsoft's platform and products, including Microsoft 365, Azure, and SharePoint. Considering the widespread adoption of the Microsoft ecosystem within organisation and AvePoint's recognition as Microsoft Partner of the year, this risk appears to be minimal for now.

Conclusion

The business continues to perform solidly as reflected by its improving underlying retention metrics. The growth prospects remain promising, driven by favorable industry trends in AI adoption. However, given the current valuation, I assign a Neutral rating.