Cabot Small-Cap Confidential Issue: September 5, 2024

The Big Idea

As organizations strive to balance growing demand for generative AI tools with their current level of digital maturity – which often lags aspirational AI goals – it becomes evident that data readiness is crucial before implementing an AI strategy.

Without properly organizing their digital workplace, organizations cannot adequately secure their data, let alone deploy advanced generative AI tools that utilize that data for enhanced productivity and value creation.

Additionally, the rising frequency and sophistication of cyberattacks further highlight the need for robust data governance and security.

These challenges are exacerbated in a multi-cloud environment, which is common among mid-to-large-size enterprises today.

Gartner, the global consulting firm, has developed a five-step model to assess the maturity of an organization’s digital workplace.

Successful integration of generative AI does not occur until the fourth step, which comes well after the initial stages of modernizing digital infrastructure and data.

Gartner estimates that nearly 85% of organizations are still in the first two stages, with less than 2% reaching the fourth stage where successful integration of generative AI can take place.

Today, we are jumping into a software company with a platform that helps organizations manage their entire data estate and prepare it for the generative AI applications that are being planned, but not yet implemented, worldwide.

Not only is this company a sleeper play on AI, it’s also part of a group of software stocks that are performing very well in an increasingly choppy market.

The Company

AvePoint (AVPT) is a small software company ($2.1 billion market cap) offering a data management and governance platform that enables customers to control and secure all information within their digital systems.

The demand for such software is increasing as organizations strive to organize their digital environments for generative AI applications while mitigating security risks.

Data security and management have always been priorities for organizations, but the expansion of digital applications, and particularly AI, has heightened their importance.

Today, companies must implement an AI-driven strategy across the organization, starting with ensuring their data is relevant and clean. Outdated, redundant information is ineffective when building and feeding a large language model (LLM).

At a high level, preparing an organization’s data for AI is the initial step in a customer’s journey with AvePoint. From there, the relationship evolves to include securing the data and ultimately optimizing it for various value-added use cases.

AvePoint’s customers range from small businesses (18% of annualized recurring revenue, or ARR) to mid-market (29% of ARR) to very large enterprises (52% of ARR) that span the globe.

Recent customer acquisitions include a Fortune 20 global financial services organization (280,000 users), a Fortune 500 financial services customer (25,000 users), a global auto manufacturer (75,000 users), and a Fortune 10 healthcare giant (200,000 users).

AvePoint’s success is closely linked to the growth of Microsoft (MSFT). As the largest provider of Microsoft 365 data management solutions, approximately 90% of AvePoint’s operations are tied to Microsoft, despite its solutions working across various cloud vendors.

This relationship is symbiotic. Microsoft provides the infrastructure and technology ecosystem, while AvePoint, as one of Microsoft’s many partners, completes the ecosystem and enhances the stickiness of Microsoft products.

Platform and Products

AvePoint’s platform, known as the AvePoint Confidence Platform, provides a comprehensive suite of SaaS solutions encompassing IT operations, development operations, and cybersecurity.

Customers turn to AvePoint’s platform to monitor and secure their digital workplaces across a variety of third-party cloud vendors, including Microsoft, Salesforce (CRM), Google (GOOG), Amazon Web Services (AMZN), and more.

The platform is organized into three interconnected product suites, each addressing a core set of functionalities and customer needs. Customers have the option to purchase individual products within each suite or the entire suite as a whole.

Here’s a quick look at each of the three product suites.

The Control Suite

The Control Suite (27% of ARR) is dedicated to the governance and management of the digital workplace. It offers a pre-built framework for automated governance and policy enforcement, enabling infrastructure and operations teams to safeguard business-critical information across collaborative workspaces.

The Resilience Suite

The Resilience Suite (61% of ARR) emphasizes security and enhanced data protection. It is primarily used by regulatory, audit, and risk management teams to efficiently comply with data protection regulations, preserve essential records, ensure business continuity, and meet compliance obligations.

The Modernization Suite

The Modernization Suite (12% of ARR) focuses on employee productivity and experience. It modernizes legacy data and business processes for use with contemporary SaaS platforms and end-user business applications. Primarily utilized by modernization and change management teams, this suite drives digital transformation with AI-ready solutions across the organization, measuring and accelerating the impact on employee experience and engagement.

Growth Initiatives

Expand AvePoint Confidence Platform: AvePoint continues to add modules to the three product suites within its platform. Recent Control Suite addition Opus (information management) and Modernization Suite addition tyGraph for Copilot (collaboration) are just two examples that are helping keep growth alive.

Leverage Microsoft 365 Copilot Demand: Microsoft’s Copilot application has been marketed as a worker’s everyday AI companion, helping to boost productivity and unlock creativity. But adoption has been held back by lack of data governance. AvePoint should see long-term benefits as organizations come to understand they need AvePoint to get the value they seek out of Copilot.

Expand Partnerships: While around 90% of what AvePoint does today is tied to Microsoft, new partnerships, like with SADA, which is one of the top global resellers of Google Workplace, should continue to diversify the business and drive growth.

Vendor Consolidation: Organizations are trying to do more with less and AvePoint is benefiting as current customers drop other vendors and prioritize expanding with AvePoint.

GAAP Profitability & Rule of 40: While AvePoint is profitable on a non-GAAP basis now, management is guiding for GAAP profitability in 2025, as well as achieving the highly-regarded Rule of 40 status (ARR Growth + non-GAAP Operating Margin = 40). Both should be viewed positively by investors.

M&A, Return Cash to Shareholders: With cash flow on the rise AvePoint is looking for M&A opportunities while also returning cash to shareholders through buybacks. In Q2 the company repurchased 653,000 shares ($5.4 million worth).

Company History & Business Model

AvePoint is a software company. A transition from term licenses (19.4% of 2023 revenue) to the higher margin SaaS delivery model (59.2% of 2023 revenue) is ongoing. As SaaS grows (was 45% of revenue two years ago) the low-margin Services & Maintenance part of the business is fading (21.4% of 2023 revenue), which is driving higher gross profit margin.

The Bottom Line

AvePoint is prioritizing – and achieving – steady, profitable growth.

In 2023, revenue grew by 17% to $271.8 million and Adjusted EPS improved to $0.09, up $0.10 from a loss of a penny in 2022.

In the second quarter of 2024, AvePoint beat expectations, growing revenue by 20.2% to $78 million (a $3 million beat) and delivering EPS of -$0.01, flat compared to Q2 2023 and $0.05 ahead of expectations.

North America revenue grew by 12%, EMEA grew by 18% and APAC led the charge, growing by 36%. Gross revenue retention was 110%, remaining near multi-year highs. AvePoint ended Q2 with $231 million in cash and generated free cash flow of $23 million over the last six months.

Looking out through the end of 2024, the company should grow revenue by around 18.7% to $322.6 million and EPS by 66% to $0.14.

Risk

• Macro weakness is a concern among many companies, and AvePoint isn’t immune. That said, so far AvePoint management says things are very steady and they’ve been increasing forward guidance.
• Should interest in AI-related investments and/or demand for AI solutions decrease, AVPT stock could fall.
• For the foreseeable future, AvePoint’s business will be closely tied to continued use and adoption of Microsoft’s solutions.
• New product introductions may not catch on as expected.

Competition

Depending on the customer size and specific solution a customer needs, AvePoint may compete with Commvault (CVLT), Veeam, Acronis, Varonis (VRNS), Quest and Informatica (INFA).

The Stock

Trading Volume: AVPT trades an average of 1.3 million shares daily ($15 million). We’re not likely to have much of an impact here.

Historical Price: AVPT came public via SPAC IPO in early 2021 and briefly traded into the high teens before beginning a long slide (along with many other software stocks), then a 50-week consolidation phase (mid-2022 to mid-2023) in the 3.4 to 6.2 range. Shares finally broke above 7.0 in September 2023 and made it to 8.6 in December, before another long consolidation phase saw AVPT trade between 7.1 and 8.6 through May 2024. The stock’s personality changed after the Q1 2024 report on May 9. Shares broke out and rallied to 9.6 over a seven-day stretch then climbed to 11.1 by late July. A brief selloff pulled AVPT down to 9.4 in early August, then the Q3 report (August 8) ignited another rally that has pushed AVPT up to 11.7.

Valuation: AVPT trades with an EV/Revenue multiple of 6.0. This multiple is higher than it’s been for several years and is justified, in my view, due to defensible growth, improving profits and a rebound in SaaS stock valuations.

Short-Term Buy Range: Expect to buy in the 11 to 12 range in the short term.

The Next Event: Goldman Sachs Communacopia Technology Conference on September 9, Piper Sandler Growth Frontiers Conference on September 10, Q3 2024 earnings around November 7.

Current Recommendations

Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.

Glossary

Buy means accumulate shares at or around the current price.
Hold means just that; hold what you have. Don’t buy, or sell, shares.
Sell means the original reasons for buying the stock no longer apply, and I recommend exiting the position.
Sell a Half means it’s time to take partial profits. Sell half (or whatever portion feels right to you) to lock in a gain, and hold on to the rest until another ratings change is issued.

Disclosure: Tyler Laundon owns shares in one or more of the stocks mentioned. He will only buy shares after he has shared his recommendation with Cabot Small-Cap Confidential members and will follow his rating guidelines.

The next Cabot Small-Cap Confidential issue is scheduled for

October 3, 2024.

Copyright © 2024. All rights reserved. Copying or electronic transmission of this information without permission is a violation of copyright law. For the protection of our subscribers, copyright violations will result in immediate termination of all subscriptions without refund. Disclosures: Cabot Wealth Network exists to serve you, our readers. We derive 100% of our revenue, or close to it, from selling subscriptions to our publications. Neither Cabot Wealth Network nor our employees are compensated in any way by the companies whose stocks we recommend or providers of associated financial services. Employees of Cabot Wealth Network may own some of the stocks recommended by our advisory services. Disclaimer: Sources of information are believed to be reliable but they are not guaranteed to be complete or error-free. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. Buy/Sell Recommendations: are made in regular issues, updates, or alerts by email and on the private subscriber website. Subscribers agree to adhere to all terms and conditions which can be found on CabotWealth.com and are subject to change. Violations will result in termination of all subscriptions without refund in addition to any civil and criminal penalties available under the law.