5 lessons from the company’s S-1
Automation of robotic processes The UiPath platform added its name to the list of companies seeking public offerings this morning with the launch of its S-1 record. The document details a fast-growing software company with sharply improving profitability performance. The company also moved from burning cash to generating cash on an operating and free cash flow basis in its most recent fiscal year.
Companies that produce robotic process automation (RPA) software help companies reduce labor costs and errors. Instead of having a human being perform repetitive tasks, such as data entry, processing credit card applications and scheduling cable installation appointments, RPA tools employ software bots.
Given that UiPath has several lines of business, including a service effort that has doubled in size during the last 12 months of operation, you can expect your combined gross margins to disappear. They do not.
The phrase that matters most when digesting this IPO request is operational leverage, which Investopedia defines as “the degree to which a company or project can increase operating revenue by increasing revenue”. In simpler terms, we can think of operational leverage as how quickly a company can increase profitability by increasing its revenue.
The greater a company’s operating leverage, the more profitable it becomes as its revenue increases; in contrast, companies that see their profitability profile decline as their revenue scales have low operating leverage.
Among early-stage companies in growth mode, losing money is not a sin – after all, startups raise capital to invest it, often making their short-term financial results somewhat unstable from a traditionalist perspective. But for companies at an advanced stage, the ability to demonstrate operational leverage is a great way to indicate future profitability or, at least, future cash flow generation.
So the UiPath S-1 deposit is both an interesting image of a company growing rapidly while reducing its deficits quickly, and a look at what a high-growth company can do to show investors that, at some point, it will generate unadjusted data Net result.
There are caveats, however: UiPath had some specific cost declines in its most recent fiscal year that make its profitability picture a little more optimistic than it could have proved, thanks to the COVID-19 pandemic. This morning, now that we’ve looked at the big numbers, let’s dig a little deeper and find out if UiPath is as strong in terms of operational leverage as a casual observer of your archive can guess.
Next, we’ll look at four other things that stood out in your IPO process. For the data!
Operational leverage, cost control and COVID-19
Image credits: UiPath
To avoid forcing you to switch between archiving and this part, here is UiPath’s income statement for its fiscal years that roughly correlate with 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 has grown faster than your overall revenue in the past 12 months. As you can imagine, this combination led to an increase in the company’s gross margins, from 82% in the fiscal year ended January 31, 2020 to 89% in the next fiscal year.
This is very good, frankly; considering that UiPath has several lines of business, including a service effort that has doubled in size during the most recent 12 months of operation, you can expect your combined gross margins to disappear. They do not.
But it is the following section, the company’s cost profile, that takes us to our first real UiPath S-1 learning:
UiPath’s operational leverage looks good, even though COVID helped
All categories of operating expenses for the company fell from the previous fiscal year to the most recent. This is an impressive and fundamental result when it comes to understanding where UiPath’s recent operational leverage came from. But it is equally important to understand how the declines occurred.