Appian Corporation (APPN) Earnings Call Transcript & Summary

Good afternoon. I'm Jack Andrews, I cover the data analytics and infrastructure software space here at Needham. We're very pleased to have Mark Lynch, the Chief Financial Officer of Appian; as well as Mark Matheos, VP and Corporate Controller. This is going to be a presentation, and hopefully, there'll be time for a couple of questions at the end. But with that, I'll turn it over to Mark.

Thank you very much. Welcome, everybody. Thanks for joining us today to talk about Appian. I'm Mark Matheos. Mark Lynch is my boss. He'll go over some financial aspects. But first, I'll talk about some of the business and the product side of things. And there we are again. So introduction to Appian, so Appian is a low-code platform. We build -- we help companies build unique software, and these are really enterprise-level software applications that we built on our platform. We have, as of 2018, $226 million in total revenue. We're growing our key metrics, subscription software, at around a 40% rate. In 2018, it was up 40%. And prior to our IPO, we only raised $10 million of primary equity, kind of showing our founder-led bootstrap culture there. We're going to go some -- over these investment highlights throughout the presentation, so I'll just keep going. So digital transformation, as you know, the massive movement requires unique software. Companies have to be competitive with each other. And obviously, in this day and age, they're building unique software all the time. Appian, we have this as kind of our -- the cornerstone of our culture is this belief that companies need unique software to be competitive and to kind of be the best and develop software. And we have this platform for which we can build really powerful applications 20x faster than using Java, and we're going to go into some examples of that throughout this presentation. We're all about speed and so much that we have an Appian Guarantee that we've put out there. And the guarantee states that we'll build your first Appian application in 8 weeks for $150,000 in services. And along with that, we also -- so the kind of the ease of using Appian and say that anyone technical can learn Appian to become a developer in 2 weeks. So that's kind of the 2 parts to the guarantee. And OCC, the best way to think about Appian and understand what they do is -- what we do is to talk through some customer stories. OCC, some of you are probably aware about, is the options clearing center, and they have very complex, high-risk industry, and they were building mission-critical applications very quickly on Appian. They're on record saying that they're building applications basically every day. The first application took 6 weeks, and they have 9, again, mission-critical applications that they've built in just 18 months. So that showcases kind of the mission-critical speed of Appian. And how does this work, right? We -- how do we do this? We have this process model, and you basically draw a picture of what you want the application to do. We enable you to do that through logical flow charts. We have prebuilt the interfaces and wizards. We've kind of codified some objects that are reusable. We have a patent called SAIL, which enables you to configure or draw an application and deploy it on multiple devices. So you write the applet, you write the app once, and then you deploy it on mobile or on PC or what have you, so you don't have to worry about that. There's zero-code integrations as well with some of the other common enterprise software companies. And all of this allows you to build applications 20x faster than using Java or a custom code. Some strength here, data can be anywhere. So in contrast to some other enterprise software companies, some of our competition in the sales force, we don't require you to store your data in Appian. It's not necessary that we can tap into your legacy systems and still use the full functionality of the Appian platform. On top of that, as I mentioned, you can run it anywhere. It automatically works on mobile devices. If those mobile devices get updated, still work seamlessly, and you don't have to rewrite anything. And host it anywhere as well. It's cloud-agnostic, Google Cloud, Amazon Web Services. Most of our customers use AWS. But we also have customers on Azure. The customer gets to pick where they want to deploy on the cloud. Security, it's vital at Appian. It's something that we take extremely seriously. We have certifications, HIPAA, HITRUST, SOC 1 and SOC 2. We're actually IL4-certified to our partner, Smartronix. These are all kind of cutting-edge certifications that most of our competition can't hold a candle to. So we offer this. This is actually a snapshot of our -- an example of one of our apps, the call center app, but we have embedded intelligent automation. So we have chat bot, case management, sentiment analysis, AI, all working kind of in a full stack of capabilities within Appian. RPA is part of that as well. And we actually have good news to share with respect to RPA. We have our first acquisition that we like to announce -- we announced it last week in this space, and it's -- the product is called Jidoka. We actually -- before I get into Jidoka a little bit, I'll tell you, we're using fully integrated and partnering with Blue Prism, Automation Anywhere and UiPath. And those partnerships are still intact. What Jidoka allows is for us to embed RPA within Appian. So we will bolster the power of the platform by having a solution within Appian so that the customer doesn't have to go to a different vendor and -- or 1 of those 3 vendors and download bot. They can just have a one-stop shop, if they so choose. Other customers may want to use third-party vendors, and we're happy to continue to support this. And we're not going to sell robots independently to compete with those 3 big vendors. So we wanted to offer a solution. So Jidoka is at Seville, Spain. The company itself is called Novayre, but the product is Jidoka. It's very highly rated on Gartner Peer Insights, as you can see. It's on a familiar Java code base, so it will integrate well technologically with Appian. And it's cloud-based, so it's something we're looking forward to developing as part of the Appian platform. There will be more announcements to come on that. Some more stories. A global manufacturing company was able to save a lot of money using Appian here. We had a partner-led engagement using the Appian Guarantee to build expedited shipping applications. So this global manufacturing has freight going all around the world, all around the country, and people were able to just select expedited shipping. The company has incurred a lot of charges. They were looking for solution on this front, and we were able to, well, through a partner, build this, the solution, quickly under the Appian Guarantee and manifest the savings for them. And the savings isn't something that's rare, it's actually commonplace. We have a lot of our customers with ROI play for Appian. We can see IDC do the study here. And [indiscernible] Appian customers, on average, break even in just 7 months on their investment. And that there's a 509%, very precise ROI, that they got within 5 years. So again, this is something that's pretty common. We have another example of health care service corporation. For those of you that aren't familiar, they own Blue Cross Blue Shield and some other insurance carriers. They've built a multitude of applications, some call center applications, some -- a lot of different applications. They've saved $200 million over the past 4 years. They're on record. One of the interesting applications is used by nurses when they're interacting with patients. So in the provider room, when you're working with a nurse, instead of having the nurse manually write things down and aggregate all this data for their insurance processing requirements, the nurse has Appian and doesn't have to worry about updating systems or updating records and can focus on streamlining that patient experience, which is obviously so important. A global oil and gas company, another good story. Here, we were able to build a mobile application with off-line capabilities. So here, you see a picture that kind of sells a thousand words. The story is there's oil rigs out there in the middle of nowhere with kind of no WiFi, no connectivity. And you have engineers doing their tasks, right, day after day, doing whatever they're doing to maintain the rigs and they're having to document their workflow, but there's no way they can update their systems from the rigs. So that was the problem that we try to solve. So this off-line capability, they're working in Appian on their tablet, say, with no Internet or WiFi capability. And then when they get back to home base, let's say they work on Monday through Thursday on the rigs, they get back on Friday, boom, it picks up at all 8 legacy systems. So it used to be that, that would be the day they sit down and enter everything into their legacy systems. So this was deployed across hundreds and hundreds of people at this oil and gas company, kind of, obviously, enabling lots of time savings and efficiencies with this off-line mobile app. So top-tier enterprise. So we have a lot of customers, right, that are in broad markets. You can see the logos on the screen of pretty big companies. Our biggest verticals are financial services, insurance, life sciences, health care and the federal government. But the other verticals, they are also representative of some of our bigger customers. And so we're vertical-agnostic. Even though we have verticalized the sales force, Appian is really -- applies to any industry. We're a recognized leader. And the takeaway from the Gartner Quadrants that we're a leader in is that we're actually the fastest among all vendors. That's the emphasis of this slide here is we're not just the leader in these areas, but we're the fastest among all vendors, and we require fewer resources to build these applications. But those categories at the bottom are the ones that we're a leader in, low-code, BPM. I'm not going to read them all, but there they are. Strategic partnerships. Deloitte, KPMG, Accenture, PwC are kind of our strategic partners. They're bringing customers to us. Accenture isn't probably the newest -- well, it is the newest of those customers. They -- 2 years ago, we didn't have a relationship with them. And as of Appian World conference, which is our user conference last year, they were a diamond sponsor. We're really excited about the potential with Accenture. It's obviously a very huge system integrator, and we're starting to see some traction in that relationship. KPMG is our biggest of the 4 right now, and the other partners on the screen are largely working on Appian deployments. If you look at all those companies, there's a lot of Appian practitioners that are building out Appian for their customers. And there's actually 10x as many Appian practitioners working outside of Appian as we have inside of Appian. So a big TAM. We have -- any way you look at it, it's not really an argument to say that we don't have a big TAM. The bottoms-up approach shows, if you look at the target companies and the ARR, $31 billion. If you add up our categories, $23.6 billion. And the custom software, TAM is astronomical. But long story short, there's a huge TAM here. Another way to look at it is through the potential customers. We have 436 customers. They're all pretty high value at $520,000 on average per year. And you can see kind of that graph is showing the potential since there's so many customers out there. Imagine if we had 4,000, not 436. So our CEO's favorite slide is the drilling of cohorts. You can see the cohorts back to 2013. Almost everyone is growing, speaks to the land and expand strategy, where we sell something to a customer and they buy more. It speaks to the product itself and the effectiveness of the product. And it's a great slide for showing that customer growth for the cohorts. We've got a great leadership team. The tenure is over 10 years for this leadership team. And they must have lost my picture, it's not on there, but this is Mark looking his finest. Let's move on to growth drivers. Solutions is something we should hit on in the ecosystem of a horizontal platform. It's a little bit of a use-your-imagination type sale initially. So we've built so many applications that are unique, but they also -- in some cases, we've become good at building certain applications. And we're offering certain applications in a prepackaged fashion. One of them is actually related to RPA. It's called the Robotic Workforce Manager. We've seen companies have more than one type of RPA bot. And then when you have more than one RPA bot, you need to manage the status of those robots. And when they're in production, they're brittle. Sometimes, they don't work. So this is a need we saw. And along with our RPA product, we're going to sell a prepackaged Robotic Workforce Manager application. There's also institutional onboarding, which is kind of a bread-and-butter type application for financial services and kind of that know-your-customer space. And with that, I'll turn it over to my boss here for some financials.

You come through here?

Yes.

Thanks, Mark. Diving into the financials. I think some attributes that are important for investors to understand is that 99% of our software is all subscription-based, that are in the cloud. Approximately 2/3 or 70% of our software subscription licenses are cloud-based and then the other are on-prem. We do pricing. Historically, we did pricing mostly by user. And so the pricing would not only be the individuals building the applications in Appian, but also the people using the application once it's deployed throughout the enterprise. More and more recently, in the past 4 or 5 quarters, we've rolled out application-specific licensing. And we've seen a nice uptick in that, especially during the past year as far as offering out a particular application, like Mark talked about, different types of solutions that we provide, customers, like the example of the manufacturing company. We had an application-specific license for that. And it was really easy for them to buy it because they said, "Okay, it's $150,000 or whatever it was, $175,000." And they can demonstrate the pure ROI. So it was really -- it's basically lowered the friction at the initial sales point. And so we're doing more and more of those. The beauty of this model, too, is we feel ultimately to be able to extract more value from a customer, given the fact that you can have the same user using multiple applications, and you get more revenue that way. And then finally, a typical contract length for Appian are anywhere between 12 to 36 months on average. 24 to 36 is really our sweet spot. As you can see the growth rates in subscription revenue, the CAGR has been around 40% over the past 4 years through 2018, obviously. And overall, the revenue growth rate is slower, given the fact that our services component is growing slower and the software is growing faster. And over time, we expect to see the basis of software growing more and more and becoming a larger percent of the total revenue over time. We've got great customer unit economics. For example, when you've got 436 customers, they're all very large, sophisticated customers. Net revenue retention of 117%. We've been saying all along since the IPO that we expect to be between 110% to 120%. So 117% is kind on the higher range there. And we have an LTV-to-CAC for the past 4 years that's been in excess of 7. Growing customer base. Three years ago, 2016, we had 24 net new customers. In 2017, we had 85 net new customers. And in 2018, it went to 87. If you look at those net new customers in 2018, the distribution of them by industry, the key industry is that we already have 5 verticals that we're really strong in: financial services, federal, life sciences, health care and insurance. So approximately 48 or in that area and then the rest of the broad market is 39 net new logos that were there. And from a territory perspective, it's been about 50-50 between North America and EMEA/APAC. Looking at the revenue split, about 75% of the revenues are domestic and 25% are international. We have best-in-breed margins. Our cloud/on-prem subscription license margins are 90% on average. The services margins are in the kind of 30% range, which is really good compared to most SaaS companies. They generally have either breakeven or loss margins. And then as you can see, the overall gross margins are improving over time as the mix shift occurs with software and services. And I give you a quick snapshot of what happened in Q3. The revenue growth rate was 38% for subscription revenue. The net revenue retention rate ticked up to 119. And then the overall gross margins are very consistent with what we've been talking about, 91%, 90% for the subscription, 31% for the services and then overall gross margins of 66%. And with that, that's the presentation. So I guess we've got a few minutes here for any Q&A, if you guys want to ask any. I know we're between you and happy hour time. So Jack.

Just could you touch on why your services business seems large relative -- as a percent of your overall revenue, it seems sort of counterintuitive historically through the value proposition of new products.

Okay. So I just -- I'll say the state -- I'll restate the question just in case you can't hear it on the tape. Why is the services business so hard -- or so large is kind of the summary of it. And so Appian, for those that aren't familiar with the story, we're bootstrapped. So prior to the IPO, we raised $10 million total, and we were bootstrapped off of the back of services. So services help keep the lights on and help build out the software and all that stuff. And so that's kind of our roots. And basically, over time now, we're basically migrating intentionally the services over to our partners. And so it's something we've been working over the past 2 to 3 years. And the services, a lot of people say, if you're 20x as fast as building stuff in Java, why do you need all these services? What the heck is going on? Is it hard to implement, et cetera? The services are really building those applications for the customer. So day 1, you plug it in, Appian is ready to roll, and you're building that application from ground zero immediately and you're deploying it. So I would expect they're large compared to any other SaaS company. We're kind of -- if you try to put us in a SaaS bucket, we just -- we look different. Over time, services will decline. We've been seeing on record that they'll grow by half as fast as subs revenue. And this year, it will probably grow less than half. And as the partners bring us into more and more opportunities, the relationship we have with the strategics is that they eat what they kill. And so for example, we talked -- I don't think Mark talked about it, but KPMG brought us into Goldman Sachs. And so we did the back-end, the case management platform for Marcus. And so KPMG did all the services that relates to that. We sold all the software. So it's a model that we'd love to emulate going forward, but it will take time. I don't see [ professional ] services disappearing because there are some -- one is high margins, 30%. It's nothing to be ashamed of. Two, it's a virtuous cycle and the fact that what we're learning is we're building these applications, get sent back into the engineers and we make the platform better and easier to use. And so that's a big benefit as well.

As it relates to that, can you just talk about the share of either billings or bookings revenue, how to think about it, coming from those partners today and maybe how that's positioned maybe successfully the software businesses for them?

Yes. So how much software business is coming from the partners today and how much could occur in the future, kind of restate it. Today, we're in the early innings of it. Some quarters, we thought we'd kind of highlight it in certain quarters where we basically -- partners brought us in to a lot of different -- a lot of new logos. And so it's early stages now. We're gaining momentum, though. KPMG is by far the most active partner out there, especially internationally. We get a lot of help from them. A rising potential partner -- not potential, but a rising partner in the ecosystem is Accenture. We signed a -- inked a deal with Accenture in Q1 of last year. They were a diamond sponsor at Appian World last year in May. And the previous year, they didn't even -- they weren't even in attendance. And so we're starting to see a lot of activity with Accenture. And we also have great relationships with PwC and Deloitte. So if you look kind of those growth drivers, one of the likely suspects will be partners bring us into more and more opportunities as we go forward.

So as you're developing for customers, have you thought about standardizing them or packaging them into templates and selling that, they don’t have to fill the same capital [indiscernible]?

Yes. So are we looking to productize sort of a lot of these apps? And the answer is yes. We have done that. So we've rolled out an intelligent call center. App is a prebuilt solution. We have a defense acquisition of systems that people -- basically, the Air Force uses Appian to buy anything from paper clips to fighter jets. So it's something that's very sophisticated. We just announced in September an institution onboarding prebuilt solution that we were offering and rolling out to each other. So we're -- Appian, one thing, if you follow us over time, we're not afraid to try out a bunch of different things. And so we're trying out a bunch of different -- these solutions, hoping that one of them becomes kind of the lightning in a bottle. And what we do is we look at things that we do really well that we've done for a lot of other customers, and then we basically productize that. So we're doing it strategically. Okay. Go ahead.

Talk about the updates of the apps [indiscernible].

Okay. So who's building all these apps? Is it Appian or is it the customer or is it partners? And the answer to that is yes to all of them. We historically would be building the first couple of applications with a customer, and then we generally try to get out of there. If you look at kind of the stats, the first year of median customer, Appian customer, about 45% of the revenue in the first year was software and 55% was services. The second year was about 85% software. And then the third year was about 90% software. So we try to get out of there and either teach our customers how to fish so they do it themselves, like Mark talked about, the OCC. The OCC has individuals within the enterprise that are building applications [ in our records and they're ] building an application today, which is really pretty phenomenal. But we also have a very large partner ecosystem. We intentionally price our services at a higher rate than the partners to create a vacuum. So the partners can go in there and do the work. I think the ideal situations for the partner -- or the customers themselves are building these apps, and they just give us a call when they need more software. So that's kind of the utopia.

There are, I guess, ultimately, users speeding up app development. Shouldn't developers be all over this? Shouldn't this [indiscernible] there for a year and there'll be a lot of pull from that front to be like, wait, I can do my job 20x faster and like -- why don't we have more -- kind of more of that opportunity?

So the question is, why aren't software developers getting up to speed on Appian and all that stuff? And I'll be honest. Appian is a platform that allows technical people to build mission-critical applications. If you're a stud Java programmer, you would not want to develop it on Appian. And so if you think about it, one of the big primary investment thesis for Appian is there is a dearth out there of software developers, and there always will be. There's a shortage. And the CIOs, for example, of that manufacturing company, if you're a software programmer coming out of college, you have an opportunity to work at a high-flying start-up company in Silicon Valley or you work in the bowels of a manufacturing company. Where are you going to want to work? So that CIO of that manufacturing company has to develop a software. They're having trouble with basically attracting and retaining software developers. And so we're a logical solution for them to build out these applications and do it. So that's our investment. It's a little bit different, but that's really our sweet spot. Go ahead.

So who owns the IP when they're building applications? So for example, if you're productizing -- like if I were -- if I'm building application for internal use, am I not making it easier for my [indiscernible]?

It's a good question. So who owns the IP when all is said and done? So the customers own the IP. So like we build it on -- it's -- but it's within Appian. So it's basically you're drawing diagrams within Appian. And what happens is Appian, the platform, takes those intentions and then create software code out of it. And you have no idea that a software code is being generated. But our partners, for example, are building applications on Appian, and they're selling that IP to their customer base. And we get a piece of the software sale there as well. But the customers -- the benefit of the customers is they have a platform -- from a CIO's perspective, we take care of a lot of the complicated heavy-lifting that is really hard for software development, right? So we have security issues, right? We handle all of the security headaches that are out there. We have all the security things that you need. We're in cloud if you want to be in cloud, but we're on-prem if you want to be on-prem. You write the application once, you can deploy on any native device. Some of the hardest software developers out there are mobile developers, like we can't even find them. And the fact that we can natively render software applications on any device is a huge advantage. So we try to take care of a lot of this stuff that makes software application development easier for our customers.

[indiscernible] partnership with Celonis?

Yes. Can I -- it basically talks to the partnership with Celonis. So for those of you guys that aren't familiar with Celonis, Celonis is basically the data mining and process optimization. They're located in both Munich and New York. And the relationship is a symbiotic relationship, technical relationship. We build applications and create processes within an enterprise. And if you had -- if our customers have the ability to leverage Celonis and identify areas that need to be optimized in those applications, it's a powerful add-on to the platform. But if you think about it, Celonis also has lots of customers out there that need to build and create automation. And so we're obviously a great low-code platform that allow customers to build these applications. So it makes a lot of sense. There's a lot of synergies there. So we're excited about where that could take us. Go ahead.

What exactly is like the ultimate [indiscernible] market later on? Is the function for that or kind of like so we have the voting background, the more of deposit managers who can just tell on this and start creating the app [indiscernible]? Or is it something else [indiscernible] find out what [indiscernible]?

Yes. I mean, if you think about it, we're a leader in a whole bunch of different things. But what are we doing at the end of the day? We're building -- we're helping companies build unique software solutions and applications, right? And so the platform allows people that are technical, right? For example, I'm not that technical. I'm not a great table builder. So I struggle a little bit building the applications, but this guy here could build and he's actually built applications in Appian internally. And so that's what we're enabling. And the interesting thing is, if you think about it, Gartner is on record of saying that 5 years from now, 65% of custom application software development will be done on a low-code platform. Now you can dispute whether or not that's accurate, it's Gartner or whatever, but it's a pretty bold statement. Any other questions?

So could you just provide some more context around the Jidoka acquisition? Just because -- since it is your first acquisition, why now specifically? And should we think of maybe some more of ] those types of transactions in the future now?

Okay. So why Jidoka now and do we expect any other additional acquisitions in the future. So Jidoka, we were introduced to Jidoka by Gartner candidly. So Gartner basically said, "Here's a company that sounds a lot like you guys. They're bootstrapped, they're breakeven, they're profitable, they're cloud, they're Java-based, and it's a really good RPA technology. We're rated really highly in the Gartner sites. You should take a look at it." And so we actually built it and looked at it, and we said, "Wow, this should be really good." And so in -- while we're looking at it from a technical perspective, Matt, our CEO, is talking to CIOs, customers of ours have said, "If we were to hypothetically have these capabilities, would you like it?" And they said, "Oh, we love it. It would make a lot of sense." It's not like we would displace ever the UiPath or Automation Anywhere, but to have it seamlessly within Appian made a lot of sense. And so we did a deep dive and we said, the negative of it, it's located in Seville, Spain. So it's not like it's geographically desirable, but there were so many positive attributes that we thought that it made sense for us to do it. And then from a kind of a P&L perspective, they're breakeven. They're not -- they wouldn't move the needle materially from a P&L perspective, but the technology is really, really good. So in the future, would we expect to do other acquisitions? The company has been around for over 20 years. This is our very first. So we're going to figure it out and make sure it's successful before we go off and do something else. Anything else? Okay, great. Well, I really appreciate you guys taking the time and being here at the end of the day. Thank you very much.