Appian Corporation (APPN) Earnings Call Transcript & Summary

Hey. Good morning, everyone. Thanks for joining us virtually for our Barclays TMT Conference. My name is Mohit, and I'm very pleased to introduce Mark Lynch, CFO from Appian; and Myles Weber, CIO from Appian for a fireside chat this morning.

So guys, digging in. So I just learned that both of you guys have a pretty long tenure at Appian. Actually, Myles, I learned that you are the 9th employee at Appian, so obviously a long, well-established road with Appian. So maybe for people on the session that are new to the story and are trying to get ramped up with the story, Myles, just give us a background on yourself. And also help us walk through the journey that Appian has been on over the last 10 years or so from a BPM vendor to now like a pioneer in low-code. Maybe we'll start there.

Sure. Thank you, Mohit, and thank you, Barclays, for having us. As mentioned, I'm Appian's CIO. I've been with the company for 20 years. I was the 9th employee brought on board. So I joined in the year 2000. I joined Appian because I thought there was some people here that -- I didn't know anybody when I joined Appian, but when I met them and when I went to interview with them, I thought there was a lot of people here that I can -- I'll learn from. And what I also learned over the years is that I had a great deal of respect for the people that work at Appian. And that's what made me stay during this time. I also got lucky in that the company grew throughout that 20-year period and allowed me to grow with the company as well. I started my career with Appian in the professional services group, and about 7 or 8 years into that, I transferred into a much more product-based focus within the company. So effectively, as a CIO, I'm a line of business CIO. I built our -- with our team, I built our cloud business from nothing to a majority of our software revenue as it is today. Our tech support line of business rolls up to me. And most recently, early this year, I led the acquisition of the RPA company that we acquired as well. So it's good to have that growth at the company and also to have that degree of respect to people that I can learn from and work with within the company. Because during that 20-year period, we've gone through 3 pretty significant recessions. I mean we -- right after the company was started, we have the dot-com crash, we had a Great Recession, and now we have the COVID recession challenges that are going on today. And so liking who you work with, respecting who you're working with you. During the fun times, I mean, that's a lot of fun, it's good; but also during challenging times, you get to work together as a team.

That's great. That's great background.

I can speak [ on the low-code side ] if you want to or its [indiscernible].

Yes. No doubt it's going to be my next question as well, Myles. So you are one of the public -- only public pure players in the sort of like this low-code market that you pioneered, right? So maybe give us a sense of the secular trends that you have seen, how they have evolved? Obviously, low-code -- I mean, the questions we used to get many times for going public was tell me about this market opportunity. And we still get those questions. So maybe help all the people on the session understand as to what the secular trends are? And maybe also maybe have seen an acceleration in those secular trends given the pandemic. Obviously, results over the last few quarters have been pretty impressive, and we can talk about those results with Mark later on. But maybe give us what the secular trends are, what the market opportunity is for you guys?

Sure. Yes. When we IPO-ed a few years ago, we went under the low-code banner. And we're really happy to do that. You spoke a little bit to our history of coming out of a business process management or workflow-type background. And if you ask many of us, we were always doing low-code for many years, even before it became a term or a market on its own. And we're really happy that, that market has developed quite well. You've seen lots of companies also attempt and enter the low-code space. And so that additional investments in marketing that us and other companies are making to grow this low-code space really feels like we do have, like you said, a secular wind to our back here. Because I think if you look at what we do today versus what we'll do a few years from now on the technology front, we will be -- we'll look back and be like, we can't believe that's how we used to do things because we're so focused on making sure those customers are successful in building capabilities to make sure that they're successful and focus on the speed of deployment and the broad range of capabilities that they can do with the low-code platform. So if you look at us like a few years ago, we would say we were always kind of in this focus on speed of deployment, customer success and having a good technical stack focused on low-code to make that happen.

Understood. Understood. And maybe just one of the questions I get from investors is this should be a greenfield market opportunity, right? But there are many, many vendors that also talk about doing low-code, right, I mean, from your peers to also some cloud vendors, right, that are talking about low-code much more often. So help us understand the competitive landscape a little bit and what differentiates you? Obviously, you have been around for a while, but what differentiates you versus not just your well-established competitors, but also some of the new guys that are getting into the market?

Yes. I think our focus is really important, right? It's -- we went -- again, we IPO-ed under that low-code banner. It's a huge focus for us, right? And when you're a much larger company and you have hundreds or thousands of different product lines that you're trying to move out there or SKUs that you're trying to move out there, you don't have that focus, right? And so us being with that complete focus on low-code or low-code automation is how we like to say it today, allows us to be innovative, it allows us to be really focused on what our customers are doing, [ lest we ] have a great degree of clarity and focus on that market. So we're -- I mean, we're -- as I mentioned earlier, we're happy to see more and more time and space from companies dedicated towards us, both from a customer perspective but also really from the partner side of it, right? The partners have seen that success, and we're happy to work with them on selling into strategic customers.

If you think about this -- if you think about the space, Mohit, it's a massive, massive opportunity. And so we're a leader in 4 different -- 5 different quadrants, case management, BPM, low-code, et cetera. And yet, we have one platform, right? So the one platform is -- that allows companies to build applications and allows them to build very complex mission-critical applications very, very rapidly. And so that's kind of the key differentiator for us within the low-code space. At the end of the day, I think the analysts kind of what Myles said, we feel like we've been doing low-code along, the analysts are trying to call it whatever they're going to call it, right? But I think at the end of the day, what we're doing is we're allowing companies to build applications and it's just a matter of how they build them because they don't have enough software developers out there to build a lot of stuff. So we allow technical people to build applications very rapidly, and it's a huge space. It's a massive opportunity. And like I said, we're at the high end in mission-critical. I mean a lot of people build mission-critical applications, but they can also build lightweight, simple workflow applications as well. A lot of our competitors, a lot of people out there, companies like Microsoft with Power Apps or even Amazon with Honeycode, they're down at the very low end, simple workflow capabilities. I think they never build -- you can never like digitally transform Dallas-Fort Worth Airport in Power Apps for example, so...

Understood. Understood. That's very helpful. And Mark, before I come back to you on the recent performance, I had one more question. So you mentioned about RPA, right, that you led the acquisition of Jidoka, if I'm pronouncing that right. So help us understand that our RPA opportunity is getting a lot of investor tension because of some private players, right, who may be in the pipeline. So help us understand where you fit in to the RPA puzzle, what Jidoka brings to you and how you see that a cross-sell opportunity evolving for yourself?

Sure. So we approach the RPA market in 2 fashions. One is that we view RPA as a portion of an overall automation strategy that companies have, right? And also, we approach it from a best-of-breed perspective. We do have some RPA technology with our platform, but we also partner with major vendors in that space. And if our customers and partners choose -- they can choose the technology that we offer or they can use other RPA vendors as well. It's perfectly fine, and we integrate and perform well with both. But RPA is -- what we've seen, especially in the system integrator partners that we have, and those system integrators are very important to Appian's strategy. What we have seen is that largely, those RPA practices are getting folded into an automation practice or a digital process automation practice, which is heavily towards Appian's strengths and history. Our history is in workflow and we have a heavy focus on low-code automation today. So we feel like the secular trend there -- we see early signs of the secular trend there towards a higher degree of focus within companies towards automation. And I think the pandemic has helped that focus a bit and it being much more inclusive than just focusing about robotic process automation, but more about a broad automation or a digital transformation story within these customers.

Understood. Understood. Mark, so coming back to you, I'm going to start with your favorite question. So explain to us about 606. I'm kidding, by the way.

Yes. I don't want to talk about it.

Exactly. Are we going to have a lot of time or what? But yes, so on recent performance, Mark. So you have basically defied the gravity of the pandemic over the last few quarters, right, so the numbers speak for themselves. Really, really strong execution despite the uncertain macro. Your new logo motion seems to be inflecting. You've actually accelerated your cloud subscription revenue growth this most recent quarter. So help us -- give us the high level as to what's working well for you guys? And what's driving that, not just resilience, but also sort of like an inflection and your performance recently?

Yes. I wouldn't say we're at an inflection point. But I do say that we've weathered the storm pretty well, right? So what happened going into the pandemic, everybody -- nobody knew what was going to happen. Nobody knew how bad it was going to be. And we had to change the way -- our sales motion is very high touch. So we're on -- we're on-site with doing proof of concepts, we got sales engineers, and we didn't pivot immediately and figure out how to do other stuff remotely. And we had to figure out how to deliver our professional services projects remotely. Even on-prem projects get done remotely. So -- and every company out there had to struggle with it. So we -- candidly, we didn't know what was going to happen. The good news is, and what happened also is all the IT budget shrink, right? They said, "Holy c***, I'm not sure what's going to happen to the company." Every discretionary dollar disappeared, right? So we did a good job of remaining relevant. So we came out with our COVID application, workforce safety in the CampusPass, a lot of higher ed and companies to bring back their employees or students safely. So that kept us relevant out there. And we added a couple of dozen logos with that application. But what also happened was going into it, we always talk about the fact that we build mission-critical applications for companies, that's what we say. But the best test to that is going through a pandemic, and we had some very large renewals in Q2 and Q3 and I was -- I'm candidly a little nervous if they weren't going to renew. They're multimillion dollars. Like on our side, we were looking at every single vendor and do we really need this as well. So the amazing thing is every single renewal came up renewed. We didn't have any pricing pressure, we had a couple of maybe payment terms that got left out, and we actually had some renewals that were coming up in Q4 that renewed in Q3 because they were afraid that the budget dollars may disappear and they needed the technology. So that's a true testament to what we deliver to the customers. Like we talk about the ROI that we deliver, that IDC is out there saying that 7 months, our customers breakeven on Appian implementation. In 5 years, they got a 509% ROI. But going through the pandemic really test -- showed that there is -- we deliver significant value, not only with our existing customers, but we were able to add logos during this period, which is hard, right, there remotely. And we had a really, really strong federal quarter in Q3. We actually doubled our software bookings in Q3 over the previous year's quarter. And all of those engagements, almost all of them, I should say, were all cloud. So the federal government's getting the cloud. And that helped, obviously, some of the growth there was the federal performance. EMEA was strong, even though countries are being locked down and all that stuff. So the IT budget shrank, but the good thing is that they -- we stayed as one of the vendors they needed to consider too. Like our sales cycles are really long. So a lot of these deals that we closed in Q2 and Q3 have been gestating for a while. And in certain deals closed earlier just because I said, we've been talking about this for a long time, we need to get going right now because all my employees are -- and I get to build out this stuff. So there's -- the headwinds are out there because it's hard to do this stuff remotely. But the good news is that we're -- we've got good -- we've got a great technology, and we're delivering a lot of value for our customers. So the thing that's making me a little bit more exciting is that once we get this behind us and the IT per string is open up, [indiscernible] for us as well.

Yes. Yes, that's great to hear. Obviously, it's all about the pipeline. People are thinking about the pipelines once we can put the pandemic behind us, right? So it's great to know that you've been excited about it. And that brings me to my next question, Mark. So we have talked about this durability of the subscription revenue growth, right? I mean with 606, you started to break it out between cloud and TAM, and we all recognize that TAM will be volatile. It can be volatile because of 606. But maybe from an underlying subscription revenue growth perspective, can you give us an idea of how you think about the durability of that growth? I think pre-606, we had conversations where you had mentioned that 30% is the sort of like the ballpark where you want to target in the midterm, right? So give us an understanding as to where you sit now? And how you think about that subscription revenue underlying growth?

I mean we've said from day 1 of the Appian IPO that we see ourselves as a 30%-plus subscription revenue growth grower, right, for the foreseeable future. There's nothing that -- and 606, love it to death. We ended up having $12 million of revenue, just -- I mean, $40 million of revenue that are deferred and are unbilled disappeared going into 2020 because they've been previously recognized but then you get the benefit in the second half of the year of upfront recognition on these on-prem deals. So at the end of the day, we looked at it -- it was like a $12 million headwind in revenue going into 2020. In 2021, that's gone, right? That headwind is gone. The other self-imposed headwind we put on ourselves was for on-prem deals, we did multiyear deals. And so what we did was we built in some language in the contracts, and we started doing this a couple of years ago, conversion will be done by the end of this year, is auto renewal language. So that if you have -- like under 606, if you have a 3-year deal, say it's $100,000 a year, you'd have to book $240,000 of it upfront immediately and then $60,000 of maintenance over 3 years. It's crazy. And companies like Splunk and Alteryx, they struggled with the duration issue as far as what is the true growth rate because of that dynamic. So what we did was we put in our renewal language. So what happens is you book $80,000 upfront and $20,000 of maintenance. $80,000 the next year, $20,000 and $80,000 that following year, $20,000. So that way on an annual basis, it smoothes up. So those 2 things, in 2021, I would expect a convergence of the growth rates between cloud and total subscriptions revenue. It won't be exactly because of the lumpiness. And I would look at that -- the conversions to be on an annual basis, not a quarterly basis. If you think about it, if you look at our subscriptions revenue growth rate on a quarterly basis, this year, Q1 was 46% growth, Q2 was 12% growth because there were some deals in Q2 that closed in Q1 and then Q3, it was 34% growth. So we're there in the 30%-plus, even with that $12 million headwind.

Got it. And just one question, the cloud subscription is all recurring, right? So -- and this quarter, we saw that go up to 40% versus the 30% -- mid-low 30s range in the first half. And I think you discussed there were some benefit from linearity that we should be aware of. So just help us -- give us an idea of as to how that translates into higher growth because you're trying to make sure that people don't -- they don't run ahead of themselves and extrapolate that. So help us understand what was that benefit there?

Yes, it was -- I mean, you can see what our guide is for Q4, right? And we generally are conservative with our guides. We generally try to beat our guides. So you can see what our senses of what could happen in Q4. We did get some benefit in linearity, in particular, in the federal government which was interesting. Usually, it's like September 28, and you get a tsunami of orders. We actually closed a bunch of deals in July and August. So there was some benefit but we definitely had -- I mean, we had 30% subscription growth rate in Q2, and it jumped up to Q -- to 40%, Q3. It's not just linearity, right? So there is definitely some good momentum in the business. But what we're trying to do is temper people's enthusiasm because now they're thinking, we're a 40% grower and I wouldn't get -- I wouldn't go to that -- I wouldn't jump to that conclusion.

Got it. One more question for you, Mark, before I come back to Myles. So on the growth versus profitability, right? So you guys, before your IPO over bootstrap, so you have a track record of maintaining underlying leverage in the model and obviously still investing for growth given the market opportunity. But help us -- just give us a refresher on how you're thinking about growth versus profitability. This year, obviously, maybe some savings that may revert back next year. So help us understand that growth versus profitability framework that you have.

We're going to continue investing in sales and marketing and engineering in 2021. The opportunity is very significant. Think about it, we only have 500 customers, right? Only 500 customers. Like what would we look like if we have 2,000? So we need to keep on growing. But we're going to do it in a pragmatic format, a form of fashion. We're not going to be spending $100 million or anything like that. We'll probably do $15 million to $20 million next year, losses from a cash perspective and higher obviously from GAAP, and we'll continue to do that for the foreseeable future, so long as the growth is there. If there's no growth, as you mentioned, we ran the company for 20 years on $10 million of primary equity. That was it. I mean we know how to run the company profitably. We just -- we're choosing not to do it right now. And we're asking investors to be patient with us and let us invest some of the extra money into the business and see what we can do with it.

Perfect. Perfect, Mark. I'll leave the 606 deep dive to another session, maybe. So I'll come back to one...

Maybe to Myles. He's far more interesting.

So Myles, maybe switching gears to you. Can you discuss your customers' base sort of like you count largest enterprises -- some of the largest enterprises, like Barclays as your customer, right? And you have talked about -- I mean, it's a horizontal platform, right? But also, there are some core verticals that you cater to, including federal, financial services, health care, right? So maybe give us an understanding of how you think about that horizontal strategy, along with that vertical -- maybe vertical product or vertical go-to-market motion?

Sure. So I think we have a couple of tailwinds related to customer acquisition. So Mark mentioned end of last year, we had about 500 customers. But if you look at just from a pure logos perspective, you draw a certain conclusion. But I think if you look at it in that we sell to the largest companies of the world, right? These are companies with thousands upon thousands if not hundreds of thousands of employees, right? So if you look at us from a user basis, the numbers are quite larger. And I think that place into a lot, led to the motion of selling into companies, right? It's -- these companies have many different business units, they have lots of needs for digital transformation solutions or automation solutions or building low-code applications, right? They have means across the entire enterprise, right? And so we will focus on customer satisfaction. We will focus on land and expand model into these large companies because there's just many, many different areas within those companies that can use our software. And nothing speaks better to selling more within a company than having success, right, and having proven success within those companies. The second part of this though, is -- and also, we have a little bit of a tailwind with us as well because we were so early with the cloud adoption, right? We've been doing it for 10 years, selling a cloud offering. And so we have that tailwind also where even some laggard industries related to cloud adoption like parts of the government, parts of especially banking industry. We have that tailwind where those customers are now also adopting cloud offerings from us as well. The other piece is our partner strategy, right, is that we have a very focused sell with strategy with those partners, and that seems to be working pretty well.

Understood. Understood, Myles. So you earlier discussed about our partner ecosystem, right? And how -- and we have heard a lot over the last few years, right? So shifting some of the services work to those partners and building a partner network. So can you help us understand the progress there? Obviously, I think the last few quarters, we have seen partners contributing a good proportion of that new logos coming into the door. So help us understand where you are, what still needs to be done and what's already working well?

Yes. So the main focus is not the shifting of services, the main focus is doing strategic work, right? And so it's not just about the delivery and like, let's focus on someone else doing delivery and we'll sell software. That's not it. It's about co-selling with those strategic partners at enterprise level. Enterprise customers don't just buy software by itself, right? They're looking for an answer to a problem that they have and they're looking to buy expertise and consulting services to help tackle those big problems and their transformation initiatives. So our strategic partners have really learned that our software really works. It works quite well. It leads to happy customers. It makes them -- it makes our partners look good. And when our partners look good, our mutual customers stay with those partners longer. And so they're able to sell more, build deeper relationships within those customers. Everyone likes a winner, and we're winning through partners.

Got it. Got it. You're almost at the end of the session. I want to leave a few minutes so that I believe you can jump on to your next one. So this last question, I guess, I'll let both of you chime in. In terms of -- so obviously, the pandemic, right? I mean hopefully, we are coming to the -- looking at the light at the end of the tunnel at some point. But I wanted to discuss about the business visibility, right, both from a financial perspective, what do you see, Mark and also Myles what you see out in the field? So how have you seen the visibility trend? I mean Mark, maybe you can also comment on whether you're -- I think you're going to be ready to guide for next year. Obviously, there has been uncertainty, and we haven't gotten full year guidance. So maybe give us a sense of how the business visibility has trended given the ongoing pandemic.

It's still uncertain, right? Until we get everybody vaccinated and so forth, it's -- we've got spiking COVID cases, both domestically and internationally right now. But our pipeline is solidified, it looks good. As far as full year guidance, I mean, it's -- when we pull our full year guidance, we did it out of abundance of caution. We just had no idea what was going to happen. We still don't really know exactly what's going to happen next year. I mean we're -- I think everybody is hopeful that in the fall, everything's going to be back to normal because everybody is vaccinated, but we don't know that for certain. So I do know that the business has done well thus far through the pandemic, and we basically beefed up the management team as well. We brought in a new CRO, we brought in a Senior Vice President in charge of customer success from Salesforce, and we just added a Chief Marketing Officer, who is a 19-year veteran from SAP for our Chief Marketing Officer. And so we've done -- we took -- during the pandemic, we took advantage of it and beefed up our executive team pretty significantly. And so with those investments, and with the technology in place and then some of the tailwinds that we've got, I feel cautiously optimistic about 2021. As far as giving out full year guidance, we'll debate that internally and see where we are at the end of February. But right now, it's still kind of murky out there, I mean, candidly.

Understood. Myles, do you have anything to add? I mean based on your customer conversations, but I guess, now is the time probably where the enterprise IT budgets are being set or are already being set for next year. So do you still see that reluctance, any reluctance from your conversations about people still worried about the uncertain environment, which it is, right? I mean we'll be hit at all the time from our checks as well. But anything from your conversations out in the field?

You're muted, Myles.

Sorry about that. During good and bad times, I think the company still look for opportunities for growth. Most of them do, right? And our platform and our technology allows people to move quickly. You've seen the work that we've done this year are moving quickly and staying relevant related to some of the solutions that we've offered to the market. And we've been able to quickly do those solutions and they exist a year ago, and we're able to move quickly like that. So I do think investments will continue to happen in the areas that have good ROI, that can really help companies grow. But it's -- there's uncertainty out there.

Understood. Understood. We'll leave it at that, but it's really, really great to host both of you and see you virtually and look forward to our continuing dialogue in the coming 3 weeks. Thanks a lot, guys. Have a great holiday break when the time comes. Thank you.

Thanks. You too.

Thanks, Mohit.