Appian Corporation (APPN) Earnings Call Transcript & Summary

Good morning, everyone, to the first day of the Morgan Stanley TMT Conference. To kick a wonderful set of presentations, we are really pleased to have Matt Calkins, Chief Executive Officer; and Mark Lynch, Chief Financial Officer of Appian. Appian is a low-code platform helping companies accelerate their digital development and we look forward to having a really interesting conversation. Before we get into that, let me quickly go through the disclosures. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. And any questions, please reach out to your Morgan Stanley sales representatives. And with Matt and Mark, welcome. You've been to every single Morgan Stanley Conference since you've gone public, and we really appreciate that. Thank you for joining us this morning.

My pleasure.

To kick the conversation off, just start from like a high level. Could you sort of describe essentially the problems that Appian is helping to solve for enterprise customers and maybe provide 1 or 2 of your favorite customer examples that highlights the types of problems you're solving for the app -- the types of problem you're solving for customers.

That would be great. I'd like to talk about a few customers. But before I do that, let me tell you what low-code is. Appian is a leader in this market called low-code and I want to get that out there, and then we'll talk about the customer examples. Low-code is the new way to build applications. And it came to prominence in 2020, though it's existed for a long time. It came to prominence recently because it allowed organizations to adapt change, to stay ahead of disruption in a difficult year. The main difference between low-code and other ways of developing is in low-code you draw a workflow, drag and drop boxes scenarios instead of writing your code line by line. As a result of that, you get 2 main benefits. The first is speed, that you probably develop about 10x as fast if you draw instead of code and then secondly the workflow becomes a great way to bring together all the assets scattered across your enterprise, all the kinds of workers like RPA and AI and humans, and all the kinds of data, siloed legacy database, all the kinds of data, all the kinds of workers can be brought together. So that's low-code in a little nutshell. We've been a leader in low-code. We've been doing this for about a decade. We're the first company to go public as a low-code firm. We own lowcode.com. So we're really at the front of low-code. Now with regards to what we do for our customers, here's a couple of examples. A classic would be Aviva, an insurer. Aviva used to -- they grew by acquisition. They had 20-odd systems they had to touch every time a customer made a phone call to change their address or something like that, they would have to touch 20 systems and it would often take 3 calls in order to clear this issue. So that was obviously frustrating and expensive and redundant. So they replaced all that rapidly with just Appian. All 22 systems decommissioned. They replaced it with just Appian and they did it quickly. And now on average or generally, they can handle it and it changes in one call. And the cost of operating the system was cut by 90%. Typically, you'll see that low-code cuts the cost of operating by about 50% or so. They went all the way to 90% cost cutting, and it was fast to make the change. Another good example recently is just last year, to give you a sense of how organizations cope with disruption using low-code, we were used by the National Health Service in the U.K. in order to protect the health of their healthcare workers and their vulnerable population in London. I've mentioned that because not that we made a lot of money on it, but because low-code proved itself in the chaos of last year. I think a lot of organizations realized they needed to change in the face of the dynamics, external the firm and you can't change these days faster than your software changes. So being able to flex your software, being agile in the way your software works became necessary and low-code allowed organizations that agility.

Perfect. That's a great explanation. I think you're spot on, Matt, with just the low-code sort of becoming part of the common vernacular within software and within IT. There has been -- as the market has grown, there has been more of a debate, if you will, low-code versus no-code. I wanted to get your take on that. And sort of give us a sense of what are the types of things that are built on a low-code platform versus a no-code platform? And then conceptually, why do we need code at all? We abstract -- continue to abstract and evolve that practice. Are we going to see code at all in any of these models?

Okay. I -- maybe you don't need code at all, we're are going toward a day when you don't. The difference between low-code and no-code is largely semantic. There is a lot you can do in the Appian platform using absolutely no-code at all. However, low-code, the market is a pyramid. you could think of it as a pyramid. And the middle to the top of it is called low-code and the very bottom is called no-code generally because it's can't-code, right, because you can't do anything that requires any code with the bottom layer of tools. And in the pyramid, Appian is the top of the pyramid. That is our niche in the low-code market, we have the highest functionality, the best scalability, security, the highest quals, the most mission-critical applications. So we're squarely in the low-code side of the market.

Interesting. Maybe we just kick off about what happened in 2020 because a lot of good things happened and somewhat surprising. I mean, 2 straight quarters of 40% subscription revenue growth, another year of 30% subscription revenue growth, accelerating customer adds in one of the worst pandemics in history. And so the question is, can you sort of walk us through the progression of 2020? Why were you able to see such strength in the second half? And as we look back on 2020, are there any sort of headwinds that you saw in the first half that could potentially turn into tailwinds, both shorter term and also longer term?

Okay. Well, the reason we did well in the second half of the year is we were proving our value in a difficult circumstance. And the reason that we had some headwinds at the beginning is because it's difficult to move your business model to a virtual situation when it hasn't been virtual before. We do services, we do sales, we do things that are frequently done in person. And so we had to improvise to overcome all that. And at the same time, our customers were understandably focused on survival and didn't yet understand that we could be their means to survive. As the year on and we proved ourselves, we had 1,000 companies interested in our initial free COVID safety application that we published before any other company published a thing like that. We got a certain level of profile, we proved our value proposition and businesses came to understand that low-code, and particularly Appian, could be a way that they could meet these challenges and stay ahead of change. And so I believe that, that had a lot to do with our success later in the year.

And one of the surprising things for me last year was the acceleration in net new customer adds. If you look at some of your software peers, this was a year to like focus on your existing customer base. And you guys did that as well. But accelerating net new customer adds in 2020 was surprising. Could you sort of dive into the factors of how that flywheel of new -- net new customer adds improved in 2020 over 2019? What were sort of the key factors there? Was that something you guys were specifically focused on going into the pandemic or is getting -- is acquiring new customers getting easier for Appian going forward?

All right. I think they were 2 main reasons why that happened. One is that -- as I said in our previously segment that we proved our value and so we were appealing to new customers because they were looking for an answer to the problems that they were facing. We also got a lot of that through partners. And I believe that the increase in new customers is a demonstration of the maturation of our alliance model, which continues to mature. We've invested a lot in that over the years, we mean to work closely with a major partner, we want to leverage their connections, their expertise, their subject matter knowledge and meet a customer together.

Let's talk about partners a little bit because it's been a part of the Appian story that's been evolving as the years go by. I think you sort of noted in your last earnings call about 70% of the new logos per year were sourced by partners. With respect to your big partners, whether it's KPMG, Accenture, Deloitte, can you give us a sense of where each is in terms of their Appian practices? How much trade capacity is coming online or came online in 2020 versus prior years?

Yes. I'd say that our largest partners are all getting larger with regards to Appian practices. They're committing many more resources. They're training a lot more people. And in some cases -- in many cases, they're even developing their own applications on our platform. And then using that application in the sales process to demonstrate what's possible with Appian to reduce the perception of risk and that's a great partnered way to approach a customer. Shortened sales cycles, it gives us a jump on any competition, it tends to eliminate competition actually. And so it's just what we'd like out of our partnerships, and that's the direction that it's going. The partners do a lot of focusing on major technologies. They believe in spotting upcoming technologies and so they've focused on Appian lately. We're getting featured at their technology shows. We're being a primary focus of their interest. This is such good progress for us. It's been many years building our way to that kind of a relationship and now particularly with our top partners, that's what we are beginning to achieve.

And to follow-up on that point, can you give us a sense of the types of sales mostly that the partners are making? I started my career at Accenture. And Accenture was all about delivering an asset for customers, not just doing a PowerPoint presentation, but giving them something that can hopefully improve their operational performance. So in terms of the types of projects that they're looking for, what projects are -- is Appian being included in as part of their sort of asset building exercise for their clients?

You're right. They're delivering a product. And sometimes, that product could really just be about what they built on Appian. So for example, one of our major partners has created a product for taking in vast amounts of paper-based data, essentially forms, insurance forms, registration forms and that works through an Appian process. It starts with RPA and RPA clears out about 95% of the forms. And then the ones that RPA can't figure out are moved to AI, and AI tries to understand the handwriting. And then what few things the AI can't understand either come to people. And the efficiency of that is terrific. It's a multi-technology solution, only really a major partner could do it, but a partner could do it repeatedly and so when they approach a customer that says, look, we've done this 5 times, we know how these technologies work together, it would be a risk if you did it, we've already done it, the risk is 0, we'll just give you this application. It's a very compelling proposition. And increasingly, propositions like that are based on Appian.

If you look at where we stand today in terms of the type of stuff that gets built on Appian versus 2 years ago, 3 years ago, 5 years ago, how has that changed?

All right. The stuff, so to speak, that's built on Appian has always been the mission-critical core application, right? We've always worked with top organizations who entrust us with their most important applications. One rumor that's bouncing around lately about low-code is that it's for citizen developers. And whenever somebody says that, I have to say, no, no, it's not. We've been here in this market, we've been inventing this market from the beginning and let me tell you, we're not focused on citizen developers. Citizen developers can benefit, sure, but IT developers need the 10x efficiency boost of low-code as much as anybody because they're building the most important applications, central, mission-critical applications. And in fact, if you look back at 2020 and you say, well, that's the year that low-code took off, well, which applications did low-code get used for in 2020. It wasn't citizen developer applications, it was the core mission-critical ones that a company absolutely needed to pivot in order to keep up with disruption. So in so far as low-code is a thing right now, it's a thing in mission-critical applications. And that's what we do, and it's what we've done actually for years. That hasn't changed very much. Appian is a platform for important applications done in the low-code style. If anything has changed, it would be the fact that Appian is increasingly used for broader automation than it used to be. Automation is evolving. Right now, we call ourselves low-code automation because we think that's such a critical part of our identity. Automation basically means using a workflow to unite the resources of an enterprise. And that could be RPA bots and AI and humans, and different data, all that, the breadth of what you can bring together is automation and we've made strides, both by being very open to all leaders in RPA and AI, but also now as of 2020, bunding our own native RPA and AI to give customers also that option. So automation has changed a lot. Low-code has stayed much the same. And our focus on important applications has also stayed the same.

Can I ask a follow up in terms of -- let's go into the RPA, like, you acquired an RPA company, I think, over a year ago now. Maybe just sort of what the progress has been in terms of Appian's own RPA story? That's question number one. And then the follow-up to that is RPA and low-code, sort of twinned engines for automation. It's all about the complementary today, but as we move forward 3 years, 5 years from now, does one sort of subsume the other. If you look at some of the RPA vendors, they talk about doing much more automation without any code. Just what's your views on that debate?

Right. Okay. Let me start with our experience with RPA. You're right. More than a year ago, we acquired our own RPA vendor and that acquisition has gone great. Let me first say that we set it up to go great because we bought the company that had the world's highest Gartner Peer Insights rating, and we believe strongly in providing a great product. Appian, by the way, also ranks at the top of the Gartner Peer Insights survey that just came out last month. So we found superlative technology, we found a good team, and we brought them on in a very harmonious way. The technology has been well accepted. Our customers are running it. We're giving it -- we're merging it with the Appian interface. I really couldn't be more pleased with the way the RPA acquisition has gone. It was our first acquisition of note and we've done really well with it. So that's been terrific. Your next question is, what's the future for RPA and automation and low-code? And the future is convergence, of course, right? These are supportive of each other, these concepts. And so automation is naturally inclusive of RPA, and not just RPA, but also AI and other technologies perhaps to come in the future. RPA is like an orchestra and when you want every instrument you can possibly get in the orchestra automation is. So what does this mean for RPA vendors and low-code vendors? Well, maybe it means a period of kind of coaptation, maybe it means we that -- we have to work together to support the customer. I don't know what it means, actually for other vendors. I'll tell you what it means for Appian though. We do whatever would be best for the customer, right? Rather than saying, it's our way or their way and you got to pick one. Appian is open. We don't put up walls. And we'll say to the customer, look, if you chose an RPA vendor in the past, that's great. We're going to work with it as if it were our own technology. We're going to be so compatible, so open, so amenable to that technology that you won't regret it. We're respecting the decisions you've already made. Appian's commitment here is to do what's best for the customer and not to try to box out potential arrivals. So we are proceeding in a vision of cooperation, but I believe that there could be some tensions between vendors, particularly those who don't see it our way.

That's right. And Matt, I wanted to pick up on your point around citizen developer, which I totally agree with sort of missing the sizzle for the stake. But what are the concepts around low-code, at least in the markets -- at least in terms of the marketing, the industry is about converting -- helping companies convert some of their talent into developer talent, right? And to what extent is that true or not true in the market? Is this really about professional developers getting better at what they already do? Or is there an opportunity to convert -- not everyone can find software developers, software driven -- there's a surge going on in the market and is expected to be so for many years to come. So where does that sort of fit into the equation in terms of customer value?

All right. Appian technology is mostly about making existing developers more powerful. It's not about making nondevelopers into developers. Now in some ways, we do facilitate that and low-code being as intuitive as it is, it does tempt nondevelopers to do development, which is great. We'd love to see it. But for the most part, what we're doing is putting more power in the hands of existing developers, skilled developers.

Understood. Let's talk a little bit about pricing. I know, like, you and I over the years, I think pricing is one -- kind of one of your favorite topics in terms of the opportunities there. But broadly, I think back around the IPO, you were sort of -- in the sort of per-user construct. I think over time you guys have gone to a per-app pricing model. So if you could just give us an update on sort of the mix that you're seeing between the per-user pricing versus the per-app pricing? What's been sort of the impact in terms of your ability to expand customers with these different focus to pricing?

Yes. Well, we like pioneering new pricing models. I'm always looking for a better way to price as a proxy for value delivered and both app and user pricing models have some flaws. And so we continue to look for other ways. And so we've got a new concept that we're launching right now, called an unlimited license that essentially says it's like an app license, except you get a time period and all the apps you built within that time period now count under the fixed license costs that we agreed at the beginning. So if you get a year or a 3-month or whatever unlimited license, you can build as many apps as you want, roll it out to as many users as you want. You just have to finish writing it within the time period allotted. Now that I like because it aligns the interest of the customer with the interest of Appian, which is that they would make maximum and ideal use of our product. Appian is a product meant to go fast. And if you use it correctly, you're moving quickly. So we give them this financial incentive essentially to move quickly. And also to use good experts, to rely on a top partner maybe or an adviser from Appian as well in order to make correct and accelerated use of the product. So there's some exciting new frontiers in pricing. As you -- with regards to your question about app prices versus the user prices, that's been about a static equilibrium over time. But I hope it will move toward unlimited in the near future. We do like thinking about pricing. I do continue to feel that pricing in our industry is both confusing and inefficient and so improvements on pricing models are possible.

Maybe to just dovetail on that point because pricing, maximizing pricing, ultimately it's about encouraging use of the software, expanding customers. Maybe that's a good launching pad to bring market to the conversation. The net expansion in the cloud business, Mark, that improved this year also in the middle of the pandemic, 119% from 115%. If you could sort of break out the components as to why you saw that with the pricing part of the equation? Was it just bigger -- your large customers expanding more? Just -- if you could just help contextualize the increase in expansion rate going forward?

Well, it wasn't pricing. We didn't change the prices on the customers that bought more. So the fact that we have a 100% -- 119% cloud net revenue retention has to do with customer satisfaction, which is very important to us, has to do with the fact that 99% of our customers stayed our customers, which is extraordinary in a pandemic year with all this chaos. I'm really proud, I think we all are that 99% gross revenue retention. So I think it comes down to customer satisfaction. It wasn't a price change. It was just customers appreciating what we could do for them and buying more.

Yes. Like Matt mentioned earlier, but Gartner came out about a week ago. And basically, we're the customer's choice for enterprise low-code application platforms. And if you drill into that, we're actually the only vendor to get this distinction in 3 areas. One is the global enterprises $10 billion or more, large enterprises of North America and the finance industry vertical, literally the only vendor in all 3 of those quadrants. So that tells a lot about what our customers think about the platform.

And then internally, Matt or Mark, it's a jump ball. But in terms of how you measure the efficiency of your customer acquisition. How do you guys evaluate? Because you guys are on record that you guys want to grow. The goal is to grow subscription revenue or software revenue, 30% each and every year. How have those customer acquisitions -- the efficiency of customer acquisitions been trending? What are sort of the metrics that you guys look to, to evaluate that?

So we look at a couple of ways. One is what we called out in the last call that our sales cycles, it would be compressed by about 30%, which is great. Our sales cycles historically are very long. So we're starting to see efficiencies. Part of that is probably partner-driven. Partners bring -- the sales cycles that the partners bring us into are much shorter. So we're seeing efficiencies there. We can definitely improve and our new CRO that we hired in March is focused on that. And that's good. The other thing we talk about is our LTV to CAC has been in excess of 7 over the past 3 years, on average. So we're actually over the 5 year -- past 5 years, it has been in excess of 7%. And a big piece of that is actually that gross renewal rate that Matt talked about, the 99%. It's almost like you're an infinite denominator, right? So the lifetime value of all of our customers is very significant.

You mentioned an interesting point, Mark, on shortening sales cycles. Could you just -- could you -- is there any way to sort of quantify that? Like what was it in 2019 or 2018? And how has that been trending as we went through 2020? Where do you stand today?

We're still not best-in-class, I think, for enterprise vendors like us is 3 to 6 months. So we're still not there, but we're a lot better than we've been historically. So we see a lot of opportunities, a lot of efficiencies coming to fruition, but we still have a ways to go to get it best in class.

What point that we haven't talked about yet, specifically just around the competitive environment? So there's a number of players that are taking up the banner of low-code, OutSystems, Mendix, Salesforce, Pega, Power Apps, ServiceNow, AWS has come out with their own. How do you compete against? One, who do you sort of focus on in terms of the competitive environment? And what sort of -- from a customer's point of view, how do they decide what gets built on Appian versus what gets built on Microsoft versus what gets built on ServiceNow and Salesforce? What sort of -- what's their framework for thinking about this?

Yes. Well, first, let me say that amongst all of those competitors, Appian is the top of the pyramid. That's our place in this market. We've got the most powerful and most proven low-code technology, and we've been at it for the longest, first IPO in low-code, right, et cetera, et cetera. So our traditional long-term competitors, Pegasystems, we've been competing with them for more than a decade. And so we still see them more frequently than any of the other companies that you mentioned in our competitions. However, there have been new groupings that come up recently, right? And so we see Mendix, Outsystems and Microsoft as one grouping and ServiceNow and Salesforce is another grouping. And each one of these has something to offer, for sure. And we find ourselves in competition with them based on certain types of customers, generally, customers who are a little bit less feature-sensitive, right, who don't demand quite as much in terms of security or scalability or power. Many of these products are really stuck at the low end, however, of the market and unable to move up. So some of them, for example, don't have testing or can't connect to external databases, or that sort of thing. They're more of a developer tool really than a low-code product. Others claim to be low-code, but they're really pretty code-intensive. They're forcing you to do a lot of JavaScript development or APEX development or something like that. So there isn't a good straight ahead rival for what we offer today in this market, lot of big names, lot of great marketing, and a lot of popularization going on of low-code, which we appreciate very much, but we don't have a direct rival who shares our virtues.

Got it. That's very fair. Our last question because we're -- we've got just under 2 minutes left. Let's talk about the opportunity within the vertical. It's another 2 parter, Matt. And if I look at government, financial services, healthcare, it's kind of been core to Appian. If you can describe how much opportunity you think is left in the core? And then to what extent have you been successful in sort of expanding or taking Appian beyond these core verticals into areas like manufacturing or retail and sort of expansion into other verticals and the progress there?

All right. Well, there's just so much potential here. We've hardly started to convert the world's development over to low-code. Prominent analysts have predicted that soon most developing organizations in the world are going to be developing in low-code. Before the decade started, I said most applications written in the 2020s are going to be written in low-code, I stand by that. There's an enormous amount of potential because we have just begun to spread this technology out. And so there's so much more to be done. Really every organization that writes its own applications, of which there are tens of thousands in the world, could benefit from using Appian. And we've created a unique product that is very intuitive, very fast, very reliable, scalable, et cetera. So I think we have terrific potential. Now you mentioned about which industries, you're right. We focused more on finance, government, pharmaceutical than we have on other industries. But we've still got world-leading organizations in the industries we didn't focus on and just haven't yet properly pursued those verticals. We chose the verticals we did because there was immediate value to be had. These are verticals in which doing something correctly is often a matter of law. And if it's not a matter of law, it's a matter of a great deal of money. So complex procedures that must rigorously be followed, that's a terrific place to start doing low-code. Also, if the game changes periodically and they have to make adjustments, whether for strategy or for regulations, that's also ideal because low-code allows you to pivot and change your application very quickly. So that's been a great opportunity, but we see great opportunities in so many industries that we have not yet put a focus on.

Well, with that, Matt and Mark, thank you again for joining us at the Morgan Stanley Conference. Always great to have you. And thank you to the audience for joining us. And let's get prepared for a full day of our presentation. Thank you very much.

Thanks, Sanjit.