Appian Corporation (APPN) Earnings Call Transcript & Summary

Okay. Great. I think we're back online. Everyone, sorry for the technical difficulties.

So let's just pick up where we left off. I think what we really wanted to talk about just really from a high level, can we talk about what Appian does, what are the traditional markets and verticals you focus on? And how has that changed over time? And can you also talk about what use cases do you really help customers to solve?

Appian has been one of the leaders, if not the leader [indiscernible] fundamentally in organizations such as Appian to build applications and to build applications at a rate of speed that they've never been able to do before. I think one of the other defining characteristics of what we're able to do is that organizations can use Appian to build applications without what I like to call a complexity seal. So it allows us to go into a financial institution, for example, and help manage perhaps all their commercial or retail onboarding, which can be an extraordinarily sophisticated application when you speak about the rules and the various workflow components that make this up. Appian has and continues to grow the breadth and depth of our application in areas that we've historically focused on like workflow and BPM. But over the last couple of years, we've been able to expand that into areas like AI and machine learning and into robotic process automation, and most recently into process mining. And we really view this as a way to have a comprehensive approach to automation that definitely distinguishes us from the rest of the market that's out there. From a market-focused area, without question, our largest industry vertical has historically been in financial services and insurance. We have a significant percentage of the world's largest banks, a significant percentage of the largest insurance companies. A lot of those use cases have certainly lend themselves quite well to what Appian can do both in terms of the complexity of case management, the complexity of whether it's onboarding activities or GRC-type applications, but as well the breadth of applications that take things on. We work with financial institutions where digital transformation efforts have resulted in them leveraging Appian in hundreds of applications with a global footprint. So FSI has certainly been our largest industry. That's followed with large customer bases that we've seen in public sector, dominated primarily by U.S. federal government, but increasingly, we're seeing growth in global government, public sector work as well as at the state and local level in the United States. Beyond that, health care and life sciences has been a major industry, and we've seen growth in many other industries whereby no means limited to just a few. In fact, [Audio Gap] listing applications or investments that they've made in their data strategies, our ability to point to data wherever it lies and leverage it has really allowed our applications to grow much faster. Our customers be much happier because they're not waiting on dependencies or have dependencies on large data initiatives to conclude before they truly can move forward. We allow them to move forward even as that so-called plane is being -- be it being landed. So it's allowed us to be at a quicker pace.

Okay. Great. Now that's helpful. And can you just remind us do you target the citizen developer who has really no coding experience? Or do you need some level of expertise to work with the platform?

So of course, this is one of those religious discussions that goes on in the low-code space. As low code has become a topic du jour, as I like to say, everybody comes out of the woodwork and says, "Oh, we do low code, we do low code." There's an argument to be made, but the original low-code platform is e-mail. So our perspective on citizen development is as follows: we believe everyone has a role in the creation and the updating of applications. And certainly, our software has been very approachable by those who do not have a coding background. We, a non-coder, a citizen developer, if you will, can understand what our process design environment looks like or what our rules design environment looks like. Now that gives them some capabilities in creating applications. And myself, I was never a coder. I can build Appian applications today. But we have not focused on that aspect of the market as our core area of market. It's an effect that we have, but the core targets of what we go after or the updating of mission-critical applications for organizations. And when you're talking about upgrading a major bank's customer onboarding system or asset management system, that's not something that you're going to put in the hands of an international relations major from that's never taken a coding class. I may have contributions to that application. I may be able to build the application that allows them to send tasks to my team. But there are lines and there are ways in which we want to be more thoroughly integrated with those that do know the coding elements or know the technical infrastructure environment. Sometimes that's because we want to make sure that data elements and services are best taken advantage of inside the applications that we discussed. So there is a dividing line between sort of low complexity, low-code application platforms that are targeted at the system developers. And while we certainly can fulfill some of those functions, the main thrust of what we're going after is to help organizations with their digital transformation initiatives to take on hundreds of applications that span the complexity spectrum that organizations face today.

No, that's great. And it really seems like you're building a differentiated solution here. And I think recently, you're differentiating a little bit more through pricing as well. You introduced an unlimited pricing model. Can you talk about how that model is different than maybe what some of your competitors offer? I think it's related to the time it takes to really build an application and also kind of give us an example how does this kind of remove pain points in the brand process make it easier for the customer?

I got it, Marc.

No, please, please.

Historically, we've licensed on a per-user basis. So I'd say from the time we were -- we basically trans -- went from a perpetual to a subscription-based licensing model in 2014, 2015, we license on a per-user basis. And the unique part of that was not only did we license the developers and people are building the applications in Appian, but we also license the ultimate users of that application that was built. So the beauty of that model is the fact that, in theory, you could ultimately have every single individual within the enterprise become a licensed Appian user. We've migrated over from that about 3 years ago to app-specific licensing. So depending on the complexity of the application, it could be -- we price it on kind of like a t-shirt size basis, small, medium, large, extra large, based on the number users, based on the ROI -- perceived ROI, et cetera. And really, the reason why we did that is we wanted to reduce the friction in the initial sale because the procurement person is basically going to try to get that per-user based pricing as low as possible and it just took a long time. And so instead, we had the flexibility of pricing on the app specific. And it gave us the flexibility to say, okay, this is the initial land. This application could probably be $200,000. We'll do it for $150,000, and you're not stuck with that pricing going forward, right? The next application you want to build, you can price it accordingly. We're trying out this unlimited use license. We've licensed a couple of these. I don't think this will become the prevalent licensing model at all within Appian. I think it will still be user-based or app-specific. But it's -- for those companies that are all in, like what Marc was talking about, someone -- like a company who wants to build hundreds of applications or dozens of applications, they know the platform is what they want to use. And they said, okay, I've got a team of people that are trained in Appian and I'm going to build as many applications as I can over the next year, right? And so if you license that, let's say that the licensing for that is $200,000 to build as many applications as they can within the year. And then it's $200,000 after that to the extent that they want to keep whatever -- let's say, at the end of that year, they built out 12 applications. And then if they want to use those applications and keep them live for perpetuity, they have to license the $200,000 each year afterwards. But most companies will want to build more apps. So if they want to build more apps, they get another unlimited application license on top of that. And so let's say they want to do another $200,000 license for the following year, they would have the $200,000 license for those 12 apps that they built plus however many apps build in the next year. That's the model. We think that for -- like I said, customers that already bought into Appian and wanted to just go crazy and build as many as applications as they can, this is a very unique licensing model that I don't think -- I don't know of any other companies are deploying it. And we're going to see how it works out. As you guys know, you guys have been on us for over 5 years as public company. We like to try things. Like, for example, we come up with the Appian Guarantee like 3 years ago. And it was basically guaranteeing that you could build an application in the cloud in 8 weeks for $150,000. And so no other company really did that. And that was widely successful. So we're trying out this licensing model, see what happens with it. But like I said before, I still believe that the preponderance of the licenses will be either app-specific or user base.

Okay. So not really something that this isn't really going to drive new logo growth, but rather something that could drive expansion on the platform?

Yes. I think it's a unique licensing model. And if you're coming in as a new logo, you've never heard of this licensing model, so you have to figure it out. And then you really don't know the virtues of Appian because you're new to it, right? And so I think this is better for -- and I can be wrong, right? I've been wrong in the past. But my sense is that this will be better suited for existing customers that really want to go crazy and build as many apps as they can.

Okay. And then maybe on the other end of the spectrum, I want to discuss a little bit more into your go-to-market approach. It's becoming more partner-driven over time. You talked about that, I think, a year ago, you said 70% of your net new deals were coming through the partner ecosystem. Can you about some of the key initiatives you're working on right now? And actually, last week, I had the chance to visit your booth at re:Invent. Can you talk a little bit more about what you're going to be doing with AWS?

Sure, sure. So I took over the partner organization prior to us going public and really focusing on making it a core strategic part of what we do. I think one of the sort of driving force behind that, the emphasis in the partner world, I think the way I would describe it is that it significantly expands the number of people and organizations who are capable of having a conversation with their prospective customer about what Appian is capable of doing. And our capabilities are so broad and our use cases are so wide that those conversations become necessary because we are not selling a commodity. We are selling something that has an intricate story behind it. So being able to apply the technology to the need or the technology to the story, screams for that sort of partner level involvement and particularly when they have a long-tenured relationship with a target customer that's out there. So I would segment our partner strategy into a couple of different flavors. We -- I think our success, particularly over the last several years, has been a substantial and significant growth of our strategic partner alliances, particularly at the global level and as well, I would say, at the federal level, too. These are -- tend to be large organizations that have made significant bets on app. They have substantially increased their practice sizes globally. We've had to, as a result, mature our training and education abilities to meet them where they need. And they've all seen substantial increases not only in the size of their practices, but the revenue that they've seen associated with it. And we've been satisfied with it and you see that the percentages that we're mentioning to you that we mentioned to The Street about the impact of the partner organization that our parties have had on our business. I think the best way of describing sort of our strategy with strategic partners is as follows: we look first to see if we can develop go-to-market solutions, go-to-market initiatives. Sometimes these are fully baked out, almost packaged pieces of software. And sometimes there are a few degrees further than a demonstration, but they tap into the particular expertise that a partner might have, and they allow us sometimes to work in conjunction with them, sometimes done themselves to take their intellectual property or their thoughts about a problem that's rampant in the industry in that particular time and construct rather quickly a solution that provides a clear way to solve that problem. To our partners, sometimes they sell that IP in addition to the Appian licenses. And sometimes that's just merely a way to get a conversation started, so that might ultimately result in a sale. And that's been successful. And we've seen a lot of maturity in that world. And we have dozens and dozens and dozens of partner solutions that are out there in a wide range of industries. The second thing that we do with our strategic partners is an industry focus. So we get with their financial services group or their retail group or their manufacturing group and educate that group about the use cases and capabilities in that region. Typically, around a successful use case that we've already had with that partner in that industry, and that's allowed us to get deeper into those areas. And then there, of course, is sort of the standard old way of doing it, where it's, quite frankly, target account mapping. A particular partner has a substantial role at a customer. We're either there or would like to get deeper at that customer, and we collaborate and work with it. I think one of the things that we've seen, particularly over the last 12 to 24 months has been that our starting points at key customers have allowed us to -- our partners have helped us to expand rapidly from those starting points because we've engaged with them in a much more strategic fashion. They've seen their practices and their ability to leverage to the next app, to the next app, to the next app and that's allowed our expansion to move at a much faster rate. So that's what we're doing with our global strategic partners. We're looking at some more initiatives that we put into developing our channel and our channel resellers to allow us to go after sort of mid-market attempts in some places as well as the expansion -- leading the expansion that we've seen in other markets that we're just getting started in. So for example, we opened up our office in Tokyo earlier this year, and our efforts in Japan have largely been partner-driven similarly in terms of how we're getting started within Latin America. Now Appian historically has obviously been a company that has focused on fewer customers with a large revenue number per customer. So the mathematical approach obviously as well if we can continue to increase customers and the partner channel can help us, and we can maintain or keep as close as we can to maintaining a high revenue per customer, then that's an easy path to growth for all of us.

That makes sense. And can you talk a little bit more about what you're going to be doing with AWS, too?

Yes, sorry. So I myself was out at re:Invent last week. We've been particularly proud of what we've been able to accomplish with AWS over really the last 15 years. We were the first business process management company to be in the cloud. We launched our cloud service, and I believe it was 2007. And from the very beginning, we've been engaged and involved with AWS. Today, a substantial percentage of the majority of our customers are running Appian in the cloud and almost all of them are doing that with AWS today or we're running that on top of AWS. So the sophistication of Appian and our understanding of how AWS works or the services that AWS provides, really puts us in rarefied air when it comes to AWS. All that being said, one of the things that we really had never done before is leverage that expertise, leverage that type collaboration from a technical side into a truly effective sales and marketing kind of partnership as well. And we're looking to change that. And Appian has been making some investments to grow our AWS relationship. We and AWS has been excited about that. And our presence at AWS last week is in line with what we see as some potential future growth for both of us in that area. Again, we -- the work that we've done with AWS has been substantial over the last 15 years. It just hasn't been part of any strategy. It's just been the technical side of what's happened, and we're looking to do more there.

Okay. So really from a go-to-market perspective now, there's a little bit more opportunity to do something with maybe co-sell, work a little bit closer?

Yes. I mean, their strategy is they want to get bigger and broader. It'd be more ubiquitous with them with the cloud and their services in exactly the client base that obviously we're in as well as a client base that we're not in yet. So it stands to reason that there's some opportunities there.

Okay. Great. And then I just want to talk a little bit more about how you're focusing on new logo growth, too, like you had mentioned. Are you starting to look beyond the G2K now? I think you had mentioned this at your last Analyst Day. And is this where you think the partner channel or your indirect channel can play a bigger role?

It's absolutely where our indirect channel can play a bigger role. The focus of our direct sales force, our account executives continues to be with the Global 2000. But we've been able to see and demonstrate to ourselves that the channel can provide -- sales acumen can provide and it's in new logos and new ACV in other markets, whether they are international markets that we don't have a direct presence in or parts of markets where we do have a lot of presence, but we're not focusing our direct account executive attention on those places. So we're interested in that. And we certainly -- again, there's plenty of customers we've had that have come from that area. But we're looking to see what more we can get out of that. But certainly, the direct sales approach is still heavily the Global 2000.

Okay. Great. And then just staying on the topic of really starting to expand your reach on driving new logo growth. You've recently announced Appian Community Edition, that could really be a way for you to drive some bottoms-up motion over time. But what have you learned so far since its launch?

I think the primary things that we've learned is that there's interest out there. We've had a lot of uptick on that. I think the idea that we can put a powerful platform like Appian that doesn't have that complexity ceiling that most other developer or I say local tools do in the hands of folks that want to prove that they can build more complex applications that they can do things at an even faster rate than they thought of before, has proven to be successful. And we've seen success out of that. Again, a lot of this is about reducing the friction between people who are interested in our software and people being able to get their hands on our software to prove out what they can do. A lot of what we do is bet on ourselves, and we've always done that. Mark was making reference to the Appian unlimited model from a licensing perspective. Just like the Appian Guarantee and Appian Community Edition is the same thing. We are betting on ourselves, and we've always won that bet. So we think Appian Community Edition is certainly part of that continued trend.

No, that's great. And it seems like both of those areas are where you can kind of differentiate from the competition. And I want to touch on that now, too. Can you talk about maybe where you run into some of the larger vendors, what type of use cases and then also where do you run into Pega? And how is the competitive environment kind of evolve from 5 years to where it is today?

The -- I'll say it's been remarkably similar to what -- in the past 5 years. It's building yourself, that's the biggest competitive. I want to build it myself. I had the resources to work with all day at the time or do I want to use something else. And if it's something else, it's generally us versus Pega 2x. We see Pega twice as often as any other vendor. Because if we -- our focus is mission-critical complex applications, and the only other vendor that can really do that is Pega. But Pega can't do it quickly, right? So when you're in Pega, building things is -- it's a much more complex environment. It's older. It's not -- they say it's cloud, but it's not really cloud. So we love competing against Pega because we basically lean on speed, the ability to deploy this in a modern environment very quickly. We do see from time to time the sales force's world with Force.com or ServiceNow, Microsoft to a lesser degree. And then there's a lot of niche vendors out there that are talking. There's dozens, if not hundreds of people talking about low-code or no-code. And we kind of laugh at no-code because once you -- if you want to build something very simple in that way, you can do it in no-code. But would you want to tie into data or do something a little bit more complex, you're going to be coding something. So I think we don't really think there's no-code platform out there, they can do what we do. So [indiscernible] -- okay, Marc?

I would say, to be clear, 99% of what one does in Appian is "no-code." it's not like our no-code capabilities, if you want to call it that, are better than any of those proverbial no-code vendors that are out there. It's a marketing gimmick like -- I agree with Mark, we sort of snicker at it. You're going to reach a point in time with a system of some level of complexity where the company will want something that is unique, a unique integration, a unique way to do something. And when we differentiate between low-code and no-code, all we're really differentiating about is the capability to say, yes, you can when that question gets asked by the customer. Not that it's a necessary component for the delivery of a particular application.

Got it. Got it. And I just want to move on and talk a little bit more about your business model now. You transitioned to a SaaS and term license model. You're seeing strong growth from the cloud aspect, especially, I think, over 35% for the last 5 quarters. But I just wanted to touch on, SaaS as a percent of revenues kind of stayed between 70%, 80% over time. Is this kind of where we should expect it to remain going forward? Or does your partner-centric strategy caused that to change a little bit over time?

I think the -- we aggressively went out to our customer base that were on-prem. And basically, anybody that was going to go to cloud are on cloud now. So there is no -- I think that transitions behind us. We would much prefer to have every single one of our customers be in the cloud, but we also look at it as a competitive differentiator, allowing them to toggle between cloud and on-prem. Do they -- depending on what the application is or the data or whatever, there is in -- for the past 6 or 7 quarters, 80% of our software bookings have been cloud and 20% have been on-prem. I think that's going to be pretty consistent going forward. That's how we model it internally. We just think some customers will be on on-prem, but most will be on cloud. And from our perspective, we used to and set the sales force to sell cloud. But it's -- I think more and more customers are comfortable going to cloud. So there's no real need to incent them additionally to go to cloud. Our preference is to be that every customer is on a cloud because it's a more modern experience. It's easier to basically manage, et cetera. But like I said, there's -- especially with, for example, capital on the bridge, about 1.5 years ago, is there some hesitancy from some customers to have certain deployments in the cloud.

Got it. And I guess in terms of incentivizing the sales force, cloud versus not cloud, I guess there are other ways to do that as well. I mean, are the platforms at feature parity? And are there -- can you talk a little bit more about the value proposition of the cloud versus not cloud when you're signing a deal?

Yes, I mean it's basically -- go ahead, Marc.

I was going to say, we certainly talk about that from a speed perspective. I mean, everybody knows that if they're going to have to set up their own infrastructure, they're going to have to learn how to administer things on their own. Your -- every time you add a bullet point to that list, you're probably adding a week, certainly a day. Whereas the Appian cloud environment, I can spin up an Appian cloud instance from my cellphone and get started 2 minutes later. The speed with which it's there, the confidence that organizations can have that we can get going fast. And then, of course, updates and monitoring are important. And we remain a company that is upgrading or releasing new versions of our software with new feature sets at least once a quarter, and consequently handling the upgrades for our cloud customers every quarter. And where lots to see customers fall behind and if they have responsibility to run the infrastructure themselves, it stands to reason that a certain percentage of them are going to be behind because they don't have the time to get to it or they're concerned about it, they want to run something else, whereas we have control and responsibility for doing that one as ourselves. So these are all points we make with the cloud. But sometimes organizations where whether it's security reasons or other reasons, want to do things themselves. I think one of the other interesting components about this that does -- that is worth mentioning is that we do see a number of customers who may not look at Appian's cloud service as the option because perhaps they're investing in their own cloud infrastructure, and they want to run Appian in their cloud, which we don't treat as cloud, we treat as an on-premise because it's not a service that we're providing. So I think in general, we're seeing more and more organizations go to the cloud, the differentiation is sometimes it's their own. It's not for their own private cloud or managed cloud as opposed to our service.

Got it. [indiscernible]

We license those the exact same. It's a subscription license, annual, try to do upfront. The only difference is 606 obviously requires you to recognize it upfront if it's on-prem versus the cloud. And then I think the important -- another important differentiation or point is the fact that the cloud -- the code base for both the cloud deployment and the on-prem is identical. So there isn't like an additional work to kind of handle a different type of code base that's on-prem versus cloud, they're identical. So from a maintenance perspective, it's only if they get past certain versions, it gets a little bit more tricky.

Okay. Great. And you just actually answered part of my next question. But given that, what's the right metric to evaluate Appian? Do you want to look at revenue growth, RPO, net expansion, ARR?

I'd say cloud subscription revenue growth is the best metric for us. It's the cleanest metric. The on-prem gets -- is lumpy and it's seasonal. On an annual basis, you can look at the total subscriptions revenues kind of getting a sense of the size of the business itself. But I think from a growth perspective, I look at cloud subscription growth.

Got it. And I think we're starting to run short of time, so I'll ask one more question here. On the last earnings call, you talked about some of the higher investments in Q4 and going forward. Can you talk about some of the areas you're targeting with these incremental investments? How should we think about ROI? And then also what are the implications on margins both short term and long term?

Yes. So we're kind of -- when we look at the market, we see the TAM, we look at our LTV-to-CAC. It's greater than 7 over the past 4 years and growing. And then it's investment. So we're fairly pragmatic as a release investment. We've decided to invest a little bit heavier than what we have in the past going into 2022, and we kind of signaled that in the earnings call. And I would look at -- kind of look at our guidance that we gave from an adjusted EBITDA perspective for Q4 and extrapolate that for 2022. I think that's the best way to do it. And really focusing on sales reps, obviously, the go-to-market, Marc's area partners is incredibly important. From my perspective, it's probably strategically the most important area to invest in. We have a new CMO, a relatively new CMO. We're giving her additional money because she's showing that she's building out the funnel really nicely, and we want to basically invest there as well. And as you know, right now, it's like -- it's a war for talent out there. And there's wage inflation, software engineers are getting post left and right. We're doing our fair share of poaching. But there is definitely an increase in costs. Plus there is that we're kind of hopefully, knock on wood, out of the pandemic finally, you're going to have -- you're going to go back to normal T&E expenditures and all that stuff. So that's going to -- all those types of things are going to weigh in on the bottom line for us next year. But we're actually very, very excited about making these investments because of the opportunity in front of us.

Okay. Great. That's helpful. And I think we're out of time right now, but I just want to thank both of you for joining us today, and sorry again for the technical difficulties. And thanks again.

Great. Thanks.