Appian Corporation (APPN) Earnings Call Transcript & Summary

Well, welcome to the afternoon session of day 3 at the Morgan Stanley TMT Conference. I am Sanjit Singh, I'm the infrastructure software analyst on the Morgan Stanley software team. I am super excited to have the Appian management team. CEO Matt Calkins, CFO Mark Lynch of the Appian team. I think you joined us every single Morgan Stanley TMT Conference since you have been public. And so we're super excited to have you once again.

To kick off the conversation, Matt, if we do a sort of review, if you like, if we look at 2021, you look -- and maybe even let's go back to like the worst part of the pandemic starting maybe the summer of 2020, what do you think the company has done well from an execution standpoint? And where do you think there's more room to improve?

All right. I'll start with the good news, if you don't mind. All right. The thing that we did the best because we did very well over the past couple of years is we saw the pandemic for what it was. But pandemic was a moment in which the economy realized the importance of change. Prior to the pandemic, we talked a lot about it. You have talked about digital transformation. We talked about how important it was to get out ahead of customers, but there wasn't a whole lot of action behind it. The pandemic made it mandatory. The pandemic sorted the companies that could change from the companies that could not. Everything was changing. Customers have different buying patterns, the employees have different working patterns, the regulations are different. You've got to change. And we saw that. And we figured we will be the platform for change. We will be the vehicle, the engine for change, and we will assemble a platform that allows the company to change from end to end. Everywhere from discovery to design to automation, you will be able to make your new change on our platform. As you know, of course, change is a function of software. When companies want to change, they have to do it through an application or through a process. So going from detecting what that process is, to designing the process to automating and running it all on the same platform, that would be a suitable response for the world's emergent mandate for change. We felt that the world needed agility. We stepped up and provided it during the course of the pandemic, we have gone from being a product to being a suite. We went from just being low code, which basically means workflow if you're not familiar with the term. We added RPA, we added automation, some we bought, some we designed. We added all sorts of automation and we added process met mining. And the result is you can now discover your new processes and then design them and automate them altogether end-to-end closed-loop ROI improvement, close cycle, we've become the platform, the engine for change. And I think that was our strength. We've met. That was great. Now for the things that we could do better. I'd start with solutions, Appian is a platform. And our market, for that matter, is a platform market today. We're creating suites. What we are not yet doing, we or our competitors, for the most part, is creating applications that are based on those suites. Our efficiency is tremendous. Now we need to capitalize on that efficiency and create prebuilt applications. Appian has begun this process. We have a few applications and some of our solutions are beginning to be a hit. However, there's lots more potential there. The other thing I'd say that is an untapped potential for us is reaching out to partners. We are -- we're a midsized software firm. We're not the biggest. We need partners in order to do our implementations in order to carry our name to places in the world where we don't represent ourselves, we need that relationship. We've come a long way. We've got a huge partner momentum there, the product. They've been a source of most of our logos. They are a lot of 8-figure partner practices, some 9-figure plans. We have serious partner relationships, but we could do more. There's a lot more we can achieve out of the symbiosis with partners, so we're going to be working on that this year.

Makes total sense. And so as you sort of alluded to the platform for change, the product categories that underpin that platform for change, nothing to be converging, right? I mean you mentioned workflow, process mining, RPA, which are capabilities that you guys have brought together in the platform. I think if you take a step back, what are the forces driving this convergence? And is it customers who are looking for the suite for the platform role? Or is it something that the vendor community is driving?

Customers... Customers need agility, just like I was saying, that was the realization from the pandemic is that the world needs to change, they need to be agile. And we're going to give them a platform that allows them to realize the agility they need. So this is absolutely coming from the customer. And the pieces that together comprise our suite, our low-code suite are customer mandate. One of the greatest things that's happened ever to our industry is happening right now in the convergence of the conception about what our industry should include. If you're a buyer, what are you buying, if you're a vendor, what are you selling, we're all starting to agree. We and our competitors and our buyers are all starting to agree on what is this category. And that's great because a long time -- for a long time, Appian has been a company without a category, a long walk, an innovator just hunting for value adds, and it's a hard sale. It's a long, difficult sale. When you can't first say, you want an X, we're an X. Now let's talk, right? It's just so much easier.

Great. In a career as a software analyst have seen different silo product markets come together. And it's actually -- it's a pretty interesting case study on when they do sort of converge and when they don't. I mean going forward, when you think about the component pieces of the platform, right, because of capabilities, are they still going to have to be best-of-breed capabilities? Or does the platform become more important to the buying decision versus the individual capabilities?

Got it. I believe that markets converge when they establish value. I think companies grow because they're good at one thing, and they're hoping that the one thing they do is going to be a valuable thing. Like we did workflow for a long time. And we go to every customer and say, we got workflow. Do you want them. And now that when our industry is coming into a broader picture when the individual providers are kind of converging on a larger vision of what our market can be, it's because that larger vision matches what the customer wanted. We wanted to provide workflows. The customer wants to change. Great. So we need to go from whatever we had to the totality of a suite to provide what the customer actually wanted. That moment of transformation is always, almost always customer driven, and it represents a success. It represents a maturation of an industry to the point where it's making a difference for the customers. Now the second part of your question was -- what about the -- it's like best-of-breed, Will there be best-of-breed components or will people make a decision on the suite to that, I wanted to say, I think people are going to decide on a best-of-breed suite. I think the market is now the suite. The identity is now the suite, and there's a place for it to be the best suite and there's a place to be a generic suite. And so you can no longer show up in a market like the low-code suite market today and say something like we have the best RPA. I don't believe that's going to work anymore. But you can show up and say, we're the best suite. You can say, we'll take you from discovery to automation to execution, the fastest. And that's you're touting the virtue of the suite, and that's where we're going to be. I think it's important in any market, especially one with great competitors, top companies to know where you stand, where you belong in that market. And we belong at the top end of it. That's where our flag is planted. We are the high-end vendor in the loco space. we are the scalable, secure, mission-critical, sophisticated application, ease of use, customer experience vendor in this space. And as such, it is our job to be the best. We can't be the biggest. We have to be the best. That is the only lane that's available to a company like ours. Now fortunately, I think we have a legacy here. We're the first company to go public as a low-code firm. We've been doing this for 15 years. Our customers are the happiest year after year in the Gartner survey. We've got 98% gross customer retention. We have top ratings in other surveys as well. We're positioning ourselves firmly as the high-end vendor in the space, possibly with the competition of Pegasystems. But we're at the top of the space. And that's the safest, most lucrative place to be in this market right now. And so we want to firmly establish ourselves there. Yes, there is a place for investor it's going to be us to use the best-of-breed suite.

If I could just follow up on like the competitive landscape element. If you sort of -- there's a number of high-profile names with big brands, Microsoft, ServiceNow, you mentioned Pega, Salesforce, UiPath, Obviously, you guys as a host of kind of point solution low-code no-code providers. What's the sort of organizing framework? I think you provided us one, right? Like high end. But in terms of your ability to like compete with other companies that also sort of play at the high end, let's say, the ServiceNows and the Pega, what's going to be the sort of first thing clinches going to funnel that demand to Appian over time versus some of these other platforms.

We've got a couple of key advantages right now. I feel like we're a little bit ahead of the market, and we want to play those advantages as firmly as possible. Everywhere I go, including here, I carry a little illustration, I will show you, right? This is our market, right? It's a product diagram. You've seen this a lot of times, right? The 3-part diagrams, get process mining or workflow and automation. We discover the process, we design it and we automate it. This is -- we reach this which is totally live, it's totally integrated. It's a single look and feel. It's a single SKU. We've achieved this, and I think that we're a little bit ahead relative to others in achieving this. But the magic isn't in that we have 3 components. It's the synergy between them. And nobody else right now is matching the synergy, right? The conversions from one to the other, take process mining, for example, process mining is by itself an interesting product, but it poses a question that it cannot answer. What you do when you discovered what's inefficient in your organization by integrating it deeply into workflow and then into automation, we can answer the question it poses. I believe that synergy is really important. And whereas our competitors have taken a kind of pick your list Chinese menu approach to these components, we've offered it as a single product on a single SKU with a single upgrade a single interface. I believe we will have a substantial and lasting advantage there, particularly because our suite is centered on workflow. And workflow, we're kind of the workflow champion. And the UiPath is the RPA champion and Celonis is the process mining champion. I'd rather be the workflow champion, all things considered because workflow is a natural coordinative layer. And so it makes sense to grow a suite around the workflow more than it does to try to grow a suite around RPA, which is really not a coordinative connecting technology.

That's an interesting point. And I just have to note that the design aesthetic of the diagram that Matt just showed us is very similar to the design aesthetics of their offices. This is a very simple, very elegant layout if you've been to the Appian headquarters. Let's go back to process mining because I think I get asked this question a lot. I don't think process mining was in the Lexicon 2, 3 years ago. And certainly, investors might ask -- so I get the question like what is pricing. What is process mining's role in the enterprise automation stack, if you will. What does it do? And then how is it going to be a sort of feedback loop into workflow and potential RPA?

Okay. Let me begin by saying what it is and then how it's beneficial as part of our suite and then maybe even how we're going to monetize it. Maybe I can cover all the -- glad you brought up the topic of process mining -- it is likely my favorite topic because we just announced the totality of the suite, process mining was the last puzzle piece and it's live as of a few weeks ago. So this is a great thing. I'm glad you brought up. Process mining is an industry, the purpose of which is to tell you whether you are running efficiently inside your own organization. Some people compare it to an x-ray. It's a diagnostic tool. It looks into your usage logs of a lot of popular application. It compares the time stamp. It finds out the sequences and the patterns of the activities that you are doing in your organization. And then it can tell you whether you are doing it inefficiently. Are you spending too much money per process? Are you spending too much time for process? Are you wasting the customers' time? You can find out this from the process mining output, which looks very much like a flow chart. It just shows you what's happening and how long it's taking, right? That's what it does. It existed as a stand-alone industry. And when it does exist as a stand-alone industry, it poses a question that is not good at answering. It's a diagnostic tool. It's not a prescription, it's not a fix. And the most important thing we've done to process mining is attached to workflow allow you to go from the process mining map, which is basically a workflow into an actionable workflow that you may then edit, right, so that you can fix all of those problems you just found so that you can reroute the work, so it's less expensive or faster or reprioritize or whatever you need to do to solve all those problems you just discovered. I think that by combining process mining with workflow, we have increased the value of that market substantially. So that's the first thing, and the thing that's the -- I'm very excited just about that. But it also allows us to differentiate against competitors because we're centered on workflow. I mentioned that. We're really the workflow champion in this convergence, right? And so since that's the play off, the bracket that we came out of, right? We want the workflow bracket, where we look at everything through a workflow lens. And fortunately, process mining looks great through a workflow lens. It's absolutely translatable into a workflow language because it already speaks that language. So I love the synergy, especially from a workflow-centric point of view. Now we're going to monetize it in a few ways. It's great for discovering new opportunities. Now I'd love for all of our existing customers to use process mining to find out where they should use our product next. It just poses questions. It gives you -- it tells you where to go. But for those customers that aren't excited about doing that, for whatever reason, maybe they don't want to spend more money on a new process right now. It's also great as an ROI tool. It's a powerful diagnostic that we can run on our own workflows in order to see how much they have improved the situation since before we started running the process in an Appian workflow. It gives you the after picture to compare to the customer's own before picture and justify the investment that's been made in our platform. So that's also great. And then there's going to be a price attached to it, and I can explain that in more detail if you're...

Yes, I was going to go right there because this is an academic size, ultimately, you want to solve customers' problems and ultimately, you guys want to sustain some really attractive rates of growth. So on the first component piece of that, as you bring these 3 pieces together, along with others, can you talk about why you've chosen the pricing construct the way you have. So it doesn't seem like you're individually monetizing process mining or individually monetizing or paying of itself there to drive more usage of the platform. Why is that the right approach? I think it's different from some of the other players.

You're referring to the perception that we're offering process mining for free and RPA for free. Let me speak first to that perception because it's not entirely correct. We want to present to the market a unified product, right? When I show this diagram, I want to say, you're not looking at 3 products, you're looking at one, and you should buy these together, single SKU, you should install them together, you should upgrade them together, you should consume them together with a single product. I want people to think about it that way. And one way to make them think about that way is to have a single price, the 3 of them. And so because it's a single price, you can get the impression and we haven't dissuaded people from concluding this that it's free, the process mining. But in fact, when we bundled in, we raised the prices. Yes. And then secondly, that's only the current buyers who are getting that as part of their SKU. And we're going back to all the old buyers and charging them to be able to use it at all. In fact, the list price is pretty high to our old buyers. And then also for the new buyers who buy it as part of the SKU, if they use it a little bit, it's free, but if they use it a lot, there's another charge. So we've got lots of gateways here to make money off of process mining, and that's all in addition to the fact that we're differentiating gaining leverage on pricing and inspiring new demand by detecting inefficiency. So I think we've got a lot of pathways to make money on this, including just charging for it and generating new business from it.

Is there an element of time to since the integrated platform has just come out. And so in terms of pushing on the single price and like the uplift that you might expect, maybe that's less sort of this early phase and then as customers sort of build that flywheel -- is pricing a potential opportunity down the road?

Yes... We have a high list price on process mining, and we will bring it to bear down the road. It's actually a great way to recollect some of the consumer surplus we've created with higher usage, right? That customer is getting a great deal with Appian. And next time we go back, we can say, look, everybody is using process mining, it's becoming standard. You don't even have the option not to buy it anymore, I need another $0.25 million a year, right? And we can just upsell them like that very systematically. So that's our future plan. But right now, we have lots of ways, even right now. By the way, our priority is not -- it's uptake right now. I would... I would sell someone process mining, don't tell them... Don't tell anybody for $1 today... If they were serious about using it and they would give us a reference that sell to for a dollar because we need the testimonials. We need the demonstration that our unified suite is productive, and it's a good thing that it's unified. I need people, customers who will talk about that. And once we have established that, then is the time to make money on it. Right now is the time to make value.

Matt and I on Morgan Stanley team will take price as money for $1 to [indiscernible] and publish our model. Let's talk about like the equation for growth. And the number that comes to mind since you're out of IPO is 30%, right? That's the mission statement each and every year. Now we think about how to think about that balance, right, if you think of the equation for growth, you've got customer expansion, you have got customer base growth. And in some time, you have average pricing per customer, which let's just assume it's sort of neutral for now. After growing the customer base 30% in 2020 in the middle of the pandemic, the customer base grew 18% in 2021. What are the factors driving that slowdown? And how do we think about customer base growth as part of that overall 30% growth equation in 2022 and beyond?

Yes, let me differentiate between customers of large and small scale. You mentioned the total customer count. And that's a bit of a skewed comparison because in 2020, we launched a low-priced product to help customers to handle COVID, we called it Workforce Safety, and that brought in some customers that were low value. And we didn't do that again in 2021. That was almost more of a marketing exercise actually than a revenue collection exercise. However, the customers that count, the big customers, we grew very quickly last year. We set records in terms of the number of large customers that we added the most customers ever more than $250,000 per year. The most customers ever by far more than $1 million per year. We added 20 of those last year. So those factors are growing and accelerating, but the small deals were declining. And I think a lot of that had to do with the fact that workforce safety would come out the prior year.

Got it. And then on the existing customer side, I think your cloud net expansion rates have been quite good and that I think the range is 110% to 120%. It's been at the higher end of that. How confident do you feel in your ability to sustain those types of net expansion rates that you've seen in recent years?

I feel really good. I feel really confident about it. In fact, process mining is another way to do the expansion, right? So you're going in there. Historically, we would land solve a problem and we would talk to other departments who would kind of like walk around the hallway to sort of find other opportunities for Appian. With process mining, you can actually take it, turn it on to these file logs et cetera, and immediately discover other processes that need to be automated and we go to the customer and say, "Hey, buy some licenses of Appian, we can automate these processes. So I think it's going to help that expansion.

Makes total sense. I want to go back to product. I think moving on to equation for growth, but you did make a brand-new sort of recent announcement around portals and some platform updates. Tell us why these updates are advancing the product story forward.

Yes. Portals is our very latest thing. We're just coming out with it now. Historically, Appian has been an inward-facing application. We've handled problems within an organization. And now portal allows us to handle application that faces outward. We created a technology that allows for Kubernetes usage, scalability up and down anonymous log-ons. And this is the #1 feature we've ever released in terms of market anticipation. We've got a long list of customers who've been waiting for this, who want to build on it. It is coming out literally now. And I'm just really excited about it. We've taken a long time to do it to get it right. And if it marks the change in the business, we're no longer just internal facing with our applications.

And so what are customers excited about like what use cases does this enable them they didn't have access to before?

It's actually remarkable when you think about how many applications actually have an external component, right? If you have any customers that are participating any partners, any citizens, any constituents, any bidders, all of those communities, if they're part of an application, make it an external-facing application. And so it's -- immediately, you can realize it's actually a lot of applications. And the [indiscernible] totally external to have to need these features. It has to be just partially external to need them. So for example, we've got a lot of applications that are largely internal but begin with an external stimulus, like, for example, a contracting application that begins with an application or a bid or a solicitation or communication or something like that from an external party, and then you do a lot of work behind the scenes on that. Well, that's effectively an external application. We need portals to run it.

Right. Let's talk about partners and [ it's been ], every year since you've been public, about the progress of your key partners, whether it's KPMGs, the Accentures of the world. And let's sort of marry that with the integrated suite. What's been the feedback from partners? And where do those partners sort of stand today in terms of their capacity to break Appian into more of their end customers?

Yes. Partners love what we're doing. In fact, we're not -- we didn't do it specifically for them. But if we had just talked to our partners and said, "What suite would you ideally like us to build, we might have built what we built. Partners love the fact that it's unified and they have to deal with one vendor. They love that we're committed to making the partnership work. We're not like Microsoft, where we could take or leave them and we're going to compete with them in some ways. We are symbiotic with partners totally committed to working together with them. We need them for reach, we need them for deployment for visibility. There's that. And then it's a very solid technology. Appian has survived and thrived in this market because we have a better mousetrap, not because we market louder or spend more money, but because our product is better and partners who are evaluated based on the success of their projects care about that. So we have a lot of enthusiasm. We have partners who are building big practices, our major partners have made huge investments -- they've trained hundreds of people. They're making tons, soon hundreds of millions of dollars on their Appian practices, and they're making big new commitments. In some cases, they're also writing solutions.

Makes a lot of sense. One of the developments in terms of the business model, and Mike, maybe you can speak to this because I remember around the time of the IPO, which was I think back in 2017, the mix between software and services was 50-50. I would talk to investors like, Sanjit, this is really a software company. It seems like part consulting, part software company. That makes us come down rather dramatically down to 29% professional services as a percentage of revenue. How do we expect that service and mix to trend? What's been driving that mix downward pretty consistently over the last several years and pretty materially this past year?

Yes. At the time of the IPO, we said that we were going to -- you're going to see the revenue mix shift go to software versus services. And that was predominantly because software was growing faster than services was growing, right? But what's happened is the partner ecosystem is growing to the point where if you look at the past 3 years, professional services is pretty much flatlined because the vast majority of the services is being performed by the partners. And so I'd say prospectively, we would expect that the percentage of revenue will continue to -- the services as a percent of revenue will continue to decrease over time. How fast it is? Who knows. But -- and the gross margins obviously will improve because you've got 90% gross margins for software and you've got 25% to 30% gross margins for services. So -- and you can see what the gross margins went from 65% to 75%.

Any sort of guardrails on the range of where that sort of settles out steady state?

I think we talked about -- we had updated our long-term model at the Investor Day, and we said we went from 75% to 78% gross margins, and we basically updated saying it realistically could go 80%, 85%.

Okay. And within that, just the professional services mix that's sort of just under 30%, where do you think that sort of settles out longer term? As a percentage of revenue services...

I don't know. I mean I... I think it's going to go to 0, right? So I think there's a lot of value there. There's a lot of things besides just the fact that you have pretty good decent profitable margins coming in. So we're not sure yet. But if you run the math on that construct, you can figure out.

The next question I had is sort of around kind of the world that we're living in, like pretty, pretty uncertain times. We have higher interest rates, we have uncertainty on the geopolitical side of the spectrum. I guess 2 questions. In terms of your exposure to Russia, maybe the Eastern block, any sort of comments there on what your revenue exposure is there? And then as sort of the democracies of the world, maybe the situation where they have to invest more in defense, federal government is a big customer, is that a potential opportunity for Appian?

Yes. Let me take each and one of those 3 components of the question. First of all, our exposure to Russia. Appian has been in the business for 20 years. We've never done a single deal in Putin's Russia, and that's because some of our founders are geopolitical nuts and tagged Putin as a bad guy from the beginning and just refused to work with the circle. We've actually frozen Russian IP addresses. You can't even log in to Appian software from Russia and never have been. So we've taken a hard line on that, just trying to make the world a better place. we obviously stand to benefit of this more military spending because we have a long history of successful military work. We're the standard for procurement in the Air Force. We built the Army Knowledge Online, which is one of the most successful applications in the history of the military, not just ours, with anybody's. So we're -- we stand to benefit if there's more spending there. I also was interested in the part of your question about the changing world. There's inflation. There's a great resignation. We're in a moment of change, and that affects our business as well. Inflation and the instability of labor has led some organizations to prioritize automation because automation is reliable because it's cheaper perhaps, at least it's efficient. And so there's some impetus to move toward automation. Our business has never been replacing people. It's more about empowering people, but we stand to benefit from a move toward automation. I believe that, that will be wind in our sales. And also the way people are working these days, very dispersed. -- companies have great dispersion of assets, their data, their customers, their employees are all more further apart than they've ever been, and we coordinate dispersed assets as a workflow vendor primarily before we got to loco and before we got suite, right, we have a long history in coordinating dispersed assets. And so the problems of the day match our capabilities pretty well.

I think that's a perfect place to end the conversation. Thank you so much, Matt and Mark, for joining us at the conference once again this year. Thank you for the conversation.

Always a pleasure.

Thank you.

Thanks, Sanjit.