Appian Corporation (APPN) Earnings Call Transcript & Summary

Hi. Welcome, everyone. Welcome to the 26th Credit Suisse conference. My name is Tim Jausovec. I cover small and mid-cap software for Credit Suisse. And with me, we're fortunate enough to have Mark Matheos join us, CFO of Appian. Mark, welcome.

Thank you very much. Thanks, Tim. Hi, everybody.

So maybe to kick it off, for those investors that are new to the story, could you tell them a little bit about the company and, in particular, what the evolution of Appian's products has been over time?

Yes. Sure. Absolutely. So Appian is a software company based out of the D.C. area in Northern Virginia. We've -- we're a founder-led company that's been in business for a little over 20 years. Our roots were kind of providing BPM solutions and software to the federal government. We've kind of evolved and gotten to the cloud fairly quickly. One of our first cloud offerings was to the U.S. Army of all places. But in the past several years, we've kind of evolved into this enterprise low-code platform and mostly cloud-based. But we also have an on-premise offering. And we help big enterprises, just generally large companies in the financial services space or insurance, pharma, health care as well as the federal government, build applications in low-code. So they do it so quickly, much quicker than high code, much quicker than Java but also in a really powerful fashion so that the applications that are built are mission-critical, powerful apps. So the company recently acquired, in the past couple of years, 2 technical assets around RPA and process mining. So at this point, we've got this unified platform, which really is a fulsome solution for companies that are looking to automate and build and create efficiencies.

How do you monetize the value that you bring to customers? What's the pricing model today? And how do you see that evolving?

Yes. Sure. So initially, we sold the software, and we still do it today, kind of on a per-user model, and we just tell how many users use Appian. And it's not just the people that build applications, but the actual users. So let's say we built an app for a bank, and it's for all the bank tellers to do some sort of -- to automate some sort of manual tasks, let's say, it's -- so many of their time sheets across the entire country. All the bank tellers would be users, right? And so that's one way. We still do it that way. But over time, we found it kind of a little bit more attractive for both us and the customer to sell application-specific licenses. So basically, it doesn't necessarily count how many users, but we look at the use case and we quote the customer on the price for that application. And what we found is that nearly all of our customers expand their use of Appian, right? We typically have customers build out many apps, in some cases, dozens of applications. And so each one of those subsequent sales is an expansion opportunity for which we charge more, obviously, more annual subscription fees for it.

Relative to a lot of other companies that we cover, on your last earnings call, you noted that you see light evidence of macro impacting your business. Maybe help us understand or give us the view on the macroeconomic conditions as you see them and why you might be more isolated relative to the rest of software?

Yes. Great question. I mean, we've been getting a lot of macro questions. And of course, it's a hot topic. But you're right. We haven't seen a lot of direct impact on our business. I think a couple of reasons stand out. One, the nature of the product, this platform is to help companies become more efficient, right? We have an ROI play that's not an afterthought. It's not a secondary thing. It's front and center. It's why companies build mission-critical applications. It's to save time and money. And so in a booming economy, you still need to automate. And of course, you want to be front footed with whatever applications you want to build for competitive reasons. But in a cycle where there's uncertainty, you certainly want to save costs and create efficiencies. And we like to participate in a CIO road map that may be out there that says, here's what we need to do to save money, cut down manual labor costs, cut down time spent on activities. And I think that's a reason why we might be a little bit more resilient and not seeing those kind of macro headwinds as directly. On top of that, where we operate is in industries that are largely still kind of doing well, financial services, insurance, health care, pharma. Those are -- and the government, which government always does well. Those are our core verticals. So that's helpful as well.

Could you quantify how big those verticals are? Are there very large verticals for you?

Yes. I mean, the government is about 20%. Federal is a little bit -- I'm sorry, financial services is a little bit higher than that. That's our biggest vertical. If you take all of our key verticals, it's about half of our business and -- with financial services and government being the top 2. But we have broad markets as well. Some of our largest customers are outside of those verticals. Like we have Dallas/Fort Worth Airport. They built 40 applications on Appian. They built 40 applications in 18 months, which is obviously really fast. So it's an airport the size of the city, and they're using us for like runway maintenance and parking garage management, and TSA agents use us. Opening up a restaurant there, can you imagine how many restaurants are at Dallas/Fort Worth? But the process to open up a restaurant and get all the permits required, that's all running on Appian. So anyway, that's -- it's definitely a broad appeal platform, but we certainly have strengths that resonate with some of those key verticals.

And you mentioned ROI and having a high ROI. What is the payback period for Appian?

Yes. I mean, it's dependent on the use case. And I think we found that some of our use cases have a really quick immediate turnaround in ROI, and the apps pay for themselves within like the first year. So it's because of the nature of our platform. And the difference is it's so custom, right, you have to kind of look at the specific use case. But we're happy to show -- it's interesting. Our process mining acquisition, and now that we've embedded that in our platform, allows us to show in real time what savings you have with an Appian workflow. So the process is mapped pre-Appian and then post-Appian, and you can see -- you can measure dollars or time or whatever units you want. And it will show you a real-time view of the ROI.

What percent of your customer base is starting using that type of visibility? Is it...

Well, it's still new. So we haven't yet -- I mean, we've just launched this within the past few months. So it's a small percentage.

It seems like many software firms have clearly shifted their focus from growth at all costs to cut at all costs. Where does Appian fall between those 2 camps, especially as you're thinking about growth versus profitability in '22, '23, '24?

Yes. So I think it's interesting. We don't ascribe to the growth-at-all-costs mentality, and we never have. We -- prior to the IPO, we only took out $10 million of equity -- of funding. We've been managing our losses, I think, with some prudence since then. We haven't been one of these companies that says, let's see how fast we can grow the top line, forget about the rest of the P&L. But at the same time, certainly have had some losses as we invest in our business model, which when you take a look at our customer unit economics, specifically our renewal rates, our gross renewal rate's at 99%. Our NRRR is at 116%. It's compelling to say, hey, we're in growth mode, let's see how many customers we can get, these are all durable ARR streams. And I think what we're doing now is looking at just as a general hygiene moment but also in light of the economic environment, we're making sure we're scrutinizing expenses. We're looking at investments that we've made to make sure they're paying off, and we're trimming back in areas where maybe we're not getting the payoff we want, and we're not just spending kind of good money after bad, so to speak. So we're cost keeping. And I think at the same time, growth is the name of the game. We certainly did a lot of hiring, especially this most recent quarter as we saw similar top talent arrive at the market, in the job market. But I think now we're going to have to start moderating our spending in that growth and pay more attention to that kind of profitability mix over time. And I think that's one of the reasons why we've kind of pointed to an improvement in our EBITDA losses next year.

That was a meaningful shift last quarter relative to the historical cadence of hiring 65-ish people a quarter to over 200. And so maybe just help us understand, given what maybe other companies and then what the overall macro feels like, what gave you the confidence to execute that type of kind of hiring pull forward?

Yes. I mean, we still believe the -- I was going to say long term, but really the medium and short term look great, too, in terms of the demand for the product. And it's not to say that we're not going to have a bumpy road with macro if it gets worse. And so it's not -- I don't want to sound like we're overly optimistic. We're very aware that it might get a little choppy. But over time, we think we'll continue to grow at a very respectable rate. And we hired the people we need. We hired salespeople and engineers, and these are folks that have recently, in the past couple of quarters, come on the market because of softness in tech or whatever else. And so when we've had a really robust recruiting engine that was faced with a tight labor market, we didn't lower our standards. We didn't say, well, it's -- we still need people, let's get them in no matter who they are. And so we hired where we could. But with the loosening up of that labor market, that's how we got 200-plus people. They're all top-notch, and they're all kind of in these strategic investment areas that I think will provide dividends for us in the future.

You've also brought in a new CRO about 6 months ago. What are his top priorities? And what does Chris bring to the table?

Yes. Chris Jones is great. He's really meshed well with the team. He's provided leadership. His initial kind of action plan is around, number one, making sure the sales team has a proper leadership and vision and discipline. I think he's investing in sales enablement, training, getting sales folks to have all the tools they need to succeed and then focusing on partners. He's a very big proponent of the partner ecosystem. I think that's a huge strategy for us in how we get more leverage out of our model, more efficiencies out of our sales and marketing spend. And how we really grow beyond, obviously, the footprint that our direct sales team can provide, we're going to have to use partners. And he comes with a lot of experience in that space.

How does the economics vary between selling through the partner channel versus selling direct?

Yes. Good question. So as you know, we have kind of the software subscription, and then we have the services piece, right? And so we sell a subscription, and that gets renewed in perpetuity as long as you need to use the software, which, in our case, the beauty is the customers use it generally, hopefully, forever, for a long time, let's just say. They keep paying us, right? But to build the app, you need services. And so we engage with our partners so that they actually get all the services revenue. They bring us the partner -- I'm sorry, they bring us a customer. We sell them, the customer, a license directly to our software. And then we let the partner kind of have that services revenue, not just for that application, but for what inevitably will become a road map of multiple applications. So they'll -- if a company is saying, I want to choose Appian to digitally transform my entire back office, and I'm a global bank, and I want to do that, it's very -- it's a good carrot for our partner to say, okay, I'll help you do that, buy Appian, and we'll start transforming your whole business.

And so on the sales productivity side, you've hired a lot of new salespeople. You've brought in a new CRO. How should we be thinking about sales rep productivity today? And how should that evolve over time over the next 12 months, call it?

Yes. I mean, it's a central focus of ours, and it's been that way. The partner ecosystem helps, first of all. I just want to make sure people understand that when a partner brings us a customer, we're already kind of halfway through the sales process, right? They know us. They've been introduced. They haven't -- they're not getting a cold call from us. They're kind of already interested, right? But separate from that whole partner ecosystem, I think, focusing on our value selling methodology, which we've rolled out to our sales team and an intensive training regimen that they go through, and then just providing manager training throughout and then investing in kind of solutions, which is -- we haven't talked about that yet, but we think of Appian as a platform where you can build applications. So we have a piece of our company that's headed up by an executive who reports to our CEO. That's called Appian solutions, and what we're doing there is building out kind of more out-of-the-box-looking applications. So most of the development work is already done. So if you look at our financial services industry, our bread-and-butter application that we've turned into a solution is this know your customer application institutional onboarding, kind of the suite of customer life cycle-type stuff that banks have to go through. We've become -- we're so good at making those for banks that we just made it a solution. And that will speed up the sales cycle, right? And so the other really good one that we've had a lot of success in recently is the government acquisitions management suite, which is a solution in the government space that we've had a lot of traction in around how does the government acquire goods or services. And when you're talking about building -- let's just talk about the military industrial complex, if there's somebody building something, it involves 1,000 different vendors and literally contracts that you have a hard time managing and the different parties that have to weigh in and approve and redline and just disparate systems everywhere, right? So Appian is a great solution for that because we built this suite that kind of gives all the participants one place to look that can track the progress of the procurement effort. And everybody is kind of on the same page and it's not a mess. So that's got applicability in the federal space where we've sold it already, but state and local as well. And each of these layers, federal, state and local, are massive, right? So arming the sales team with this solution kind of puts them in a position to sell quicker, that they're not having to join a conversation and start from scratch. They've already got kind of the product there. And when the customer buys a solution, they see the power of the platform. It's time to talk about what else they can do with Appian, right? And it's a great way to still expand after that.

What percent of the business is solutions today? And where do you think it can go over time?

I think it will be -- we're intending on it being a very important growth driver. And we've -- it's only been a couple of years that we've made this a focus, and we have had significant sales. We don't disclose the percentage, but it's a growing percentage. And it's something that's becoming meaningfully quickly.

How does the competitive landscape differ in a solution sale versus more custom low-code, no-code platform sale?

I think it's similar. We -- our competitive landscape has been fairly steady. And I don't know if you want talk about the landscape itself, but...

Yes.

Yes. We still see a customer initially deciding whether they could build it themselves. A lot of -- nearly all of our customers have internal development teams, and they still use Appian because it's a more efficient way to build certain things, right? So if they don't want to build it, they say, let's see if we can -- sorry, if they don't -- if they want to build it themselves, they say, let's see what else we can do. And they look at us. Of course, they look at Pegasystems. That's a competitor we've seen in the past and probably a predominant, most frequently seen competitor. We also see ServiceNow and to some extent, some others like Salesforce and Microsoft. But generally, those are few and are far between.

Yes. I wanted to follow up on that. So one of the things a lot of our investors do is pull up the Gartner Magic Quadrant and see a lot of mega vendors in there. And you're a challenger. And so maybe help us understand kind of, are there different pieces in the market that maybe Microsoft might play in? And even within the context of Microsoft recently said, they have a $2 billion business, growing 70% year-on-year, so maybe just help us better understand why you are not seeing Microsoft in deals as much? And on a go-forward basis, how that landscape might evolve?

Sure. Yes. So Microsoft is a great, obviously, a fantastic company, but they're not playing in the same space as us with respect to these applications. They're all kind of much lighter weight applications that's centered around kind of add-ons or extensions or plug-ins, ways to make existing, call it, Microsoft Office ecosystems more efficient. And you can build -- certainly build applications, but you can't build applications that are as robust and mission-critical as ours you can't go to a massive bank or an insurance company and completely overhaul a critical process from soup to nuts. And so we don't necessarily see them as often because of that. Our use cases are more kind of impactful, mission-critical applications that we built from soup to nuts and not as lightweight as those. They're more of a commoditized version of application and low-code stuff.

And then as we think through how this competitive landscape might evolve over the next 3 to 5 years, what's the moat around your business? What protects you being able to build those complex applications that's unique to Appian?

Right. Well, so we've been -- thankfully, we have -- our Founder and CEO is a visionary in this space. And I think he's got the right kind of recipe, and it's been there for us to kind of see, which is to say that having a company that has all the assets necessary to provide to a customer so that the customer doesn't have to go hunting around for different vendors to do different things is part of the value proposition. So we are the only ones that have a unified platform where you can identify, through process mining, what your application needs are, go right to building with our workflow engine. That's our bread-and-butter application building in low-code. And with the acquisition and development of AI and RPA, you can automate and save money by just taking out all sorts of intensive -- labor-intensive work. And so everywhere else you go, if you go to ServiceNow, they can do some workflow. They need to go -- you need to go somewhere else to get process mining, and you need to go somewhere else to get bots, right? And I think that's a temporary phenomenon in this evolution. It's not the way things will be in the long term. I think it makes more sense for companies to have an automation vendor who can help with all the needs.

So we've seen process mining, RPA becoming part of your platform. As you think about other adjacent markets that the platform could expand into, are there others? Or do you now have a platform that has a lot of still greenfield opportunity that your customers will expand into or maybe a mix of both?

Yes. It's a balance. I know that there's -- we've got -- our CTO is very involved in making sure Appian is at the cutting edge, getting the best technology. But part of the argument is to say we've already got a huge market opportunity with what we have, and we are ahead of the game from a tech perspective, a product perspective. Let's go -- even we can kill. And there's another argument that says we -- as soon as you lay low on technology, someone's going to beat you. So we definitely need to balance those 2 things. I think right now, having come off of these 2 acquisitions in the past couple of years, we'll be acquisitive. But the bar is going to be pretty high on what else we acquire.

You've recently opened R&D center in Chennai?

That's right.

How does that change kind of your R&D structure from either a kind of cost efficiency perspective or from a product development speed perspective?

Yes. Chennai is going to be a strategically critical piece. We're trying to -- it's one way we can get our objectives around technology and developing the product further but also extract operating leverage from our model and make sure we get ROI on all the dollars we spend. The fact is that there's really, really good engineering talent, and it's at a price that is compelling, right? And so we still want to grow engineering. We still need to do that. We still are a technology company at heart and in every way, really. So we are investing in a data -- I'm sorry, in a development center there. And it doesn't mean we're not going to also grow engineering in the U.S., but this is a lever we are happy to have at our disposal to be able to kind of increase our firepower at a cost that's reasonable.

We'll take a couple of questions from the floor in just a minute. Before that, another question from my end. As we think about the macro environment, as we -- and the investors kind of look at different end markets, you've talked a little bit about your vertical exposure. But as we think about what your bookings might be most correlated to from an end market perspective, what are the KPIs that you look at that might be leading indicators to your business?

So are you talking about from a macro perspective or...

Yes.

Yes. I mean, we're looking at our conversion rates, our ability to get new pipeline, and we're looking at our new versus existing expansion. We have -- about 2/3 of our revenue comes from -- 2/3 of our revenue growth comes from existing customers because our customers are constantly expanding. And of course, it's easier to sell to a customer that knows us and wants more, right? But we are absolutely out there hunting for new customers. And to the degree there is a softening there, we'll be on it. We're watching that very carefully. So that split is important. But so far, so good.

Any questions from the floor? I guess not. It's late in the afternoon.

I think we answered all the questions.

So our customary closing question.

Sure.

As you look over the next 3 to 5 years, what is a technology or a trend that you think will get adopted faster than most people expect?

Yes. So I think, in general, the automation market will accelerate way faster than people will anticipate today. Gartner is on record saying we have to build 500 million applications in the next 2 or 3 years. At the same time, we have a dearth of developers. That's a fact. There is a drop-off in what -- developers that are available. So there's got to be a forcing mechanism where companies have to use other options. And a proven local platform like Appian's is going to be at the center of that from a beneficiary perspective.

Mark, thank you very much for your time.

Thank you. Thanks, Tim.