Appian Corporation (APPN) Earnings Call Transcript & Summary

All right. Good morning, everyone. Welcome to the second day of the Barclays TMT conference. I'm really happy to have Appian here with us, Myles Weber, the CIO; and Sri Anantha, the Senior Director of IR. So thanks for being here.

Thank you.

So look, I want to just kick it off by talking about just Appian's transformation and product vision a couple of years ago or several years ago actually, at IPO time versus where you are today. Can you just talk about how your vision and focus has kind of changed over time and how you kind of evolve the platform over time?

Sure. Low code is a way that -- for building applications quickly, Appian IPO-ed under low-code banner. But our history has historically been in tide of business process management, workflow, process automation, case management, all these different ways that businesses build applications to get work done. We found low code as a way of quickly building those applications and communicating that to the market. But our core from private IPOs through ad IPO and today it's in the process automation market, and you can see that through a lot of the enhancements and capabilities that we brought to the platform over the recent years.

Got it. And when you say low code is replacing some of what you used to do? Or is it more of a complement?

Low code is in everything that we do. It's how we build our features. It's an expression of simplicity, quickness, power that we bring to it. So it's part of our methodology, part of our DNA as far as the way at which our customers interact with our platform as it being something that doesn't always require somebody would like a computer science background, but that it brought in lands who could build on our platform.

Okay, and that's helpful. And then as you've added process mining, you've added RPA to the platform, can you kind of talk about how Appian is now more of an end-to-end platform? What kind of the low code [indiscernible] in your roots, in your DNA?

Sure. Yes, Matt Calkins just wanted our platform to be a very well-integrated platform when we acquire a company, and I ran the acquisition of the RPA company that we brought in to it as well, so I have a lot of background in that. When we acquire a company, we want the tech to be a really good match for our platform and for it to be extremely well integrated. We don't keep the company separate or anything like that. We really want that tech and that culture of that company to match up well with us as a company, and so we're focusing on markets that are very related to that core that we had there, and so RPA is a great one of them. We always view RPA as a feature rather than a stand-alone market, and I think that -- I think recent history has proved us to be correct in that. The process mining capability as well, we view that also as a feature of a process automation platform, now in a stand-alone market as well. So we've been incorporating that technology directly into our platform because we feel that customers want a well-integrated approach rather than a partnership-based approach or a disjointed where they have to go do their own integration between products and things like that. So we've been tightly integrating those capabilities within our platforms as features as well as upselling to customers rather than having them being treated separately.

Got it. And can you talk about some of the -- maybe some of the enhancements you've made to on those products once you brought them in and added them to the platform?

Sure. On the RPA side, it was an additional way for our customers to integrate with platforms, platforms that didn't have APIs, platform that could use a human automation aspect to them. So we focused on that part. On the process mining part, there's 2 ways that we communicate that. One is, I think especially relevant in the economic situation we're perhaps in at the moment, which is that we use process mining as an ROI capability, a way to find places where things can be more well automated, a place where you can get an ROI through speeding the operations or cost reduction aspect of it. And then that it's extremely complementary after we have sold as well, which is we use process mining as a validation of the automation that they have done to give them a report on an ongoing basis on how the application that they build, the workflows that they build, they have automation that they build, how it's improved their line of business and to continue to find ways to refine it.

That's helpful. And then as you're maturing the platform, even more -- can you talk about maybe a little bit more on just how -- what customers are asking for now. kind of what's next on the product road map, where do you kind of see yourself going?

Sure. One of the most requested features of the platform over the past few years has been something that we released within the past year, which is a portal capability. And what I mean -- portals is a pretty generic term. What I mean by it is that it's a way of integrating our automation capabilities directly in companies, typically consumer-facing aspects of the business, so their websites. You can look at like maybe it's a car rental business, and it's the capturing of the registration for interest in a car or a mortgage processor requesting all the information. But where Appian software is directly embedded in an extremely like scalable and elastic manner into those websites. But that work, that data processing all happens then within the Appian platform and then also gets integrated with all of their current and legacy systems as well. So the portals launch has been -- it was heavily requested and super happy finally released our capability. It's been the fastest upticks that we've had in our future release space.

That's great. That's great. It's only available on the cloud, though, right?

Right now, it's available to the cloud. We -- majority of our business is a cloud subscription business, and we tend to launch features first in our cloud offering. The reason being is that it allows us to have great feedback and instant feedback. We don't need to wait for our customer if they're running their software on premise to upgrade and then use when we released in a cloud. We have it in a very well-defined manner where we can monitor, we can improve, we can get very fast feedback loops. And so we will -- not always, but we will tend to launch capabilities first in our cloud offering because it allow us to just have a really fast feedback cycle in regards to usage data, what's working, what's not working and things like that. But the portals capability launched initially on the core offerings.

Got it. And is that also a way for you to kind of nudge customers to the cloud versus staying on-prem, just kind of offering more and more features on the cloud first?

I mean I don't know if we intentionally nudge. I think if they come to that our own conclusion, that's fine. I find that people that -- as a little bit of history of background myself, I've been at Appian, I was one of the first 10 employees of Appian. I've been at Appian for 22 years. In the CIO function of a software company, it's kind of an unusual thing at times. Sometimes they don't exactly exist and it might be inside of a CTO function. Sometimes it's just not some both IT of ERP and e-mail, things like that. My role at Appian is that I've run lines of businesses for the company, and so I ran our cloud business for over a decade, both on the operations side and also on the business side of it. So it's not necessarily like we would nudge them Specifically, I find that those that buy cloud or those that still want to run their own software have very specific reasons why they want to do it now. It was different 3 or 4 years ago, but now they have very specific reasons for that. And at Appian, we keep investing on ways to encourage more cloud usage, and I'll give an example very recently. One of those markets that tend to buy self-managed software from us was the Department of Defense market, U.S. Department of Defense market. We added to our cloud offering within the past year certification there at the Department of Defense level called Impact Level 5 certification. So that allows that business which was traditionally self-managed inside their own like data centers to be now run through our cloud offering as well, and that's helped us with some of our solutions that we specifically sell it at Defense market as well to do that. So yes, we want most of our business. It shows in our numbers to be a cloud subscription business, but a buyer is going to have some specific reasons why they might want to run down their own.

And that are actually on that certification that you have with the -- I guess you have FedRamp already. You have this. So can you just talk about the public sector and kind of have we kind of got to the point where you see like an inflection point there? Or should we expect a lot more in the coming years time?

I think it's a percentage of our business. It's always kind of interesting during different economic cycles. It's us being based in the D.C. area, it gives us a bit of a home field advantage in that federal and defense market of it, and it's been a major industry for us for many years. We feel like we have a lot of natural advantages there with our government acquisition suite. We have a history of success there with some of the agents there. We're continuing to invest in that as a solution with what we have there geographic wise and being local and the partnerships that we have there. And then additionally, with the certifications that we have in regards to FedRAMP and in regards to the Department of Defense level certifications. We find that, that helps us as well. It's an important market for us, and we continue to invest in it. Whether inflection point or things like that, time will tell. But it's -- I think we have some very natural advantages there, and we're going to push those advantages.

It's been a strong market for us. And if you look at -- it's the second biggest vertical for us. Clearly, IL-5 certification does help in -- to get us into much bigger opportunities that previously we couldn't do it. So we're always excited about the federal opportunity.

No, that's great. And then just can you talk -- when we talk about the cloud, invariably, we get questions on is how do you monetize it. You have more and more data coming through the platform now. So can you just talk about maybe some ways that you could kind of monetize that a little bit better in terms of just bundling or pricing or whatnot?

We always look for ways of improving the monetization. But we don't lead with, say, for example, when we think about Appian. We have a platform-first approach. We don't lead with the market with an RPA or process mining and try to say, "hey, how do we price these and extract that incremental dollar." What we are focused is on driving higher usage, and we clearly see that within the trends that we're seeing. And over time, we feel that, that is going to lead to better monetization. Having said that, right, earlier this year, we've talked about implementing price increases. That's one way of trying to monetize the incremental features and incremental functionality that's being baked into the platform. So all things equal, you have to be -- feel good that we will look for those incremental monetization opportunities.

No, that makes sense. And this year, Appian's value proposition in this type of market does seem to make a ton of sense. Lower in cost is something that everyone needs to kind of focus on right now. So can you just talk about the typical use cases for customers on Appian? And have you seen maybe a change in this market, maybe a focus on some specific use cases over others?

We haven't seen anything specific to say, hey, this particular use case is ramping more than the others in the past when we've talked about is today, customers can build anything using an Appian platform, right? Having said that, some of the most common areas, broadly speaking, is in the compliance area or know your customer or it could be supply chain-related. When you think of these things, all of them are related to some kind of cost efficiency use case that the customer is dealing with. And given the long sales cycle that we have, it's hard to pinpoint, "hey, one use case is seeing higher adoption versus the other." One solution that's been doing really well that we have talked quite a bit about is the government acquisition management solution. If you go back a couple of years ago when we first launched, customers were starting with one particular module. Today, when we see customers, right, they are adopting the entire suite, which comes with 4 modules. We recently launched a vendor management solution as a part of that suite. What we're also doing is we're taking some of those and repurposing within the state and local. We saw that a quarter ago when one of our partners took it and sold it in 1 of the biggest states within the U.S. We are clearly going to do more of that, taking those common use cases and productize them or part of our solution strategy. We're going to sell it to different verticals.

That makes sense. That makes a lot of sense. And then you mentioned longer sales cycles, and I think just about everyone is seeing sales longer sales cycles right now. Can you just talk about how -- when you're going to a customer trying to incent them to spend a little bit more on the platform, some of the techniques or strategies that you're doing to kind of get them to say, hey, look, Appian is mission-critical. We need to actually spend your -- here's the ROI." What's your approach?

We haven't changed anything. When I talk about sales cycle, longer sales, it's always been the case. It's not because of the current macro environment, right? We've talked about our sales cycle in the past being 9 to 12 months. With higher partner involvement, those sales cycles had compressed by 30%. And we see that sales cycle improving going forward, either because of a combination of whether it's a value-based sales methodology or involving partners more into it or coming up with more solutions. In the current macro environment, clearly, we're talking more about process mining because process mining is that quick ROI tool. It helps identifying efficiencies within your existing processes. Not only it identifies, it also tells you, if you were to fix this, what is the additional improvement that you will see either in terms of quicker sales or in terms of improving your cost structure. But once with that, then we can go with our workflow solution to help fix that particular problem. So clearly, that process mining tool is helping in this kind of a macro environment.

Okay. And then in terms of when a customer wants to try process mining and move the workflow, is it a lot easier for them to do that on the cloud versus on-prem? And can you just talk about in general right now, are you seeing more or less cloud deployments and expansions versus on-prem?

We lead the market with cloud. And if you know cloud subscription and the customers who today are on-prem, have been on-prem. They're going to be on-prem for a specific reason. That's because of their internal business use case. It's not that we are pushing a customer one way or the other. We don't have that license to cloud subscription. That's been done a couple of years ago. That's pretty much behind. Today, when customers -- we leave it to the choice of the customer. The product is essentially the same, whether it's in the cloud or it's hosted on-prem. But having said that, the cloud customers get all the latest features and functionality first compared to the on-prem customers.

All right. That makes sense. And then just I wanted to dial back for a second talk about the most recent quarter. Can you just -- I guess for people who may have not looked into it, can you just give an overview first and then talk about specifically the pull forward in hiring that you did?

Yes, We had another good quarter. The revenue was in line or better than expectations when you account for the FX on a constant currency basis. On the OpEx front, we did pull forward investments, mainly in sales and marketing and R&D. We thought it was -- we saw a good opportunity to hire quality talent. When you go back 6 months ago and 8 months ago, it was a tough hiring environment. And suddenly things shifted, and we pull forward some investment. Having said that, we said as you think about going forward, the hiring growth is going to be at a much more moderate pace than what we have seen in the current period. And as a result, our EBITDA margins in the second half of 2023 will be negative 10%, which is almost half the level of what you've seen at 4Q.

I mean can you talk about what gave you the confidence to pull forward the hiring right now? Because you've seen a lot of others actually do the opposite.

Yes. When we look at our sales pipeline, right, we look at various demand-driven metrics internally. We look at our sales pipeline. We look at the opportunities both within the existing customer base as well as the new customer base. We haven't seen anything material because of the current -- the sales cycles haven't deteriorated or they haven't gotten better. So all of these various inputs that go into that model gave us the confidence to pull forward those investments.

Got it. That makes sense. And then I wanted to just switch gears for a second and just talk about the competitive environment as you've added RPA and process mining to the platform to create more of an end-to-end experience for your customers. Can you talk about how that positions you in the competitive environment? And do you feel like you're better positioned versus your Pegas of the world? And how does that position you against, let's say, a Microsoft or a ServiceNow or kind of working on the lower end of the market?

Our competitive environment has been relatively consistent for the past couple of years. Nothing has materially changed. Having said that, with bringing in RPA, bringing in process mining and adding more features and functionality, we believe that we have a much stronger competitive position. Today, no other vendor offers that unified fully integrated suite. Think about if you're a customer, right, you're dealing with one software code rather than dealing with multiple software codes, right? If you look at most of our competitors, either they're doing offering some pieces of that platform or they are approaching that with partnerships. We don't think that partnership approach is going to serve the customer longer term, especially when one worries about cost efficiencies. So we clearly think that we have a leg up over the competition. More importantly, when we look at our win rates across all sets of vendors that you just mentioned, it's been pretty strong. There hasn't been any material change. We're clearly focused on the high-end enterprise customer base dealing with complex use cases, complex workflows.

And just on win rates, have you seen any change in win rates over the quarter and into this month?

Nothing. It's been pretty strong. There hasn't been anything material versus any of the vendors.

Got it. And I think the topic that comes up also is sales efficiency. So I wanted to talk about how are you kind of evolving your sales approach and then really within emphasis on partners because I know that's becoming more and more of a priority for you.

Yes. Sales -- improving sales efficiency is a big focus for everybody within the company, and we are doing lots of different things to improve that. But also, I just wanted to provide some context, right? When we went public, we were the first vendor to talk about low code. Nobody really understood about low code. Today, it's pretty much everybody knows what low code is, what the benefits of low code, why you should adapt the low code. But also think about some of the secular drivers, right? The huge amount of backlog of applications, not only legacy, but also new applications that needs to be launched over the next couple of years. Gartner talks about 500 million applications. Over the next 2 to 3 years by itself is a very big number. Then in the -- you talked about the shortage of highly qualified developers. And with the low code, what we think about is making existing developers more efficient, but also bringing in new folks like a business analyst that can build the applications much more quickly. So there's that secular thing. On the other hand, we are also involving our partners much more embedded with our sales force. We think the combination of all of that should drive incremental sales and marketing efficiency. Even if you look at our sales and marketing efficiency today to where it was 2, 3 years ago, it has improved, but we have ways to go.

Got it. And then just in terms of this, you're bringing a lot of new salespeople on right now. Can you talk about just how do you kind of get -- show ROI quickly given that it's bringing on so many people in this type of macro environment? Investors are going to want to see some type of evidence of either better revenue growth or whatnot.

No one -- the sales hiring that we're doing, a lot of them are experienced sales folks. These are not out of college that will take a significant one. So that's one big difference in terms of the type of sales hires we're doing. Second, we're also bringing our new tools to help the sales force to show that precise point about this ROI. We've talked about process mining, our process mining as example. It's not only with new customers, but also with the existing customers, right? We have some customers that have been using our platform for the past 5-plus years. We take this new tool. Previously, all of these customers were doing manually, right? We bring this some automated tool that helps them identify at the same time, also helps them with new use cases. And solutions is the other thing, right? As we said, solutions should also help the sales cycle compress and also helps sales and marketing efficiency.

Okay. And in terms of what you're going to have them working on specifically, are they more focused on expansions with existing customers? Or are you going to have some people really go out hunt for new logos?

I know a number of companies have talked about focusing. I don't think we're doing anything different from what we have been doing. Just know, partners are more focused on new logos. That's how they are. Whereas if you're an existing sales force, clearly, if you have already worked with a big customer, the natural [ inflation ] would be work with an existing customer, upsell to an existing customer. But we haven't given any specific guidance to say, "hey, just focus on existing customer". Our sense is they are spending time equally between existing and new customers.

And just remind us, how are salespeople generally compensated?

On renewals, a very small amount. Most of the time is on new logos and on expansions.

Got it. Okay. And then in terms of partner contribution over time, can you talk about where you are today and where do you see that going?

Yes, we haven't given any specific breakdown. What we've said in the past is if you look at our new logos, just the new logo addition, 70% of the new logos additional partner or partner-influenced. But again, it's a small portion today, and we clearly think that given the momentum we are seeing on the partners and their commitment with respect to a number of Appian practitioners that they want to bring on internally, we expect the partner contribution to increase over the next couple of years.

Okay. And can you just talk about maybe the unit economics? And as you increase the partner-assisted sales, how does that kind of improve the unit economics of just the overall go-to-market approach?

So if you look at our unit economics today, it's already very strong, right? Gross retention rate is 98%, 99%. You look at our LTV to CAC, it's -- we've said it 7x plus. It's a materially higher number. We think what we really need to do is just improve sales and marketing efficiency, but our unit economics is pretty strong. Again, given the strong unit, it calls for more investment, but we have never been a company being growth at any cost. We are being very disciplined on where the incremental dollar, investment dollar going to give. And unless we see a specific ROI attached to that investment, we're not going to blindly go and invest in that incremental dollar.

Okay. That makes sense. And I think we only have a couple of minutes left, so I just wanted to open it up to the audience for any questions. All right. Well, in that case, I have one more. You had mentioned the EBITDA margin target next year, about half of where you are now. Can you just generally talk about your approach? How do you balance growth with profitability?

Yes. The #1 focus is for us is the cloud subscription growth. We've talked about that cloud subscription growth being 30% plus. When we think about the sustainability of that growth, we are going to keep on investing to drive that, given the market opportunity at the front of us. At the same time, we are also doing optimizing within R&D, within sales and marketing with some of the new initiatives. Earlier this year, we've talked about bringing online a new R&D center in India. This is purely R&D engineers that are going to be focused there. So we're going to shift some of those resources incrementally within the new ones. So that should drive some operating efficiency within the R&D. Sales and marketing, we're talking -- we have now a dedicated team focused -- just focused on renewals. So that the sales guy is not focused on that. That should improve the sales and marketing efficiency as the salesperson focuses more on driving upsells and on new logos. So all of these things that we are doing should drive incremental operating efficiencies, and you should see steady improvement in our EBITDA margins.

Okay. And I know you may not be able to say too much about this, but you're obviously in the middle of a legal dispute with Pega, and they're going through the appeals. You're going through the appeals process. They're going to appeal. I'm sure you'll file a counter appeal. Can you just give us kind of an update on kind of where you stand today? And just for those who may not have a background, just a quick summary of the case.

Again, we've sued Pega for an IP theft. And recently, the judge awarded us $2 billion. On top of that, there is an incremental interest that accrues $100 million plus every year. At this time, Pega decided to appeal it, and we think that process is -- it's going to be a long drawn-out process, maybe 2 to 3 years. But the biggest takeaway for us is it just talks to the superiority of our platform, the technology of our platform. So we think competitively, it certainly helps us, especially if you're a new logo or a new customer that's evaluating. This is certainly on the back of mind. One thing I can say is it's certainly not been a distraction for us. We're already seeing some movement within our partner channel shifting to sources towards an Appian practice. So we think from a competitive perspective, it certainly helps us in the market.

Yes. No, that makes sense. Well, thank you, both of you for coming today. Really appreciate it.

Thanks, Vinod.