Greetings. Welcome to the Appian Fourth Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. Please note this conference is being recorded. At this time, I’ll turn the conference over to Will Maina, Investor Relations. Please go ahead.

Thank you, Rob. Good afternoon and thank you for joining us to review Appian’s fourth quarter and full year 2019 financial results. With me on the call today are Matt Calkins, Chairman and Chief Executive Officer; and Mark Lynch, Chief Financial Officer. After our prepared remarks, we will open up the call to a Q&A session. During this call, we may make statements related to our business that are forward-looking statements under the federal securities laws and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements related to our financial results, trends and guidance for the first quarter and full year 2020, the benefits of our platform, industry and market trends, our go-to-market and growth strategy, our market opportunity and ability to expand our leadership position, our ability to maintain and up-sell existing customers, and our ability to acquire new customers. The words anticipate, continue, expect, estimate, intend, will, and similar expressions are intended to identify forward-looking statements or similar indications of future expectation. These statements reflect our views only as of today and should not be reflected upon as representing our views at any other subsequent date. These statements are subject to a variety of risks and uncertainties that could cause our actual results to differ materially from expectations. For a discussion of the material risk and other important factors that could affect our actual results, please refer to those contained in our 2019 10-K filed with our other periodic filings with the SEC. These documents and the earnings call presentation are available in the Investor Relations Web site at appian.com. Additionally, non-GAAP financial measures will be discussed on this conference call. Please refer to the tables in our earnings press release and in the Investor Relations portion of our Web site for a reconciliation of these measures to their most directly comparable GAAP financial measures. With that, I’ll turn the call over to our CEO, Matt Calkins. Matt?

Thanks, Will, and thank you all for joining us today. Under ASC 605 in the fourth quarter of 2019, Appian subscription revenue grew 28% year-over-year to $43.1 million and our non-GAAP operating loss was $8.7 million. For the full year, subscription revenue grew by 34% to $155.1 million and our non-GAAP operating loss was $32.7 million. Our subscription revenue retention remained strong at 116% as of December 31, 2019. These results exceeded our guidance. Also, we don't guide into this but at 68% Q4 has the highest gross margin we’ve ever announced. We added 109 net new subscription customers last year. At the same time, we maintained total annual revenue per client of about $0.5 million. We finished the year with 48 seven-figure ARR customers and doubled the number of customers producing at least $3 million of ARR. Last month, we acquired Novayre, the producer of Jidoka robotic process automation or RPA. It’s the highest rated RPA product on Gartner Peer Insights of those above a minimum threshold of reviews. It's Java-based, built for the cloud and highly regarded by customers making it a perfect fit for our platform and our enterprise customer base. Adding RPA to our platform makes Appian a one-stop shop for automation capable of natively orchestrating humans, bots and artificial intelligence within a workflow. Appian has built strong partnerships with the leaders of the RPA market, like Blue Prism, Automation Anywhere and UiPath. We're planning to keep and even strengthen these relationships to the degree that our partners will facilitate. That’s because of the way I think this market is going to mature. RPA is sold in a decentralized fashion to the bottom of the enterprise, so what’s likely to happen is that the typical enterprise will own multiple RPA tools. If so, that puts value…

Thanks, Matt. Before I go through our results in more detail, I’d like to provide you with an update on our adoption of ASC 606. As we noted last quarter, we were required to adopt ASC 606 in our 2019 10-K which we filed with the SEC after the market closed today. We adopted the standard on a modified retrospective basis and have included these details in our earnings press release. As a reminder, Appian licenses our software on a subscription basis which can be deployed either in the cloud or on prem. Our contract terms are generally one to three years in length, approximately two-thirds of our subscription revenue is in the cloud and is materially unchanged under 606. The remaining subscription revenue is on prem. Under 606, approximately 80% of the on-prem subscription revenue is recognized upfront. The remainder is recognized over the subscription term as support revenue. Given the mechanics of revenue recognition under ASC 606, we will report cloud subscription revenue and cloud subscription revenue retention rate as our new key metrics. We believe these metrics appropriately measure the growth of our subscription business under ASC 606. In addition, we will report total subscriptions revenue which includes support and all subscription revenue regardless of whether the customer deploys Appian in the cloud or on prem. We believe that total subscriptions revenue reflects the true scale of the business. It is important to note that regardless of the 606 accounting impacts on the financial statements, we’re a subscription software business. As such, the vast majority of our subscriptions revenue is recurring with very high gross renewal rates. ASC 606 is going to diminish the apparent size of our business in 2020 by approximately $40 million of loss reportable revenue due to the on-prem licenses that were sold…

Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions]. Thank you. Our first question is coming from the line of Raimo Lenschow with Barclays. Please proceed with your question.

Hi. Thanks for taking my questions. And Mark, congrats to your finance team as well. That was kind of a lot of work as I can see. Let’s start – can we kind of – you gave the revenue guidance for the year in 606 and for Q1 you still gave us like an offset, like what would have been on the 605. Do you think you could do that for the full year as well? And then a question for Matt. That open approach that you kind of alluded to on the call earlier on RPA, but then we also have like process mining coming in there. How does that go into – is that what you see from customers, because your competition will probably not do that and then will have more close system. Can you just talk what drove that decision of yours? Thank you.

Would you like to go first with regards to the annual --?

Yes, I’ll go ahead and take that. So for Q1 guidance we didn’t talk about any deltas for the guide. In fact, what we did which is rare from what I’ve seen previous companies doing is we actually gave what guidance would have been under 605 and guidance under 605 would have implied a 31% to 33% growth rate or 32% to 33% growth rate. Under 606, it looks slightly lower – slower growth rate. For the full year there is a delta from the headwinds from 606 that we kind of called out. It’s going to be a bit more than what we saw in 2019, but we’re definitely facing those headwinds and we were losing $40 million of revenue. And we’re also at the same time reducing the durations on our on-prem subscription licenses to one year, and so there’s a couple of headwinds there that are creating that.

Okay.

I’m going to jump in to talk about the second part of your question, Raimo. You want to know about how this open strategy has come to be and whether it’s going to last, whether we’re going to cooperation in return? Well, I think a good guide would be to figure out what the customers would want us to do and then do it. I think customers right now would like to see the various elements that make up their automation suite play well with each other. In my opinion, the most succinct definition of automation is that it’s workflow with the new workers. And by that I mean that the foundation is workflow and we’re just bringing on new workers instead of this typical human workforce that we would have had in decades past. Now we’ve got a workforce that has human plus – RPA bots plus artificial intelligence plus some rules and whatever new technologies might come along to get work done. And I believe that the customer is going to want the orchestrator of all that work to cooperate well, to be highly compatible with the elements that execute the work. And so we’re coming into this market with a customer interest in mind. And it wouldn’t make sense to try to be the best at all of these things. I think the customer is going to want a central hub and a trusted manager, and I believe that you’ll see – there’s so much excitement around these elements that are coming together to make automation. There’s excitement around them, but in some cases the diversity of institutions that are providing these technologies and perhaps even in some cases the experimental nature of some of the institutions that are providing these technologies could give CIOs pause. I believe that we need to up the reliability. We need to demonstrate the potential of all of these different technologies when working in concert, and I believe that Appian is relatively well positioned to be the demonstrator of that cohesive maturity due to the fact that we have exceptionally happy customers and a reputation for the same, due to the fact that we’ve been in the market for a long time. We’ve been in this market for 20 years. We’re a public firm and we’re well known in that regard. And we deal with the top of the IT organization habitually. So we are the CIO’s friend, so to speak. So I believe that we’ve got the credibility to lend a missing factor to an exceptionally valued and vibrant market. And so we look forward to doing that in full cooperation with all of the other components.

Okay, perfect. Thank you.

The next question is from the line of Arjun Bhatia with William Blair. Please proceed with your question.

Hi, guys. Thanks for taking my questions. And Mark, I want to echo the thanks on putting together 606 materials. Those are very helpful. Maybe I want to start off with the partner channel. It seems like you definitely ended the year on a strong note with partners doubling new deal contributions. How should we be thinking about partner contribution going into 2020 and progressing throughout the year as the partners have spent a lot of 2019 ramping up their Appian practices? And how should we think about kind of the mix between software revenue and professional services revenue for the year?

Yes, I’ll tell you I don’t think the partner component of Appian’s business has reached a plateau at all. I think it’s on a ramp. And so the evolutions that we have seen, reliable to continue to see. As for what that will mean for a revenue mix, we’ve been saying for years that we intended our license revenue to grow at twice what our services revenue grew at. And while we’ve made – I think it’s fair to say almost no effort to actually maintain that ratio, it was a general intention, right. And it hasn’t always hued to that, but I know I don’t have any reason to retire that intention. We mean to create more demand for Appian services by far than we are capable of fulfilling. And we eagerly turn that over to the partners who give us the complementary skills that we require; the access, the credibility, the reach and the strong team of trained service providers that dwarfs what we are capable of fielding ourselves.

Got it, very helpful. And then on the RPA acquisition of Jidoka, how should we be thinking about the monetization and kind of the pricing model there? Are you going to make any tweaks to it from what the company had on a standalone basis? And is there any revenue contribution from that acquisition baked into the full year guide that we should consider?

All right. I believe that we haven’t baked anything say for a rough assumption of breakeven on that. However, I think mostly we have just dodged the topic. I believe that the real impact – let me clarify. We are not selling standalone RPA. That’s the most important thing for me to say. We are not entering the RPA market. We’re entering the automation market. And to us, the automation market is about orchestrating its workflow with new workers. And so RPA are some of those workers and it’s important for us to be able to bring those factors to bear for our customers, be it Appian owned or somebody else owned. Now there will be a charge for Appian RPA, all right, but it won’t be sold standalone. And we’re not going to be break it out. And so we were absolutely – begin by asking whether we’re going to change their pricing model, you bet we are, because for us we’re selling a suite.

So they’re going to buy --

Yes, they’re going to basically be required to buy the platform. And if they want bots on top of – they’ll pay an extra fee for bots.

Got it. That makes a lot of sense. All right. Thank you very much.

The next question is from the line of Chris Merwin with Goldman Sachs. Please proceed with your question.

Hi. This is Kevin on for Chris. Thanks for taking my question. Can you talk a bit about the makeup of the large customer adds in 2019? And is there any significant change in terms of verticals that saw more traction or changes in sales cycles for those new customers? Thanks.

All right, okay. The verticals in which we performed best were the verticals in which we were already performing best. We’ve seen a further strengthening of places that we already had an advantage and you can see this, and I say that the way the number of $3 million a year customers for us doubled last year. We’ve gone from strength to strength essentially and I think that’s – I don’t see any change to that pattern right away. We know that our technology hits the bull’s eye for certain customers. And I think a lot of our plan going into 2020 actually is to understand exactly where that bull’s eye is and be sure the arrow is pointed right at it.

Okay. Thank you.

Thank you. Our next question comes from the line of Sanjit Singh with Morgan Stanley. Please proceed with your question.

Thank you for taking the question. I had two questions actually. Maybe first to start off with Matt and to dovetail on Chris’ questions before. The net new customer adds this year accelerated pretty meaningfully. I think it was a 25% year-over-year growth on the 109 new customer adds versus last year. So I guess the question there would be was that mostly a function of the ramping partner contribution or more sort of greater market awareness of low code? And the follow up to that is in terms of that cohort of 109 new customers, how are they ramping in terms of going on from application 1, application 2, what’s the sort of adoption curve going beyond the initial use case that you’ve seen thus far?

Yes. First of all, I’m happy to give our partners credit for the increase in net new logos. I think they deserve it and they’re going to be a powerful engine for us in adding logos going forward. My favorite statistic with regards to these new logos is the fact that even though we did add a record number and it was pretty good growth over the prior year, the average revenue per client actually did not decline; or if it did, it trivially. It’s been in the same place despite multiple years of substantial logo count expansion. I think that’s a great sign and it does go a long way toward answering the second part of your question, which is what happens when a new customer signs up with Appian. And the answer is, they find their way to $0.5 million. And they don’t do it immediately, but that’s where the median – that’s where the average is across our customer base. And I think that really speaks to the amount of value that an Appian customer gets from using our technology and we’re proud of that number. And I think it says a lot about our potential. As we touch more customers year after year, we don’t seem to be – this number doesn’t seem to be changing, which demonstrates that every untouched customer is – has high potential for us.

Understood and pretty exciting. Moving on to Mark, I have a question on guidance, Mark. So I guess I’m trying to understand a little bit is historically you guys have guided to total subscription revenue and as we get into 606, you’re guiding specifically to cloud revenue but a big – still a meaningful chunk whether it’s 30% or 40% of the overall subscription mix is still sort of on-prem subscriptions and it seems like that’s where the headwind is in terms of 606 you called that is going to be greater this year than last year. Implied in the fiscal year 2020 guidance, what should we be assuming for the total subscription piece relative to the cloud revenue piece?

So the easiest way to look at it, we put out in gory detail all of the details of the – the breakout of all the revenue line items on the Web site to help you guys with your models. And so you can just come up with – I would suggest coming up with what you’re estimating growth rate for services is. And then you can pretty easily back into the implied guidance that we have there for the on-prem. That’s how I would do it. But the reason why we didn’t guide – we actually internally [indiscernible] we’re guiding to subscription revenue, but because of the upfront recognition is kind of perpetual and it just gets dicey. So the total revenue we feel comfortable with, the cloud subscription gives you a sense of – the growth rates are normalized and it gives you a sense of the growth rates of the companies very similar to what subscription revenue was. And so that’s how we’re guiding it.

Got it. Okay, great. Thank you.

Is that helpful? We can talk offline about it too.

Absolutely. We’ll talk offline.

Thank you. The next question is from the line of Alex Kurtz with KeyBanc. Please proceed with your question.

Hi. Great. This is Steve Enders on for Alex. I guess just kind of to the same point about how to think about the on-prem subscription as we look at it next year, how should we be thinking about the seasonality of that and potential renewal opportunity as those come back up?

Yes, so we’ve got auto renewals baked in so that – generally our growth renewal rates are very high. So we feel confident that once we get a customer in and then we build the fill applications, they’ll generally renew. The seasonality – so if you see in the implied guidance in Q1, the term licenses – if you kind of back into what we’re applying for guidance for the full year, Q1 is strong. And part of that is because you have 12/31 deals that close and yet the subscription license doesn’t actually start until Q1. And so you get the revenue under 606 in Q1 versus starting in Q4. But I think for Qs two, three and four, I think they’re going to be fairly consistent with the way they were last year. So you can just take a look at kind of how the term license laid out, it’s fairly linear. It’s not very seasonal. But hopefully that helps.

Okay, yes, that’s very helpful. And just one other thing I want to touch on the shift from three year deals to one year, just trying to get a better sense of what’s driving that shift and what kind of impact that had to the backlog number this year?

A pretty significant impact to the backlog. What we’re doing is we’re still signing two to three-year contracts, but we have auto renewal clauses in those contracts. And the purpose of it is under 606, if you think about it, you get a three-year deal and you recognize almost all the revenue upfront, it’s hard to figure out the growth rates of the company, it’s hard to manage the business as far as visibility and all that stuff. And so we just – having seen kind of companies going into that situation about a year and a half, two years ago, we decided to basically put in our renewal language. Once we guided to 606, we didn’t quite get everything converted over, but we’ll be pretty much converted over by the end of 2020. That way we’ll have – pretty much we’ll have good visibility of what’s going to renew that year from an auto renewal perspective or from a contract renewal perspective and it just helps out from our perspective. And it gives – candidly it gives investors a better sense of the true growth rates of the company once we get through this headwind.

Okay, great. Thank you.

Our next question is from the line of Jack Andrews with Needham. Please proceed with your question.

Good afternoon. Thanks for taking my question. I was wondering if you could drill down a little bit more on your largest customers. I think you mentioned that you doubled the number that are paying you more than $3 million in ARR. I’m just wondering if you – is there any commonalities among that group of customers or the lessons learned that can be applied to your broader customer base to increase the revenue opportunity to that size?

There definitely are some lessons. Like, don’t quote an enterprise price upfront. That’s a good lesson. Yes, I jest. But what I think this shows is the depth of value that we’re capable of creating which in my opinion actually is well in excess of $3 million per year for a substantial organization. Appian is a high saturation point prospect, which is to say you can use a lot of it before it doesn’t help you any more on the margin. As such, we need to be consistent with our pricing and negotiate in pieces, right. Negotiate one project at a time or stick to fair prices because we know there’s a long road ahead. Add a customer once we succeed. It tends to be the case that the leverage that a company has varies positively with the duration of the relationship. So the more we’ve established on a customer site, the stronger our negotiating position is. So given that there is a great deal of value ahead for us at every one of our clients, we have learned to negotiate in a way that preserves our long-term value and to not flash our prices or offer an enterprise price for an enthusiastic customer in order to get them on board. I think that’s certainly been a lesson. But the primary thing I take away from this is a demonstration of the depth of the value that we can add, which I believe is only enhanced by the recent acquisition and by the broadening of our value proposition into automation generally and out of merely workflow. Now, it’s also the workers. I think this is going to be a very good shift for us. We’re already kind of a specialist at this deep value and this is just going to help us get deeper.

I appreciate the color. And just as a quick follow up, you talked about new customer adds being concentrated in terms of your existing – the strength of your existing verticals. Moving forward, is there may be an emerging vertical that we should be keeping an eye on that you think are starting to get increasing traction in?

Well, if I had to pick one, it might be energy. We’ve seen some very good work in energy over the course of 2019. But whenever I’m presented with a question like this, what I want to say is I think we belong everywhere. I think every medium to large organization could benefit a lot from having the kind of orchestration and agility that the Appian platform provides. So I don’t want to write off any of these industries. I was thinking in some cases we’ve got such a fast lane in some of the industries, like financial services that we should be doing all we can there and racking up the demand that comes our way, and there will be time to scoop up demand in other places. But we should focus on the fast lanes predominately.

Understood. Thanks for taking the questions.

Our next question is from the line of Derrick Wood with Cowen and Company. Please proceed with your question.

Great. Thanks. Andrew on for Derrick. Matt, I was just wondering if you could give us the sense for what you plan for sales capacity additions for this year, anything around the linearity of hiring, how aggressive are you hiring and what areas that would be in?

Okay, great. I can tell you that we are hiring. We continue to hire. We continue to believe that the Appian platform should be introduced to many more prospects than it today is introduced to. We’ve got a number of approaches that we’re going to take to make that happen. We’re a higher profile than we used to be and we’ve got a new batch of customer reference videos that we’ve created toward the end of last year and we’re going to hope to get our profile higher so more customers have heard the name and they think of us when they think about automation or low code. We are hiring more sales people. We are addressing more customers. We are engaging more partners. And we’re having those partners create targeted solutions that are going to take us to markets that maybe didn’t take us seriously in the past but would if we offer them something that seemed directly pertinent to the problem that we know they face, and comes by the way with solid references and a complete demo and a more or less plug and play adoption cycle. I think it’s essential for the growth of this business that we create easy paths for more customers to get onboard Appian. And by easy paths I mean so it’s easy to know about us, it’s easy to buy from us and it’s easy to use us. And if we can take those three components and minimize the friction, we can expand to so many more customers. The size of the Appian community is not limited by the number of companies who could benefit from using Appian. It’s limited by our ability to shout loud enough so that the world hears us and understands the value that we’re offering. So anything we can do here, whether it’s more sales people and definitely we continue to grow that. We’re not slowing down. We’re going to grow that, but we’re going to grow in so many ways to try to reach out to a larger customer base and get our awareness up.

Great. Thanks. And I have one more for you. The international had another good year. I think you’re in 12 countries now. Any color on markets that are doing the best there, anything new planned internationally and what you’re hearing from customers in any particular regions and whether the macro is having any impact there? Thanks.

Yes, that’s right. We saw very strong performance from some of our international regions. I’ll call out the UK and Spain, but that’s just a few among many. And I think we’ve got the potential to have more breakout countries as we go forward. It has to do with interesting combination of factors in order to really be a local winner that you need great leadership, you need presence, customers, testimonials, active partners. So you got to put all of these together and then add heat, and then it starts working. So in some places it really is and it’s given us a playbook that we can follow and try to replicate in other places. For what it’s worth, I’m more interested right now in taking offices that exist and making them break out successes than I am in creating new offices, which is somewhat similar to the strategy I outlined with regards to industries. I want to double down where it’s working and where we’ve made an investment.

Great. Thanks.

Thank you. We’ve reached the end of our allotted time for question-and-answer today and that will also conclude today’s conference. You may disconnect your lines at this time. We thank you for your participation.