Good day, everyone. Welcome to the Appian Corporation First Quarter 2020 Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Scott Walker from Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, and thank you for joining us today to review Appian’s first quarter financial results. With me on the call today are Matt Calkins, Chairman and Chief Executive Officer; and Mark Lynch, Chief Financial Officer. After prepared remarks, we will open up the call to a question-and-answer session. During this call, we may make statements related to our business that are forward-looking statements under 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 second quarter, the impact of COVID-19 on our business and on the global economy, 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, estimate, expect, 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 as of any 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 risks and other important factors that could affect our actual results, please refer to those contained in our Q1 2020 10-Q filing, our 2019 10-K filing and our other periodic filings with the SEC. These documents and earnings call presentation are available in the Investor section of our website at www.appian.com. Additionally, non-GAAP financial measures will be discussed on this conference call. Please refer to the tables in our earnings release and the Investor Relations portion of our website for a reconciliation of these measures to their most directly comparable GAAP financial measures. With that, I’d like to turn the call over to our CEO, Matt Calkins. Matt?

Thanks, Scott, and thank you all for joining us today. In the first quarter of 2020, Appian’s cloud subscription revenue grew 33% year-over-year to $28.4 million, and our adjusted EBITDA was a loss of $3.6 million. Subscriptions revenue, including on-premises and cloud software, grew 36% year-over-year to $50.4 million. Total revenue, including professional services, grew 31% year-over-year to $78.9 million. Our cloud subscription revenue retention remained strong at 115% as of March 31, 2020. These results exceeded our guidance. We also set a new high mark to gross profit margin in the first quarter at 70%. This surpasses our previous high of 67% achieved in the prior quarter. We’re operating in unprecedented times with COVID-19, and I hope you and your families are healthy. COVID is a health crisis first and an economic crisis second. Our consideration begins with the health of our employees, their families, our customers and everyone else. But let me discuss the crisis from an economic perspective. In a situation like we’re going through now, we’re inevitably going to face some disruption in some predictable ways and some unpredictable. It’s likely that some sales cycles will lengthen and also likely that services revenue will be lower than we previously expected. In the long-term, however, the world is changing in a way that is beneficial for us, becoming more digital and more automated. And we’re also strengthening, so that when the crisis is over, I expect us to be better positioned than we were going in. This deserves a little more explanation. Let me offer five reasons that I believe Appian will emerge from this health and economic crisis stronger than we entered it. First, we’re still relevant. A crisis is a testing point for any institution, some step forward, others step back. Appian asserted itself and…

Thanks, Matt. Before I review the financial performance for the quarter, I want to briefly discuss the effects of COVID-19 on our business. We’ve not seen a meaningful impact to our reported financial results. It’s very difficult to know how the pandemic will impact us over the next two to three quarters. In the short and medium-terms, we expect some disruption. And in the long-term, we’re confident that our business is well positioned to succeed. We’re benefiting from our high gross renewal rate currently at 98%, which reflects the mission-critical nature of our platform. Our core verticals such as financial services, U.S. federal government, healthcare and pharma are less affected by the short-term impacts of the pandemic and we have very little exposure to small and medium businesses. Our strong land-and-expand business model will also help us get through this crisis with historically two-thirds of our software ACV growth relates to customer expansion and one-third to new logo acquisition. Having said that, we expect short-term negative impacts to our business, especially as it relates to net new ACV bookings and professional services revenue. With that, I’ll review the financial highlights of the quarter. Cloud subscription revenue for the first quarter was $28.4 million, an increase of 33% year-over-year and above the top-end of our guidance. Our total subscriptions revenue is $50.4 million, an increase of 46% year-over-year. This exceeded our expectations for two reasons. First, we recognized approximately $4 million of on-prem revenue associated with deals that closed in Q1 2020 that we anticipated would not close until Q2 2020 when we provided our initial Q1 guidance. Additionally, we closed a two-year on-prem contract during the quarter, where the customer did not want the contract to auto renew on an annual basis. As a result, we recognized $2.8 million in…

Thank you. [Operator Instructions] And we’ll take our first question from Arjun Bhatia with William Blair.

Hey, guys, thanks for taking my questions and hope you’re all doing well. First one, maybe for Matt. You talked about in your prepared remarks a little bit about how you think you’ll emerge stronger after the current crisis. Can you maybe just flesh out a little bit what you’re thinking on the investment side and how you plan to kind of either put your foot on the gas pedal or take it off throughout this crisis to maybe emerge stronger and in a better position competitively on the other side of this?

Okay. I’m having a little bit of trouble with the speakers. So I couldn’t hear everything that you said. However, I do strongly feel that we’re positioned to be better on the way out. The economy is going to be looking for different skills than they were before COVID and we’re fortuitously positioned for some of that, and then the rest of it, we’re making up with hard work. So I know the economy is going to want digitization, cloud, SaaS, low-code, this all is completely intuitive. But take, for example, our position in automation. We were a little bit ahead, having acquired an RPA company and we’re bringing together the factors at work. Automation, just to remind you, is human and digital workers together in the same workflow. So we have been packaging together these digital workers, the RPA and AI with humans in the workflow and now everything is in place for a while due to COVID. So it would be difficult to do acquisitions, but we are working behind the scenes to make our integration tighter and better and cohesive, which means – I see it as a lengthening of our lead in automation. It’s also coming out of COVID, is going to be a hard time to get the attention of organizations to try to be the first or a novel start in the new industry. I feel like you have to have the quals before a moment like this and we do have the quals. So I think that also helps us a little bit. Now I might have missed some of your question, unfortunately, because I couldn’t hear well.

No, that sounds great. That was helpful. Thanks. And maybe a follow-up for Mark. Mark, on the guidance, I know you’re not fiving full-year guidance. But as you think about Q2 and the rest of the year, can you just maybe flesh out for us a little bit the assumptions in Q2, specifically, in terms of how you think new customer deals will be impacted? Are you anticipating any impact from existing customers, either on the positive or negative side in that cloud subscription revenue number? Would just be good to hear a little bit more on some of the assumptions you’re making there?

Okay. Yes, I’ll address the latter part of your question first. Yes, as you guys know, our gross renewal rates are 19%. And candidly, towards the end of Q1, we had several very large renewal deals coming up and it was a true test to see whether or not we’re going to close them all. We closed them all seamlessly. We’ve got three big renewal deals in Q2 that are coming up and they’re all trending very positively. So right now, the good news is the – if you look at the verticals that we’re in, our key verticals, 70% of our revenue are largely not impacted or less impacted, if you will. I think everybody is going to be impacted by COVID. But we’re less impacted to some other verticals. That’s 30% of our revenue. So I feel good about the renewals occurring throughout the year. Obviously, we’re not going to renew 100%, but I feel pretty good about the ability of renewing these. Most of the – most of our customers are very mission-critical applications, and they’re basically proactively renewing. For example, we have a government agency that is coming to us a couple of months in advance to renew, just in case the funds disappear, right, so that they’re in the highest level. So those are encouraging signs from my perspective. As it relates to net new logos, it’s going to be more difficult, where we’re a bit of a – we’re a higher touch sales organization. But you can’t help to be very impressed with how the sales organization has shifted to kind of working in a virtual manner. We basically operate – we’re doing a ton of new webinars. We’re getting a lot of activity there. We’re doing a virtual conference next week. So – but at the end of the day, net new logos are going to be difficult and harder to get. And as you know, our sale cycles are a little longer. And so I wouldn’t be surprised if we see sales cycles elongating. And that’s really why, at the end of the day, we decided to withdraw the full-year guidance. We thought long and hard about it before doing it. We just don’t know right now. We don’t know how it’s going to impact us in the next couple of quarters. But as Matt said, we feel confident that once we get through this, we’ll be better for it, we’ll be stronger for it, and we’ll be well positioned.

Perfect. Thank you.

We’ll take our next question from Raimo Lenschow with Barclays.

Hey, guys, it’s Mohit Gogia on for Raimo. Thanks for taking my questions. Hope everyone on the call is staying safe and healthy. My first question is for Matt. So Matt, I was just wondering if you can sort of like give us some of the high-level priorities for the new CRO? Obviously, these are very uncertain and very different times. And coming into the door, what are some of the things he is going to sort of like, look at to maybe optimize and maybe change? So if you can start with that, give us some more color as to – behind his appointment and what he has in store for him in the first few months? And then I have a follow-up question for Mark.

Yes. Okay. Let me talk about the whole CRO thing generally. In fact, I see the COVID crisis as an opportunity to refit and improve the company’s management and processes. It’s like a – like an untimely winter, right? We can’t harvest, but we can sharpen the tools. It’s our intention to exit the COVID episode a much stronger company than we went in. So we’ve hired a couple of stars. We have first round draft pick kind of people to our team this spring. Pavel in services, Eric in sales. It’s important that I note that I think our sales services are efficient. Our sales numbers are strong. And on services side, we have famously happy customers and a very high renewal rate. So that’s what we’re doing here. Now Eric’s challenge is going to be to come into a team that’s performing well, as you can see, right, from the numbers that we’re reporting, performing well and capitalize on the changes in the environment to step up our game and take Appian into a new level. That’s absolutely the intention here. We want to capitalize on the change and on the fortuitousness and the alignment between what the world is going to be asking for and what we can deliver. He has got some philosophical approaches about when the sale is made and how it’s all – a lot of touch before that – so a lot of decision-making happens before the contact of the sale. I think it’s right on. I believe that we’re going to construct a more and more effective way to reach the customer, convince the customer, convey our industry message and be intuitive. And if we can connect more intuitively with the market and convey our value proposition more effectively, I believe that he will do as much as anything could possibly do to take Appian into new level.

That’s very helpful color. A follow-up question for Mark. So, Mark, I think you sort of gave us an understanding of the two areas, right? So if there is a – if I don’t want to call it lack of visibility, but two potential areas of weakness maybe that may transpire in the COVID, new logo growth and the professional services, right? So I know you – again, you’re not guiding for the full-year, but I was just wondering if you can dig into at least a professional services piece, right? So you have been building this partner ecosystem over the last few quarters, few years. How are you thinking on – what are you hearing from these partners, first of all? And how are you thinking of leveraging that ecosystem just to sort of mitigate the impact on professional services from the crisis? Thank you.

So as you guys know, forecasting professional services is difficult for us. We could generally do it a quarter out, and it’s difficult in good times and difficult to forecast it for the full-year. And so that’s one element, and COVID-19 has been impacted. The good news candidly is that, from a deployment perspective and us delivering the projects, we have been able to seamlessly work remotely. Either – if the projects are in cloud, we’re obviously able to do it remotely. But even those projects that are on- premise, we’ve been able to do all those remotely as well. We haven’t really missed – skipped a beat there. As it relates to the partners, one of the statistics we didn’t talk about in the script was the fact that the partner channel basically was a solid contributor to our new logo performance in Q1. They contributed 71% of the new logos. So that’s really good. And it’s really – and as you guys know, the first step of deployments to customers is generally look to either have the partners who are Appian business deployment. So that’s another reason why, I think, the professional services are going to get a headwind. It’s COVID-19, but also we’re not quite sure how many of these projects can be done by the partners. And candidly, as you guys know, we’d rather have a partner who do as many as they can, so long as they bring us those deals. And so those two elements combined make it very difficult to give – even come close to giving a respectable full-year guide for services. But that – those are the two dynamics going on there.

Thanks, guys.

And we’ll take our next question from Sanjit Singh with Morgan Stanley.

Hi, guys, this is Melissa Dunn on for Sanjit. Thank you so much for taking the question. I was hoping to ask about the subscription business. First on the timing of term subscription renewals with – how should we think about the linearity there? Could this be mostly in Q3 and Q4? And then just related to that, last quarter, you talked about converting customers to one-year contracts with auto renewals. How much of the base has converted to the same billings methodology? And if you have any thoughts on when that process will be done? Thank you.

Regarding the on-prem term licenses or our subscription licenses to auto renewals will largely be complete by the end of this year. So that was one of the headwinds coming in when we converted over to 606, coming into the year as you recollect is we’re actually doing that. So we weren’t actually benefiting from the tailwind of multi-year on-prem upfront recognition. We just wanted to normalize our growth rates and smooth out that business. As it relates to seasonality, given the group like typical, most software companies, Q4 is generally the strongest one. So you probably expect to see more of the business in Q4 than in Q3. Having said that, Q3 is the nuance for federal government and federal government is one of our larger verticals. And thus far, the pipeline is looking pretty healthy as it relates to federal, we’re hoping for some good things to occur there as well. So didn’t really answer your question, but kind of answered it.

Do you have any other questions?

No. Thank you, guys. Very helpful.

And we’ll take our next question from Jack Andrews from Needham.

Good afternoon. Thanks for taking my question. I was wondering if you could just talk about maybe some of the impact of the applications, you’ve rolled out the the COVID-19 response management application, as well as the Workforce Safety and Readiness application? Is this creating pipeline opportunities for Appian that sort of people are able to see a broader – the value proposition of Appian in a broader context? Or is there any impact of how this may impact your business downstream in the future?

Yes, definitely. It’s a visibility opportunity. It’s making introductions for us, new firms. It’s getting us a higher profile. I wouldn’t say it’s much of a revenue event right now, particularly the way we gave away the COVID app for nothing, even services related to it was given away for free, but it’s gotten us press, it’s gotten us connections with a lot of new customers or potential customers. And, of course, the latest app is not free, the Workforce Safety and Readiness. We’ve got serious interest from big companies on that. There’s more than 30 opportunities right now and two-thirds of them are new logos. So it’s a strong way to reach out and be relevant in this climate. And I think the way it will primarily end up helping us is the introductions that it made for us into new potential customers.

That’s great. And then just as a follow-up, could you touch on the importance of the strategic alliance with Deloitte? Is this giving you more breadth of coverage? Or is there some industry-specific expertise that you’re going to be able to leverage out of them?

Yes, definitely. The alliance with Deloitte has been focused primarily on the federal sector to date, where they do have a very strong presence. And it’s a meaningful sector to us. So that’s the primary advantage that we’re getting out of that alliance. So, of course, we’re happy to work with our partners anywhere around the world. We have a few top partners that we focus on. And our preference is to have those partnerships be very strong to the point, where those partners see Appian as their secret weapon, their hidden advantage in any bid they go into. I’d rather have a few partners like that and a lot of partners who were just linked by a press release.

Great. Thanks for the color.

And we have a question from Derrick Wood from Cowen.

Hey, guys, it’s Andrew Sherman on for Derrick. Hope you are all well. Mark, I was wondering on the 2Q guide, if you could help us kind of unpack pro services versus license? How much do you think pro services will be down?

I mean, If you take – I’m trying to say in a way that we get to the right answer. Pro services will be down, I don’t – will be down sequentially, but not dramatic.

Okay. And license will be a more normal, is that right?

I mean, part of it is that – embedded in that license guide is that $3 million that would have been recognized in Q1 – or that was recognized in Q1 that would have been recognized in Q2, so it’s part of the downward guide. So that’s going to mute pro services to a certain degree.

Okay. Okay, thanks. And then – that’s great. You said 70% in core verticals, which aren’t impacted as much, but what is your direct exposure to travel, hospitality and other affected industries? And what are you assuming around those customers?

So the – so if you look at kind of the travel, hospitality and retail, that’s less than 5% of our revenue. And then the exposure to small SMB is minimal. So we’re kind of lucky there. Obviously, we’d love to have more business in other – in these verticals. But right now, it just happens to be the case that our strongest verticals are the ones that are least impacted by this crisis.

Great. Thanks, guys. Take care.

And we have a question from Chris Merwin from Goldman Sachs.

Hi, this is Kevin on for Chris. Thanks for taking my questions. Maybe one on hiring. How your – as you enter Q2 and beyond, I mean, how are any changes to hiring plans, particularly on the sales side? And how are you thinking about that for the rest of the year?

Yes. We’ve definitely changed our hiring plan in some areas, but not in all. We have curtailed our hiring in services, but we have maintained our hiring in sales and engineering. Now it’s a great time to find top employees who wouldn’t usually be available, and in some areas, we are committed to growing. And in services, we can wait now until we see how the market recovers. But Appian has committed to staying a hirer throughout. And we’re doing – I think we’re doing some really good recruiting during this period. April is a strong month for recruiting, probably the best of the year-to-date. I believe it puts us in an advantageous situation. It’s also been a source of some good press that we’re strong and growing during this period.

Great. Thank you.

And we have no further questions at time. Ladies and gentlemen, that does conclude today’s conference. We appreciate your participation today.