Good day, and welcome to the Appian Corporation Second Quarter 2020 Earnings Conference Call. Please note that today's conference is being recorded. And at this time, I'd like to turn the conference over to Mr. Scott Walker, Investor Relations. Please go ahead, sir.

Thank you, operator. Good afternoon, and thank you for joining us today to review Appian's second 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 for 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 third 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 upsell 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 are similar indications of future expectations. 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 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 Q2 2020 10-Q filing, our 2019 10-K filing and our other periodic filings with the SEC. These documents and the earnings call presentation are available in the Investors 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 in 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. Thank you all for joining us today. In the second quarter of 2020, Appian's cloud subscription revenue grew 30% year-over-year to $29.6 million, and our adjusted EBITDA was a loss of $7.0 million. Total revenue, including a decrease in professional services, grew 2% year-over-year to $66.8 million. Our cloud subscription revenue retention was 113% as of June 30, 2020, including a gross renewal rate of 98%. These results exceeded our guidance. Appian has navigated the pandemic relatively well. Like a lot of companies, we've seen a dip in services revenue, but we have strong results elsewhere. Some businesses have seen lower new customer acquisitions and longer sales cycles, but Appian saw the opposite. We nearly doubled our new logo wins compared to Q2 last year, and our sales cycles in Q2 were actually faster than our historical average. COVID has forced every organization to reassess how they react to changing circumstances. Every business now understands the importance of agility. A lot of the change that organizations want to make is done through software. So there's new emphasis on finding ways to create applications quickly. Naturally, low-code stands to benefit from this trend. Analysts looking at the post-COVID economy have concluded that low-code software will emerge as one of the winners. I generally agree with that. But I want to point out that most low-code technology is not capable of creating powerful mission-critical applications. And it's in these powerful core applications that change is needed most urgently in a crisis. Companies think software that they can bet their business on. Software, for example, that reconnects them with now virtual customers or automates new processes like applications for emergency loans or maximizes the productivity of their dispersed workforce or protects the safety of employees returning to the office. The most…

Thanks, Matt. I'll review the financial highlights of the quarter, and then we'll provide details on our guidance. Cloud subscription revenue for the second quarter was $29.6 million, an increase of 30% year-over-year and above the top end of our guidance. Our total subscriptions revenue was $41.4 million, an increase of 12% year-over-year. As we discussed last quarter, when we provided our initial Q1 guidance, we had approximately $4 million of on-prem revenue that we had originally expected to close in Q2 2020, but instead was closed earlier as part of Q1 2020 deals. Professional service revenue was $25.4 million, down 11% from $28.4 million in both the prior year period and in the first quarter. Partners continue to be a larger part of our ecosystem and are increasingly helping us sell more software. During the quarter, all of our PS engagements, both cloud and on-prem, were performed remotely. Total revenue in the second quarter was $66.8 million, an increase of 2% year-over-year and also above our guidance range. Our cloud subscription revenue retention rate as of June 30 was 113%, within the 110% to 120% range that we target on a quarterly basis. We remain pleased with our customers' expanded use of our platform. Our international operations contributed 37% of total revenue for Q2 compared with 33% in the prior year period, demonstrating the strength of our business, both domestically and internationally. The increase as a percent of revenue was predominantly due to lower professional services revenue in the U.S. Now I'll turn to our profitability metrics. For the second quarter, our non-GAAP gross profit margin was 69%, an increase of 383 basis points compared to the same period last year. Subscriptions non-GAAP gross profit margin was 89% in the second quarter, consistent with the second quarter of 2019.…

[Operator Instructions]. We will take our first question, and it comes from Sanjit Singh.

I wanted to dig a little bit into the pipeline you're seeing for the back half of the year. Are these like new low-code digital projects coming back into the pipeline? Or is the outlook still a little subdued? And maybe on top of that, are there any changes to pricing or incentives that you're giving to get customers to restart these projects if you should get them going?

Yes. Let me take that. Okay. First of all, we had some successful solutions launches in the second quarter. But I want to reassure you that, that is not the driver behind our -- behind the increase that we've seen in logos and the strength of our pipeline. We are also succeeding on nonsolutions opportunities. And so the answer to the second part of your question about whether we're offering a special deal is no. Because, in fact, the pipeline is strong, and we are able to get new logos even outside of these solutions context.

Got it. That was very helpful. And then maybe if I can make in 1 quick follow-up. On the CampusPass solution, the Workforce Safety solution, like how should we be thinking about the lifetime value of these solutions in a post-COVID world? Just how should we be thinking about that customer-related time value? That would be very helpful.

That's right. We think about this a lot. These are solutions that address an emergency situation, and we want to be sure that the relationship that we create with every buyer can be transitioned into a lasting relationship. We don't want to just be there for the emergency, we want to be their partner going into the future. And so we know we've got a window to impress them. And we are focused on that. We realize that from the beginning. We see this as like a dress rehearsal, right, for a real customer relationship. And we're already seeing success with. We've already seen cases where our solutions customer is delighted with what we've done, turnaround across the platform, we bought another application. So we're focused on that conversion, and we're already seeing success with it. The good news is Appian shows well, Appian works well. When people adopt this software, they typically do like it. We've got an extremely high customer satisfaction, often called out by the analysts for that. If only we could get more customers for whatever reason to just give this a serious try and see what they can do with it. I believe that we have an exceptionally strong retention rate on whatever sample would do that. So we know that's a challenge. We do want to convert, and we're working on it succeeding already.

Our next question comes from Mohit Gogia.

Congrats on the quarter. My first question is around, you highlighted a really good traction in terms of new logo wins and sales cycles shortening this quarter. Seems to be that you were able to leverage the partner ecosystem, which contributed towards this positive. So wondering, has anything changed in terms of the partner ecosystem, maybe the partner incentives or the playbook that basically drove a very healthy performance in that regard this quarter. And also, what are you seeing in terms of these partners like deals, right? Are there specific vertical? Are they geared towards certain initiatives? You mentioned, obviously, low-code is becoming top of the mind doing COVID. But just wondering if you can give us more color around that partner ecosystem and the partners like this? And then I have a follow-up question on the numbers.

Great. The two keys to our success with partners last quarter were being relevant in the midst of the COVID crisis, and we were relevant through solutions and through low-code because low-code is just, by its nature, important because it allows people -- companies to react quickly to change. And secondly, to a long process of maturation of relationship building and outreach to these partners that have put us front of mind when they see a problem, they think of us. And that's just part of -- the fruits of a long investment. Now you put those 2 factors together and we've been stronger than we've ever been with them.

Understood. My follow-up question, on the professional services business, right? So I mean, if it's -- no surprise, obviously, there is some headwinds there. But can you help us unpack those headwinds? Like, there is -- you're trying to leverage partners more for professional services. So there is 1. And then obviously, there is COVID, right? So if you think about a normalized run rate and COVID subsides, hopefully, how should we think about that business going forward? That's all from my end.

Yes. That's right. Okay. So going forward, I expect it still to be a grower. We've -- there's just some unique circumstances right now to shape that. I believe that we can grow our professional services at a very modest rate and still have partners enthusiastically growing and taking a good deal of the upside in the additional market space that we're creating with our software. I think there's room for everybody to win here. And our individual services are still valuable because they demonstrate what can be done with our software. Our value proposition comes through very clearly. So I believe there's room for all. We don't mean to shrink our PS into nonexisting. We instead expect it to coexist happily and grow slowly once we're out of the COVID situation.

And I think we talked about the Architect Services as well, coming in at the high end helping customers solve very complex problems. And we worked with several of our customers that were basically partner-led engagements, where the PS engagements were done by the partners, but we came in kind of with the squad team, if you will, the Architect Services and help them out. And so I would expect we're going to be offering and continue to offer these high-level, high-margin offerings. So I think going forward, we'll be a grower, but to Matt's point, it will be slower grind in it.

Our next question comes from Arjun Bhatia.

Good job executing in the quarter here, and it's been a tough environment. Matt, for you, on the R&D side, it's been great to see some of the productivity of the product, or you talked about some of the new solutions that you introduced this quarter, and I think you made some enhancements to the core platform as well along with the RPA and process mining integration. Can you just maybe give us an idea as you're thinking forward in your R&D efforts where you're deploying resources? Whether it's on the productization front or further enhancements on the core platform?

Yes, I'm glad you asked about this because I'm also proud of the results that we had with our R&D side this past quarter. In the face of an emergency, we produced some applications, and we produced them faster than anyone else in the market, to my knowledge, was able to produce them. A digital health strategy is something every business needs right now to protect their returning workers as they come back to the workplace. As I mentioned, only about 10%, 12% of them actually have it. The others are using pen and paper or Excel or something like that, which really isn't responsible. A digital health strategy has 3 core components, and we put all 3 of these together and got to market faster than our competition. First of all, you got to collect a lot of data about your employees, the facilities, the places they went, the vulnerabilities, all that because the more you know, the more you can protect people. You collect all that. Number two, you bring it to bear at the moment when there's a decision to be made. Let's say an employee has a test or has a symptom or they think they might be sick. At that moment, you got to make a quick decision. So you got to have all that data brought to bear in the moment and accessible to the decision maker. And then that requires a lot of integration, of course. And then number three, whatever decision you make, you've got to act on it immediately. If you want to tell this person not to come to work this morning. Do you want to tell that person that they got to get a quarantine or a test? Do you want to revoke those 10 people's badge, right? It…

That's helpful color. And then a quick follow-up on the new customer and new logos that you talked about. I'm just curious whether you're seeing kind of an inflection in the awareness, an CEO, CIO awareness of the low-code category? Meaning, were these customers that were in the pipeline? Or was it the pandemic that kind of accelerated their low-code road map relative to what they had maybe in January, February this year?

Yes. I think that -- if that's happening, it's just beginning to happen. We -- I do believe that low-code is caught on this year. Actually, I think low-code would have caught on this year even without COVID. I think it's an idea whose time had arrived. I was saying at the end of last year and the beginning of this year that in this new decade, I thought the majority of the software written around the world be written in low-code. And that's sounding a lot less hyperbolic than it was a few months ago because it really seems like, right, the circumstances change, we get addicted to speed. We decide everything should be fast. I think organizations are going to expect this. And you can see it in the way the low-code is being used less as a noun and more as an adjective. It's often used now to describe anything the authorship of which should be quick in software as opposed to just 1 industry that exists in order to facilitate quick authorship.

Our next question comes from Chris Merwin.

This is Kevin on for Chris. Matt, given the current environment, has there been any shift in the way customers are thinking about cloud versus on-prem deployments?

All right. Thanks, Kevin. I think that there is a continuing interest. I just see the same natural preference for the cloud that we have continued to see the same trend toward the cloud that there's been. I suppose there might be a little more urgency around cloud. And I did list cloud as one of the things that I thought would be accentuated in the post-COVID era because it does allow for that remote control, that instant instantiation. It's a change facilitator. I think there's a lot of reasons why cloud will be called out as a positive part of the reaction to COVID. So I expect nothing but goodness for the cloud, how do this experience. And I suppose we might have seen just a little bit of an additional preference. But remember, we do almost all cloud anyway. So for us, we're already solidly in the cloud corner.

Great. That makes sense. And then maybe how is the federal pipeline progressing? Any additional color to call out there?

Sure. The federal pipeline is impressive right now. It's strong. We've got a solution that's specifically targeting the federal space. It's an acquisition management solution for writing contracts, which is something that every agency needs to do, and they put a lot of focus on it, lot of money behind it. Efficiency is extremely important. And we have created a leading product in this market as a solution on top of our platform. We've demonstrated a couple of the highest profile cases in the federal government, including the Air Force, to them to show how confident this solution is at handling a procurement, and it comes out on top. It's done great. It's differentiated itself against incumbents, against traditional methods. It's flexible, it's agile, it's quick to deploy, it's user-friendly. It's been doing really well. And both because of that and outside of that, our federal pipeline looks very strong.

Our next question comes from Alex Kurtz.

Good quarter, guys. Just want to -- I know you're not giving fiscal -- the full year guide, which I appreciate, but why not go to take a stab at it, obviously, and with the good print here and the guide, just so we don't get maybe too ahead of ourselves on Q4 and what that means for the run rate into '21. Mark, is there some considerations that we should be making across the different revenue segments? I think you've already hinted at a few of them. But just to clarify, as we really dial in the Q4 numbers, that would be helpful. Just so we don't extrapolate too far into '21 and beyond.

Yes. Let me say, just talking about the full year guide. We still see that there's plenty of volatility left in COVID, right? There could be another wave. It's still an area of uncertainty. And we see that most comparable companies are not giving a full year guide, which is why we decided not to. But I want to clarify that I remain optimistic, maybe even very optimistic about the business where it stands now about the second half of this year. And so the lack of a full year guide is not to be taken as an expression of pessimism.

Noted. Mark, you want to add to that?

Yes. I mean, I think if you're looking at kind of the extrapolation, you generally know how we like to give guidance, we like to be conservative. So I would urge you and everybody listening on the call to kind of follow an element of conservatism as it relates to the second half of the year. We kind of mapped out Q3, you can follow that same road map for Q4. And I think you'll be in an appropriate place.

Our next question comes from Derrick Wood.

It's Andrew on for Derek. Nice quarter. Now, I wanted to touch on sales hiring in the quarter and what are your second plans for the second half versus first half? And any challenges in hiring virtually?

Sure. We are full speed ahead on sales hiring, have been all year, never turned it off. And yes, it is challenging. You see that our comparable companies are hiring as well. So the market didn't really get easy at any point to hire good ADUs. Luckily, we've got a great product. We've got happy customers. We have an edge in the market, but the market itself was never simple. As for hiring at a distance, that's actually not particularly difficult for us. I think virtual is a perfectly good way to do interviews. We're practiced at it. I've done a lot of virtual interviews and so is the whole organization. I don't believe that is a stumbling block. If anything, it's an accelerator because in the past too, it was considered obligatory to meet in person or bring in a candidate to the headquarters. And now it's perfectly understandable while you wouldn't do that and you move forward more rapidly.

Great. And then on the 76% on the Workforce solutions for new customers, maybe just talk about how you can upsell them later. And are you seeing any signs of that so far? And Mark, what that might mean for expansion rates in the second half?

It's absolutely happening. We're focused on it. We're already doing it. We understand that, that's the order business when you get a solutions customer. And that's also why we're deploying our solutions in families, by the way. Every solution is going to have -- most of them anyway, going to have another solution that connects to us as a natural glide path for the customer journey to take. I think that those first few purchases are very confirming purchases. And you got to get the customer in the habit of consuming and buying and consuming more. So we're going to make this systematized and easy. We absolutely keep an eye on that as we gather a new wave of solutions customers.

Yes. I mean, as you guys know, the way we generally land and then expand, it takes some time to get that expansion. These are Q2 deals that have happened. So from a modeling perspective, continue to earlier, should probably see significant, especially in the P&L, would be sometime in Q4 potentially from these. These are more going to be great opportunities for us for 2021 and beyond from a momentum perspective.

[Operator Instructions]. And at this time, we have no additional questions.

Great. End the call.

Ladies and gentlemen, this does conclude our call. We do appreciate your participation. At this time, you may disconnect.