Matt Calkins - Chairman, Chief Executive Officer Mark Lynch - Chief Financial Officer Srinivas Anantha - Director of Investor Relations

Good day! And welcome to Appian Corporation’s Second Quarter 2021 Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Srinivas Anantha, Director of Investor Relations. Please go ahead, sir.

Thank you, operator. Good afternoon, and thank you for joining us to review Appian’s second quarter 2021 financial results. With me today are Matt Calkins, Chairman and Chief Executive Officer; and Mark Lynch, Chief Financial Officer. After prepared remarks, we will open the call for questions. During this call, we may make statements related to our business that are forward-looking under Federal Securities Laws and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These includes comments related to our financial results, trends and guidance for the third quarter and full-year 2021, 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 or similar indications of future expectations. These statements reflect our views only as of today. They do not represent our views as of any subsequent date. They 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, refer to our 2020 10-K and other periodic filings with the SEC. These documents and the earnings call presentation are available in the investors section of our website www.appian.com. Additionally, non-GAAP financial measures will be discussed on this conference call. Refer to the tables in our earnings release and the Investor section of our website for a reconciliation of these measures to their most directly comparable GAAP financial measures. With that, I would like to turn the call to our CEO, Matt Calkins. Matt.

Thanks Sri, and thank you all for joining us today. In the second quarter of 2021, Appian’s cloud subscription revenue grew 44% year-over-year, to $42.5 million. Subscriptions revenue grew 37%, to $56.9 million. Total revenue grew 24% year-over-year, to $83.0 million. Our cloud subscription revenue retention rate was 121% at quarter end, and our adjusted EBITDA was a loss of $16.3 million, that’s pretty good numbers for us. In addition to some good results, though, we’re also announcing an acquisition of Lana Labs, a leading process mining firm. We expect the transaction to close next week. Process mining is the technology that examines the usage logs to discover what work people are actively doing, and see the patterns in network and find processes that have not yet been automated. Those processes can then be automated, in Appian using workflow technology. So, process mining is a great complement to workflow. Process mining discovers processes, workflow, automates them. Combining them in one product may create new business opportunities, help substantiate the return of investment in Appian, and accelerate our expansion within our existing customer base. This acquisition also signals for Appian, believes the Low-code automation market is growing. We believe the heart of this evolving and consolidated industry is workflow. Workflow is about doing, as our automation technologies like RPA. Process mining by contrast is about knowing, knowing and doing are natural compliments. When used together that create greater value, and either component could have conveyed alone. Here’s an example of the synergy between process mining and low-code automation. This is from a leading insurer, who is also an Appian customer. They bought Appian late last year and built a few processes. They saw how quickly Appian could automate the processes they knew they had to improve. At the same time, they…

Thanks, Matt. I’ll review the financial highlights for the quarter and then we’ll provide details on our Q3 and full year 2021 guidance. Cloud subscription revenue for the second quarter was 42.5% an increase of 44% year-over-year, and above the top-end of our guidance. Our total subscriptions revenue was $56.9 million, an increase of 37% year-over-year. Professional services revenue was $26.1 million up 3% from the $25.4 million in the prior year period and up 4% from $25.1 million in the prior quarter. Partners continue to be a larger part of our ecosystem. They help us sell software and they performed the professional services work with respect to any new service contracts they sign. As the usage of partners expands, we expect a proportion of our total revenue from subscriptions to increase over time, relative to professional services. Subscriptions revenue was 69% of total revenue in the second quarter and 70% for the first half of 2021 as compared to 62% and 63% respectively in the prior year periods. Total revenue in the second quarter was $83 million, an increase of 24% year-over-year and also above our guidance range. Our cloud subscription revenue retention rate as of June 30 was 121% as compared to 113% in the year ago period and 118% in the prior quarter. We are pleased with our customer’s expanded use of our platform. As a reminder, we continue to target cloud subscription revenue retention rate of 110% to 120% on a quarterly basis. Our international operations contributed 35% of total revenue for Q2, compared with 37% in the prior year period, demonstrating the balance of our business both domestically and internationally. Our cloud software bookings were approximately 80% of total software ECB bookings in the first half of 2021 consistent with the full year 2020. Now,…

Thank you. [Operator Instructions]. We’ll take our first question from Sanjit Singh with Morgan Stanley. Please go ahead.

Thank you for taking the questions, and congrats on the 44% cloud revenue growth. Matt, I want to talk about the acquisition a little bit. So when I look at the platform capabilities, low-code, plus RPA, plus process mining, you’re really starting to build out that automation platform, and I guess the question is that, should we think that this will allow you to target a different segment market, different types of customers, and from a competitive environment, competitive standpoint rather, does this allow you to go after a different set of competitors, now that you’re bringing these adjacent technologies together in a unified platform.

I appreciate that question. I think that these features coming together allows us to satisfy a larger market. I believe that this new market is going to be bigger than some of its components and that Appian by assembling these components and doing so tightly with real synergistic integration is going to be a leader in the provision of this new bundle of goods. So I see this as a very strategic move by us. We’re reaching beyond just low-code. As I mentioned the notes were going beyond our legacy of action. Appian has always been about taking actions, structuring action, executing action. We’re moving beyond that now, into knowing what you should take action upon. I think it’s a great complement to what we do. It’s going to allow us to expand inside of our existing customer base. It’s also going to allow us to discover a great deal more demand than we would have discovered otherwise. And, I believe over time that these components are so naturally complementary, that they are going to be perceived as the same market by buyers. So we’re just getting there first.

Understood. And then on the cloud expansion rate, that hit 121% this quarter and Mark you mentioned that, that the rate is going to fluctuate between 110% to 120%. I wanted to sort of sanity check that, in the sense that you know cloud is now 80% of bookings and so if you compare the expansion rates that you were seeing, an earlier part of the cloud story. So when more of the business was coming from kind of term subscriptions and if you look at the expansion rate on premise versus the expansion that you’re seeing in the cloud. Would it – it should be – the expansion rate will be structurally higher in the cloud, and so that these 120% type expansion rates could potentially be more durable going forward. Any thoughts on that in terms of this comparative expense rates between these two sides of the business?

Candidly Sanjit, I would think that the expansion rates are going to be very similar for the on-prem and the cloud. We land with solving one particular problem and then we expand through other applications that the customer wants to deploy throughout the enterprise. And so like really, certain customers are just super paranoid about having their deployments on-prem behind their firewall. But, the sales motion is very similar regardless of where the software is located. So, I don’t think there’s a material difference between cloud deployment to where on-prem as it relates to the expansion rates.

Got it! Very interesting. Congrats on the quarter.

Thank you. We’ll take our next question from Arjun Bhatia from William Blair.

Perfect. Thank you very much. And I’ll echo my congrats on closing the acquisition. Certainly a very interesting space and one that’s seeing a lot of demand. Matt, maybe for you, what can you just about Lana Labs, what about Lana Labs made it a good fit for Appian? We know there’s quite a few players in the space. What’s stuck out to you? And then when you look at your customer base, from a process-mining perspective, are there other vendors that your customers are all using to address the process-mining use case or do you see this as more of a Greenfield opportunity.

Alright, I think that there are other vendors, but this is still probably more Greenfield than the RPA move was a year and a half ago. I’m excited about the potential of this move. I think that we’re hitting the market at the right time, and the natural synergy between knowing and doing is so strong that we’re going to make a splash with this capability. So, I’m excited about where we’re going here. I think that it’s going to – it’s going to have a big effect on our existing customers. But then I also think that once this technology is well understood, it will be clear to the broader market, how valuable it is to go through this natural discovery process. Now your first part of the question was about how we selected Lana and I want to address that as well. We don’t look for market impact in an acquisition, we look for technology because our goal is to create value. And so, we’re not trying to buy customers, buy revenue, we’re trying to put together a set of technologies that has great value. So, we’re looking for a solid team, good culture, good morale and a winning piece of technology, and that’s what we found. And so we’re going to double down on what we’ve discovered here. It’s a great little operation. I think we’re really fortunate to come across it. They use the kind of technologies we use, the philosophy we have, that put the customers first like we do, it’s cloud, it’s very compatible with what we do and that to us is by far the most important consideration. I’d rather have that and have scale or have them have more customers, we’ll earn the customers. We put together great technologies, we show the synergy, we’ll earn the customers. We need to start with compatible technology built by great people.

Very helpful. And maybe I sensed a bit of a – in your prepared remarks a bit of an inflection in the partner motion, right. Even as we look at the back half of the year, Mark talked about professional services being down sequentially from where we are today. Is there anything that you can think that’s driving that inflection in the partners now? Certainly it’s been a journey over the last couple of years, but is there – would you attribute that to something, maybe your platform vision as you add these different components or just a general increase in the awareness of low-code automation, we just love to get your thoughts there?

Well, I want to echo and agree with your observation, that something is fundamentally changing about the way our product when it gets to the market. I think partners are stepping up and taking a greater role and that it’s even happening faster than we anticipated, which is for the best, right. The side effects of this, the higher commissions, the lower CytoSorb, these are things that we’re happy to accommodate. The key strategic move is that partners are driving the adoption of our software, and we see partner practices multiplying versus last year, given really impressive growth; commitments being made by partners, staffing up experts to playing them, pitching our product, building solutions on our product. This is a very important step, strategically for us in our intended direction.

Perfect! Thank you, and congrats again on the quarter.

Thank you.

Thanks.

Thank you. We’ll take our next question from Steven Enders with KeyBanc.

Great! Thanks for taking my questions. I just want to touch on the acquisition again, just wondering how you’re thinking about the monetization of Lana here. Is there something that you’re expecting to directly monetize or is this more about utilizing a process mining to figure out where the next place is to deploy RPA or your own low-code technologies within a customer?

Thank you for the question. We’re not going to directly monetize it, which is to say, we’re not going to have a price on this technology in the near term. We’re instead going to monetize it indirectly, which is to say by expanding within existing customers and discovering more business and differentiating from the competition that has not achieved the total perimeter of modern low-code automation as quickly as we have. So, that is our monetization strategy.

Okay, perfect! Great! It’s great to here. And then maybe for Mark. I just want to get a better sense for some of the puts and takes on the guide here. EBITDA was guided down a little bit from, I think primarily from the quarter and the impact from higher commissions. But I guess, how should we think about the upside that we did see on the service line and the impact from that going forward? And then also the EBITDA component of that, and your commissions there?

Yes, so the – you know what’s going into the guide, one is the Lana, the additional expenses from Lana, it’s about $1 million in Q3 and for the full half of the year it’s approximately $3 million, so its implied and basically baked into the adjusted EBITDA guide. The subscription, the total revenue guide basically has implicit in it a reduction in PS right? So PS continues to reduce a little bit based on the partner activity that Matt just talked about. And then the cloud subscription revenue guide, we actually – you know we have flowed through the deed and raised it nicely to 35% growth rate for the year. So, we feel good about the guide. It’s typical acting guides. Candidly we’re fairly conservative on our guides. It pains Matt when we put it together, but that’s where we’re at.

Okay, perfect! Thank you.

Thank you. We’ll take our next question from Fred Havemeyer with Macquarie.

Hey, thank you for this. So you noted in your deck that partners is roughly double bookings, year-to-year, which is notable here. Could you describe the types of use cases that you’re seeing your partners developing, Appi and [inaudible] as they are building up their practices?

There’s a myriad of them. Let me describe one, just to give you an idea. We’ve been approaching the state and local business here in the U.S., state and local government with the leadership and in tight coordination with a partner, a large, large firm one of the world’s largest and they’ve been -- they had the context, they’ve steered us in the right direction, they’re creating IP, they are making the best. They are carrying the deals for a lot of the – they are doing a lot of the heavy lifting and the results are so promising that I now consider this to be one of our best up and coming verticals. That’s an example of the kind of help we’re getting today from partners, the kind of win-win they’re seeing working with us. It’s on a different league than we saw even 12 months ago.

Thank you, for that. Then a question also about Lana. So, you mentioned the costs that were coming online from this acquisition a little bit earlier. I wanted to ask, are you embedding any anticipated revenue contribution in 2021 from the acquisition?

Nothing important. It will be a negligible revenue.

Deminimis?

Got it.

Thank you. [Operator Instructions] We’ll take our next question from Derrick Wood with Cowen and Company.

Great! Thanks. It’s Andrew on for Derrick. Was wondering on sales rep productivity in the quarter versus your expectations and maybe just talk about some of Eric’s new initiatives that have improved that, and then also how was sales rep hiring track versus your expectations?

Alright, well we don’t speak to hiring, but I can tell you that productivity is in really good shape. On the board, batting average so to speak is, well I don’t remember it being higher. We don’t disclose this, but it’s in a good place we’re seeing a lot more productivity. So, I’d say that those initiatives are moving in the right direction strongly so.

Thanks. And then government revenue looked like it was up a solid 30% year-over-year. Any color on the software growth within that? Maybe just talk about how the Q3 pipeline is trending?

Well, I can’t say too much about the pipeline. I can tell you that I feel we’ve got a great value proposition, and there are some promising opportunities in the government right now that I can tell you that I’m excited about. The Government Acquisition Management Solution now has four separate components, each of which purchasable has its own product and I’m excited about that. We just launched the fourth recently, and the uptake. The reception has been terrific, we’re seeing good uptake, good pipeline on that concept. I’m also excited about the state and local initiative that we spoke about recently. So without getting too specific about the pipeline, let me tell you that I’m bullish about the potential.

Great! Thanks guys.

Thank you. That does conclude today’s question-and-answer session and that does conclude today’s conference. We do thank you for your participation, and you may now disconnect!