Good day, and thank you for standing by. Welcome to Appian First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Sri Anantha, Senior Director of Finance, Investor Relations. Please go ahead.

Thank you, Operator. Good afternoon, and thank you for joining us to review Appian's first quarter 2023 financial results. With me today are Matt Calkins, Chairman and Chief Executive Officer; and Mark Matheos, Chief Financial Officer. After prepared remarks, we will open the call for questions. Today, you will want to follow along with the earnings presentation. You can download it from the main page of our investor site at investors.appian.com. 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 include comments related to our financial results, trends and guidance for the second quarter and full-year 2023, 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 risk and other important factors that could affect our actual results, refer to our 2022 10-K, our 10-Q for Q1 2023 and other periodic filings with the SEC. These documents are also available on our Investors section of our website. Additionally, non-GAAP financial measures will be discussed on this conference call. Refer to the tables in our earnings release and the Investors 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 everyone for joining us today. In the first quarter of 2023, Appian’s cloud subscriptions revenue grew 31% year-over-year to $69.7 million. Overall subscriptions revenue almost broke the $100 million line, but finished at $99.0 million. Total revenue grew 18% year-over-year to $135.2 million. Our cloud subscription revenue retention rate was 115% as of March 31, our adjusted EBITDA was a loss of $15.8 million. Our non-GAAP gross margin set a post IPO record at 75%. These results exceeded our guidance. We hosted our annual conference Appian World in San Diego last week, I'm pleased with the attendance and the enthusiasm. More than twice as many prospects came to Appian World this year as last. Our conference theme was process automation, customers talked about the benefits of running the whole process lifecycle on Appian's platform. On stage, I explained the emerging split between what I call public AI and private AI. Public AI involves sharing data with a cloud AI provider, and that's unacceptable to many of our clients. Companies want to keep control of their data. They may have legal restrictions as well and they don't want to help train an algorithm that could then be used by their competitors. Private AI by contrast means every company cultivates their own AI algorithms starting with a public model, but training it privately and using it privately. I predict that in the long run private AI wins, which is to say that it becomes the more popular model for our customers. I think customized AI algorithms will someday they be as normal as custom applications inside big firms. Private AI will feature strong accuracy despite having smaller training data sets, because the data is more pertinent and the scope of each AI will be narrower. These AIs…

Thanks, Matt. I'll review the financial highlights for the quarter and then we'll provide guidance for Q2 and the full-year 2023. Total revenue, cloud subscription revenue and adjusted EBITDA were above guidance, while non-GAAP EPS was at the top end of guidance. We saw continued healthy contribution from existing customers and strong growth from key industry verticals, especially the U.S. public sector. Let's go into the details. Cloud subscription revenue was $69.7 million, an increase of 31% year-over-year and above guidance. On a constant currency basis, cloud subscription revenue grew 32% year-over-year. Subscription revenue was $99 million, an increase of 18% year-over-year. On a constant currency basis, subscriptions revenue grew 19% year-over-year. It was impacted by lower on-prem license revenue and as some customers converted to the cloud this quarter and from a higher mix of new cloud bookings during the quarter. Professional services revenue was $36.3 million, an increase of 19% year-over-year. This quarter, services revenue benefited from new large projects with existing customers and recognition of revenue that was on hold from Q4. As previously noted, we have limited visibility in services and a few large projects can influence professional services revenue in any given quarter. Long-term, we believe partners will drive the majority of our implementations. Our professional services will continue to be strategic by enabling partners and driving customer success. However, we expect professional services revenue to continue to decline as a percentage of total revenue. Total revenue was $135.2 million, an increase of 18% year-over-year and above our guidance. On a constant currency basis, total revenue grew 19% year-over-year. Subscriptions revenue was 73% of total revenue, consistent with the year ago period and 74% in the prior quarter. Our cloud subscription revenue retention rate was 115% as of March 31, 2023, consistent with the prior…

Thank you. [Operator Instructions] Our first question comes from the line of Steve Enders with Citi. Your line is now open.

Okay, great. Thanks for taking the question here. I guess, I just want to start and ask about just what you're seeing out there in the deal environment currently? And if you're seeing any change in kind of the deal cycles or and if automation and low code workflow solutions are becoming a bigger part of the discussion points as maybe the macro begins to follow a little bit more. So, yes, it's just great to get more details on what you're seeing out there?

Yes, okay, great. We are seeing some deal delays in extra scrutiny, but it's not much more than last quarter, so it's just a gradual progression in that. And I wouldn't say it was overly disruptive to this quarter. As for whether it shines up brighter spotlight on automation, I believe that in the long run having to do more with less in a year of not plenty will encourage the, kind of, creativity that will turn people toward an automation solution and increase the popularity of this industry, I think that's going to take time. So we're definitely not seeing that yet.

Okay. Got you. That's helpful. And then maybe just on how you end the big call there, just on the severance -- on the severance side and kind of more scrutiny on the cost structure. I guess I appreciate the commentary about getting above 10% in the second-half of the year on EBITDA, but I guess maybe what is expected a little bit more built into the guide there versus kind of what you -- or versus kind of what you showed there? So I guess is there anything that we should be thinking about for timing or is there -- how do we think about incremental investments that are coming in here as well?

Yes. So I mean to be clear, we're still in gross med, right? And we're still investing overall, I think the point to pay attention to is in certain areas we will kind of reinvest in backfill. And I think on a net basis, there’s certainly will be savings, and we've kind of shown that with our $5 million improvement in our full-year adjusted EBITDA adjustment there. So, yes, I think we're definitely continuing, kind of, our growth with scrutiny path forward.

Okay. Thanks for taking the questions.

Thank you. Our next question comes from the line of Sanjit Singh with Morgan Stanley. Your line is now open.

Yes, thank you for taking the question. Mark had a question for you on the on-premises versus cloud dynamics this quarter. It sounded like, and I think you mentioned in the script, there was -- you saw more customer migrations on the cloud. Any color there on what's driving that modem -- that on-premise customer base moving more to cloud? And or sort of the impact on on-premise revenue, because of those migrations?

Yes. So we saw some renewals that were slated to be on-prem that actually renewed as cloud. And there were only a couple, but they were pretty sizable, they weren't small. So that did move the needle. In addition, we had as I noted an 85% cloud rate on our new deals as opposed to the multiple 80%. But on the former on kind of the -- kind of renewal based question, we hadn't seen much movement in that historically over the past couple of three years, but we did notice that in Q1 just for a couple of those customers. We don't necessarily expect a trend to, kind of, emerge here, so to speak on a renewal basis, we do have a good portion of them already on the cloud and it’s been pretty stable in recent history.

That's right, we think…

Yes, and just to follow-up there, I guess two questions. For the customers that do migrate over, is the [Indiscernible] that those customers have moved from on-premise to cloud? Do you think they have the potential to be higher expanding customers going forward? And the second question, Matt, is for you just coming off of Appian World, what sort of your assessment of, kind of, the non-public sector pipeline going to the rest of the year? What do you look at your health and life science of customers, financial service of customers? How is that shaking up post Appian World?

Okay, great. First of all, with regards to whether there's an additional expansion and profitability on cloud customers versus on-premise? In our opinion, the experience of being an Appian Cloud customer is slightly superior to [Technical Difficulty] of being an Appian on-premise customer. And therefore, I would expect those customers to be maybe a little bit faster to expand, but just a little, right. The experience is very clunks and I don't want overplay that [Technical Difficulty] with a slight positive effect there. And then secondly with regards to the non-public sector pipeline. It is strong relative to last year, and I don't want to break it out by sector. We don't have it broken out by sector, but the overall non-public is good.

I appreciate that, Matt. Thank you.

Thank you. Our next question comes from the line of Kevin Kumar with Goldman Sachs. Your line is now open.

Thanks for taking the question. I had one on the increased sales capacity that's been added over the last couple of quarters. Just curious where the incremental capacity is being deployed and are you starting to see that positively impact KPIs at this pipeline conversion rates or maybe new logo growth? Thanks.

Sorry, what’s the voice there once? Okay, well, I'll answer the question. We'll just be careful about having one voice at a time. The question make it back to it. It was about incremental pipeline and sales from the new cohort of account executives that we added in late last year, I believe. And I would say it's yes to the pipeline and no to the bookings. There's been enough time for that to help us with pipeline and later this year maybe second-half, we’ll see that start to contribute to bookings.

Okay. That's helpful. And then maybe just one on the new public sector solutions. GAM has been really successful and it's -- government is a meaningful part of the overall revenue base. So just curious kind of on the new solutions and what type of government departments will Appian be targeting and maybe how impactful do you think they are in terms of broadening the overall government GAM? Thank you.

Yes, let me clarify that this new government solution is part of GAM. We have six modules in GAM, and it covers the life cycle of the acquisitions process. So we're now able to sell all the six and they execute them sequentially for the same public sector customer, which is to say we're doubling down on a winner. We're getting good traction with this solution. We have buyers. We feel confident that we can sell those buyers an additional module that's built to be compatible with the modules they already have. So we are hitting the same need, but more with this latest module. So that's what we're doing. And we're also as you noted branching into state and local with state wrap. And with partnerships that target the state local business with GAM like functionality. So that's our primary avenue into the government. And as for whether that's a major value add, absolutely, these acquisitions is a primary process for government buyers. It's done very systematically, it’s done in great volume and we've shown a substantial advantage over our competitors. So very good business.

Thanks for taking my questions.

Thank you. Our next question comes from the line of Joe Meares with Truist Securities. Your line is now open.

Hey, guys. Thanks for taking the questions. Appreciate it. It's great if you can speak to any cross sell or up sell that has been a result of the new process mining functionality that you guys have and -- or any recent wins that have to do with the process mining that?

Yes. Well, process mining has definitely allowed us to upsell. I have not deployed it. Together the first sale because the initial step in process mining is a services intensive and somewhat slow step. And you can see the way we're working around that in our new process mining vision, which has to do with leveraging Appian's Data Fabric in order to rapidly collect the data to create an assessment about the efficiency of your process by using our own data gathering capabilities, we're going to sidestep that flaw in the data mining, so the process mining industry. So we're using as an expansion tool now. But going forward, we plan to use it as an awareness tool putting a spotlight on Appian's greatest strengths. That's our capability of handling data, the Data Fabric exploring data from end-to-end of the enterprise being able to deploy any kind of automation tool in real time to start handling work and comparing it A versus B. Appian has specific advantages, right? We're playing for certain synergies. We united factors and now we need to make that pay. And whether that set of factors is end-to-end coverage of process or the total suite of automation technology or just access to all the data in an enterprise, we need those synergies to pay off and the process HQ product is going to showcase those three synergies and spotlight the value of process mining along the way. I know that was a long answer maybe more technical than you wanted, but process HQ is very strategic to us in that it polishes and displays the kind of full suite advantages that Appian has technologically.

Super helpful with the detail. And then just as a follow-up, in our conversations with Appian World, it sounds like a big reason why a lot of customers choose Appian's products is the security that's embedded. And so I'm just curious if you could kind of explain how having Impact Level 5 set you guys apart from competitors? Thanks so much.

All right. Well IL-5 is going to be necessary to some buyers. So that will set us apart in a big way. It makes us eligible to bid on specific public sector high security projects. But IL-5 impresses many buyers, who do not have that as a formal requirement. It reassures them as to the security of their information when they work with Appian, we intend to be the high-end leader in this space. And it's calls like IL-5 that substantiate our leadership and encourage our customers be they public sector or not to trust us.

Thank you. Our next question comes from the line of Jacob Roberge with William Blair. Your line is now open.

[Technical Difficulty] your results. And thanks for taking my questions. Just wanted to touch on generative AI. I think one of the more compelling use cases that, that I've heard on the generative AI front has been around increases to developer productivity. So curious how you think that productivity increase flows into the low code and automation space given that's one of the core value props for the tech?

Yes. It absolutely is an accelerator in low code. We're using it right now, our co -pilot feature suggests smart services to enhance and finish the application you're trying to create. And so it's already a nice accelerator. We've also shown how some generative AI can literally write the sale code that underlies Appian applications. So we're approaching it from different directions. We're very excited about the acceleration demonstrated, but we also want to caution people against thinking AI is a magic answer, particularly for our customers generally industry leaders doing distinctive, maybe unique things. You can't get your answer from AI, if they've never seen an application like this before. So AI is an accelerant. It's not a substitute. It's a partner and not a replacement. When we treat it that way, we get great benefits out of AI, but it's nowhere near able take away the human in the chair.

Some of the demand you're seeing for some of your newer products like process mining, RPA and portals. Have any of those been more or less prioritized as a result of the macro? And then I'm curious if you think that any of those products could see outsized benefits or even headwinds from the adoption of generative AI?

Yes, that’s interesting. Well, you could say that AI is a tool in an automation portfolio and thus a substitute for other tools in an automation portfolio and perhaps, if AI were exceptionally much better, it might diminish the demand for RPA or business rules or something else. But right now, I don't see it that way. I see AI as being good in its lanes and other automation tools being good in their lane. And so I still think there's plenty of demand for say RPA or these others. So I don't want to call a distortion on the automation market right now. And as for which of them is popular, I think with every one of them, the best feature is the synergy, is the combination, the availability of all of them to serve the client if and when they need it. And therefore it's, kind of, dodging your question, because I don't think that one of them headlines the offering or drives the adoption, it's the convenience and the totality that are the virtue.

[Technical Difficulty] Taking my questions.

Thank you. Our next question comes from the line of Derrick Wood with TD Cowen. Your line is now open.

Great. Thanks guys, it’s Adrian on for Derek. Matt, financial services is a pretty big vertical for you. Just wondering if saw any impact from the banking crisis on customer decision making there? And how our pipelines for that vertical tracking versus three months ago?

Yes, that's good. First of all, we didn't see any blowback from the banking industry episode this quarter. I don't know what has affected some financial services decision makers to apply extra scrutiny, that's possible, but that would be a second order consequence. I can speak to the absence of first order sequences. So that's my answer.

And then last quarter you mentioned Pega competition was a factor in some deals as customers are noticing. What's going on there? Did you see that again this quarter? And is that helping drive up win rates this year at all?

Yes. Well, our win rate against Pega is pretty good. But it's actually pretty good against everybody. We tend to do well once we get into the competition. Once we're on the shortlist, so I don't know that it's changed much quarter-to-quarter. In fact, I haven't noticed any change serially versus Q1 with regards to any of these competitors, including Pega Systems, remains our most common competition and against whom we have a solid record.

Thank you. Our next question comes from the line of Andrew DeGasperi with Berenberg. Your line is now open.

Thanks for taking my question. I relative to your federal customers, which I know have been pretty meaningful in terms of the opportunities for you. With the state land certification, how big is the market for state customers and another?

Yes. Well, the challenge with the state side is being able to address them. The reason we haven't touched that market before is, because we didn't have the expertise and the connections in state houses. And I felt in the past that, that was a good market for a very large firm with a well-developed an extensive sales organization. We mean now to approach that market by partnering with a firm that does have those connections and by at least expending the resources internally to be sure that our product is well targeted for those buyers' needs, which are a little bit different from the federal buyers' needs, but not so terribly that our successes is in federal don't qualify us and put us in a favorable light. We'll have to see how much of this market we can access. And how much state and local buyers are willing to spend on this technology. Initial feedback is good. I mentioned one institution, a state and local institution that made a purchase this quarter. I mentioned another major one last quarter. We're picking up some wins. At the state level, but I believe it early to state how large this could be for us. So I'll just leave it at that.

Thanks Matt. And then maybe on the partnerships side, you've had quite a few partners at Appian World this year, I think, over 300 and I noticed many were from international end markets. I was just wondering, are we still -- is there potential for grow from those ex-U.S. to accelerate, you see a lot of activity outside the U.S?

Okay. First of all, yes, the partners attended Appian World very well. I gave my first speech of the week was to the partner gathering and they were overflowing their room that people are standing on the sides and at the back and it was a pretty big room. So we're very pleased with the partner participation. I think that's because they see a lot of opportunity. They're doing this because the demand is real and they're making good money on Appian and the demand is resilient as well. And so as to whether it's international, I would say it may be slightly more international than it was before, but it hasn't been a big shift. It's probably just that where we're getting more attention in India than we did before. Though it was already [Technical Difficulty] pretty good, but maybe it's even more over the past year. But I don't think there's been a substantial shift internationally in our partner base.

Great. Thank you.

Thank you. Our next question comes from the line of Vinod Srinivasaraghavan with Barclays. Your line is now open.

Hi, thanks for taking my question. I just wanted to ask about Appian Protect that, you know, you released that about two months ago. Can you just talk about kind of how this product is positioned in the market and your overall vision for it?

Yes. This goes back to a theme that we mentioned on one of the earlier questions about how essential it is to be perceived as the high-end offering. The safe offering, and we do a lot to emphasize this. Protect is part of that play, but it's only the beginning of it. We put a lot of work into establishing our credibility as the most reliable vendor base. We understand the permission critical processes, the fire is betting their career to some degree. On the solidity and security and scalability, safety of our platform and for that matter of the expertise that comes with it and the success of the deployment. We believe that in a market where purchases bear substantial risk, one of the primary ways that best of breed player differentiates itself from its competition is by providing safety. You'll see the same theme come up repeatedly in our solutions. A solution is about safety, it’s about knowing what you're going to get before you have to pay for it, talking to people who've used it, the same thing in the past. Knowing that it's worked at a company you respect. So what is it? It's safety, right? The answer to your question, we're selling safety. We're selling reliability and a lack of risk. And this is just one way we substantiated and of course I love the idea that put a brand, right, on top of our safety attribute. We'll do that as much as we can. But this is a market where people do important things. And they ask a lot of processes. It's not just that the process has to be easy to create. It has to be rock solid after they build it. And we understand that to be one of our primary advantages in the market. But we may not be the biggest vendor in this market, but we mean to be the best.

That makes sense. And just one more for me. I think at your Investor Day you mentioned you were transitioning a lot of your customers over to your microservices based cloud. Can you just give us a sense of how much like, kind of, that impact on gross margin throughout year as you transition more customers? And when again do you expect that to be completed? Thank you.

Yes. Okay. Well, so our [Indiscernible] initiative is a multiyear large project, which will provide us the microservices you're talking about. And it's not going to affect our margin this year, not materially. It is a long evolutionary thing. We're covering a modules to handle some customers, not to handle others, but I make no financial projections around this, none. We've just got to see the technology play out and move carefully and understand that this is the toll for getting to the future. So we're just going to pay the toll. This is how we want to organize software going forward. And we're committed to being in the lead, so we thought about it carefully and this is the way we want to structure our software. But as I want to dial down the expectation that it's a financial play or will lead to something tangible.

Understood. Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Fred Havemeyer with Macquarie Capital. Your line is now open.

Hey. Thank you very much. Matt, I was interested to hear, I think you had said in your prepared remarks that seven-figure deals doubled year-over-year in the quarter. Would love to get a little more context around that in addition to what you're describing in terms of specific clients there, because it sounds like despite some of the scrutiny and perhaps macro headwinds that are out there that you're seeing this significant growth. So we'd love to just understand better what's going on there?

Yes, all right. Well, we did get twice as many new crossings of the seven-figure threshold during the first quarter of 2023, as we achieved in the first quarter of 2022 wording that carefully. If you'd like more detail, it is in the packet of reports, which we have distributed. And you can say I think it's in the lower right of a quadrant report that shows the increase in customers of certain threshold sizes. So pleased with that movement for sure, I don't believe that all of those went from zero to $1 million though, you understand some of those probably went from $0.5 million and crossed the $1 million threshold. So what we're really doing is tracking how many have gone over the $1 million threshold, but it's great to see them do it no matter where they came from. And so it is a sign of confidence. It's just a question of whether it's a confidence in our product or in our marketing. It depends on whether they come from nothing or come from something. Either way, we're very pleased to see that it's still possible to sign big deals in 2023 that the macro environment has not turned off, our clients from wanting to take Appian up a notch. That's what I read in it and I'm grateful for their confidence.

That is definitely encouraging. And I wanted to ask with respect to the growth with scrutiny strategy. Understand what you're saying and that you'll have a higher bar for any new investments that you're making, but could you just describe perhaps where you're continuing to hire and how you're thinking about that hiring strategy under this present growth with scrutiny strategy?

Yes, the intention here is to keep up a very robust hiring pattern at the same time as internally we are finding investments that we do not wish to continue, right? I don't want to have a cautious year in which we simply slow things down. I believe that would be counterproductive intention here is to remain dynamic, while also dynamically detecting inefficiency. So that's the act of strenuous counter position that I am attempting to have us execute in 2023. So it's exciting growth at the same time as meaningful consideration of what investments should continue.

Thank you for that context.

Thank you. Our next question comes from the line of Fred Lee with Credit Suisse. Your line is now open.

Hi. This is [Tim Yashwanth] (ph) on for Fred. Thank you for taking my questions. First, given the mix shift to the cloud in the quarter, it is somewhat hard to tease apart how much of the cloud outperformance is coming from a higher-than-expected shift to cloud versus an acceleration in the underlying business dynamics? Could you provide any metric that would help us better understand the underlying business growth trends you saw in the quarter?

Yes. So it's actually almost zero is related to that shift. If you're looking at our relative strength in the cloud growth, that's all kind of organic progress without any reference to the shift. And that's because our bookings, kind of, end up landing towards the end of the quarter. And so we wouldn't have recognized much cloud revenue from those conversions anyway, so…

That's super helpful. Thank you. And then I wanted to circle back on the thinking behind the transition to microservices architecture. And maybe at a high level, are you containerizing your current platform and functionality in order to take advantage of the scalability offered by microservices? Or are you more thinking about writing a new set of features enabled by microservices that are not currently enabled by your platform?

No, it's throughout, which means it's the former. We're containerizing the existing functionality and setting a pattern that we can continue with all further functionality.

Thank you.

Thank you. And I'm currently showing no further questions at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.