Good day, and thank you for standing by. Welcome to the Appian First Quarter 2024 Earnings Conference Call. [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, Reagan Redman, Investor Relations. Please go ahead.

Thank you, operator. Good morning, and thank you for joining us. Today, we will review Appian's first quarter 2024 financial results. With me are Matt Calkins, Chairman and Chief Executive Officer; and Mark Matheos, 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 include comments related to our financial results, trends and guidance for the second quarter and full year 2024, 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 reflect 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 2023 10-K, our Q1 2024 10-Q filing and other periodic filings with the SEC. These documents are available on the 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 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, Reagan. In the first quarter of 2024, Appian's cloud subscription revenue grew 24% year-over-year to $86.6 million. Subscriptions revenue grew 19% to $117.7 million. Total revenue grew 11% year-over-year to $149.8 million. Our cloud subscription revenue retention rate was 120% as of March 31. Adjusted EBITDA was a loss of $1.3 million. Two weeks ago, we held our annual user conference. Many of the people on this call were there. We had 46% more customers and prospects in attendance than a year before. This has show featured a series of major customers discussing the success they've had with our platform. Attendees heard how Novartis reduced risk assessment approval times by over 50% using Appian. The Navy developed an employee onboarding app in a fraction of the time other technologies would have required. We heard how TELUS integrated siloed systems into a single Appian app to manage cross-functional planning and expects to reduce planning cycles by 55% and saved from misallocation up to $42 million. We also heard speakers from Merck, the U.S. Army, Axiom Space, T. Rowe Price among others. Aside from the customers, my favorite part of the show was our new feature announcements. Not all of them were about AI, but I'll start there. Our unique edge AI comes from strength in complementary technology, specifically processes and data. We're a leader in all 3 areas. This year, every company is looking for ways to validate AI. Big budgets will come later. For now, they need quick proof of ROI. A process is the perfect place to start using AI, a process offer structure, a ready-built framework of activity pointed towards an important goal, a set of workers, human and digital with whom to collaborate and metrics that measure what improvement AI has created. We're so confident in…

Thanks, Matt. I'll review the financial highlights for the quarter, and then we'll provide guidance for the second quarter and full year 2024. Cloud revenue, total revenue and adjusted EBITDA came in at or above the high end of our guidance ranges. Cloud subscription revenue was $86.6 million, an increase of 24% year-over-year and above guidance. Our cloud subscription revenue retention rate was 120% as of March 31, 2024, up from 115% a year ago and 119% in the prior quarter. We continue to target a cloud subscription revenue retention rate of 110% to 120% on a quarterly basis. Approximately 82% of our total net new software bookings in the quarter was for the cloud compared to 85% in the prior year's first quarter. Total subscriptions revenue was $117.7 million, an increase of 19% year-over-year. Professional services revenue was $32.1 million, down 11% year-over-year. As we've mentioned previously, professional services revenue can fluctuate from quarter-to-quarter due to the timing of large projects. We continue to leverage professional services to enable partners and to drive customer success. However, long term, we expect professional services revenue to continue to decline as a percentage of total revenue. Total revenue was $149.8 million, an increase of 11% year-over-year and at the top of our guidance range. Consistent with our strategy, subscriptions revenue was 79% of total revenue compared to 73% in the year-ago period and 80% in the prior quarter. We continue to see global demand for our platform with our international operations contributing 37% of total revenue compared to 33% in the year-ago period. Note that foreign exchange movements provided a revenue benefit of 1% to 2% this quarter on a constant currency basis. Now I'll turn to our profitability metrics. Non-GAAP gross margin was 76% compared to 75% in the year-ago period…

[Operator Instructions] Our first question comes from Steve Enders with Citi.

Okay. Great. I guess maybe just to start, I'd be, I guess, maybe hear an update on what you're hearing out there in the deal environment. And I think you made a comment at the Investor Day that you felt like the macro was maybe getting a little bit better. So I guess it would be good to get a little bit clarity on exactly how that deal environment has shifted and evolved and how you're kind of viewing that today?

Yes. Okay. I think that the macro isn't perfect. There's definitely some consternation around the U.S. government, around international affairs, around whether inflation is going where it's going, but it's workable. And with regards to AI, which is almost a macro effect for us, I don't see big budgets around AI amongst our customers. So that's not something that we're working with and drawing energy from this curiosity, but there's not big line items.

Okay. That's helpful there. And then I guess just on the conference and get an update on the feedback you heard from customers on maybe how they're thinking about AI investments, how they're thinking about some of the new products and the adoption there. And I think also on the pricing and packaging changes that were announced there. So good to get a little bit more clarity on feedback from the customer side.

Yes. First of all, let me say that conferences we went through a bit of a lull with COVID, right? When they went remote, they lost energy. This, in my opinion, was the best conference we've had since before COVID. I love the energy. I love the enthusiasm, the attendance was good, prospects showing up. Very pleased with the conference. I think that the changes in our pricing approach, which serve to both simplify and raise our prices have been broadly welcomed. I think there's a willingness to see value in the new features that we have announced 2 weeks ago. And I didn't get any complaints. Why isn't this free? Instead, there was just appreciation for what we've created. And the simplicity, I don't get any pushback on that. It used to be we had so many different ways to price the software. And now we've got one, it's not drawing additional friction. In fact, it's simplifying and accelerating the process.

Our next question comes from Jake Roberge with William Blair.

Mark, I guess just to start off, can you help us better understand the cloud revenue guidance? It was a solid quarter. But when we look at the sequential increase from Q1 to Q2, it looks a bit softer. But then the guidance implies a few points of back half acceleration. So could you just walk us through some of the building blocks that you have in the model for that acceleration, whether it be the pricing increases, packaging increases or some of the new products that give you confidence in that guide?

Sure, Jake. I think you've got the right question, the right analysis. That is kind of in the background, those price increases and things like that, but it's really just more about our seasonality in our business. we tend to have Q2 being the lowest revenue quarter for us in terms [indiscernible] the weakest. And a lot of that is also what happened in Q1 from a bookings and billings perspective, right? So I think it's mostly seasonality, and we do expect traction and recovery, and that's why we reaffirmed our full year guide.

Okay. Very helpful. And then can you just talk about the uptake you've seen with your new data fabric solution. And just from a competitive positioning perspective, we've heard a few other vendors in the space launch their own fabric solutions over the past few months. So could you walk us through the differentiation of your product? And then just also how the monetization path has been going over the past few quarters?

Yes. Thanks for asking. Those products are completely different. Our data fabric is meant to reach across the enterprise and integrate every data source, whereas our competitors are liable to offer a data fabric that is built just to connect their own data sources to each other because their own data, internal architecture is so convoluted that there isn't natural compatibility between these products in the first place, their own products I'm talking about. So their data fabric is to integrate their own products. Ours is expansive. And the other thing ours is that there does not, is it creates a semantic layer so that all of these data sources are not merely integrated but addressable through a common language, and you can treat them like objects like they were local objects, all through the same nomenclature. So it's an entirely different product, what we've got, except that they borrowed the data fabric terminology. That's a rough guide. The products are quite different. As for uptake, our data fabric uptake is very high. It's one of the best adopted features we've ever launched, and we anticipate having it even more deeply launched in the future as customers reach out to connect a greater share of their enterprise with the data fabric. I like to joke around here that it's such a powerful differentiated feature that we're almost a data fabric company. I do mean that as a joke. But it's a very important differentiator for us.

Our next question comes from Derrick Wood with TD Cowen.

It's Andrew on for Derrick. Mark, the comment you made 2 questions ago about Q1 bookings impacting the guide. Was there anything maybe a bit of slowness to start the year after a strong Q4 from a bookings perspective? And how is linearity? And did any deals slip into Q2?

Yes, I think it's more typical for us, right? We do have a seasonal effect to our bookings, and it's not abnormal to have the phenomena that we've seen so far in 2024, which is that Q1 is much weaker than Q4. And I think that's kind of almost ubiquitous in the software industry. But we certainly had that this year, and it's nothing abnormal there.

Okay. Good. And then Matt, you made a comment about the new pricing model of potentially accelerating things. Would you expect that to accelerate sales cycles potentially this year?

Look, I absolutely have that in mind when I roll out the new pricing plan. I also have in mind that we'll shift the basis for our discussions with customers away from price. I don't want to be price engineers. I want to be feature engineers. And I want to talk about the features and the scalability, the reliability, the things that make Appian actually different, that's where I want to spend our time. So I am hopeful that it will help us to reduce sales cycles, but I can't put anything on the table. I do think that it will guide the conversation in a more productive and pro-Appian direction.

Yes, that's great. One last one for you, Matt. You have reduced the number of partners a lot with the focus on quality over quantity, it seems like. Has that kind of improved the quality of leads and pipeline flow from partners?

I'd say that we're early days on this shift. We have emphasized a few partners. You're absolutely right. I think that's going to be healthy for the business. Right now, we're getting a little bit more than we did in the past from partners. So if you take all of our partners added up, even the ones that we drop, right, total sum, right, addition to our pipeline, yes, it is up. But I think it's still early to see the long-term ramifications of this prioritization. And all I can say is that the first indicator looks like we're probably making the right decision. But I already have more confidence that we're making the right decision based on other things based on internal analysis. So this is just one of the smaller confirmations that we've made the right choice.

Our next question comes from Kevin Kumar with Goldman Sachs.

I wanted to ask about net revenue retention. That's been picking up the last couple of quarters. Just curious kind of the trends you're seeing there and whether some of the go-to-market changes that you've been making to focus on your large customers and maybe some of the pricing changes are impacting that kind of expansion motion?

Yes. Well, first of all, I would love to see this in the kind of range where it is. We always talk about 110 to 120, but between those, I got a preference. And I think that this is the kind of net revenue retention rate that is encouraged by the moves we have made, just like you pointed out, I think it's too early to say that these changes, which have just happened, right? We're just making them now at the top of the year, have had any impact on the net revenue retention rate. Honestly, that's a trailing indicator. It's going to take a long time for the changes we've made to filter into that metric slowly over the course of a year or 2. But they should help. If we focus on large opportunities, if we put more of our attention on our top customers and our top partners, I believe that will be a net revenue retention positive, and I'm not asking to see it in Qs 1 or 2 or even 3. But I do think in the long run, it's going to boost us.

That's helpful. And then maybe can you talk a bit about ProcureSight and how that expands the federal opportunity for Appian? It's probably still a bit early, but what's been the initial response there?

I've been itching to talk about this for quarters. So thank you for bringing it up. I'll be happy to address it. As you know, we've got something called the government acquisition management suite, which is a series of solutions, interlocking solutions that cover the entire acquisitions process for a public sector buyer. Those can be adopted singly or in serial and all at once or sequentially. That's been really popular. It's established itself as an emerging standard in the U.S. government. The users are very pleased and this new offering reinforces it. It capitalizes on the market leadership that we've established in procurement by offering a service, an AI-backed service that taps into a number of different data sets, very deep, very wide data sets that give you the history of procurements of the past, including awards of the past and solicitations of the past. So we're going to give expert AI-based advice on what's happened before in the world of procurement. And then also AI will help you to write your new procurements. This is an extraordinary accelerator. I wouldn't recommend using it without a person in charge, right? This is for the procurement professional, not a substitute for the procurement professional, but it does allow that procurement professional to be far more efficient and if they're already working with Appian, then they've got the confidence and they've got a framework into which to use the results they get out of ProcureSight. So we've got high hopes for this one. I've been excited about it for a while.

[Operator Instructions] Our next question comes from Tom Blakey with KeyBanc Capital Markets.

Just I guess my question is riding on a couple of the prior questions, one of Andrew's on bookings. But the 1Q bookings sounded a little soft. And just wondering, looking out then with the acceleration expected in the second half, what kind of bookings assumptions were made there, Mark? And maybe dovetailing in the pricing as well, a 25% price lift, I think, is the number sounds high. Is this just for new processes? Is it just for new work? Or does this kind of come upon each contract renewal for a larger set of customers? And I have a follow-up.

You take the first part of [ the neck ] and then I'll... That's right.

Yes. So Tom, it's really not an abnormal story for us. Again, it's seasonality. One thing I didn't mention, which I should, is that we did have an FX weakness since our last guidance in February. And so we did have a few million dollars leave our backlog for the year. And so we've absorbed that, we're able to reaffirm our full year cloud guide despite that. But that took a toll on Q2 and the full year, and it was an impact as well. But there's nothing about our bookings pattern this year that's different than any other year in our assumptions for guidance or anything like that.

Great. I'm going to talk about our 25%. This is the higher tier and the new higher tier in our pricing system and all of the new features that we just announced at Appian World, they're all in the advanced tier. So customers like this, we have a lot of momentum. I think it's probably the best feature drop we've had in a long time. And customers understand that in order to use these features, whether it's Process HQ or Case Management or they're going to have to buy the higher tiers 25% more. I think that this is likely to come up in our renewal negotiations. So it's not all at once. But when customers talk about renewing, we're going to discuss why they should renew at the higher rate. It is not a mandatory 25% increase. It's optional, and we're trying to lure them up with these new features. I don't expect a rapid impact from this. But I do think that Appian has a large consumer surplus, which is to say that our customers get more than they pay for. And so by creating a new higher pay rate, we can sort of take some of that back with features, which I hope soon will be considered mandatory, [indiscernible] for any Appian customer because they're such good features. That's the plan here.

That's a great answer, Matt. And just as a follow-up to that, is the surplus being shifted to these higher tiers? Or is it just all incremental in terms of these higher tiers and a leading question to consider if you wager a percentage of revenue that you would expect to take this higher tier, especially given the fact that you have the power to move some of that surplus to those higher tiers.

Yes. I'm going to hold back on making a prediction. I mean look, I love the question. I asked this of myself, but I just don't want to answer it. I want to just see where we fight this and and get back with more dollars...

And especially with TCO and other benefits, I'm sure if you could push the surplus to the higher tiers and the consideration of continuing to save the company and customers' money, maybe we'll see a considerable move over. Matt, as a follow-up to your budget kind of commentary, Appian still continues to grow double digits in a kind of flattish to up low single-digit IT budget environment. Where do you see the budgets coming? I think it was Steve Enders question in terms of AI budgets. Where do you see Appian's budgets coming, and in the context, if you could answer, I saw your $1 million plus ARR deals, that chart has been phenomenal over the last few years kind of flattened out a little bit. If you could just kind of combine the 2 points in terms of an answer that would be helpful.

Yes. Let me just say, I know some people are watching that chart by the quarter. I wouldn't watch it too closely. I do think there's some natural volatility and Q1 is Q1 for us. So don't get too absorbed in the ticks on $1 million accounts. However, let me say that the real space for us long term in this market is at that high end, right? That's where a best-of-breed player belongs. And so for us to focus on larger businesses and bigger deals and higher feature sets and elevated prices, this is strategically where we belong. EPEx fits right into that, for example, the new elastic scale feature. What we've done recently, and you could see it in our show and the way we dropped a bunch of great features, and they all have price tags. The way we're reorganizing the priorities in the market to focus more on the larger opportunities. It's all under the understanding that there's a place that we can live comfortably in this market space, and it's at the high end.

Makes sense, and it could coalesce around maybe Mark's model producing some profits in the future to coalesce around that.

[Operator Instructions] Our next question comes from Raimo Lenschow with Barclays.

Matt, if you think about the data platform and the AI adoption, does the data have to come first. So if you think about like how the world is going to evolve here? Like you mentioned earlier, there's not that much on the AI budgeting side. Do you think the bigger move and people don't talk about is actually that they need to clean up the data first and hence your data profit should be or could be and will be the more interesting offering for the time being?

I think the data conversation is underpursued in AI generally. As a society, we don't give data enough credit. As businesses, we're not broadly giving data enough credit for the value it creates inside AI. Now let me take that point one step further and say, AI will truly be valuable when it's about you. right? This is true for you personally. If you were to type a question into a public AI algorithm, you would get back a generic answer. But if it knew you, it would give you an answer that was valuable to you. And the way people get around this right now is they try to explain themselves very briefly, like if I care about this or if my priority were X, Y, then what would you recommend for me, right? They're basically kind of prompting the AI with a little bit of themselves. But at that level, when the AI knows little to nothing about you, it's a novelty. When AI moves from being a toy to being a tool, it's going to be because it knows you. And that's true right now when you as a person, interact with public AI, and it's also true for businesses. When they interact with AI, it's just a toy until the AI understands the business. And that's the real hurdle because understanding the business means exposure to the data that the business owns, the crown jewels of the business, and there's privacy concerns, there's regulatory concerns, there's a lot of fear in that system. For us to get serious as a civilization about AI, we're going to have to figure out how to make AI about you, in this case, you being the business. And that's going to mean getting across this, how do we share question,…

Yes. No, make total sense Yes, it's really valuable. And then one follow-up, Mark, for you. Like obviously, the big question you got is like, if you look at the bookings this year, you said like it's all fine. Can you maybe talk a little bit about the shape of the pipeline. And with that kind of always [indiscernible], is that always the plan for the year? So can you give us a little bit more handholding here because that's where I get the most pushback?

Yes. I mean the pipeline has kind of shown the exact behavior we expected. So there's no change. the linearity has been typical for us, which is back-end loaded quarters. And as we've said for years, Q1 is our weakest quarter, and that was just the seasonal buying patterns of our customers. So the only other missing piece is what I'll reiterate, which is the FX piece, which did cause the departure of our cloud revenue backlog of about $2.5 million for the full year. So that's one thing that you could see, obviously, in Q2 as well. But I would caution anyone to read into anything abnormal. It's really more the rule versus the exception for us.

Our next question comes from Steve Enders with Citi.

I guess I just want to clarify the FX impact that you are seeing? And I guess, maybe the framing what was embedded in the guide before for the year? I guess what's now kind of being embedded in the guide for the year now and maybe also kind of the impact for the 2Q guide would be helpful.

Sure. Yes. So we don't forecast changes in FX. And what I'm pointing out is that when we set our guidance for the year after our Q4 results were presented in February, the foreign currency rates yielded a certain amount of revenue, right? And since that time, in the passage of 3 months, essentially the European exchange rates have weakened to the point that we saw $2.5 million of cloud subscription revenue leave that forecast or that guidance or that backlog, however you want to put it. And so by maintaining our full year guide, right, we've absorbed that $2.5 million impact. For the second quarter, that impact was around $1 million. Is that helpful?

Yes, that's clear. So you're saying that if FX constant currency basis, you would have raised the guide by $2.5 million for the year, but because you're [indiscernible] to that, it's maintained.

Yes. I would hesitate to use the word constant currency because that implies prior year's rates, but just using the rates as of February. If we use those rates, certainly would have had those numbers, $2.5 million increase for the full year and then $1 million for the second quarter.

Okay. Perfect. No, I appreciate the clarification there.

[Operator Instructions] Our next question comes from Oscar Saavedra with Morgan Stanley.

Oscar Saavedra on for Sanjit Singh. I want to ask a question on just the macro demand environment and the health of like your core verticals that being financial services, government and healthcare. It's nice to see like your net retention rate uptick in over the past several quarters. So just your view on the general demand environment and what you're seeing that is allowing you to see that consistent uptick while others in software seeing that deteriorate?

Yes, I would say that our customers are getting a lot of value out of Appian software. You can see in all these new features, the innovation we're doing that we're very attendant on delivering benefit, being reliable, satisfying them with outcomes of their technology investment. I think that, that shows in the retention and the support that they give us. The gross revenue retention is high as well at 98%, and they also turn up for us on industry satisfaction surveys. So like I can't speculate on what's happening for other firms, but I will say that our customers are enthusiastic and loyal because we make sure that their experience is great.

Got it. So in terms of just like the broader demand environment, are you seeing any particular like still budget constraint or just anything around that?

Not particular... No.

Okay. And just one more. On your AWS partnership driving deals, like any additional details on what's driving those early deals?

We announced that part of it that I wanted to announce. So I don't want to get into anything more other than to say that we're enthusiastic about our long-standing relationship with AWS.

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