Q1 2021 Appian Corp Earnings Call
Greetings and welcome to the Appian Corporation's first quarter 2021 earnings conference call.
At this time all participants are on the listen only mode. Later, we will have a question and answer session and if you need to go into Q of the command is star one.
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.
These documents and the earnings calls call presentation are available in the investors section of our website www Dot Appian Dot com.
Additionally, non-GAAP financial measures will be discussed on this conference call refer to the tables and our earnings release and the investors section of our website for a reconciliation of these measures to the most directly comparable GAAP financial measures with that I'd like to turn the call to our CEO Mark Hawkins Matt.
Thanks, Lynn and thanks, everyone for joining us today.
And the first quarter of 2021, Appian cloud subscription revenue grew 38% year over year to $39 1 million.
Subscriptions revenue grew 26% to $63 8 million.
Total revenue grew 13% year over year to $88 $9 million.
And our cloud subscription revenue retention rate was 118% at quarter end.
And also of note, we set of new high Mark for gross profit margin.
And our adjusted EBITDA was positive.
These results exceeded our guidance.
The business community recently faced its biggest disruption in decades.
Organizations responded by adapting faster than they previously thought possible low code was and essential technology, enabling change and will remain essential as businesses maintain a quick metabolism into the future.
Everyone sees the business became more agile last year and changed more quickly than before.
And Mckinsey and company put numbers around this and found the firm's augmented their data security 19 times faster than usual.
Migrated to the cloud 24 times faster than usual.
Adopted new technologies, 25 times faster than usual et cetera.
Companies are digitizing their operations customer service and supply chain three to four years sooner than planned.
The ways low code can help and the organization change can be summarized and three points, which I have taken the calling the low code promise.
You can build and application and 110th the time.
Have it cost one half as much and get better functionality.
Happy and is pioneering the low code industry. We were the first company to go public as a low code firm, we're ranked as a leader and over 10 analysts squadrons, including gardeners enterprise low code platforms and foresters digital process automation.
Importantly buyer.
Buyers rank us as their number one vendor in our industry. According to Gartner peer insights Appian is the leader and the only leader for North American clients. The only leader for the finance industry. The only leader in the entire analysis for big companies, those whose annual revenue exceeds.
<unk> of $1 billion.
Happiness popular with buyers because we deliver on the fundamental value proposition of the low code industry summarized and that low code promise I mentioned <unk>.
Remember that speed savings and superior apps for.
For example, a government agency overseeing federal employment regulations became a new appian customer and 2015 and uses our platform across half of its enterprise. It originally selected our platform to replace 39 disparate case management solutions, it's built over a dozen appian applications and saves over.
$18 million annually.
In Q1 and purchased more licenses to expand our platform and two additional business areas and.
The other satisfied customer is the leading global insurance company has increased its software spend nearly every quarter since for of spying Appian and 2018, our platform automates the variety of processes across the company's reinsurance claims management compliance and employee commissions tracking systems.
In Q1 and signed a new deal the licensed tens of thousands of users globally.
We won this deal because of our low code builds apps quickly.
For example, we delivered the customer's global reinsurance App and just eight weeks under the Appian guarantee while the competition estimated 6000 person hours and up two of year to deliver the solution.
Here's the third example of top global bank and existing customer uses appian to mitigate the financial reporting risks across its business.
In 2020, the bank expanded our low code automation platform into its global consumer banking group to systematize hundreds of error prone manual processes to comply with the regulatory mandate.
Appian enabled the bank to meet regulations within a year saving millions of dollars now in Q1. It purchased a seven figure deal to remediate another 1000 high risk processes before the end of 2021.
Low code is here to stay busy.
Businesses are now expected to be able to implement change by the management by.
By the investors by their customers.
So of agility is a central reason for the sustained usage of low code.
It is not the only reason, though mobi.
And mobility is now a necessary part of every application and that will drive more development to low code platforms.
Also technical debt rises in times of change and that too will boost low code lets dig into these other factors.
Last year saw a surge in remote work and corporate mobile App usage grew 220% globally.
Mobile usage on Appian apps, However grew 1008 hundred 70% in.
In the trailing four quarters.
And that's because every appian app is natively mobile while most others are not.
And today's era of remote work, it will be and expectation that applications being mobile accessible.
Low code and Appian, and especially is an ideal platform for building and application once and publishing it to every device.
For example of top 10 entertainment conglomerate purchased Appian and Q1 to manage its international Labor standards program across 40000 global facilities.
And for Appian, the company struggled to adapt to evolving regulations, because it lacks global governance over its original systems.
And now thousands of field workers will use appian on any device to audit facilities and coordination with corporate offices. We won this deal because of our mobile support and our performance and a complex proof of concept.
Yes.
And this new era of rapid change agility has become the most important business virtue.
Organizations need to be able to pivot their apps quickly.
They don't have time to manage cumbersome technical debt.
As you know technical debt is the cost of keeping all the applications up to date.
In times of change apps go out of date faster and the already high cost of technical debt becomes almost paralyzing.
Appian is the antidote to the technical debt.
We keep applications up to date automatically.
Every quarter, we strengthen our cloud security just to mention one example to ensure that every application written on our platform upholds the modern security standards.
Appian cloud maintains compliance with over a dozen and security certification and audit frameworks and 2021, we've expanded our ISO 27001 certification validating our cloud security controls and personal data protection for global customers.
And the recently achieved the high level of National Security framework certification for the Spanish government.
Also appian RPE achieved fed ramp certification for U S government organizations.
Appian cloud proved to be a winning differentiator and Q1, 89% of our new logos chose to deploy and our cloud for example of top global private equity firm purchased a seven figure deal to become a new customer and the first quarter.
The firm has a company wide mandate to modernize it systems by the end of 2021 and it has selected our low code platform to replace its legacy on Prem investment management system, the customer will migrate over 30 workflows to Appian cloud before the end of this year.
And that they suggest they selected appian because our cloud met their security requirements and our team built a custom demo and just two hours while the competition took over a month.
And Australia, and the government group that supplies electricity the hundreds of thousands of customers became a new appian clients this quarter.
It's selected our low code automation platform to modernize its siloed supply chain business before.
Before appian it lacked digital tools to unify its procurement and legal teams, resulting and bottlenecks and multi week delays and supply chain Onboarding and reporting we wanted the steel because of our superior cloud ratings and strong track record with large government groups.
We're making low code better by joining it with automation.
Low code is about creating applications by drawing of workflow.
Automation is about using of workflow to coordinate work across different types of workers RPI AI and peoples the.
These industries belong together and it's time to unify them.
Workflow makes this convergence of inevitable.
Great low code and great automation coming out of the same thing of great process model happy and has been a leader and process modeling for more than a decade and now we apply that strength to a broader market.
Documentation automation anywhere bots will populate customs data into the company systems and internal staff will track deliveries.
All of it in a single workflow.
We won this deal because of our open platform automates complex processes and provides governance over the manufacturers existing data and technologies.
And as the World enters this new era of change Appian is attracting more interest as demonstrated by the thousands of registrations for next week's Appian World and are 61% new logo growth and Q1 compared to the same period last year for.
For example of top 10 media company selected our low code platform as a primary tool for its newly formed consumer products Division.
The group will use appian to manage its end to end process to launch new products globally from initial market research to final licensing with studios and the retailers.
Okay.
The customer base is tight competition and wants to grow its thriving consumer products business line. We won this deal because of our low code is fast the customers first project will be delivered and eight weeks under the Appian guarantee.
A year ago I spoke to you about why Appian will emerge from this pandemic stronger than we entered it.
While the full extent of 2020 was unpredictable to the business community and its impact on the way organizations will work tomorrow is clear.
Agility is the most important business virtue.
Appian and open low code automation platform facilitates mobile usage eliminates technical debt and.
And enables customers to adapt quickly modernize their enterprise and scale.
Now I'll turn the call over to Mark for a deeper discussion of our financials Mark.
Thanks, Matt.
I'll review the financial highlights of the quarter and full year, and then will provide details on our Q2 and full year 2021 guidance cloud subscription revenue for the first quarter was $39 1 million and.
And increase of 38% year over year and above the top end of our guidance of.
Our total subscriptions revenue was $63 $8 million and increase of 26% year over year.
As a reminder, in Q1, 2020, we closed a three year on Prem contract and recognized $3 million of revenue upfront.
The customer had instead chosen to have the contract auto renew on an annual basis as nearly all of our on Prem customers do.
We would've recognized just $1 million in Q1, and 2020 and total subscriptions revenue would have grown 34% year over year for.
Professional services revenue was $25 $1 million down 12% from $28 4 million in the prior year period and down from $25 5 million and 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 contract the site.
As the usage of partners expands we expect the proportion of our total revenue for the subscriptions to increase over time relative to professional services subscriptions revenue was 72% of total revenue and the first quarter 2021, as compared to 64% and the prior year period.
Total revenue and the first quarter was $88 $9 million and increase of 13% year over year and also above our guidance range.
Our cloud subscription revenue retention rate as of March 31 was 118% within the 110% to 120% range that we target on a quarterly basis, we remain pleased with our customers' expanded use of our platform or.
Our international operations contributed 32% of total revenue for Q1, compared with 33% in the prior year period, demonstrating the balance of our business, both both domestically and internationally.
Our cloud software bookings were 80% of total software ACB bookings and Q1, 2021 consistent with the full year 2020.
Now I'll turn to our profitability metrics for the first quarter. Our non-GAAP gross profit margin was 75% and increase of 5% compared to the same period in 2020 subscriptions non-GAAP gross profit margin was 91% and the first quarter compared to 90% and the same quarter of 2020.
Our non-GAAP professional services gross profit margin was 32% and the first quarter compared to 35 per cent and the same quarter of 2020.
Total non-GAAP operating expenses were $68 $9 million and increase of 14% from $60 3 million and the year ago period. This increase was partially offset by impacts from COVID-19, which of naturally decrease certain expenses like travel entertainment and office related expenses adjusted EBITDA income.
It was $369000 into first quarter ahead of our guidance and compared to an adjusted EBITDA loss of $3 $6 million and the year ago period.
And the first quarter, we had approximately $3 million of foreign exchange losses, compared to $3 $5 million and Q1 'twenty 'twenty.
We don't estimate movements in FX rates, and therefore, they arent considered and our guidance.
Non-GAAP net loss was $4 million for the first quarter of 2021 or a loss of six cents per basic and diluted share compared to the non-GAAP net loss of $8 $2 million for a loss of 12 cents per basic and diluted share for the first quarter of 2020.
This is based on $70 7 million basic and diluted shares outstanding for the first quarter of 2021 and $67 5 million basic and diluted shares of stadium for the first quarter 2020.
Turning to our balance sheet as of March 31, 2021, our cash and cash equivalents and investments for $255 $1 million compared with $258 4 million as of December 31, 2020 for the first quarter cash used by operations was $2 8 million versus $3 9 million for the same period last year.
Total deferred revenue was $110 6 million as of March 31, 2021.
With respect to our billing terms the majority of our customers are invoiced on an annual upfront basis, but we also have large customers that are billed quarterly or monthly due.
Due to the variability of our billing terms changes and our deferred revenue for generally not indicative of the momentum and our business.
And I will turn the guidance.
For those new to the Appian story I'd like to remind everyone that we believe cloud subscription revenue measures the growth of our subscription business.
The true scale of the business is represented by total subscriptions revenue, which includes support and all of subscription revenue regardless of whether the customer deploys appian in the cloud or on Prem.
For the second quarter 2021 cloud subscription revenue is expected to be and the range of 41, and $41 $5 million representing year over year growth between 39 and 40%.
Total revenue is expected in the range of 77 and $78 million.
And there are two dynamics involved and the total revenue guide first we expect professional services to decline from Q1 'twenty to 'twenty, one because of our partners continue to perform more of the services work.
Partners delivered 70% of our new logos during 2020 and.
And the situations, where they help us close the new logo partners generally perform the services.
Second on Prem revenue is proving to be seasonal.
Q1 is generally the strongest quarter of the year and Q2 is generally the weakest quarter of the year you can see this dynamic and the quarterly results from last year.
Adjusted EBITDA losses expected to be and the range of 16 and $14 million non-GAAP net loss per share is expected to be between 26 and 23.
This assumes 71 million basic and diluted common shares outstanding the increase losses, principally due to the on Prem seasonality.
Long with the higher expenses due to our hiring efforts.
For the full year 2021 cloud subscription revenue is expected to be and the range of 171 and $172 million representing year over year growth between 32 and 33%.
Total revenue is expected to be and the range of 353 and $355 million.
Adjusted EBITDA losses expected to be and the range of 38 and $36 million.
Non-GAAP net loss per share is expected to be between 68 65.
This assumes $71 2 million basic and diluted common shares outstanding are.
Our full year revenue guidance reflects a faster than expected shift from Appian services to partner services.
With that let's turn it over to questions.
Thank you.
And at this time, we'll be conducting a question and answer session. If you'd like the question if you'd like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is and the question in queue. You May press star two if you'd like to remove your question from the queue for.
And for participants using speaker equipment, it may be necessary to pick up of your handset before pressing the star of keys, one moment. Please while we poll for questions.
Our first question comes from from Surjit Singh with Morgan Stanley. Please proceed with your question.
Hi, guys. This is Melissa Dunn on for Sanjay. Thank you so much for taking the question and.
So I guess first just for my high level of hoping to get and understanding of what you've been seeing and the first quarter of 'twenty 'twenty. One in terms of the broader spending environment and how that has compared to the back half of 2020, if theres been any meaningful changes or improvements there.
Alright, thanks for the question Melissa.
We see a continued growth of healthy spending environment.
We are pleased with the change and our pipeline.
Over the last 90 days.
Oh and it is.
And it is continuous with the changes we saw the positive changes we saw last year, it's at least as strong as those changes.
Okay. That's really helpful and then so just.
Double clicking on some of your last comments there about the expectation for services to be going more toward partners and is it fair to assume then with your total revenue guide staying the same but cloud moving up that that delta of the remaining revenue.
<unk> is it.
And is your expectation for services now to be lower than what you originally were expecting last quarter. When you issued your original guidance.
Melissa that's exactly right that is exactly right yeah, we're at where we got a very strong guy there on the the the the.
Most important metric and on the services were preferring to remain cautious and our services are pivoting our role in the Appian deployment World is changing all of our our role and I was going to be extra expert advice and touching the most customers, but not mainline deployment. So the rate of the mix shift maybe.
And unpredictable and.
And ahead of schedule.
But the direction of the mix shift is exactly where we want it to be.
And the old Yeah, where we're just seeing our change being a little bit ahead of schedule here. It's the high variance item were certainly not running the business to optimize for for hitting C. S numbers and yeah, you'll see us being cautious and our estimate with regards to C. S.
So the answer of generally is yes.
Okay, well, thank you guys so much.
Yeah.
Our next question comes from Arun Bhatia with William Blair. Please proceed with your question.
Okay.
Guests.
Thank you and.
Good to hear you both Mark and maybe this one's probably for you, but it sounds like you had a pretty.
Strong first quarter on the cloud subscription line of and the guidance for for the second quarter. It looks like its volume for some acceleration.
Can you maybe just talk about the full year guidance and I think it implies maybe a little bit of of growth drop off and in the second half of the year. So is there something from a comp perspective that we should be considering.
Because I think it sounded like for Matt's comments that the pipeline itself was actually pretty strong.
And I mean, if you look at the way we the the beat raise is flowing through the the cloud subscription revenue.
Pretty cleanly, the the second half you've got tougher comps rate for cloud.
We had 40% of both in Q3 and Q4, but for my business and as you guys know we've been doing this for this is our 16th the earnings call. We're generally conservative and our guidance right now and we generally like to beat our guidance.
And and so that's you see that and this guide here, we're increasing it we had I think last quarter, we implied of 31% to 32% growth rate for cloud and now it's 32 to 33, so wood.
But overall high level of business looks good pipeline looks strong and we're cautiously optimistic on where were headed.
Okay perfect.
And then.
Mark maybe one of the things of that stuck out was the new logo growth and in the quarter can you maybe just kind of I think that partners that are driving that are you have you made and changes to them.
Youre marketing or of your top of funnel and then is there anything that we should think about in terms of how the deal size is for your new customers have the have evolved over the past year or so.
While we're pleased with that new logo growth of course.
And and I'm also pleased the the size of some of these new deals that we're bringing in.
We're getting larger deals.
And I.
I think appian can convey value at a larger scale so to see those larger deals come in and feels to me like of validation of my belief about where we can be and this market.
And so that's another positive direction.
You asked where the new logos were coming from they are coming mostly from partners and our relationship with partners is better than ever.
And we are we're getting a lot of lift.
Both from the customers that the partners bring us too and also the partners placement of their own the solutions. So yeah, the definitely partners mostly.
Okay perfect. Thank you both.
Our next question comes from Christopher Merwin with Goldman Sachs. Please proceed with your question.
Hi, This is Kevin on for Chris Thanks for taking my question.
Last year was relatively strong in terms of new customer ads is there any color you can provide on how the newer of cohort of customers are doing for the expansion perspective.
Relative to the more mature customers.
Well you mean other than the the the net revenue retention rate that we quote.
And that would be the best statistic that I would use and it remains at the high end of our range, we're pleased with where it is.
And it shows that our customers have a healthy appetite for growing the their Appian instance, once they once they joined the family.
Great and then maybe on the the EBITDA guidance for full year I think you kept it the same.
Despite media and better mix of <unk>.
Scripts and revenue for the year.
So let me take that the main kind of ongoing investments and and go to market and product.
And how should we think about hiring for the remainder of the year.
We're aggressively hiring like we said last quarter, we're aggressively hiring.
The sales reps the marketing folks, we have of new CMO and and.
Software engineers, so we're going to continue to aggressively hire so we decided to keep the of the guide the same.
Based on some additional investments that may come in through the second half of the year.
Great. Thank you.
Our next question comes from Steven Enders with Keybanc capital markets. Please proceed with your question.
Hi, This is George Grosso on for Steve first a high level question for Matt.
Scott the customer adoption, you're seeing for the full hyper automation portfolio and protect.
And you would highlight outside the four of them.
And the VPN capabilities and.
And a quick follow up clarifying question for Mark and the guide.
It looks like you took down the 'twenty, one and EPS guide lots of the EBIT Guide could you just help me understand what's true Delta. Thank you.
Shall I start.
And then you go okay.
So.
We are currently.
Okay first of all yes, we have at all of the automation experience. We're redeploying it we've got happy customers I mentioned, one of the automation and case studies in my prepared comments today.
We are we're pushing out more case studies soon so that we can get public credible large company testimonials of how great. It is to be and Appian, the low code automation and customer.
So the answer is yes, there's real value of their customers are experiencing it and they will testify to it.
Oh, and Mark up of about the EBITDA, yeah. So the adjusted EBITDA.
<unk> is the same.
From a guidance perspective, the 38 to 36.
And it's probably the reconciling items between the the non ADF between the EPS calculation and the adjusted EBITDA and it could be of share change as well.
And I can work I can help you of the model offline, but that's.
Okay.
Great. Thank you both.
Our next question comes from Derrick Wood with Cowen and company. Please proceed with your question.
Great. Thanks, it's Andrew on for Derek.
Hey, guys.
Mark International revenue and what kind of get slowed a little bit of was there and impact on P. S. There and any color of what the cloud subscription growth was.
Basically you're going to ask the variability because of the the professional services and.
And that's predominantly what is the growth rates are.
Internationally, they're doing really well so the growth rates from a of.
Our cloud subscription revenue growth rate is similar to the U S and it's strong.
So I would say that the rate when the.
The 1% difference is mostly professional services.
Great. Thanks.
And then just.
Denise joined and in February of any new initiatives. She is driving to help debt no new logo growth and.
And anything else you're excited about on the marketing front would be great to hear.
We're actually very excited on the marketing front and the the new initiatives and he says going and I think it would take too long and create a list of them, but she is the Dynamo and we've have some efforts underway that I think we've we've been excited about doing it for a long time, and we're able to do them now and well, perhaps perhaps my favorite is the encouragement of the.
The <unk> of our community.
The of the Appian community as everybody, who logged on and everybody's got a clearance everybody I'm sorry of of everybody's got a certification right past one of our tests of buyer of our software and answer or ask or of questions are are we want our community to be easy to join it is very important in 2021 that appian and be able to build a large community of affiliate.
The individuals and we're off to a hot start this year and in building the community. Our New Community addition, which is a free version of our software that anybody can walk up and use get access to quickly build things on and then even more.
The move what they've built into our production instance, later on if they buy the software that's of great new way to get involved and the Appian community of something that she has been integral to setting up and it sets taking off so I'm really pleased with what we're doing on the marketing front right now.
Great. Thanks, guys.
And as a reminder, if you'd like to ask a question. Please press star one on your telephone keypad one moment, please while we poll for questions.
Our next question comes from Fred have Meyer with Macquarie. Please proceed with your question.
Hi, Thank you for thank you for the dish. So firstly I'm happy to see professional services as a percentage of revenue starting to come down here.
I'd like to just understand a couple of different dynamics that are showing up and the model here. Firstly it looks like the federal business is continuing to expand as a percentage of overall revenue.
It looks like its at about 21% now and and growing about 58% year over year. So I'd love to understand what you've seen in terms of the cadence of that federal business and with it growing ahead of the overall business is there anything to call out on your momentum within corporates.
Yeah of.
There have been a few positive developments for us lately on the federal side, we had a really solid third quarter. We've been productive since then and our federal solution is showing a lot of promise and in fact, maybe the most promise of of all the solutions that the pipeline looks good.
I think that we've just had some good things turn our way in the federal space.
I'm hopeful for a solid 2021 and the federal market.
Also of state and local where we've made additional we've made some efforts lately to take our success on the road and see if we could do as well and state and local as we've done and the federal space and the.
The results yet, but the early indications look good.
Thank you there and as.
As a follow up question.
I'm interested in a number of different topics here, but in particular.
The three point quarter over quarter decline and sales and marketing expense here you know you've been talking about the.
Different aspects of your business for your hiring you're expanding and youre going to market more aggressively and love to understand is there anything to call out in terms of that sales and marketing declined that was helping margin this quarter.
And I think part of it is the the on Prem seasonality down per M number so it kind of distorts the percentage of revenue.
Cost for sales and marketing and then it's the travel yes, but like for like so for example.
<unk>.
Sales and marketing is sequentially up costs quarter over quarter is $33 7 million and Q4, and then Q1 its $34 9 million so its going the right direction.
Got it. Thank you there and then just last one I'll get in and then I'll hop off the queue or back into the queue here just.
So overall, how would you take a look at the competitive landscape and just rank where you believe your stand and the competitive landscape at this time, because we certainly heard from a number of of enterprise software platforms out there about their low code capabilities.
Some of them showing some momentum there so we'd love to hear about your perspective on your competitive landscape and generally where you see your win rates standing. Thank you.
That's right.
You're right a lot of organizations are talking about low code I love it when they do that actually because low code means workflow and workflow is something you can be really good at or just okay at and we've spent a long time building our capability in workflow.
Low code is about workflow and also automation is about workflow, we feel that our longstanding advantage and workflow and process management is going to give us a meaningful advantage in the current market.
And then there are a lot of the hype thats generated around low code is going to send the potential buyers of researching to figure out which vendor can meet the requirements most fully.
Appian and tends to be the vendor that can meet their requirements. Most fully the the the vendor with the best functionality and the happiest customers that is and remains our mission in this space.
In order to be the pioneer we also have to be the pioneer and the emerging definition of low code automation and.
The merging of these two markets, which we of we've done we ship out of the box with the components that comprise automation and addition to the components of the comprise low code.
Bringing to the together these markets and creating that new industry perimeter as an essential part of our leadership and Youll see us continue to establish and defend that new perimeter, which gives us a real edge over those who provide just one part of it.
Overall, I'd say our ability.
The ability to be competitive as at least as strong as it has been in the past I feel I feel good about our our odds no matter, who we're up against and any deal and and our customers as you saw in the Gartner peer insights survey.
Rank us as their number one choice and our industry not only by the weighted we come out at the top of that the analysis in terms of the quality.
Right of our product and our experience, but we also received the most of votes or the I'm sorry of the most reviews, which is to say we're also the most considered and the most responded to product in our industry. In addition to being the Favoured product I think it says a lot for our ability to maintain and then two to live and this high.
And space that we've chosen for ourselves that.
That our that the customers have.
If you have noticed we are here.
Have an opinion about appian and that opinion is very strong.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.
Okay.
Okay.