Q3 2025 Appian Corp Earnings Call
Speaker #2: Good day and thank you for standing by . Welcome to the Appian Third Quarter 2020 Earnings Conference Call . At this time , all participants are in a listen only mode .
Speaker #2: After the speakers presentation , there will be a question and answer session . To ask a question during the session , you will need to press star one one on your telephone .
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Speaker #2: Please be advised that today's conference is being recorded . I would now like to hand the conference over to your first speaker today , Brian Dennehy , from ICR .
Speaker #2: Go ahead .
Speaker #3: Thank you . Good morning , and thank you for joining us today . We'll review APPIAN CORP third quarter 2020 financial results . With me are Matt Hawkins , Chairman and Chief Executive Officer , and Serge Tange , chief financial officer .
Speaker #3: After prepared remarks , we'll open the call for questions . During this call , we may make statements related to our business that are considered forward looking .
Speaker #3: These include comments related to our financial results , trends and guidance for the fourth quarter and full year 2025 . The duration and impact of the current US government shutdown .
Speaker #3: 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 .
Speaker #3: These statements reflect our views only as of today . And don't represent our views as of any subsequent date . We do not intend to update these statements as a result of new information , unless required by law .
Speaker #3: Actual results may differ materially from expectations due to the risks and uncertainties described in our SEC filings . Additionally , non-GAAP financial measures will be discussed in this conference call .
Speaker #3: Reconciliation of GAAP to non-GAAP financial measures are provided in our earnings release . With that , I'd like to turn the call over to our CEO , Matt Calkins .
Speaker #3: Matt .
Speaker #4: Thanks , Brian . And thank you , everyone , for joining us today . In the third quarter of 2025 , APPIAN CORP cloud subscriptions revenue grew 21% to 113.6 million subscriptions .
Speaker #4: Revenue grew 20% to 147.2 million . Total revenue grew 21% to 187.0 million . Adjusted EBITDA was 32.2 million this quarter . Appian made big strides on our two efficiency metrics our go to market productivity ratio rose to 3.5 .
Speaker #4: This is the ninth consecutive quarterly increase . See slide four . We keep getting more from our sales and marketing dollars and intended outcome of our strategy of the last few years .
Speaker #4: In Q3 , our weighted rule of 40 score was 39 , up from 31 last quarter . As a reminder , Appian's weighted rule of 40 puts double weight on cloud subscriptions .
Speaker #4: Revenue growth compared to adjusted EBITDA margin . The AI revolution took an important turn this summer . Businesses started to realize that AI isn't as valuable unless it's connected to real work , and that you need a process or a workflow to make that connection .
Speaker #4: The most important factor was probably the July MIT report that told us that 95% of AI implementations were getting no return . As MIT wrote , quote , the standout performers are those embedding themselves inside workflows , and people are getting the message .
Speaker #4: Looking at Google search trends , the term AI moderately increased over the past 12 months , but the combination of AI in terms like process and workflow spiked this summer .
Speaker #4: News outlets like Forbes and Fast Company are publishing headlines like why AI isn't Delivering the Value You expected , and good AI innovation means focusing on workflow , not cutting jobs .
Speaker #4: This trend also matches my personal experience and customer conversations . IC corporations quickly losing interest in standalone AI deployments and favoring the use of AI in the context of a process .
Speaker #4: This new realization is not a surprise to Appian , nor to you . If you've been listening to our calls for the last couple of years , we have said consistently that AI forms one corner of an essential trio of technologies an AI triangle .
Speaker #4: If you like , in which AI is dependent upon each of the others . I've never had trouble convincing people that AI is only as good as the data you give it .
Speaker #4: It's obvious that AI agents cannot research cases , reach conclusions , solve problems , or get smarter . Without 360 degree access to data .
Speaker #4: Our data fabric remains the gold standard in providing data to AI without having to migrate it. Only recently have people started naturally agreeing with my second assertion that AI is only as good as the work you give it. AI will add more value if it works on the more valuable tasks, and the most valuable tasks involve many workers, many steps, and are coordinated in a process.
Speaker #4: As such , process is an essential tool in connecting AI to meaningful work with industry leading process technology , we offer the missing link between AI and today's most important jobs .
Speaker #4: When you combine AI data and process , you can address bigger work and create bigger value . We call this serious AI . It's an exciting crossroads at which to do business , and we are not new here .
Speaker #4: Appian has orchestrated enterprise business processes for over two decades . We are recognized by industry analysts as a leader in process orchestration , business workflow automation , digital process automation , and most recently , the inaugural Gartner Magic Quadrant for Business Orchestration and Automation Technologies .
Speaker #4: I'd like to share with you a few examples of serious AI . First , a global pharmaceutical company and seven figure cloud RR customer manages its global anti-bribery and corruption practices on our platform .
Speaker #4: Appian automates the company's highly regulated process for approving interactions with external healthcare practitioners and vendors. However, cycle times are slowed by the many human reviews the customer built into its process.
Speaker #4: In Q3 , it purchased a seven figure software deal to deploy Appian AI . Now our agents will ingest hundreds of thousands of requests , validate compliance , and recommend a status .
Speaker #4: This major pharma company expects to speed up the critical process by 80% with Appian . Next , a US military command became a new Appian customer in Q3 and will use our platform to automate end to end warehouse fulfillment processes .
Speaker #4: Upon receipt of goods . Appian AI agents will extract shipment data and open a case on our platform . So warehouse workers can validate the package and approve it for distribution .
Speaker #4: Meanwhile , back office staff will track fulfillment status and coordinate logistics before Appian . The organization had prolonged distributions because its processes were disjointed and manual .
Speaker #4: Now , the combination of Appian , AI and data fabric will reduce processing time from weeks to minutes . Customers see strong , quantifiable value using Appian AI in their core processes .
Speaker #4: Organizations have reported a 36% reduction in invoice processing times, an 83% faster patient intake, three times faster audit processing, and a 95% automation rate in the order management process.
Speaker #4: Good ROI . And they're willing to pay for it . Today , over a quarter of our customer base pays for Appian AI .
Speaker #4: Of those paying AI users , nearly half use our AI powered intelligent document Processing , or IDP . This is a really powerful offering .
Speaker #4: Appian IDP agents can ingest a wide range of complex documents from unstructured emails to medical reports and insurance claims . Our agents read documents with 95 to 99% accuracy , which is significantly better than the 60% accuracy rate of traditional document recognition technology .
Speaker #4: For example , one international insurer uses Appian IDP to optimize its underwriting processes and save millions of dollars a year . These strengths are why Gartner ranked Appian number one in automated processing use cases for IDP in their 2025 Critical Capabilities Report .
Speaker #4: Appian , IDP agents take autonomous action . They explore data from across the enterprise to inform their decision making on each new document .
Speaker #4: Once they contextualize and understand the incoming document , they launch actions in the form of Appian processes . For example , a global insurer purchased a seven figure cloud software deal to automate its underwriting process and became a new Appian customer in Q3 .
Speaker #4: Appian's AI agents will ingest emails and policy forms , open cases , and automatically decline ineligible submissions . The insurer expects to improve its auto declination rate by 20% and grow its written premiums practice to $10 billion within the next three years .
Speaker #4: Using Appian . Early in 2024 , we launched an AI product for improving government procurement . You may remember it . It's called Procure Site .
Speaker #4: We collected a ton of publicly available government procurement data sets and connected that to our process technology . So our users could publish smarter RFPs .
Speaker #4: 96 US government agencies and Subagencies have adopted it so far . Now , customers are purchasing advanced levels of the offering to embed the AI into their procurement workflows and connect it to both public and private data sets .
Speaker #4: For example , a US Air and space agency already automated it's contract writing process with Appian Technology . This quarter , it signed a seven figure deal to automate additional phases of its procurement process with more pre-built Appian solutions featuring AI .
Speaker #4: I usually talk about releases after they happen , but we have a big 1 in 10 days and I'd like to share it with you now we're launching a major feature called Agent Studio that's going to enable the most powerful agents we've ever made with easy , code free , natural language configuration .
Speaker #4: This is a highly anticipated feature , judging by the oversubscription on the beta program and the widespread Prega deployment . The technology is poised for broad usage on release to triage customer complaints , initiate credit checks and loan applications , and conduct background reviews .
Speaker #4: Most of you are familiar with Appian's multiyear quest to focus on the top end of our market . Appian has a particular advantage upmarket , and it shows in the data Appian suits the needs of the executive buyer and the large enterprise , and the mission critical use case compared to last Q3 Appian booked over 50% more new seven figure software deals .
Speaker #4: We're pleased with our federal sector performance this fiscal year , which grew faster than our overall business . Our upmarket strategy will continue to drive momentum in the US public sector once the government reopens .
Speaker #4: I'll share two big wins from Q3 . First , a major restaurant franchise operator plans to open 1000 new locations next year . In Q3 , it purchased Appian Cloud licenses and became a new customer after the Chief technology officer of a peer organization endorsed our platform .
Speaker #4: The customers restaurant opening process used to take several months because the franchise and third parties worked across siloed systems . Now it will use Appian to unify the enterprise and create a comprehensive workflow to reduce opening timelines by 40% .
Speaker #4: Finally , a US military branch and existing customer is under executive mandate to modernize core systems and improve operational agility fixed time period .
Speaker #4: This quarter , it purchased within a decommission Inflexible Systems , supporting its complex incident management process . Now , Appian will provide a consolidated and more feature rich application to manage hundreds of thousands of cases annually .
Speaker #4: Appian serious AI offering and upmarket strategy continue to drive our growth while expanding margins . I think you can see in the fact that 25% of our customers now pay for AI , and in our 50% increase in seven figure deals and in our nine quarters of rising go to market efficiency and in our adjusted EBITDA margin of 17% , the power and timeliness of our business model with that , I'll hand the call to Serge .
Speaker #4: Thanks , Matt .
Speaker #5: I'll begin with a detailed review of our third quarter results and then finish with our outlook for the fourth quarter and full fiscal year 2025 , starting with our Q3 results .
Speaker #5: Appian exceeded the guidance ranges we provided on our key metrics of cloud revenue, total revenue, and adjusted EBITDA. The strength in the quarter was driven by the traction we are seeing with AI and continued momentum in our focus on the high end of the market.
Speaker #5: As Matt mentioned in his remarks , cloud subscription revenue was 113.6 million , an increase of 21% year over year on a constant currency basis .
Speaker #5: Cloud subscription revenue increased 18% year over year for the fourth straight quarter of growth in mid to high teens . Total subscription revenue was 147.2 million , an increase of 20% year over year on a constant currency basis , total subscription revenue grew 17% .
Speaker #5: Professional services revenue was 39.8 million , up 29% compared to the third quarter of 2024 . As a reminder , services revenue can be volatile quarter to quarter .
Speaker #5: Subscription revenue represented 79% of total revenue , compared to 80% in the year ago period and 78% in the prior quarter . Total revenue was 187 million , an increase of 21% year over year .
Speaker #5: On a constant currency basis , total revenue grew 19% . Slide eight of our earnings presentation shows the history of our constant currency growth rates , our cloud subscription revenue , retention rate was 111% in Q3 , compared to 117% a year ago , and 111% in the prior quarter .
Speaker #5: Our international operations contributed 40% of total revenue , compared to 36% in the year ago period . Cloud net new ACV bookings were approximately 90% of total net new software bookings in Q3 , compared to 88% in the prior year .
Speaker #5: Q3 cloud net new ACV growth was the strongest we've seen so far this year . Now let's turn to profitability metrics . I'll be discussing our results on a non-GAAP basis unless otherwise noted .
Speaker #5: Gross margin was 77% , unchanged from the year ago period , and compared to 75% in the prior quarter . Our subscription gross profit margin was 88% , compared to 89 in the year ago period and 87 in the prior quarter .
Speaker #5: Professional services gross margin was 34% , compared to 30% in the year ago period and 33% in the prior quarter . Total operating expenses were 113.6 million , up from 110.2 million in the year ago period .
Speaker #5: The 3% growth in opex reflects both our continued focus on efficiency , as well as approximately $6 million in marketing , training and consulting expenses that were originally forecast in Q3 .
Speaker #5: But we now expect to incur in Q4 . Adjusted EBITDA was 32.2 million versus our guidance of 9 to 12 million , and compared to adjusted EBITDA of period .
Speaker #5: This outperformance relative to our guide was largely driven by greater than expected revenue , as well as the timing of expenses . I just referenced .
Speaker #5: Net income was 24.4 million , or $0.32 per diluted share , compared to a net income of 1.8 million , or $0.02 per diluted share , for the third quarter of 2020 .
Speaker #5: For . This is based on 74.6 million diluted shares outstanding for the third quarter of 2025 , and 74,000,074.2 million diluted shares outstanding for the third quarter of 2024 .
Speaker #5: Turning to our balance sheet as of 10.8 million in the year ago 2025 , cash and cash equivalents and investments were 191.6 million , compared to 159.9 million at the end of last year .
Speaker #5: For the third quarter , cash provided by operations was 18.7 million , compared to 8.2 million cash used by operations for the same period last year .
Speaker #5: Turning to guidance for the fourth quarter of 2025 , cloud subscription revenue is expected to be between 115 and 117 million , representing year over year growth between 16 and 18% .
Speaker #5: Total revenue is expected to be between 187 and 191 million , representing year over year growth between 12 and 15% . Adjusted EBITDA for the fourth quarter of 2025 is expected to be between 10 and 13 million .
Speaker #5: non-GAAP earnings per share is expected to be between 4 and $0.08 . This assumes 74.5 million fully diluted weighted average shares outstanding for the full year 2025 .
Speaker #5: We are increasing our guidance for cloud subscription revenue and total revenue . We're also increasing our overall adjusted EBITDA range for the year .
Speaker #5: Cloud subscription revenue is expected to be between 435 and 437 million , representing year over year growth of between 18 and 19% . Total revenue is expected to be between 711 and 715 million , representing year over year growth of 15 to 16% .
Speaker #5: Adjusted EBITDA is now expected to range between 67 and 70 million for an approximately 10% margin at the midpoint of the range . non-GAAP earnings per share is expected to be between 50 and $0.54 .
Speaker #5: This assumes 74.6 million fully diluted weighted average shares outstanding . Our guidance assumes the following . First , we anticipate term license revenue to be flat on a year over year basis in Q4 and to grow in the mid-single digits for the full year .
Speaker #5: Second , we expect professional services to grow in the teens for both the fourth quarter and the full year . Third , total other income and interest expense will be approximately 3.2 million in Q4 and 13.8 million for the full year 2025 .
Speaker #5: Fourth , our guidance assumes FX rate as of early in November . Finally , I want to explain how the ongoing government shutdown is reflected in our guidance .
Speaker #5: We've been cautious in our approach , and we assumed a modest amount of disruption in our guidance . However , we do assume that the government will reopen in the coming weeks since we don't know how long the shutdown will last .
Speaker #5: We wanted to help you understand the impact on our guidance in a hypothetical scenario that the shutdown continues through year end in that scenario , we believe that we could there could be up to 10 million impact versus this revenue and EBITDA guidance .
Speaker #5: The vast majority of this scenario impact would be to our term license revenue , a meaningful portion of which is related to renewals .
Speaker #5: We would expect only a small potential impact to cloud subscription revenue and professional services margin . In this scenario , we are confident that whatever impact we might see from the shutdown in Q4 is just a function of timing .
Speaker #5: In closing , we're pleased with our Q3 results , particularly our continued improvements in profitability . We're energized by the opportunity we see ahead of us and will continue to invest responsibly to maximize our long term value .
Speaker #5: Now we'll turn the call over for questions . Operator . .
Speaker #2: Thank you . At this time , we will conduct the question and answer session . And as a reminder to ask a question , you will need to press star one one on your telephone and wait for your name to be announced .
Speaker #2: To withdraw your question , please press star one one again . Please limit your questions to one question and then one follow up question .
Speaker #2: Please stand by while we compile the Q&A roster . Our first question comes from the line of Sanjay Singh with Morgan Stanley . Please go ahead .
Speaker #2: Your line is open .
Speaker #6: Yeah . Thank you for taking the taking the questions . I wanted Matt to talk about . I think you mentioned that cloud ACV bookings this quarter was the strongest of the year .
Speaker #6: So wondering where , you know , where that strength was derived from , whether it was particularly industries , whether it was a strong fed quarter ?
Speaker #6: Was it an enterprise . Just love to get some color on that . And then I have a follow up .
Speaker #4: Yeah . First of all , I'm not going to attribute it to any sector . I think it was a broad strengthening . I think it's the continuation of our upmarket strategy and the traction we're getting with AI .
Speaker #4: That's where I'm going to have to attribute it .
Speaker #6: Awesome . And then on the go to market side , right . We're seeing kind of sustained growth . Growth rates in cloud .
Speaker #6: The margins are headed higher . You've seen a multi-quarter improvement in sort of go to market efficiency . What do you think we are if we use the baseball analogy in terms of the that sort of go to market transformation , are we sort of , you know , you know , well along the path or do you still see go to market , you know , productivity enhancements continuing to effectuate for the going into next year ?
Speaker #5: Yeah . Sanjiv , let me take that . So we're very pleased with the progress that we're making . As you noted , we've now seen cloud subscription revenue growth stable in the mid to high teens on a constant currency basis for four quarters in a row .
Speaker #5: And we've continued to see seeing the improvements in our go to market productivity metrics . And what that really means is just that our focus up market and resulting in higher sales productivity .
Speaker #5: And so we're making great progress in our move up market where we are in terms of innings , I would say maybe fourth or fifth inning , because what we're going to do now , going into next year , is returning to growth in our sales org .
Speaker #5: So we've we've focused our efforts on our existing sales org over the last call it 12 to 18 months . And we've seen significant improvements in execution and focus and improvements .
Speaker #5: And now the goal is to return to growth and continue improving productivity , while we also grow the size of the org , because to us , the key goal here is really to create a sustainable compounding growth engine .
Speaker #5: And for that , we need to both grow our coverage , which we have plenty of space to do , as well as maintain and continue improving our productivity .
Speaker #6: Yes , sir .
Speaker #2: Thank you . One moment for our next question . Our next question comes from the line of Steve Enders with city . Please go ahead .
Speaker #2: Your line is open .
Speaker #6: Okay , great .
Speaker #4: Thanks for thanks for taking the questions . I guess I want to start on .
Speaker #7: Just the fed side and appreciate the the call out for Q4 , but I guess I want to understand a little bit better .
Speaker #7: Just the impact that maybe you were seeing from the efficiency focus from from the government this year . And maybe how did that play out in , you know , the big budget flush quarter in three ?
Speaker #7: Q versus maybe how you were originally thinking about it ?
Speaker #4: Yeah . Let me say that I love what's happened to the government overall in its purchasing patterns . This year . And the shutdown is a temporary thing .
Speaker #4: But the changes , the government has instituted in the way they approach technology , those are more long lasting efficiency has become the priority .
Speaker #4: The government is willing to see software as the answer . It's open minded about using AI . It's willing to do direct deals with an organization like Appian , like a mid-sized software firm .
Speaker #4: These are all enormously positive changes . And then we've got the temporary negative of the shutdown . So overall , I'm really bullish about the government business .
Speaker #7: Okay . That's good to that's good to hear . And then I want to ask on AI studio . And that release coming out in the next couple of weeks I guess what has been you know , the feedback so far from from the early customer program and how are you kind of envisioning the monetization for that , for that product is that starts to get rolled out into a general availability for , for customers .
Speaker #4: Yeah . First of all , let me say that not only did we have the most oversubscribed beta program we've ever had , we also had the most positive feedback from the most different users we've ever had .
Speaker #4: So this is a much anticipated release . It's really taking the the we're pioneering what what's possible with AI agents . And I could go into detail , but I'll keep this short .
Speaker #4: We're very excited about the release . We feel like it's going to make a big difference for a lot of customers , and it puts us in the in the vanguard of innovation .
Speaker #4: What you can do with agents and process together . So that's really exciting . What else did you ask about ?
Speaker #5: Well , let me jump on modernization . So monetization will go in the form of continued expansion of our AI advanced tier . So Agent Studio will be available in the AI advanced tier .
Speaker #5: And as Matt mentioned , roughly a quarter of our customer base is now paying us for AI . So incremental features like Agent Studio will continue pushing that number higher .
Speaker #5: And then secondly , there will be elements of of consumption as a part of Agent studio and as as customer use cases in particular drive .
Speaker #5: There will be an incremental driver of growth , you know , in the long term . But it's an important incremental lever .
Speaker #7: Okay , perfect . Thanks for taking the questions .
Speaker #2: One moment for our next question . The next question comes from the line of Raimo Lenschow with Barclays . Please go ahead . Your line is open .
Speaker #8: Perfect . Thank you . Congrats for me as well . I have two quick questions . One for Matt , one for Stuart .
Speaker #8: Matt , if I if I think AI and AI adoption , we obviously are in a bit of a race with a lot of vendors are trying to do , you stake out their claim here and , you know , trying to be like the center of the universe .
Speaker #8: Can you think can you kind of discuss a little bit what kind of what do you think the determining factor will be for someone that can deliver a versus someone that just has more marketing slides ?
Speaker #8: And then I had one follow up research .
Speaker #4: Yeah . Okay . So the AI market is going to be interesting in the next couple of years . First of all , I think it's essential to differentiate between those who are creating the AI and those who are creating a compliment for AI .
Speaker #4: Our technology is explicitly intended as a compliment , like a car is to an engine . We mean to enhance the capabilities of AI and to bring that power into the hands of our customers .
Speaker #4: So specifically , we take that AI and we connection , which is to say we connect it to data across the enterprise , connected to workers .
Speaker #4: We give it . Secondly , coordination , which is to say we tell it when it's its job . When does it take a turn ?
Speaker #4: Who does it give the work to when it's finished ? That coordination makes it part of a valuable process . And finally we give it governance , which allows it to , you know , you get oversight and auditability and changeability and guardrails .
Speaker #4: Those are essential components . And they stake out process as a technology , as being a a really essential complement to AI going forward .
Speaker #4: I think that realization began in the summer , but it's going to continue , and I think we're going to see process accepted , process software accepted as a complement to AI software .
Speaker #4: Now , in terms of how we differentiate from others , who would provide process software , I'd say we've got a natural advantage here in that we've been focused on process and data fabric for a long time .
Speaker #4: Lately it's become obvious that those things are . Essential complements to AI , but we were in this and leading this long before it was known , and therefore we've got a big head start over .
Speaker #4: Anybody who's seen the writing on the wall and is now going to scramble to try to create process software or or a data fabric like we already have .
Speaker #8: Yeah , okay . Perfect . Makes sense . And then search for you . The obviously there was timing in in the profitability number this quarter .
Speaker #8: And that's why the guidance is for Q4 . If you think about the overall profitability performance though , that's kind of something that you guys will be measured on , like where how do you see kind of take away the timing differences , where what path we're on there and how do you think it from here now that you've been in the job for a little bit longer ?
Speaker #8: Thank you .
Speaker #5: Yeah , thanks for the question . And I think you're right , I think the better way to think about our profitability is to sort of zoom out from quarter over quarter dynamics related to timing and seasonality and focus on the full year .
Speaker #5: So we're guiding to EBITDA margin at 10% at the midpoint of the range , which we think is a significant milestone for us , particularly when you think about where we've come from over the last couple of years .
Speaker #5: And that's really the credit to focus on efficiency and improving productivity across the company , but especially in our sales org . As we look going forward , the key for us is to develop , to deliver sustainable revenue growth and continued margin expansion .
Speaker #5: I would say , though , as we think about next year in particular in the context of what we've done this year and how much we've exceeded our own expectations when it comes to margin , I would expect more modest margin expansion ahead .
Speaker #8: Okay . Perfect . Make sense . Thank you . .
Speaker #2: One moment for our next question . The next question comes from the line of Devin with KeyBanc Capital Markets . Please go ahead .
Speaker #2: Your line is open .
Speaker #9: Good morning . Thanks for taking my questions here . First one , I have is I just want to dive into your international performance there .
Speaker #9: I think you mentioned up the mix uptick in 40% of total , which kind of implies growth in the 30% range , which is a very nice acceleration .
Speaker #9: Is there any color you can provide us on what's driving the strength there? Are there any differences in the types of sectors gaining traction?
Speaker #9: And are you perhaps seeing more up sharing or AI adoption in international versus in the US ?
Speaker #4: This is a broad wave , but you're right , it's AI and and it's succeeding at connecting higher in organizations having higher level conversations , addressing larger projects , creating more value .
Speaker #4: We do that by connecting AI to real work and making it pertinent to decision makers at the top of the organization . I've got to say that's that's the biggest driver .
Speaker #5: I just want to say on a more pedantic side , effects was also helpful here because obviously dollar has depreciated versus foreign currency .
Speaker #5: So that's part of the drive . But to Matt's point , not not not by far . Not the whole thing .
Speaker #9: Yep . Nope . That's helpful . And then just one quick one for Serge . Professional services . The gross margin there really strong .
Speaker #9: Close to 35% in the quarter . Any any additional color you can give us on what's driving that uptick and how should we think about that level in terms of sustainable gross margin for professional services moving forward ?
Speaker #9: Yeah ,
Speaker #5: We're very happy with our performance in professional services , both in revenue as well as in margins . And the way that I think about our professional services .
Speaker #5: Org is that it's a highly strategic asset for us . Our customers , like the high quality implementation , and that's why they're willing to pay a premium .
Speaker #5: And that's why we have the margins that we have . And then the other thing is that professional services drives RR growth . And increasingly AI adoptions , because our customers are more likely to turn to our professional services for AI implementations when it comes to margins , we are we are very happy with the performance in this quarter .
Speaker #5: I will say that the margin is particularly high because we've exceeded our bookings expectations , and that's resulted in much higher utilization of our team .
Speaker #5: Frankly , probably a little bit higher than sustainable people are working weekends and not taking vacations . So maybe the 34 level isn't quite sustainable , but we think high profitability going forward is also on the in the cards .
Speaker #9: Great . Thank you .
Speaker #2: Thank you . And as a reminder , if you would like to ask a question , please press star one one on your telephone and wait for your name to be announced .
Speaker #2: Our next call comes from the line of Derrick Wood with TD Cohen . Go ahead Derrick , your line is open .
Speaker #10: Great . Thanks , Matt . We're we're seeing some software vendors move into forward deployed engineer models to help accelerate adoption . How are you thinking about the services model and the context of Appian and AI deployments ?
Speaker #10: And and potentially kind of leaning in around PhDs ?
Speaker #4: Yeah . Well , look , our model well predates the phrase forward deployed engineer , which I always thought was a bit amusing , but we have gained benefits as an innovator from emphasizing CS over the years .
Speaker #4: We have always put CS forward . They've been a differentiated , innovative force . They've been able to develop our new technologies into fruition and demonstrate to customers .
Speaker #4: And it's helped us . It's an accelerant . It's helped us move faster and deploy our new benefits into the the user base .
Speaker #4: So Appian is a technology led organization . We've always won through superior technology . And the CS force has helped us bring that that the benefits of that technology to our users .
Speaker #4: It also along the way allows us to get greater , greater retention , greater expansion , better relationships with our customers , a direct pipeline .
Speaker #4: And it's a terrific route for talent to come up through the organization . So we are unapologetically a services featuring software organization . I think it's worked great for us , particularly in our position as an innovator .
Speaker #10: Great . Thanks . And , Serge , can you help us understand just the bridge between your cloud net revenue retention rate at 111% and cloud growth at mid upper teens over the last four quarters , is the delta from migrations that aren't counted in the gnrh-r .
Speaker #10: How should we think about the relationship between these two metrics ?
Speaker #5: Yeah , thanks for the question . So the net retention rate was 111% , which is stable compared to the quarter ago . And we talked a little bit about this metric in the past , expansion from our existing customers is very important to us .
Speaker #5: Obviously , it's one of our key drivers of growth , but it's not the only one , right ? We also go after new customers and we've been very successful over the past year .
Speaker #5: In particular of winning some large new logos straight out of the gate , which I found very impressive given the where we are in our upmarket journey and the so the net retention is not is a part of the growth story , but not the whole growth story .
Speaker #5: The other thing we talked about in the past is that our net revenue retention is a bit backward looking , meaning that we look at revenue over the prior four quarters for customers who had been with us in the four quarters before that .
Speaker #5: So it tends to lag trends in revenue . And that's why you can see discrepancy between those two at times . But it has nothing to do with the migrations .
Speaker #5: We don't see very much in the way of migrations from on prem to the cloud . In fact , we see continued healthy growth on prem , which you also see this quarter .
Speaker #10: Great . Thank you .
Speaker #2: Thank you . One moment for our next question . The next question comes from the line of Jake Robert with William Blair . Please go ahead .
Speaker #2: Your line is open .
Speaker #11: Yeah . Thanks for taking the questions . Just wanted to double click into the expectation to grow sales account headcount again next year .
Speaker #11: Can you can you talk about how you're expecting to balance those investments with just the continued margin expansion ?
Speaker #5: Yeah . So as I mentioned and I'll kind of go across the board , but starting of course , with our biggest expense line sales and marketing , we've achieved improvements in productivity and our efficiency metrics that you see over the last 12 or so months , roughly in flat headcount .
Speaker #5: And that is sort of the right way to approach it . If you think about it . Because as you move up market , as you focus on better execution , we've also brought in new sales leadership .
Speaker #5: You don't want to be doing that while at the same time growing headcount . You want to do one thing at a time , but now we're at a moment in which we feel confident because we've made significant improvement when it comes to our productivity that we want to return to .
Speaker #5: What I would describe as as moderate headcount growth and the key goal for us , again , is to build a sustainable growth engine and to do that is first you need a large market .
Speaker #5: We have it . And then secondly , you need to expand your coverage and continue growing your productivity . We've done well on productivity .
Speaker #5: Now we got to return back to expanding coverage . So as we think about obviously we're not providing guidance today . But as we think about sort of the mix between growth and margins for next year , we expect to deliver both .
Speaker #5: But margin expansion , particularly in the context of what we've just accomplished over the last two years . You know , we're forecasting 10% EBITDA margin at the midpoint of the range for this full year versus negative ten two years ago .
Speaker #5: We're going to be more modest as far as our margin expansion , because we're increasingly confident in our ability to create this sustainable growth engine .
Speaker #11: Okay , that's that's helpful . And then we're hearing that this legacy app transformation opportunities is seeing a pretty meaningful uptake . And interest right now .
Speaker #11: I know you've been building some new solutions in that area . Can you talk about how you're thinking about addressing that opportunity moving forward ?
Speaker #4: All right . First of all , that was not an entirely clear question . There was some breakup on the line , but I think I heard enough of it to answer it correctly .
Speaker #4: And you could just tell me if I miss any detail . You're asking about the modernization opportunity , which is essentially the conversion of legacy applications into a modern platform .
Speaker #4: And we intend to be where we are now, but we intend to be a leader as this market grows to large scale.
Speaker #4: I do think it's going to be a substantial , a meaningful new software market . I think we're extremely well positioned for it .
Speaker #4: We've been in the modernization market for a decade already , and we have performed some admirable and publicly recognized modernization projects . But today , of course , the volume is going to increase dramatically because AI makes it easier to extricate and understand existing legacy applications , and also to rewrite them in a new platform .
Speaker #4: In this case , Appian . We've got a number of advantages that I think will really differentiate us in this market . First and most importantly , that if you're going to port an application from a legacy platform , by all means you should port it to a platform that is the opposite of legacy .
Speaker #4: A flexible growth tracking , scalable , feature rich platform like Appian would be ideal for porting your old applications . Secondly , we we handle the the job of recreating an application in in a really collaborative way .
Speaker #4: So this a deep collaboration between between AI and the developer where AI will propose things and the developer can modify . And we just saw another demo this yesterday .
Speaker #4: It's spectacular . I'm really impressed with the technology we put together . I think there's nothing like it . We're going to create a dialogue , which is just what you need for the most important applications .
Speaker #4: This isn't a simple delegation and you move one stack of code into another stack of code . It's about reinventing an old application , making it better .
Speaker #4: Maybe combining it with other applications along the way and creating something that suits the modern moment . That's not just a mere translation .
Speaker #4: Even if AI could do the whole translation , it would be insufficient . It's a collaboration , and so that , to me is the the golden key to getting modernization right is creating a rich collaboration so that those old applications aren't just ported , they're not just translated , they're recreated for on a better platform .
Speaker #4: For the moment . Right ? So , so that's what we're focused on . I love this market . We didn't talk about it much in the prepared remarks today because we understand that we've got a we have to emphasize agents this time .
Speaker #4: We've got a new new launch there . But our excitement is undiminished .
Speaker #11: That's very helpful . Thanks for taking the questions .
Speaker #2: Thank you . And this does conclude the question and answer session . And the program . Thank you for your participation in today's conference .