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spk07: Good day, and welcome to the Appian Corporation's second quarter 2021 earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Sriyananta, Director of Investor Relations. Please go ahead, sir.
spk01: Thank you, operator. Good afternoon, and thank you for joining us to review Appian's second quarter 2021 financial results. With me today are Matt Calkins, Chairman and Chief Executive Officer, and Mark Lynch, Chief Financial Officer. After prepared remarks, we will open the call for questions. During this call, we may make statements related to our business that are forward-looking under federal securities laws and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These include comments related to our financial results, trends, and guidance for the third quarter and full year 2021. the impact of COVID-19 on our business and on the global economy, the benefits of our platform, industry, and market trends, our go-to market and growth strategy, our market opportunity, and ability to expand our leadership position, our ability to maintain and upsell existing customers, and our ability to acquire new customers. The words anticipate, continue, estimate, expect, intend, will and similar expressions are intended to identify forward-looking statements or similar indications of future expectations. These statements reflect our views only as of today. They do not represent our views as of any subsequent date. They are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For a discussion of the material risks and other important factors that could affect our actual results, refer to our 2020 10K and other periodic filings with the SEC. These documents and the earnings call presentation are available in the investor section of our website, www.appian.com. Additionally, non-GAAP financial measures will be discussed on this conference call. Refer to the tables in our earnings release and the investor section of our website, for a reconciliation of these measures to their most directly comparable GAAP financial measures. With that, I would like to turn the call to our CEO, Matt Calkins. Matt.
spk05: Thanks, Sri, and thank you all for joining us today. In the second quarter of 2021, Appian's cloud subscription revenue grew 44% year over year to $42.5 million. Subscriptions revenue grew 37% to $56.9 million. Total revenue grew 24% year-over-year to $83.0 million. Our cloud subscription revenue retention rate was 121% at quarter end, and our adjusted EBITDA was a loss of $16.3 million. That's pretty good numbers for us. In addition to some good results, though, we're also announcing an acquisition of Lana Labs, a leading process mining firm. We expect the transaction to close next week. Process mining is the technology that examines usage logs to discover what work people are actually doing and see the patterns in that work and find processes that have not yet been automated. Those processes can then be automated in Appian using workflow technology. So process mining is a great complement to workflow. Process mining discovers processes, workflow automates them. Combining them in one product may create new business opportunities. help substantiate the return of investment in Appian and accelerate our expansion within our existing customer base. This acquisition also signals where Appian believes the low-code automation market is going. We believe the heart of this evolving and consolidating industry is workflow. Workflow is about doing, as are automation technologies like RPA. Process mining, by contrast, is about knowing. Knowing and doing are natural complements When used together, they create greater value than either component could have conveyed alone. Here's an example of the synergy between process mining and low-code automation. This is from a leading insurer who is also an Appian customer. They bought Appian late last year and built a few processes. They saw how quickly Appian could automate the processes they knew they had to improve. At the same time, they were using process mining to discover and map thousands of their existing processes. This quarter, they brought it all together. They multiplied their Appian investment to automate the many processes they discovered with process mining. Lana Labs is a strong firm in its own right. In the most recent analyst report on process mining, they're listed as a major contender. Like Appian, they focus on complex enterprise processes. They run natively in the cloud. They're recognized for ease of use, and they have many happy customers. Some of Appian's top partners already have LANA practices, including KPMG and PWC. They've got a great staff, very smart, good people. They're based in Berlin, and we're going to keep the operation there and grow it. Culture is a very important factor in Appian acquisitions, and we think we are fortunate with this one. We hope to keep every member of the LANA team. When Appian makes a technological acquisition, we follow a three-point playbook. There are three things that we prioritize when we combine technologies, and these are things our customers can count on as we expand our platform. The first is synergy. We're not just creating a portfolio of technologies. We're integrating them deeply. We think process mining and low-code automation are better together, so we're combining them. We think both are improved by intimate access to the other. Appian offers one product. And after this acquisition is processed, we will still offer one unified product. The second thing is reliability. We automate important processes for prominent organizations. Everything Appian offers has to be enterprise grade. The third is low code. Appian makes powerful technology that is still easy to use. For us, low code is an adjective. and it represents a new standard in usability. We are pioneers in the concept of low-code, allowing our users to program machines in simple terms. Whatever functionality Appian sells will feature an intuitive low-code interface. So that's it. That's our game plan. Synergy, reliability, and low-code. We have done it before. Last year, we acquired an RPA vendor Within a year of that acquisition, we fused our functionality to invent low code automation. We made RPA secure, certifying it with all our existing credentials. We made it low code, easy to use and integrate. We bundled it into our product. RPA is now a native feature in the Appian platform. An example will help show what I mean. A top international grocery retailer has been an Appian customer for two years. The company uses our low code automation platform to investigate issues with its supply chain, to file claims, and to manage the logistics of its fleet drivers who deliver supplies to stores. In Q2, the retailer purchased additional licenses and will deploy Appian RPA to help automate its distribution centers. For example, Appian bots will carry data across systems and assign truckloads to drivers. The company appreciates having RPA and low code in the same platform. and expects to save seven figures annually using Appian. For a while now, I've been explaining our industry to newcomers with what I call the low-code promise. It's a statement of what you can expect from our industry, an introduction for those who aren't familiar with it. It goes like this, and you've probably heard it before. With low-code automation, you can build apps 10 times faster, cut development costs by half, and still enjoy better functionality. So I've been saying this for a while based on internal data. But this quarter, an independent study was released by Forrester Research, and it validates the benefits I've been talking about. They found Appian's low-code automation platform accelerated app development by 17 times, better than 10, and reduces customer costs, including operating and maintenance costs, by 50%. Additionally, Appian improves the time-to-value of our customers' apps by half, reduces thousands of hours of manual work annually, and produces a 389% ROI on average with a payback period under six months. Here are a few examples of customers choosing Appian because we can deliver the low-code promise. A Fortune 500 insurance company became a new Appian customer early last year and has expanded its use of Appian with additional license purchases almost every quarter since. Our platform orchestrates the work between third-party RPA bots and employees as it onboards insurance policy resellers. In Q2, it purchased more licenses to deploy Appian RPA and build additional workflows, automating the end-to-end process of creating, processing, and shipping documents to customers. We won this deal because the company can cut its operational costs in half using Appian. A domiciliary care provider in the UK purchased over a million dollars in Appian software licenses in Q2 and became a new customer. The company will use our platform to orchestrate patient care and replace two legacy systems. Call center agents will use Appian to respond to care inquiries and request site visits, while back office workers will assess staffing resources, schedule visits, and dispatch a health care provider. Then, dispatched providers will record the services rendered on an Appian app so invoicing teams know how much to bill clients. We won this deal after proving our platform's speed and flexibility during a competitive proof of concept. Partners have increased their involvement in our software business, bringing roughly twice the software bookings in the first half of this year compared to the same period last year. This has raised our commission payments above expectations and reduced our services revenue, both of which effects we feel are generally positive. Speaking of partners, a partner helped us win a global humanitarian agency responsible for supporting international public health as a new customer. This agency purchased a seven-figure software deal in Q2, making Appian its new enterprise low-code standard. To start, we'll automate core financial and global fund resource planning processes. We won this deal after proving our speed and flexibility with multiple demos built in just days. We saw strong performance this quarter in our key industries. Here's several examples. Our top global medical devices company became a new Appian customer in Q2. It selected our low-code automation platform to oversee its manufacturing installation process for a specialized medical device. Before Appian, the company lacked unified tools to coordinate its manufacturing timelines, customer deliveries, and enablement training of these devices. These inefficiencies caused delays in their revenue recognition. We won this deal because our platform will unify these processes and improve overall efficiency by over 30%. The customer's first project will be delivered in eight weeks with the Appian guarantee. Also, a U.S. government group that administers federal funding is another existing Appian customer that purchased a seven-figure deal for software licenses in Q2. The group selected our platform to manage the end-to-end processing of constituents' funding requests. We won this deal because our platform allows the organization to quickly build and deploy a new application. Within weeks, they'll be able to distribute billions of dollars in accordance with a federal relief mandate. Our mission is to build the world's best low-code automation platform. We're doing this by bringing together complementary technologies that provide the greatest benefits to our customers. This quarter, we unified process mining and low-code automation. Process mining will allow companies to understand their processes so they can automate them on our platform. Now I'll turn the call over to Mark for a deeper discussion of our financials.
spk04: Thanks, Matt. I'll review the financial highlights for the quarter, and then we'll provide details on our Q3 and full-year 2021 guidance. Cloud subscription revenue for the second quarter was $42.5 million. an increase of 44% year-over-year and above the top end of our guidance. Our total subscriptions revenue was $56.9 million, an increase of 37% year-over-year. Professional services revenue was $26.1 million, up 3% from $25.4 million in the prior year period and up 4% from $25.1 million in the prior quarter. Partners continue to be a larger part of our ecosystem. They help us sell software and they perform the professional services work with respect to any new service contracts they sign. As the usage of Partners expands, we expect the proportion of our total revenue from subscriptions to increase over time relative to professional services. Subscriptions revenue was 69% of total revenue in the second quarter and 70% for the first half of 2021 as compared to 62% and 63% respectively in the prior year periods. Total revenue in the second quarter was $83 million, an increase of 24% year-over-year and also above our guidance range. Our cloud subscription revenue retention rate as of June 30th was 121% as compared to 113% in the year-ago period and 118% in the prior quarter. We are pleased with our customers' expanded use of our platform. As a reminder, we continue to target cloud subscription revenue retention rate of 110% to 120% on a quarterly basis. Our international operations contributed 35% of total revenue for Q2, compared with 37% in the prior year period, demonstrating the balance of our business both domestically and internationally. Our cloud software bookings were approximately 80% of total software ACV bookings in the first half of 2021, consistent with the full year 2020. Now I'll turn to our profitability metrics. For the second quarter, our non-GAAP gross profit margin was 70% compared to 69% for the same period in 2020. Subscriptions non-GAAP gross profit margin was 88% in the second quarter compared to 89% in the same quarter of 2020. Our non-GAAP professional services gross profit margin was 30% in the second quarter compared to 36% in the same quarter for 2020. For the second half of 2021, we expect our services gross margins to decrease to the mid to low 20% range as we dedicate more customer success resources to support our partners. Total non-GAAP operating expenses in the second quarter were $75.9 million, an increase of 39% from $54.6 million in the year-ago period. Adjusted EBITDA loss was $16.3 million in the second quarter, slightly above the high end of our guidance, and compared to an adjusted EBITDA loss of $7 million in the year-ago period. The higher adjusted EBITDA loss was due to higher than forecasted sales commission expenses during the quarter. Adjusted EBITDA for Q1 2021 was $369,000 versus a loss of $16.3 million in Q2, predominantly due to the seasonality of the on-prem revenue. In Q1, we recognized $19.9 million of on-prem revenue versus $9.3 million in Q2 2021. In the second quarter, we had approximately $1 million of foreign exchange gains compared to $625,000 in gains in Q2 2020. We do not estimate movements in FX rates, therefore they aren't considered in our guidance. Non-GAAP net loss was $16.9 million for the second quarter of 2021, or a loss of 24 cents per basic and diluted share compared to non-GAAP net loss of $8.2 million or a loss of 12 cents per basic and diluted share for the second quarter of 2020. This is based on 71 million basic and diluted shares outstanding for the second quarter of 2021 and 68.4 million basic and diluted shares outstanding for the second quarter of 2020. Turning to our balance sheet, as of June 30th, 2021, our cash and cash equivalents and investments were $249.7 million compared with $258.4 million as of December 31, 2020. For the second quarter, cash used by operations was $6.6 million versus $3.1 million for the same period last year. For the six months ended June 30, 2021, cash used in operations was $9.4 million versus $7 million for the same period last year. As we return to the office, we will need to build out additional office space. Capital expenditures will be approximately $8 to $10 million over the next six months. In addition, we will be paying $31 million in cash for the Lana Labs acquisition at the time of closing, along with an equity component that will vest over time. Total deferred revenue was $116.7 million as of June 30th, 2021. As we have stated on past calls, 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 to the variability of our billing terms, changes in our deferred revenue are generally not indicative of the momentum in our business. Now I'll turn to guidance. As a reminder, 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 in all subscription revenue, regardless of whether the customer deploys Appian in the cloud or on-prem. For the third quarter of 2021, cloud subscription revenue is expected to be in the range of $45 to $45.5 million, representing year-over-year growth of 31 and 33 percent. Total revenue is expected to be in the range of $90.5 and $91 million. Implicit in the total revenue guide is that we expect professional services to decline from Q2 2021 as our partners continue to perform more of the services work. In the situations where they help us close a new logo, partners generally perform the services. Adjusted EBITDA loss is expected to be in the range of $13 and $11 million. Non-GAAP net loss per share is expected to be between 20 and 17 cents. This assumes 71.3 million basic and diluted common shares outstanding. Included in the quarter's guidance is approximately $1 million of net operating expenses from the LANA Labs acquisition. For the full year 2021, CLOD subscription revenue is expected to be in the range of $174 to $175 million, representing year-over-year growth of approximately 35%. This compares to prior guidance of $171 million to $172 million. Total revenue is expected to be in the range of $355 million to $357 million versus prior guidance of $353 million to $355 million. Adjusted EBITDA loss is expected to be in the range of $40 and $38 million. Non-GAAP net loss per share is expected to be between $0.68 and $0.65. This assumes 71.3 million basic and diluted common shares outstanding. Included in the full-year adjusted EBITDA guidance is approximately $3 million of net operating expenses from the Lana Labs acquisition. On a separate note, we're excited to announce that we will be hosting our first Investor Day here at McLean headquarters on October 4th. We will be issuing a press release with more details within the next couple of days. So in summary, we are pleased with our Q2 results and are excited about the growth opportunities ahead of us. We're making disciplined investments to accelerate go-to-market success and continue to expand our platform to address the large and expanding market opportunity. With that, let's turn it over to questions.
spk07: Thank you. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again, that is star one if you would like to ask a question. We'll take our first question from Sanjit Singh with Morgan Stanley. Please go ahead.
spk10: Thank you for taking the questions and congrats on the 44% cloud revenue growth. Matt, I want to talk about the acquisition a little bit. So when I look at the platform capabilities, low code, plus RPA, plus process mining, you're really starting to build out that automation platform. And I guess the question is, is that should we think that this will allow you to target a different segment of the market, different types of customers, and from a competitive environment, a competitive standpoint, rather, does this allow you to go after a different set of competitors now that you're bringing these adjacent technologies together in a unified platform?
spk05: I appreciate that question. I think that these features coming together allows us to satisfy a larger market. I believe that this new market is going to be bigger than the sum of its components and that Appian, by assembling these components and doing so tightly with with real synergistic integration is going to be a leader in the provision of this new bundle of goods. So I see this as a very strategic move by us. We're reaching beyond just low code. As I mentioned in the notes, we're going beyond our legacy of action. Appian has always been about taking action, structuring action, executing action. We're moving beyond that now into knowing what you should take action upon I think it's a great complement to what we do. It's going to allow us to expand inside of our existing customer base. It's also going to allow us to discover a great deal more demand than we would have discovered otherwise. And I believe over time that these components are so naturally complementary that they're going to be perceived as the same market by buyers. So we're just getting there first.
spk10: Understood. And then on the cloud expansion rate that hit 121% this quarter, And, Mark, you mentioned that the rate's going to fluctuate between 110 and 120. I wanted to sort of sanity check that in the sense that, you know, cloud is now 80% of bookings. And so if you compare the expansion rates that you were seeing at an earlier part of the cloud story, so when more of the business was coming from kind of term subscriptions and you look at the expansion rate on premise versus the expansion rate that you're seeing in the cloud, would it – Should the expansion rate be structurally higher in the cloud so that these 120% type expansion rates could potentially be more durable going forward? Any thoughts on that in terms of just comparing the expansion rates between these two sides of the business?
spk04: You know, candidly, Sanjit, I would think that the expansion rates are going to be very similar for the on-prem in the cloud. You know, we land with solving one particular problem and then we expand to other challenges. through other applications that the customer wants to deploy throughout the enterprise. And so it really, certain customers are just super paranoid about having their deployments on-prem behind their firewall, but the sales motion is very similar regardless of where the software is located. So I don't think there's a material difference between cloud deployments or on-prem as it relates to the expansion rates.
spk10: Got it. Very interesting. I'll see you before. Congrats on the quarter.
spk07: Thank you. We'll take our next question from Arjun Bhattai from William and Blair.
spk09: Perfect. Thank you very much. And I'll echo my congrats on closing the acquisition. Certainly a very interesting space and one that's seeing a lot of demand. Matt, maybe for you, what can you just about Lana Labs, what about Lana Labs made it a good fit for Appian? We know there's, you know, there's quite a few players in the space. What stuck out to you? And then When you look at your customer base from a process mining perspective, are there other vendors that your customers are already using to address the process mining use case, or do you see this as more of a greenfield opportunity?
spk02: All right.
spk05: I think that there are other vendors, but this is still probably more greenfield than the RPA move was a year and a half ago.
spk02: I'm excited about the potential of this move.
spk05: I think that we're hitting the market at the right time and that the natural synergy between knowing and doing is so strong that we're going to make a splash with this capability. So I'm excited about where we're going here. I think that it's going to have a big effect on our existing customers. But then I also think that once this technology is well understood, it'll be clear to the broader market how valuable it is to go through this natural discovery process. Now, your first part of the question was about how we selected Lana, and I want to address that as well. We don't look for market impact in an acquisition. We look for technology because our goal is to create value. And so we're not trying to buy customers, buy revenue. We're trying to put together a set of technologies that has great value. So we're looking for a a solid team, good culture, good morale, and a winning piece of technology. And that's what we found. And so we're going to double down on what we've discovered here. It's a great little operation. I think we were really fortunate to come across it. They use the kind of technologies we use, the philosophy we have that put the customers first like we do. It's cloud. It's very compatible with what we do. And that to us is by far the most important consideration. I'd rather have that than have scale or have them have more customers. We'll earn the customers. We put together great technologies. We show the synergy. We'll earn the customers. We need to start with compatible technology built by great people.
spk09: Wonderful. That's very helpful. You know, maybe I sensed a bit of, in your prepared remarks, a bit of an inflection in the partner motion, right? Even as we look at the back half of the year, Mark talked about professional services being down sequentially from where we are today. Is there anything that you can think that's driving that inflection in the partners now? You know, certainly it's been a journey over the last couple of years, but Would you attribute that to something, maybe your platform vision as you add these different components or just a general increase in the awareness of low-code automation? We'd just love to get your thoughts there.
spk05: Well, I want to echo and agree with your observation that something is fundamentally changing about the way our product gets to the market. I think partners are stepping up and taking a greater role. and that it's even happening faster than we anticipated, which is for the best, right? The side effects of this, the higher commissions, the lower CS, these are things that we're happy to accommodate. The key strategic move is that partners are driving the adoption of our software. And we see partner practices multiplying versus last year, even. Really impressive growth. Commitments being made by partners, staffing up experts, deploying them, pitching our product, building solutions, on our product, this is a very important step strategically for us in our intended direction.
spk09: Perfect. Thank you, and congrats again on the quarter. Thank you.
spk02: Thanks.
spk07: Thank you. We'll take our next question from Steve Enders with QBank.
spk11: Great. Thanks for taking my questions. I just want to touch on the acquisition again, just wondering how you're thinking about the monetization of Lana here. Is this something that you're expecting to directly monetize, or is this more about utilizing process mining to figure out where the next place is to deploy either RPA or your own low-code technologies within a customer?
spk05: Thank you for the question. We're not going to directly monetize it, which is to say we're not going to have a price on this technology in the near term. We're instead going to monetize it indirectly, which is to say by expanding within existing customers and discovering more business and differentiating from the competition that has not achieved the total perimeter of modern low-code automation as quickly as we have. So that is our monetization strategy.
spk11: Okay, perfect. Great. Great to hear. And then maybe for Mark, just want to get a better sense for some of the puts and takes on the guide here. You know, even I was guided down a little bit from, I think primarily from the quarter and the impact from higher commissions. But I guess how should we think about the, you know, the upside that we did see on the services line and the impact from that going forward and then also the EBITDA component of it and the commissions there?
spk04: Yeah, so the, you know, what's going into the guide, one is the LANA, the additional expenses from LANA. It's about a million in Q3 and for the full half of the year it's approximately $3 million. So it was basically baked into the adjusted EBITDA guide. The subscription, the total revenue guide basically has implicit in it a reduction in PS, right? So PS continues to reduce a little bit based on the partner activity that Matt just talked about. And then the cloud subscription revenue guide, we actually, you know, we had flowed through the bead and raised it nicely to 35% growth rate for the year. So we feel good about the guide. It's typical apping guides. Candidly, we're fairly conservative in our guides. It pains Matt when we put it together, but that's where we're at.
spk11: Okay, perfect. Thank you.
spk07: Thank you. We'll take our next question from Fred Headmeyer with McQuarrie.
spk08: Hey, thank you for this. So you noted in your deck that partners roughly double bookings year over year, which is a Notable here, could you describe the types of use cases that you're seeing your partners developing or using Appian to develop as they are building out their practices?
spk05: There's a myriad of them. Let me describe one just to give you an idea. We've been approaching the state and local business here in the U.S., state and local government, with the leadership and in tight coordination with a partner, a large firm, one of the world's largest. And they've had the contacts. They've steered us in the right direction. They're creating IP. They're making the pitch. They're carrying the deals for a lot of the – they're doing a lot of the heavy lifting. And the results are so promising that I now consider this to be one of our best up-and-coming verticals. That's an example of the kind of help we're getting today from partners, the kind of win-win they're seeing working with us. It's of a different league than we saw even 12 months ago.
spk08: Thank you for that. And then a question also about Lama. So you mentioned the costs that were coming online from this acquisition a little bit earlier. I wanted to ask, are you embedding any anticipated revenue contribution in 2021 from the acquisition?
spk05: Nothing important.
spk03: It'll be a negligible revenue contribution. De minimis. Got it. Thank you.
spk07: And then once again, if you'd like to ask a question, please hit on the pressing star one. We'll take our next question from Derek Wood with Count & Company.
spk06: Oh, great. Thanks. It's Andrew for Derek. Was wondering on sales rep productivity in the quarter versus your expectations and maybe just talk about some of Eric's new initiatives that have improved that and then also how is sales rep hiring tracking versus your expectations?
spk05: All right. Well, we don't speak to hiring, but I can tell you that productivity is in really good shape. On the board, batting average, so to speak, is, well, I don't remember it being higher. We don't disclose this, but it's in a good place. We're seeing a lot more productivity. So I'd say that those initiatives are moving in the right direction, strongly so.
spk06: Thanks. And then government revenue looked like it was up a solid 30% year-over-year. Any color on the software growth within that? Maybe just talk about how the Q3 pipeline is trending.
spk02: Well, I can't say too much about the pipeline.
spk05: I can tell you that I feel we've got a great value proposition, and there are some promising opportunities in the government right now that I can tell you that I'm excited about. The government acquisition management solution now has four separate components, each of which purchasable as its own product. And I'm excited about that. We just launched the fourth recently and the uptake, the reception has been terrific. We're seeing good uptake, good pipeline on that concept. I'm also excited about the state and local initiative that we spoke about recently. So without getting too specific about the pipeline, let me tell you that I'm bullish about the potential.
spk03: Great. Thanks, guys. Thank you. And that does conclude today's question and answer session, and that does conclude today's conference.
spk07: We do thank you for your participation, and you may now disconnect.
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