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Operator
Good day, everyone, and welcome to the Appian Corporation third quarter 2021 earnings call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Sri Anantha, Director of Investor Relations. Please go ahead, sir.
Sri Anantha
Thank you, operator. Good afternoon, and thank you for joining us to review Appian's third quarter 2021 financial results. With me today are Matt Hawkins, 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 fourth 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 beliefs 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 discussions 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 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 compatible GAAP financial measures. With that, I would like to turn the call to our CEO, Matt Calkins. Matt.
Matt Hawkins
Thanks, Sri, and thanks, everyone, for joining us today. Third quarter of 2021, cloud subscriptions revenue 36% year-over-year to $46.7 million. Subscriptions revenue grew 32% to $67.2 million. Total revenue grew 20% year-over-year to $92.4 million. Our cloud subscriptions revenue retention rate was 117% at quarter end, and our adjusted EBITDA was a loss of $12.0 million. Two years of global tumult have tested every business's ability to change. Agility is now a top priority for every organization. Companies are scrambling to adapt to new customer buying patterns, new health practices, and new regulations. This kind of change is done with software processes. The burden of facilitating change like this falls on the IT department, and expectations of IT have risen dramatically. You can see this in studies like the one that Appian sponsored with the Economist Intelligence Unit this autumn. The IT department has finally found the spotlight. When I was a consultant in the 90s, I visited a lot of IT departments to tune their databases, and they had the worst real estate, satellite buildings, low ceilings, basement floors. IT got the worst of it because it was considered less important. That is changing now. After two years of COVID, IT is a hero, important like marketing or finance. Without enterprise technology, we couldn't have been productive through the pandemic. Imagine if we'd approached the plague of 2020 with the technology of 2010, even. What a difference modern technology has made to enable dispersed productivity and adopt new processes. IT saved the economy these last two years. So that's the preamble, but here's my thesis. Organizations need the ability to change, above all. and they need IT to deliver. With that in mind, over the past two years, Appian has created exactly the product we think IT departments need now, a change engine. Our goal is to assemble a set of technologies that will enable businesses to create new processes the fastest. Workflow is the heart of it, of course, because that's, in my opinion, the world's fastest and most intuitive way to program. But we've gone way beyond workflow now. We have a suite. It begins in discovery, finding your next opportunity for process improvement, and it ends in automation, executing your new processes with a full complement of digital workers. Appian's change engine starts with process mining. Process mining is a new industry. It's like an X-ray, peering inside your business, to detect inefficiency and recommend improvements. Process mining by itself is just a diagnostic, but when coupled with workflow, it becomes actionable and powerful. Now the diagnosis can be followed automatically by the cure. The cure is creating a workflow to coordinate the inefficient processes you found. For all the excitement in this emerging consolidated market, few firms can claim to be strong in workflow. Appian has been a top leader in this technology for more than a decade. Workflow delegates. It sources data and routes work, but it doesn't do the work. What's not done by people these days is done by automation, which is to say by digital workers. Digital workers include RPA bots, AI, intelligent document processing, and business rules. And they work best in concert. each handling those jobs for which they are best suited. Appian has spent the last two years assembling a product suite that fits this moment. Our product is a change engine, getting clients from zero to 60 on a new process as fast as technology can enable. In the same platform with all native Appian technology, our clients can go from discovering a new process to designing it to automating it. I'd like to share some examples of how our customers use these tools together. Entirely by coincidence, my first two stories feature luxury automakers. First, a leading European car brand became a new Appian customer earlier this year. It's modernizing its business to save tens of millions of dollars annually. It uses Appian to digitize supply chain processes, including the movement of car parts across Europe under Brexit regulations. Our platform coordinates shipping agents and RPA bots to complete this work in collaboration. In Q3, it purchased thousands of new licenses to add third-party logistics providers to its workflow. While these projects are underway, the company will also mine processes in its financial and procurement groups to discover future Appian projects. This story has it all. The entire suite used together and synergies everywhere. Our next automotive manufacturer story involves an international luxury car brand that became a new customer this quarter. It selected our low code to quickly unify its business. Appian is consolidating enterprise systems so the company can assess inventory and launch promotions that incentivize dealerships to sell cars faster. Before Appian, the company was slow to deliver these incentives. Its incomplete systems required manual workarounds. We won this deal after proving our speed by building complex proof of concepts in just one week. We're seeing good international growth. I'll mention a few notable international deals. First, we landed a sizable expansion at a global elevator manufacturer and logistics provider, making it a multi-million dollar customer. The company uses our platform to manage customer installations. In Q3, it purchased more licenses to manage global installations and quality inspections. Field installers will use an Appian mobile app to report their progress, while corporate workers at desktops monitor their locations. Inspectors will later visit sites and use Appian to report on installation quality. Before, the company lacked visibility on dispatched workers and paid penalty fees for late projects. We won this deal because our low code allows the company to deliver timely projects and meet quality standards. Second, a top global bank. Second example. Top Global Bank, an existing Appian customer, purchased a seven-figure software deal in Q3. The group runs a large Appian center of excellence with hundreds of internal resources and partner developers. They've built dozens of applications to automate processes across their enterprise, including audit, compliance, customer management, and corporate operations. This quarter, they bought more licenses to deploy additional applications. Finally, a restaurant franchise and licensing chain needs to digitize its process for onboarding and managing international franchisees. It became an Appian customer in Q3. It bought Appian, including a solution written by an Appian partner, and I love it when that happens, to orchestrate its franchisee lifecycle. Before, the company managed franchise relationships manually because it couldn't unify its systems and data and employees into a single workflow. Now, With Appian, the company will run its processes 30% faster and open more than 10,000 new restaurants in the next decade. Our federal sector also performed well this quarter. Several customers made large software purchases for new applications. My first example is a US government organization that administers federal funding. This long-term Appian customer added licenses multiple times this year. In Q2, it bought licenses to process funding requests for constituent groups in accordance with a federal relief mandate. The app was delivered in just weeks, and tens of thousands of users have been approved for billions of dollars. Now, in Q3, it again purchased software to approve facilities-related funding requests for healthcare groups. We won this deal because our low-code is flexible and can deliver the customer's new project before the end of the year. Another federal organization that implements monetary policy, became a new Appian customer in Q2 of this year. It selected our platform to manage its mergers and acquisitions process for banks nationwide. A quarter later, it bought more software to modernize a legacy regulatory system. Appian will consolidate disparate systems and provide governance for thousands of users. In just two quarters, the group became a multi-million dollar Appian customer. Our federal vertical did well this quarter partly due to the popularity of one solution called Government Acquisition Management, or GAM, or GAM. It's actually a suite of four distinct solutions written by Appian on the Appian platform that manage the highly regulated federal procurement lifecycle. These solutions gather requirements, complete vendor evaluation and source selections, award contracts, and automate contract clause writing processes. Appian solutions, including GAM, are written to be used together. They're standardized, and they upgrade with our platform. They share common data definitions and common reports, and they feature built-in calls that talk to each other. It is traditional amongst our customers and our competitors to view these applications in silos, but Appian brings them together. Integration and compatibility is a theme for us. It was true for the components in our change engine, and it's true for our solutions. Customers love being able to run their end-to-end procurement cycle on one platform. It can give them faster throughput, better data visibility, and better decision making. Some Appian customers buy all four GAM solutions at once. Others start with just one and later expand by purchasing the remaining solutions. For example, a federal defense agency purchased our full-gam solution suite and became a new Appian customer in Q3. The agency chose Appian to modernize its costly and inflexible legacy system. It'll deploy Appian to over 1,000 users who will process billions of dollars in awards annually. We won this deal after automating the procurement lifecycle of other federal agencies who serve as happy references for us. Another federal defense command overseeing national cybersecurity needs, an enterprise-grade procurement system, it selected Appian and became a new customer last year. It started by purchasing one of our GAM solutions, requirements management. Now, in Q3, it purchased a second GAM solution, awards management, to automate the next phase of its build-out. Appian is a low-code pioneer. We were the first to go public as a low-code vendor several years ago. Now, we're realizing the next generation of this technology. It's more than just workflow now. It's a change engine with the power of process mining, workflow, and automation combined in a single platform. Now, I'll turn the call over to Mark for a deeper discussion of our financials. Mark.
Sri
Thanks, Matt. I'll review the financial highlights for the quarter, and then we'll provide details on our Q4 and full year 2021 guidance. Cloud subscription revenue for the third quarter was $46.7 million, an increase of 36% year-over-year and above the top end of our guidance. Our total subscriptions revenue was $67.2 million, an increase of 32% year-over-year. We're pleased with the continued strength of cloud subscription revenue and overall subscriptions revenue. Professional services revenue was $25.2 million, down 5% from $26.5 million in the prior year period, and down 3% from $26.1 million in the prior quarter. As noted in the past, 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 services contracts they sign. As the usage of partners expands over time, we expect subscriptions revenue as a proportion of total revenue to increase relative to professional services. Subscriptions revenue was 73% of total revenue in the third quarter and 71% for the first nine months of 2021 as compared to 66% and 64% respectively in the prior year periods. Total revenue in the third quarter was $92.4 million, an increase of 20% year-over-year and also above our guidance range. Our cloud subscription revenue retention rate as of September 30th was 117% as compared to 115% in the year-ago period. We are pleased with our customers' expanded use of our platform. As a reminder, we continue to target a cloud subscription revenue retention rate of 110% to 120% on a quarterly basis. Our international operations contributed 32% of total revenue for Q3 2021, which is consistent with the year-ago period and demonstrates the balance of our business both domestically and internationally. Software ACV bookings was approximately 80% of total software bookings in the first nine months of 2021, which was consistent with the full year 2020. Now I'll turn to our profitability metrics. For the third quarter of 2021 and 2020, our non-GAAP gross profit margin was 73% in each respective period. Subscriptions non-GAAP gross profit margin was 90% in the third quarter of 2021, consistent with the year-ago period. Our non-GAAP professional services gross profit margin was 26% in the third quarter compared to 40% in the same quarter of 2020. The services gross profit margin last year was positively impacted by a reduction in services performed by subcontractors and decreased travel and entertainment costs. Moving forward, we expect our services gross margins to decrease to the low 20% range as we dedicate more customer success resources to support partners. Total non-GAAP operating expenses in the third quarter were $80.5 million, an increase of 33 percent from $60.3 million in the year-ago period. Adjusted EBITDA loss was $12 million in the third quarter within our guidance range and compared to an adjusted EBITDA loss of $2.4 million in the year-ago period. In the third quarter, we had approximately $2.3 million of foreign exchange losses compared to a gain of $3.3 million in the year-ago period. We don't forecast movements in FX rates, therefore they aren't considered in our guidance. Non-GAAP net loss was 15.9 million for the third quarter of 2021, or a loss of 22 cents per basic and diluted share, compared to non-GAAP net loss of $34,000, or breakeven per basic and diluted share, for the third quarter of 2020. This is based on 71.1 million basic and diluted shares outstanding for the third quarter of 2021, and 69.9 million Basic and diluted shares outstanding for the third quarter of 2020. It is important to note that our non-GAAP net loss was negatively impacted by the $2.3 million of foreign exchange losses, or a loss of 3 cents per share, which was not included in our original guidance. Turning to our balance sheet, as of September 30th, 2021, cash and cash equivalents and investments were $188.5 million, compared with $258.4 million as of December 31, 2020. For the third quarter, cash used by operations was $25.1 million versus $6.5 million for the same period last year. For the nine months ended September 30, 2021, cash used in operations was $34.5 million versus $13.5 million for the same period last year. The increase in cash used by operations during Q3 was predominantly due to slower collections in the quarter. We expect to have strong collections in Q4, which should significantly reduce the cash used in operations for the quarter. As a reminder, we paid $30.7 million in cash for the Lana Labs acquisition during Q3, along with an equity component that vests over time. As we return to the office, we will need to build out additional office space. Capital expenditures will be approximately $3 to $4 million in Q4 2021. Total deferred revenue was $124.9 million as of September 30, 2021, an increase of 7% from the prior quarter and 23% from the year-ago period. As we've 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 deferred revenue are not generally 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 apping in the cloud or on-prem. For the fourth quarter of 2021, cloud subscription revenue is expected to be in the range of $48.8 million to $49.3 million, representing year-over-year growth of 32% and 33%. Total revenue is expected to be in the range of $95 to $95.5 million, representing year-over-year growth between 16% and 17%. As partners continue to perform more services work, We expect a portion of professional services revenue within our total revenue to continue to decline. This is implicit in our total revenue guidance. In situations where partners or when partners help us win a new logo, they generally perform the services. Adjusted EBITDA loss is expected to be in the range of $15 to $13 million. Non-GAAP net loss per share is expected to be between 24 and 21 cents. This assumes 71.2 million basic and diluted common shares outstanding. Our operating expenses forecast includes incremental investments in a lot of labs, go-to-market strategy, sales and marketing, and some expenses normalizing as we return to the office. For the full year 2021, cloud substitution revenue is expected to be in the range of $177 to $177.5 million, representing year-over-year growth of approximately 37 percent. This compares to prior guidance of $174 to $175 million. Total revenue is expected to be in the range of $359.3 to $359.8 million versus prior guidance of $355 to $357 million. Adjusted EBITDA loss is expected to be in the range of $43 to $41 million and compared to prior guidance of $40 and $38 million. Non-GAAP net loss per share is expected to be between 75 and 73 cents compared to prior guidance of 68 to 65 cents. This assumes 71.1 million basic and diluted common shares outstanding. Given the large market opportunity in front of us in the healthy customer unit economics, we expect these higher levels of forecasted investments in Q4 2021 to continue going forward. So in summary, we're 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 growing market opportunity. With that, let's turn it over to questions.
Operator
Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. And we'll pause for just a moment to allow everyone an opportunity to signal.
spk12
And our first question will come from Bhavan Suri with William Blair. Bhavan, your line is open. If you're using a speakerphone, check your mute function or pick up your handset. I'm sorry, Bhavan, we're still not able to hear you. Please check your mute function. Hello? Hello? Hey, guys. Can you hear me now? We can.
Operator
Yes, sir. Please go ahead.
spk02
Hey. Hey, sorry. This is Arjun for Bhavan. Thanks, guys. Sorry about the technical difficulties there. Maybe to start off with, you know, Matt, I know you talked about becoming a change agent. Can you maybe just, you know, I understand how the technology will play into that. What else do you need to do to help guide your customers to become more agile? Is there anything that you need to do from a change management perspective, from a process perspective, that will help guide them through this journey outside of just providing them the workflow, the process mining, et cetera. How do you think about that aspect of it?
Matt Hawkins
Yeah, absolutely. It would be one thing to just have these different sets of functionality as a portfolio, and it's quite another to integrate them deeply and present them as a unified suite. If we focus, and we are focusing, on the synergy, not merely on the breadth of the suite, but on the synergy between the pieces, We can smooth out all the corners and take out all the friction that slows down a customer as they proceed through the steps from discovering their process to designing their process to automating their process. We want that to flow incredibly easily. And so we're targeting any step that would have caused them confusion or delay. We're making those as easy as possible to draw the user through the sequence So it's not enough merely to provide the technology. You have to streamline the sequence, and that's the other thing we're focusing on. We're also providing education that allows people to see how it can work. We've got demos that showcase it. We've got a community edition with training videos that teaches our users for free, even our prospective users, how this technology can help them and how each part of it can be brought to bear in an easy way. The technology alone is not enough. You have to facilitate it, educate it, and then popularize it. We're working on those elements as well.
spk02
Understood. Very helpful. And then I would like to hear maybe just some commentary on what you're seeing in the pipeline. I know the guidance does imply a little bit of a step down. in growth, we saw a bit of a sequential tick down in net retention. Can you just talk about how customer expansions are trending, what you're seeing in terms of Q4 demand, both from a net new perspective and expansion front? That would be super helpful.
Matt Hawkins
Yeah, I feel good about the pipeline, about the expansion. That NRR is always going to fluctuate a little bit. It's in the range we're expecting. I think it is healthy, and I believe that our pipeline and our opportunity is healthy as well.
Sri
Yeah, and I think in the guide itself, there's the typical happy conservatism big in there as well. I'll let you say it.
spk02
We can't go without that. Last one for me, and then I'll cede the floor. It sounded like international was having a great quarter. Is there anything you're seeing that's different about international markets, either in terms of whether they're coming a little bit later to the low-code investment cycle, or are there specific investments that you've made in the partner channel and the go-to-market motion, that we're now starting to see the international motion get going and have some strong quarters here.
Matt Hawkins
We have seen some strength in international. You're right about that. And there are some trends that indicate that low code and a change engine, like I'm talking about today, could be breaking out. international maturation is one of those trends. Another one which crosses my mind just earlier today is the great resignation. You've probably heard of it, how employees are leaving their employers more frequently now. And this puts pressure on organizations that need to create new processes, new applications with perhaps less expertise on hand or Yeah, or maybe just newer expertise on hand, so it's got to be intuitive. You see that the bar has to be lowered for how difficult it is to make a new application, make a new process. Volatility of labor, scarcity of labor is another reason why low code is important. So, yeah, I see a number of trends pointing in our way.
spk12
Perfect. That's very helpful. Thank you guys for the color. And we'll take our next question from Sanjit Singh with Morgan Stanley.
spk14
Hi, this is Elizabeth on for Sanjit. Could you provide some color on the uptake or adoption of RPA and how it's changed year over year? And also any early feedback on the process mining application would be really helpful.
Matt Hawkins
Yeah, yeah, that's right. Thanks for the question. So RPA is being adopted as a complement to workflow. So when it's used in confluence, in partnership with workflow, we see strong adoption. We don't see standalone RPA, and we're not going for it. So for us, to be blunt about it, RPA is a feature. RPA is not a product. We see strong interest in it as a feature, as part of our suite, but we're not pursuing it as a standalone market. Got it. And then... I'm sorry, I'll speak to that as well. In both cases, lots of beta interest, right? Lots of enthusiasm. I think that the process mining functionality reaches the point of intuitiveness so easily. I'm really enjoying pitching it to our customers. Not many of them are using it, obviously, because we haven't launched it yet under the Appian brand. But they love it when they hear it. It makes sense. They completely understand how you would start with a process mining analysis and move to workflow and how you would transition a process mining map to a workflow model. So the intuitiveness factor is very high. The organic interest is very high. And the beta interest is strong. I could speak to just that, but it's not TA yet under Appian's name.
spk14
Got it. Thank you so much for the color. And then You know, just another one on the new pricing model, you know, that was announced, you know, maybe early, but any response kind of from the customer base on, you know, how they feel about the effort-based pricing model?
Matt Hawkins
Yeah, you're talking about Happy and Unlimited, where we're charging for a – we're letting our customers subscribe to applications according to how long it took to build them. I like this model because it's a proxy for the value of the application and all of our prices. We're just going to be a proxy anyway, so why not pick an exceptionally simple one? It also incents them to fully staff their Appian deployment to get every last person month's worth out of the contract they signed, and I like that. Partners like it because it means that our customers want expertise. This model has been popular. We have not shifted our entire platform user base over to this model and I don't expect that we ever will. In my opinion, this model works better for the second sale than the first sale because what you must have in order to make a sale based on your productivity is you have to establish in the mind of the buyer that Appian is a means to efficient production. If it's not clear to the customer how fast they can develop a new application on Appian, then they won't be impressed by the price relative to what they think they can accomplish in that frame of time. So what I prefer to do is sell one application based on old methods, maybe an Appian guarantee, eight-week drop-in, or perhaps a per-user license, something like that. And then the second application, now that they see how efficient we are and how we multiply the speed of development, now we let loose their creativity and offer them an Appian Unlimited license. So that's typically how it's going to go, which I think means that it's going to take a little time to reach its full potential. It is still a minority of our customers who are using an Appian Unlimited license, but I like its simplicity. I like how it shortens sales cycles. I like how it's not really matched by what our competitors are doing and how customers can intuitively understand what they'll pay for what they get.
spk12
Great. Thank you so much. And we'll take our next question from Fred Havemeyer with Macquarie.
Fred Havemeyer
About government, given that this is typically your strongest government quarter, it looks like some of the momentum is in the back half.
Matt Hawkins
Could we make that a little bit louder, please, Fred? Oh, sorry.
Fred Havemeyer
Fred, we couldn't hear you. Let me try. Let me drop the headset and see if this is any better.
spk00
That's better.
Fred Havemeyer
Perfect. I wanted to ask about government. Typically, this is your strongest government quarter, and certainly you were calling out government during your prepared remarks here. It was looking like, when I'm taking a look at the 10Q, that the government year-over-year growth is slowing a bit, certainly against a stronger back half of 2020 showing. So I'd like to ask about this. Could you talk about the dynamics that you're seeing with your government vertical and how this is impacting your revenue line? And whether any of this is also reflecting government penchant for purchasing more term licenses versus cloud?
Sri
Yeah. Well, one thing, the growth rates in the queue could be distorted based on professional services versus software. From a software perspective, the quarter was real strong. Matt called out some of the successes that we had in the vertical itself. So the vertical continues to be our second strongest vertical out there. So we're real pleased with that.
Matt Hawkins
It's also our number one solution success story now. I mean, I would say this is the solution I am most excited about at this point. The government acquisition manager, it's got four components and it's being adopted the way I hoped it would be, starting with one piece and then expanding to the others, using that easy integration to make it so the next purchase is a no-brainer and just moving along through the procurement cycle. So Yeah, that's a great trend. I feel like we posted solid results in government this quarter.
Sri Anantha
And Fred, just to clarify, most of the revenue in the government vertical is subscription. There is no term license.
Sri
Yeah, like the vast majority of the bookings this quarter were cloud. And it's all subscription.
Fred Havemeyer
All helpful there, especially the call out of ProServe in the mix, I think, in the revenue last year. You know, as a separate follow-up question, could you also talk about your competitive landscape, you know, with more low and no-code startups in the market and larger software vendors talking a lot about low-code lately? Again, I know you touched on this in your prepared remarks a bit, but are there any different faces in your deal cycle at this point, and how are your win rates progressing overall?
Matt Hawkins
Yeah, let me talk about both of those individually, both the the startups and the established players who are starting to talk about low-code. And before I get into it, let me start by saying that our win rates are rising, and we were very pleased with our win rate this quarter. The startups, they are not a concern right now. We don't see them. They're not serious competition because Appian is at the top of the pyramid in this market. We are the high-end industrial scale version of low-code. and the startups are going to come in at the bottom. So we don't see direct competition from them. And as for the large firms, the stack vendors, the big tech firms that are talking about low-code, they're certainly going to get their piece. They've got their captive customers. They're going to sell low-code into a lot of them, but their product is not competitive, in my opinion, not competitive. And so they're also whetting a lot of appetites that they cannot satiate. And so I think part of what they're doing is beneficial for us, even while they are going to claim their fair share, so to speak, of the low code demand.
spk12
Thank you. And our next question will come from Derek Wood with Cowen and Company.
spk11
Hey, guys. It's Andrew for Derek. Thanks. Matt, the big restaurants win is interesting. It's outside of your core verticals. Maybe just talk more about that deal, how it came about, and could this potentially be a new vertical of focus for you?
Matt Hawkins
Yeah, I love this, actually, this story. It shows how the concept that we are exploring, developing, applies everywhere, right? It applies in businesses. in food and entertainment, it applies in travel, it applies in energy, it applies in education, it applies in... You see, every business of scale in the world is facing the same problem. They have to change. Nobody's business is staying the same versus two years ago. They're all in the midst of rapid turnover and they've all got to learn to be faster than they have been before. Some businesses have used change to survive. Other businesses have used change to differentiate, and they're going to keep using it as a weapon to defeat their opponents. I think there's like an arms race now, like an arms race in agility. And Appian is a purveyor of agility. Our goal right now, and I tried to make it real clear in the prepared remarks, but our goal as an organization is to collect and combine those technologies that allow a company to create change the fastest. And so I'm delighted to see a big win outside of our traditional industries. It just shows how the value of change is rising in other industries. I think the reason why we did so well early on in financial services is because the value of a great process was already so high in financial services because it was a matter of a lot of money. It was a matter of abiding by the law. Because so much money flowed through those processes, that was the natural first place where we would get a real foothold. And then government was another natural one. And pharmaceutical, you can see why our major industries were intuitively our major industries at the beginning. But over time, you see the value of change and agility rising in other fields. And so I think it's a trend. I think we're going to see more major deals in non-core industries because Every business needs to change now. That's great.
spk11
And maybe just any commentary on how sales rep hiring is trending versus your plans, and do you feel like you have enough sales capacity heading into next year?
Matt Hawkins
I think we have enough sales capacity, and yes, we are hiring. We are moving as fast as we can.
spk12
Great. Thanks, guys.
Operator
And now we'll take a question from Terry with Truist.
Terry
Hey, guys. This is Joe Mirzon for Terry. Thanks for taking the questions. I appreciate it. You recently talked about evolving the company's marketing strategy. I think there are three pillars of that, elevating the message, building a pipeline, and increasing market awareness. So I was wondering if there were any concrete steps you guys took this quarter aside from the analyst day and what's the game plan for 2022 to knock on these pillars?
Matt Hawkins
Yep. Well, we're working hard on building our community. That's an area of investment lately. We want to be sure that there's a large ecosystem surrounding the Appian technology and organization. And so as many people as we can educate and inspire and empower with the community, we want to do that. And we've put particular emphasis on that lately. So maybe that's a bit of an enhancement on those three areas of marketing that we discussed previously.
Terry
Got it, thanks. And then just as a follow-up, at the annual stage, you talked about a $60 billion TAM opportunity, and I was a little surprised that process mining was only $1 billion. It just seems like such a massive white space right now. Was that just Appian conservatism there, or is it because the acquisition is so recent? I guess what's the thought process behind the $1 billion TAM for process mining?
Matt Hawkins
Yeah, I was quoting other organizations for credibility's sake, but I don't actually believe their numbers. I think that they had some of the, some of them were over or understated, and I would have listed them differently. I will say that whatever size you think process mining is today, it's going up. The reason it's going up is because it has heretofore been an incomplete industry for the fact that what it diagnosed it could not address. And by combining it with workflow, I think we're taking a major step for the process mining industry. I think that we're giving it the thing it's always been missing, and that's going to make it a much larger, more important, more popular offering than it has been.
spk12
Thanks for taking the questions. Appreciate it. Next, we'll take a question from Jack Andrews with Needham.
Jack Andrews
Good afternoon. Thanks for taking my question. One of the other opportunities you talked about at your analyst day was the expansion of your TAM beyond the Global 2000. And so what do you think is going to be the same and maybe what might be different as you potentially expand into smaller organizations?
Matt Hawkins
Yeah, I think there's a big opportunity beyond the Global 2000, and we are seeing momentum there. So we mean to invest and pursue. I think that typically the smaller the organization, the less it insists on perfection in a new process, the less it wants to invest. They're willing to take 80% instead of invest to get 95% or 100%. They want something simple. Our platform has become radically simpler over the past year with the education videos, the free training, the community edition that allows people to test it out and migrate the things they create into GA later on. We're making our technology much more accessible. That's part of the outreach to these buyers. Another is to have education amongst partners. They've probably got a partner they trust. They don't want a new one. We want to be sure that the partner they trust is a partner that knows Appian. They can get them to success quickly. And then third, they're facing this industry today with some trepidation because they see process mining, workflow, and automation, which occur naturally in sequence, coming from three different vendors. And it's It's important that I don't understate the benefit to these investment shy organizations of taking away the friction between those three elements allowing a common view of data common definition common reports common migration. A unified experience means a lot and it's often this moment of unity that actually brings in the non global 2000 like this is this is the or the flag that starts the race for a lot of these firms, it's now safe because it's been unified. It's safe because you've got a reliable vendor that can get you from one end to the other. I think this is the sign that some of them are waiting for, and we want to be the firm that facilitates their entry into consumership in this market.
Jack Andrews
Thanks for your perspective on that. If I could just ask a follow-up question, getting back to the – the new licensing model. Matt, you mentioned that you think it works better for the second sale. So could you provide a sense as to how we should think about the potential impact on your expansion rate, if there'd be any sort of difference in cadence to expansions?
Matt Hawkins
Yeah. I don't know that it would make much of a difference in the expansion rate, actually. I think it might in the long run, because if they've buy an unlimited license, they have a reason to invest in maximum capacity early on in their Appian life cycle. And so I could imagine a couple years hence that they would continue building because they'd trained up, they'd standardized on our technology. I think it might have a long-term perpetuating effect So maybe it does. Maybe it does affect the growth rate. I was thinking early on it wouldn't because they'd have already locked in the spend that they were going to make for the next year. You see, they've already decided that they've now got a license to build every new application. And so for the next 12 months, whatever they build, it's already covered. But they're much more likely to build more in the second year. So I think that post-first year, it could have an impact on net revenue retention.
Sri
And I think, as Matt had mentioned, we just rolled it out recently. So it's just too early to tell. how it's going to impact the NRR. The thing I like about it is you get a customer, and they're basically building multiple applications. So they do a one-year unlimited, and they think they can build seven apps. They're going to be incredibly sticky once they get done with the seven apps, and they'll probably want to do more. So it's just another way to license it, trying to remove the frictions, shorten the sales cycle. And we'll see what happens as it relates to the expansion. But as you guys know, we try different novel licensing techniques every year. And this is the newest, latest, and greatest, but it's actually gaining traction.
Matt Hawkins
You know, there's another good thing you can do with it. Definitely one thing, and what I originally intended most of all to be used for was the customer would buy a year's worth of development time, and then they would just develop as much as they could. And they'd train up, and they'd hire our consultants or partners' consultants, and they would go to work building maximum amounts of Appian license. I mean, that's the ideal usage pattern. But it's also been a pretty useful framework to have in place for pricing small introductory deals. If a client wants a deal in the past, we would have tried to appraise the value of that new application and give it an application price. And that's a pretty subjective discipline. And now we can just guess something like, hey, this will probably take two months to write. How about we just give you the two month price and it short circuits or shortcuts what would have otherwise been a long dialogue on exactly how important this application is. I like it just as a shortcut to a pricing outcome. So it's also been useful for that.
spk12
That's great, Culler. Thanks very much. Next, we'll hear from Steve Enders with KeyBank.
Culler
Hi, great. Thanks for taking the questions. You made a comment earlier about GAM and how it's driving easier adoption and expansion trends within your customers since they can land with some specific use cases. I was just wondering kind of what you can or how you can apply this kind of same idea to kind of a general enterprise, general enterprises out there and kind of really drive a further expansion opportunity within those accounts.
Matt Hawkins
Yes. This solutions model that we're working on That allows solutions for the same industry to be built compatible pre integrated. Even with a common look and feel and we are we're creating them like. Like puzzle pieces to snap into each other. Is is good in any industry. And this will also help expansion by the way it makes it such an easy decision if you've got one of them. First, you found Appian because you had one problem. You bought the solution that solves that problem. And then a year later, you find that we can help you expand to a contiguous area or take that data and just flow it forward and solve the next problem. It's such an easy decision. This is the strategy I want to run everywhere we do solutions. And I'm encouraging our partners who build solutions on the Appian platform to do it too. I think it's a winning model. In fact, I think... that we as software consumers, like the universe of enterprise software consumers, doesn't expect enough of integration and compatibility. We've become accustomed to poor compatibility because different applications typically come from different vendors and they are incentivized to keep their data for themselves and to have to put up a wall instead of put up a door. And we don't need to do that. There's no reason why an application or solution on the Appian platform needs to be a silo. I would just encourage buyers generally to stop tolerating silos. One of the things I hope to accomplish with Appian is to get people to think beyond the silo and to expect that applications which sit side by side will in fact feel so seamlessly integrated that you can't even tell they're two separate applications.
Culler
Okay, great. That's very, very helpful. And then maybe for Mark, just on, you know, some of the incremental investments that you're making in Q4, it sounds like it was more targeted at Lana Labs and go-to-market, but kind of wondering if you can give a little bit more detail or specifics around where those investments are heading towards, particularly on the go-to-market side?
Sri
Obviously, we talked about hiring, ramping up the sales reps, AEs. For every sales rep you hire, you've got a whole herd of folks following that sales rep around. But I think the other piece that wasn't clearly stated in my prepared remarks was we're focusing on taking the customer success folks, and that's why the margins are coming down. And we're, you know, helping enable the part, trying to get the partner channel enabled quicker. So those are investments that we're making, concerted investments making, taking billable people and making them non-billable. And obviously that's a double-aim as it relates to investments. But I think from our perspective, it's a no-brainer. What we've noticed is that where our customer success folks are involved in projects, the NRR is, you know, 20% higher. you know, we want to get out there and enable the partners, but also be in a position to help touch those projects as well.
spk12
Perfect. Very helpful. Appreciate you taking the questions. Our next question will come from Kingsley Crane with Barenburg.
Kingsley Crane
Hi. Thanks for fitting me in. So, with some of your newer offerings like RPA and process mining, Do you feel like your customers are constrained in all terms of adopting those? And then how much are you funneling that enthusiasm for those products into the workflow management side of things?
Matt Hawkins
Yeah, well, it's important for us to note when we come to a new customer and we're selling not just workflow, but also process mining, RPA and all the other automation components that we are not there to displace the RPA company. or probably several RPA companies that already exist in that organization. We're there to use RPA as a feature supporting the low-code functionality that they get out of Appian. They're going to build an application in Appian. They're going to build a process in Appian, and that process or that application is going to feature RPA. It's going to use robotic process automation as a way to do some of the work that it does. That's what we're trying to accomplish with RPA. It would be tempting to say, now we have this product, let's contest the RPA market. But I believe that that would be overlooking the synergy, which is our best feature right now. So I want to be sure we train our guns at our greatest opportunity, which is the synergy between each of these components. And so when we go into a new customer, we're not looking to pick a fight with whoever their favorite RPA vendor is. We're trying to say RPA absolutely belongs as part of your change engine, part of your low-code suite, and we've got it. And so wherever in your low-code suite you need RPA, here it is. It's great functionality. It's well integrated. It's cost effective. And so it should be an easy choice to use within the Appian sphere.
Kingsley Crane
That's good to hear. That makes perfect sense. So would you still say that for some customers, they could be using process mining, RPA, and workflow management all from Appian, and that could be sufficient.
Matt Hawkins
Oh, absolutely. And that's what I expect, that they will do that in some cases. We just want to get there by first introducing Appian, letting them see how good this is, see the commercial terms, which are very advantageous, and then make their own decision whether they want to use our RPA across the rest of the organization. But we'll start with the Appian sphere.
spk12
Okay. It makes perfect sense. Thank you. And our next question will come from Vinan Srinivasaragavan from Barclays.
Vinan Srinivasaragavan
Hi. Thanks for taking my question. I just wanted to get an update on Appian Community Edition, which you launched in July. Can you just talk about the interest you're seeing in that so far? How do you kind of encourage conversions to paid plans? And what's kind of the lever that pushes a customer to potentially go to a paid plan? Thanks.
Matt Hawkins
Yeah, the interest in that is sharply up. And the reason they'd want to pay is because you can't run it until you pay. You can play around with it. It's a sandbox. You can build some objects. But you can't do anything in production until you pay. So it's an exceptional place to learn. A lot of free education. It's got some free content loaded in that you can play with. We try to make it as intuitive and engaging and inviting as possible. But to do anything of business value, they will have to pay.
Vinan Srinivasaragavan
Got it.
Matt Hawkins
Oh, and by the way, I think it's been terrific. A lot of growth in the ACE environment.
Vinan Srinivasaragavan
That's good to hear. And then typically, do customers move to your application pricing tier first, or in some cases, do they move to the unlimited pricing model that you talked about?
Matt Hawkins
Well, they could go either way. And since unlimited is sometimes used just as a framework for saying what an application price could be, you could say that we use unlimited rather a lot because it's a good way to shortcut to a price number. I would say most of the time, they don't go unlimited following an experimental time in the ACE environment. Usually, that's not enough to establish our efficiency. They need to see something brought to production.
spk12
Okay, perfect. Thank you. And once again, if you'd like to ask a question, please press star 1. We'll pause for just a moment. And we have no further questions queued at this time, so I'll turn things back over to our speakers for any additional or closing remarks.
Matt Hawkins
I just want to thank everyone for their interest.
spk12
Pleasure talking to you this evening. Thank you. And this does conclude today's call. Thank you for your participation. You may now disconnect.
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