Appian Corporation

Ladies and gentlemen, thank you for standing by and welcome to the Appian Third Quarter 2022 Earnings Conference Call. I would now like to turn the call over to Sri Anantha, Senior Director of Finance and Investor Relations. Please go ahead.

Thank you, operator. Good afternoon and thank you for joining us to review Appian's Third Quarter 2022 financial results. With me today are Matt Calkins, Chairman and Chief Executive Officer and Mark Mateos, Chief Financial Officer. After prepared remarks, we'll open the call for questions. Today, you will want to follow along with our earnings presentation. You can download it from the main page of our investor site at investors.appian.com. 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 2022 and 2023, the impact of macroeconomic changes, 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 sell 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 certainties 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 2021 10-K and other periodic filings with the SEC. These documents are available on our investor section of our website. 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.

Thanks, Sri. And thanks to everyone joining us today. In the third quarter of 2022, Appian's cloud subscription revenue grew 30% year over year to $60.6 million. Subscriptions revenue grew by 29% to $86.5 million. Total revenue grew 28% year over year to $117.9 million. Our cloud subscription revenue retention rate was 115% as of September 30th, and our adjusted EBITDA was a loss of $22.9 million. That last figure is outside of our guidance, and we'll need a careful explanation. I'm going to spend much of my time today on that and a new set of charts that I want to share. Before we dig into those deep topics, I have a few quick points of news. Number one, Appian recently closed a $150 million debt facility with a five-year term. The purpose of this facility is to remain strong in cash throughout the anticipated economic contraction. Number two, Appian opened our new dev center in Chennai, India ahead of schedule with a full complement of employees and a new office location. This will help us with efficiency and access to talent. With those news items out of the way, let's get to the quarterly numbers revenue growth in every category is healthy revenue in fact has been setting records with the last four quarters our strongest for growth quarters since the IPO and that is despite the FX headwind foreign exchange rate fluctuation cost us several percentage points as you will learn in the financial presentation but it didn't stop our revenue momentum still The adjusted EBITDA number is outside of expectations and that is due to higher expenses. Those expenses were driven by hiring surge and a sharp drop in attrition. Let's discuss how we got there. Appian came to this quarter in an unusual situation. We expected a recession but hadn't felt any effects of it yet. We were enjoying our strongest revenue growth since our IPO in 2017. Usage in our product was increasing exponentially. That's a good proxy for value delivered, and customer satisfaction with our platform was at an all-time high. We decided to invest in growth. Our plan was and is to grow through the potential recession and be stronger at the other side of it. We set out to keep the team we had and build it bigger for next year. In Q3, our personnel plans succeeded beyond my expectations. Our attrition... dropped all the way down to 3.2% company-wide for the total quarter, which is to say that 97% of our team stayed. Recruiting, meanwhile, performed much stronger than I predicted. In Q3, we added 221 employees compared to 203 in the prior three quarters combined, the prior three quarters combined. 77% of those people joined the sales engineering, and consulting departments, our three areas of focus in that order. We hired more than 100 people into the sales department alone, repairing a long-standing shortage of account executives. We hired 56 engineers, many of them the founding cohort of our new dev center in Chennai. We hired 38 consultants addressing a scarcity of billable resources. This third quarter turned out to be an exceptionally advantageous time for finding elite new talent, as periods of economic turmoil often are. Without the effects of FX and the personnel surge, which is to say the cost of acquiring, retaining, training, and onboarding these employees, adjusted EBITDA would have been in range this quarter. With this bountiful hiring, we staffed the team we need for 2023. And we did it in three months instead of three quarters like we'd expected. But we brought forward a lot of future expenses into the present quarter and exceeded our loss expectations. So these are good expenses, though they were incurred over quickly. I and we take seriously our commitment to operating in a predictable manner. So I want to finish with a reassurance. Our adjusted EBITDA loss this Q3 is 19.4% and Q4 looks to be a bit higher at 21.6%. Next year we plan it to be much lower. We intend to cut it in half over the next 12 months. We plan to reduce the loss to 10% by the second half of 2023. There will be more detail on our expenses situation when Mark discusses our finances But there's another major topic I have to address so I'll move over to that now. Last quarter I predicted an economic slowdown and said we were not feeling it yet. This quarter we did feel it. We're entering a period of uncertainty and I like to respond to uncertainty with additional transparency. You may recall I presented a special series of charts at the start of 2022 for a similar reason. I've assembled for you now a set of reports that target symptoms you'd expect to see in a recession. And I'm going to present these same reports every quarter from now until we're past whatever downturn occurs, whenever that may be. With these charts, you'll be able to see how the economic situation plays out at Appian from multiple camera angles. Please look at the packet of economic indicator charts as I explain this section. They begin on slide four. Every chart will report data quarterly, generally starting with Q1 of this year and with Q1's value as a baseline. So we're looking at relative movement, not absolute numbers. And one more thing. We do not consider these to be key performance indicators. The first chart measures the reliability of our collections with a traditional stat, DSOs, or days sales outstanding. We believe there is no problem with the reliability of our collections. But this is a traditional indicator, so I'm including it. Second chart is gross renewal rate in the cloud. Appian's recent 98% and 99% GRR is awfully good compared to our industry, and we would expect to see at least some dip in that during a real downturn. When budgets get squeezed, how much will customers stick with us? This is a good place to keep watch. For now, though, we're still at 99%. The third page shows our growth in ARR and several ARR cohorts. Here you can see the growth in logos at the 250K range, the 500K range, and the $1 million range. If a recession arrives, you might see ARR slow down or the top dollar bracket grow more slowly than the lower brackets. This could show us how mission critical our customers consider us to be and whether they're becoming reluctant to do big deals. We'll keep a watch on it. The final chart shows the growth of the Appian community how many people are choosing to register this could be driven by opportunity since many of these people are looking to work as Appian practitioners or it could be driven by interest in the market or our technology specifically or you know they could be spies sent by our competitors but probably they're joining the Appian community because they like our technology and want to be affiliated with us this stat has been growing quickly lately And if individual people start showing conservative economic behavior, it might plateau. In addition to these charts, I want to add my reflection on sales cycle length. In Q3, we saw a mild lengthening, roughly 10%, which is consistent with a recessionary scenario. It might also, however, reflect that Q3 is characterized by federal business, and those deals have slightly longer sales cycles. Finally, I'd like to share a few wind stories from this quarter. A US national security agency purchased a seven-figure software deal and became a new Appian customer in Q3. The agency will digitize its business with Appian, starting with two use cases. First, it'll use our government acquisition management solution suite to gather acquisition requirements and automate procurement processes. Second, it'll use an Appian partner solution built on our low-code platform to manage its HR operations like onboarding employees and facilitating performance reviews. With Appian, the group will automate manual processes and improve its hiring timelines by 50%. Second, a story about a fast expansion. A space exploration company became a new Appian customer just a few quarters ago. Our platform unifies the company's existing data and systems into a single application so it can manage the assembly of spacesuits. In Q3, the customer bought an additional seven figures worth of Appian software licenses to add new user groups and functionality to the app. Hundreds of caseworkers will use Appian to reference the make of individual suits and troubleshoot malfunctions that occur while astronauts are deployed. We won this deal after demonstrating our platform's speed and flexibility during a comprehensive custom demo. Finally, a large bank in the Asia-Pacific region became an Appian customer a few years ago. It uses our platform to manage local bank operations, anti-money laundering, and consumer banking processes. With Appian, the bank opened one million digital bank accounts last year and reduced the time it takes to create new accounts from hours to minutes. In Q3, the bank upgraded its licenses with our newest features like Appian Process Mining and RPA, increasing its total software spend by nearly a million dollars. Appian has a strong market position. Our customer base is loyal. Our ecosystem is growing, and there's high demand for our product. Appian is an attractive destination in the current job market. We have the team we need to win in 2023. We feel confident we can now limit our spending while extending our growth. Now I'll hand the call to Mark for a deeper look at our financials. Mark?