Appian Corporation (NASDAQ:APPN) Q2 2023 Earnings Call Transcript

Appian Corporation (NASDAQ:APPN) Q2 2023 Earnings Call Transcript August 3, 2023

Appian Corporation misses on earnings expectations. Reported EPS is $-0.39 EPS, expectations were $0.42.

Operator: Good day, and thank you for standing by. Welcome to Appian Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Sri Anantha, Senior Director of Finance and Investor Relations. Please go ahead.

Sri Anantha: Thank you, operator. Good afternoon and thank you for joining us to review Appian’s second quarter 2023 financial results. With me today are Matt Calkins, Chairman and Chief Executive Officer; and Mark Matheos, Chief Financial Officer. After prepared remarks, we will open the call for questions. Today, you will want to follow along with the 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 third quarter and full year 2023, 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 than expectations. For a discussion of the material risk and other important factors that could affect our actual results, refer to our 2022 10-K, our 2023 10-Q filings and other periodic filings with the SEC. These documents are also available on our Investors 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 Investors 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?

Matt Calkins: Thanks, Sri. In the second quarter 2023, Appian’s cloud subscription revenue grew 30% year-over-year to $74.4 million. Subscriptions revenue grew by 22% to $93.8 million. Total revenue grew 16% year-over-year to $127.7 million. Our cloud subscription revenue retention rate was 115% as of June 30th. Our adjusted EBITDA was a loss of $24.7 million. These results exceeded our guidance. Best thing about this year so far has been the rise of AI into public consciousness and general interest. It is a pleasure to take customer questions to speak about it in every form and to write about it in the Wall Street Journal and also, of course, to have this reason to initiate new selling conversations. Appian has been an AI leader for years.

We have developed shipped and deployed AI for years. We use it throughout our product, but now it’s getting the attention it deserves. Customers now recognize the potential, but they still need guidance to achieve practical value. Appian sees the AI market a little differently from other firms. I’ll summarize the difference with two quick statements. First, AI is a partner and not a substitute for human labor. We need to work together. Businesses can expect to be routing tasks to and from AI as we collaborate. Appian’s leadership and workflow is advantageous here. Second, data is everything. AI could make your data more valuable, but it’s also a threat to data privacy. The top priority now should be to protect and defend an organization’s own data.

Appian facilitates a private form of AI that will keep us differentiated from the public versions offered by our competitors. Let’s explore for a moment that second point. AI allows data to be real-time actionable. It is, in a sense, the natural culmination of the data warehousing movement from the ’90s. AI provides a new data structure that can make a vast amounts of information instantly accessible by reducing the excess costs, it increases the value of data. Common imagination suggests that companies will be happy to send their data and their prompts to public AI firms and any lingering concerns about that can easily be fixed with a few contractual terms about not retaining the data or a promise to redact the sensitive bits before sending it across the Internet.

I’m skeptical of this belief. And the conversations I’ve had with CIOs suggest I’m not alone. The more sensitive your data and the more regulated your industry, the more you’re going to need private AI. Every firm will set their own AI privacy standards, but I know what I’d be looking for. One, no third-party access to my data. Two, my data shouldn’t be kept or used by anyone else. And three, I’d want to own every AI algorithm I trained, not rented. From what I see, no vendors in our market are seriously pursuing such a customer-first pro-privacy position, no vendors other than Appian that is. Appian has 2 big advantages in the emerging AI battleground. We have a leading data fabric, which can gather data sets for training and AI algorithm.

Our data fabric is like a virtual database, a great way to address and unify data that statistically separated. And we also have a great process modeler to route work to and from AI. We plan to lean on these two factors to create practical AI value for our customers. We’re creating practical AI value today with prebuilt models. Our most popular models automate the extraction of data and classification of documents and e-mails, building more models now, including one we just released to summarize request for quote responses. Here’s a customer story about how one of our prebuilt models is used. A US fire safety company is under executive mandate to standardize its financial processes and reduce payment errors by the end of this year. In Q2, the group selected Appian to automate its accounts payable process and became a new customer.

It will train an Appian AI model, classify unique documents, identify vendor invoices and extract payment information. Employees will review AI outputs and tune the algorithm all within a single app. They anticipate a five-fold increase in efficiency using our product. Their first project will be delivered in eight weeks under the Appian guarantee. The story is also a good example of our belief that AI and humans will work in collaboration, on most processes AI will become a more prominent member of process work, but not a substitute for the process itself. That belief matches our skill set. Appian has been a leader in process automation for decades. Our platform orchestrates work across different agents like humans, business rules, RPA and AI.

Late last year with economic clouds looming, I began sharing a series of metrics to provide additional transparency on how macroeconomic factors might impact our business. You can see them starting on slide 4 of our earnings presentation. They don’t say a lot this quarter. The bottom line is that there is some macro effect, but not enough to knock us off the plan we set for 2023. I’ll close by sharing a few large customer examples from Q2. A global insurance provider and existing Appian customer has grown by acquisition. It needs to unify global operations. The group is running a digital transformation initiative to automate core processes like claims management. It’s selected Appian as its enterprise platform standard. In Q2, it purchased a seven-figure software deal to license users in its largest geographic region.

Appian’s data fabric will integrate dozens of different systems into a comprehensive customer management application for tens of thousands of agents. Next, a top Canadian pension fund manages billions of dollars in investments; it’s aiming to double its portfolio size. The group bought Appian two years ago to digitize its investment management processes. Its first app reduces the time it takes to assess potential investments by 90%. The customers starting at the next phase of projects and signed a seven-figure software deal in Q2, now over half the organization will use Appian. Last example is a top US health insurance provider and new logo. In Q2, it selected our platform to replace an inflexible call center system by the end of the year. It purchased a seven-figure software deal and will build a customer management tool for 1,600 call center agents.

We won this deal after proving our platform’s speed and flexibility with a custom proof-of-concept built in two weeks. The customer expects to save millions of dollars every year using Appian. Now, I’ll hand the call to Mark for a deeper look at our financials. Mark?

Mark Matheos: Thanks, Matt. I’ll review the financial highlights for the quarter, and then we’ll provide guidance for Q3 and the full year 2023. Total revenue, cloud subscription revenue, adjusted EBITDA and non-GAAP EPS were above guidance. We saw continued healthy contribution from existing customers and strong growth from key industry verticals, especially the US public sector and Life Sciences. Let’s go into the details. Cloud subscription revenue was $74.4 million, an increase of 30% year-over-year and above guidance. On a constant currency basis, cloud subscription revenue grew 27% year-over-year. Subscriptions revenue was $93.8 million, an increase of 22% year-over-year. On a constant currency basis, subscription revenue grew 19% year-over-year.

Consistent with the prior quarter, subscriptions revenue was impacted in part by some customers in cloud and from a higher mix of new cloud bookings during the quarter. Professional services revenue was $33.9 million, an increase of 2% year-over-year. On a constant currency basis, professional services revenue declined 2% year-over-year. As previously noted, our ability to predict services revenue is limited and a few large projects can influence growth in any given quarter. Long term, we believe partners will drive the majority of our implementations, our professional services will continue to be a strategic offering, focused on enabling partners and driving customer success. However, we expect professional services revenue to continue to decline as a percentage of total revenue.

Total revenue was $127.7 million, an increase of 16% year-over-year and above our guidance. On a constant currency basis, total revenue grew 13% year-over-year. Subscriptions revenue was 73% of total revenue, consistent with the prior quarter and 70% in the year ago period. Our cloud subscription revenue retention rate was 115% as of June 30, 2023 consistent with the prior quarter. As a reminder, we continue to target the cloud subscription revenue retention rate of 110% to 120% on a quarterly basis. Our international operations contributed 38% of total revenue compared to 35% in the year-ago period. On a year-over-year basis, international growth was broad-based and saw healthy contributions from both APAC and EMEA regions. Our cloud software net new ACV bookings were approximately 85% of the total net new software bookings in the first half of 2023, an increase from 80% in 2022.

Now, I’ll turn to profitability metrics. Non-GAAP gross margin was 73% compared to 75% in the prior quarter and 71% in the year ago period. Subscriptions non-GAAP gross margin was 89%, consistent with the year ago period and 90% in the prior quarter. Professional services non-GAAP gross margin was 28% and compared to 30% in the year-ago period and 34% in the prior quarter. We expect professional services non-GAAP gross margin to decline to the mid-20% range in 2023 and low 20% range beyond 2023. And as we continue to invest in non-billable resources to help our customers maximize the value of their Appian investment. Total non-GAAP operating expenses were $119.7 million, an increase of 14% from $105.1 million in the year ago period. Adjusted EBITDA loss was $24.7 million versus our guidance of a loss between $30 million and $26 million and compared to an adjusted EBITDA loss of $25 million in the year ago period.

In the second quarter, we had approximately $1.2 million of foreign exchange gains compared to foreign exchange losses of $6.5 million in the same period a year ago. We don’t forecast movements in asset rates. Therefore, they are considered in our items. Non-GAAP net loss was $28.5 million or $0.39 per basic and diluted share compared to non-GAAP net loss of $33.4 million or $0.46 per basis diluted share for the quarter — for the second quarter of 2022. This is based on 73 million basic and diluted shares outstanding for the second quarter of 2023 and 72.4 million basic and diluted shares outstanding for the second quarter of 2022. Turning to our balance sheet. As of June 30, 2023, cash and cash equivalents and investments were $237 million compared with $196 million as of December 31, 2022.

For the second quarter, cash used by operations was $11.9 million, versus $29.7 million in the same period last year. Total deferred revenue was $195.4 million as of June 30, 2023, an increase of 28% from the year ago period. As we have stated on our past calls, the majority of our customers are invoiced on an annual upfront basis, but we also have some customers that are built quarterly or monthly. Due to the variability of our billing terms, changes in our deferred revenue are not — are generally not indicative of the momentum in our business. We continue to believe cloud subscription revenue is a better indicator of our business momentum in billings or remaining performance applications. The latter metrics fluctuate based on timing of the in seasonality of on-prem license work and the duration of customer contracts.

The true scale of the business is represented by subscriptions revenue, which includes support and all software subscription revenue regardless of whether the customer deploys to the Appian Cloud to their private cloud or on-prem. Now I’ll turn to guidance. For the third quarter of 2023, cloud subscription revenue is expected to be between $75.5 million and $76.5 million, representing year-over-year growth of 25% and 26%. The Total revenue is expected to be between $134 million and $136 million, representing year-over-year growth of 14% to 15%. Adjusted EBITDA loss for the third quarter of 2023 is expected to be between $16 million and $12 million. Non-GAAP net loss per share is expected to be between $0.28 and $0.23. This assumes 73.3 million basic and diluted weighted average common shares outstanding.

For the full year 2023, we are increasing cloud subscription revenue to between $299 million and $301 million, representing year-over-year growth of 26% and 27%. This is an increase from prior guidance of between $296 million and $298 million, representing year-over-year growth of 25% and 26%. For the full year 2023, we are increasing total revenue to between $538 million and $543 million, representing year-over-year growth of 15% to 16%. This is an increase from prior guidance of between $533 million and $538 million, representing year-over-year growth of 14% and 15%. Adjusted EBITDA loss is expected to be between $67 million and $63 million, an improvement from prior guidance of between $70 million and $65 million. Non-GAAP net loss per share is expected to be between $1.16 and $1.10.

This assumes 73.2 million basic and diluted weighted average common shares outstanding. Our guidance as seems the following: first, Q3 and full year 2023 professional services revenue will grow at a mid-single-digit rate compared to the year ago period. Second, on-prem license revenue will be up on a sequential basis consistent with seasonality and year-over-year growth will continue to be impacted in part by some customers converting their contracts to cloud subscription. Third, Q3 adjusted EBITDA loss should improve both sequentially and year-over-year. We continue to expect non-GAAP adjusted EBITDA margins to come in better than 10% for the second half — in the second half of 2023. Fourth, total other nonoperating expenses of approximately $2 million in Q3 and $5.4 million in 2023.

Fifth, capital expenditures of approximately $2 million in Q3 and between $12 million and $13 million in 2020. This is primarily related to the build-out of additional office space. Finally, our guidance assumes FX rates as of August 1, 2023. In summary, we’re excited about the growth opportunities ahead of us. We remain focused on investing in areas that will drive growth and generate superior returns long-term. With that, let’s turn it over to questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Vinod Srinivasaraghavan from Barclays.

Vinod Srinivasaraghavan: Hi. Thanks for taking my questions today. It really seemed like a very clean quarter, strong cloud, be it. So I just wanted to just generally talk about first, some of the buying trends you saw in the quarter, any differences versus last quarter? And then secondly, we’re expecting that copilot announcement next week. It seems like every vendor is announcing some type of AI assistant or feature in that. So do you think this is really table stakes now? And secondly, how are you kind of differentiating your solution? What’s going to be the Appian difference? Is it data fabric? Is it something else? Any color on that would be appreciated.

Matt Calkins: Yes, sure. I’ll speak to that. AI is a wonderful opportunity, but a lot of firms have much the same vision and are pursuing the same endpoint. And I think our advantage is that our vision is different. Ours is a very customer-centric data-centric, privacy-centric and collaboration-centric vision of AI, and that’s what we’ll be facilitating. So I mean, we’ve already made a lot of AI functional drops, right? So we’re in the market today with a great deal of AI-related functionality, large language model related and otherwise. So just in terms of volume of AI functionality, I believe we’re doing great. But, more importantly, we are guiding toward a sensible philosophy of AI use and where AI is going to prolong in the enterprise.

And I think that because we’re correct about that, we’re going to be facilitating a usage model that customers are going to want to invest in. Also, you asked if buying patterns were changing, I would just say simply that they’re not, that we didn’t see much change in buying patterns.

Vinod Srinivasaraghavan: I appreciate that. Thank you.

Operator: Thank you. One moment for our next question. Our next question comes from the line of Steve Enders from Citi.

Steve Enders: Okay. Great. Thanks everyone. Thanks for taking the question here. I guess I just want to ask on the deal environment currently. And I guess, how should we be thinking about the stability of budgets and willingness for customers to be investing in automation and low-code and AI initiatives at this point?

Matt Calkins: Well, I think there was a tremendous amount of excitement around AI. But I also think it’s a little bit early for us to appraise that because the AI boom happened less time ago than the length of our sales cycle. So I think it would just be premature to speak to the way that’s open pocket books. I don’t know yet. I will say that it appears that customers are applying extra scrutiny to purchases this year that their sales cycles are slightly extended by that. There’s been some delays, more delays than cancellations. There’s just, I think, just extra consideration around investment to be made. And the counterpoint to that is an extreme amount of excitement about the way technology could create better efficiency, specifically around AI.

Steve Enders: I guess on the deal cycle point, I mean, I think you remember after the past couple of quarters that there might have been some slight impact that not a real I guess, not an overarching challenge there. I guess, has that continued or has it gotten maybe a little bit more trend in the past quarter or so?

Matt Calkins: I would say that it’s somewhat consistent with last quarter. We see deals taking longer, but not disappearing, just taking longer. The interest is there. And I don’t deny you could see it in the numbers, right? If you were to see side-by-side of a regular year versus what we’re seeing now, there would be an evident difference would be a delay. But I also don’t want to make it sound like that’s an enormous difference because it’s not. This is a — this is a quantifiable but a small factor.

Steve Enders: Okay. All right. That’s helpful. And then I want to ask on Data Fabric. And I guess maybe kind of the extent that’s penetrated throughout the base at this point. And I guess, kind of secondarily, when you think about data fabric differentiation is think about the AI initiatives that you’re undertaking, I guess how much is that helping those conversations and maybe pushing towards a purchase decision with the data fabric element in there?