Appian Corporation (APPN) on Q1 2021 Results - Earnings Call Transcript
Operator: Greetings, and welcome to Appian Corporation's First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will have a question-and-answer session. As a reminder, this conference call is being recorded. It is now my pleasure to turn the conference over to your host, Lang Ly, Investor Relations. Thank you. You may begin.
Lang Ly: Thank you, Operator. Good afternoon and thank you for joining us to review Appian's first quarter 2021 financial results. With me are Matt Calkins, Chairman and CEO; and Mark Lynch, CFO. 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 statements under Federal Securities Laws and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. This includes comments related to our financial results, trends and guidance for the second 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, and should not be reflected upon as representing our views as of any subsequent date. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations.
Matt Calkins: Thanks, Lang, and thanks everyone for joining us today. In the first quarter of 2021, Appian's cloud subscription revenue grew 38% year-over-year, to $39.1 million. Subscriptions revenue grew 26%, to $63.8 million. Total revenue grew 13% year-over-year, to $88.9 million. Our cloud subscription revenue retention rate was 118% at quarter end. Also of note, we set a new high mark for gross profit margin, and our adjusted EBITDA was positive. These results exceeded our guidance. The business community recently faced its biggest disruption in decades. Organizations responded by adapting faster than they previously thought possible. Low-code was an essential technology enabling change, and will remain essential as businesses maintain a quick metabolism into the future. Everyone sees that business became more agile last year, and changed more quickly than before. McKinsey & Company put numbers around this and found that firms augmented their data security 19 times faster than usual, migrated to the cloud 24 times faster than usual, adopted new technologies 25 times faster than usual, et cetera. Companies are digitizing their operations, customer service, and supply chain three to four years sooner than planned. The ways low-code can help an organization change can be summarized in three points, which I've taken to calling, the low-code promise. You can build an application in one-tenth the time, have it cost one-half as much, and get better functionality. Appian is pioneering the low-code industry. We were the first company to go public as a low-code firm. We're ranked as a leader in over 10 analyst quadrants, including Gartner's Enterprise Low-Code Platforms, and Forrester's Digital Process Automation. More importantly, buyers ranked us as their number one vendor in our industry, according to Gartner Peer Insights. Appian is the leader, and the only leader for North American clients, the only leader for the finance industry, the only leader in the entire analysis for big companies, those whose annual revenue exceeds $1 billion.
Mark Lynch: Thanks, Matt. I'll review the financial highlights of the quarter and full-year and then will provide details on our Q2 and full-year 2021 guidance. Cloud subscription revenue for the first quarter was $39.1 million, an increase of 38% year-over-year and above the top end of our guidance. Our total subscriptions revenue was $63.8 million, an increase of 26% year-over-year. As a reminder, in Q1 2020 we closed the three year on-prem contract and recognized $3 million of revenue upfront. If the customer had instead chosen to have their contract auto renew, on an annual basis is nearly all of our on-prem customers do, we would have recognized just $1 million in Q1 2020. In total subscriptions revenue would have grown 34% year-over-year. Professional Services revenue is $25.1 million, down 12% from $28.4 million in the prior year period, and down from $25.5 million in the prior quarter. Partners continue to be a larger part of our ecosystem. They help us to sell software, and they perform the professional services work with respect to any new service contract they sign. As the usage of partners expands, we expect the proportion of our total revenue for subscriptions to increase over time relative to professional services. Subscriptions revenue was 72% of total revenue in the first quarter 2021 as compared to 64% in the prior year period. Total revenue in the first quarter was $88.9 million, an increase of 13% year-over-year, and also above our guidance range. Our cloud subscription revenue retention rate as of March 31 was 118%, within the 110% to 120% range that we target on a quarterly basis. We remain pleased with our customers expanded use of our platform. Our international operations contributed 32% of total revenue for Q1 compared with 33% in the prior year period, demonstrating the balance of our business both domestically and internationally. Our cloud software bookings were 80% in total software ECB bookings in Q1 2021, consistent with the full-year 2020.
Operator: Thank you. At this time, we'll be conducting a question-and-answer session. Our first question comes from Sanjit Singh with Morgan Stanley. Please proceed with your question.
Unidentified Analyst: Hi, guys. This is on for Sanjit. Thank you so much for taking the question. So, I guess first just from a high level, hoping to get an understanding of what you've been seeing in the first quarter of 2021 in terms of the broader spending environment, and how that has compared to the back-half of 2020, if there has been any meaningful changes or improvements there?
Matt Calkins: All right, thanks for the question, Melissa. We see a continued growth, a healthy spending environment. We are pleased with the change in our pipeline over the last 90 days. And it is continuous with the changes we saw, the positive changes we saw last year. It's at least as strong as those changes.
Unidentified Analyst: Okay, that's really helpful. And then, so just double-clicking on some of your last comments there about the expectation for services to be going more toward partners. Is it fair to assume then with your total revenue guide staying the same, but cloud moving up, that that delta of the remaining revenue lines is -- is your expectation for services now to be lower than what you originally were expecting, last quarter, when you issued your original guidance?
Matt Calkins: Melissa, that's exactly right. That is exactly right. Yes, we got a very strong guide there on the most important metric. And on the services, we're preferring to remain cautious. Our services are pivoting. Our role in the Appian deployment world is changing. Our role now is going to be expert advice and touching the most customers, but not mainline deployment. So, the rate of the mix shift may be unpredictable and ahead of schedule. But the direction of the mix shift is exactly where we want it to be. And yes, we're just seeing our change being a little bit ahead of schedule here. It's a high variance item. We're certainly not running the business to optimize for hitting CS numbers. And yes, you'll see us being cautious in our estimate with regards to CS. So, the answer generally is yes.
Unidentified Analyst: Okay. Well, thank you, guys, so much.
Operator: Our next question comes from Arjun Bhatia with William Blair. Please proceed with your question.
Arjun Bhatia: Yes, thank you, and good to hear you both. Mark, maybe this one is probably for you, but it sounds like you had a pretty strong first quarter on the cloud subscription line, and the guidance for the second quarter, it looks like it's acceleration. Can you maybe just talk about the full-year guidance? And I think it implies maybe a little bit of a growth drop-off in the second-half of the year. So, is there something from a comp perspective that we should be considering, because I think it sounded like, from Matt's comments, that the pipeline itself was actually pretty strong?
Mark Lynch: Yes, I mean if you look at the way we -- the is flowing through the cloud subscription revenue pretty cleanly. The second-half, you get softer comps, right, for cloud. I think we hit 40% both in Q3 and Q4. But from a business -- and as you guys know, we've been doing this for -- this is our 16th earnings call; we're generally conservative on our guidance, right. We generally like to beat our guidance, and so that's -- you see that in this guide here. We're increasing it. We had, I think last quarter, we implied a 31% to 32% growth rate for cloud, and now it's 32% to 33%, so -- but overall, high-level business looks good, pipeline looks strong, and we're cautiously optimistic on where we're headed.
Arjun Bhatia: Okay, perfect. And then, Matt, maybe one of the things that stuck out was the new order growth in the quarter. Can you maybe just comment, is that partners that are driving that, have you made any changes to your marketing or your top of funnel? And then is there anything that we should think about in terms of how the deal sizes for your new customers have evolved over the past year or so?
Matt Calkins: Yes, well, we're pleased with that new logo growth, of course. And I'm also pleased with the size of some of these new deals that we're bringing in. We're getting larger deals, and I think Appian can convey value at a larger scale. So, to see those larger deals come in feels to me like a validation of my belief about where we can be in this market. And so that's another positive direction. You asked where the new logos are coming from. They are coming mostly from partners. And our relationship with partners is better than ever. And we're getting a lot of lift, both from the customers that the partners bring us to, and also the partners' placement of their own solutions. So yes, but definitely partners mostly.
Arjun Bhatia: Okay, perfect. Thank you both.
Operator: Our next question comes from Christopher Merwin with Goldman Sachs. Please proceed with your question.
Unidentified Analyst: Hi, this is Kevin on for Chris. Thanks for taking my questions. Last year was relatively strong in terms of new customer adds. Is there any color you can provide on how the newer cohort of customers are doing from an expansion perspective relative to the more mature customers?
Matt Calkins: Well, you mean other than the net revenue retention rate that we quote. Now, that would be the best statistic that I would use. And it remains at the high end of our range; we're pleased with where it is. And it shows that our customers have a healthy appetite for growing their Appian instance once they join the family.
Unidentified Analyst: Great. And then maybe on the EBITDA guide for full-year, I think you kept at the same despite maybe a better mix of subscription revenue for the year. Should we take that to mean kind of ongoing investments in go-to-market and product? How should we think about hiring for the remainder of the year?
Mark Lynch: Yes, we're aggressively hiring. Like we said last quarter, we're aggressively hiring sales reps, marketing folks; we have a new CMO, and software engineers. So, we're going to continue to aggressively hire. So, we decided to keep the guide the same based on some additional investments that may come in through the second-half of the year.
Unidentified Analyst: Great, thank you.
Operator: Our next question comes from Steven Enders with KeyBanc Capital Markets. Please proceed with your question.
George Kurosawa: Hi, this is George Kurosawa on for Steve. First, a high-level question for Matt, customer adoption you're seeing for the full portfolio, and in particular highlight BPM capabilities? And then a quick follow-up clarifying question, Mark, on the guide, it looks like you took down the '21 EPS guide less the EBITDA guide. Could you just help me understand what's your delta? Thank you.
Matt Calkins: Shall I start, Mark, then you go?
Mark Lynch: Yes…
Matt Calkins: Okay. So, we are currently -- okay, first of all, yes, we have the automation experience, we're deploying it, we got happy customers. I mentioned one of the automation case studies in my prepared comments today. We're pushing out more case studies soon so that we can get public, credible, large-company testimonials of how great it is to be an Appian low-code automation customer. So the answer is yes, there is real value there, customers are experiencing it, and they will testify to it. And, Mark, about the EBITDA?
Mark Lynch: Yes, so the adjusted EBITDA is the same from a guidance perspective, 38 to 36, and it's probably the reconciled items between the non -- between the EPS calculation and the adjusted EBITDA, and it could be a share change as well. And I can help you with the model offline, but that's --
George Kurosawa: Great, thank you, both.
Operator: Our next question comes from Derrick Wood with Cowen and Company. Please proceed with your question.
Unidentified Analyst: Great, thanks. It's Andrew on for Derrick. Hey, guys. Mark, international revenue, looks like it slowed a little bit. Was there an impact on PS there? And any color on what the cloud subscription growth was?
Mark Lynch: Basically, you're going to have some variability because of the professional services, and that's predominantly what it is, the growth rates are -- internationally, they're doing really well. So, the growth rate from a cloud subscription revenue growth rate is similar to the U.S., and it's strong. I would say the 1% difference is mostly professional services.
Unidentified Analyst: Great, thanks. And then, Denise joined in February, any new initiatives she's driving to help that new logo growth? And anything else you're excited about on the marketing front would be great to hear?
Matt Calkins: We're actually very excited on the marketing front. And the new initiatives Denise has going I think it would take too long for me to list them. But she's a dynamo. And we've some efforts underway that I think we've been excited about doing for a long time. And we're able to do them now and well. Perhaps my favorite is the encouragement of the -- of our community. The Appian community is everybody who logs on, everybody's got a clearance. Everybody is saying they got a certification right past one of our tests, a buyer of our software and answer or asker of questions, or we want our community to be easy to join. It's very important in 2021, that Appian be able to build a large community of affiliated individuals. And we're off to a hot start this year in building the community. Our new Community edition, which is a free version of our software that anybody can walk up and use, get access to quickly, build things on, and then even move what they've built into a production instance later on, if they buy the software. That's a great new way to get involved in the Appian community, something that she's been integral to setting up and it's taking off. So I'm really pleased with what we're doing on the marketing front, right now.
Unidentified Analyst: Great. Thanks, guys.
Operator: Our next question comes from Fred Havemeyer with Macquarie. Please proceed with your question.
Fred Havemeyer: Hi, thank you for this. So firstly, I'm happy to see professional services as a percentage of revenue starting to come down here. I'd like to just understand a couple of different dynamics that are showing up in the model here. Firstly, it looks like the federal business is continuing to expand as a percentage of overall revenue. It looks like it's at about 21% now and growing about 58% year-over-year. So I'd love to understand what you've seen in terms of the cadence of that federal business, and with it growing ahead of the overall business. Is there anything to call out on your momentum within corporates?
Matt Calkins: Yes, Fred there has been a few positive developments for us lately on the federal side. We had a really solid third quarter. We've been productive since then. And our federal solution is showing a lot of promise. In fact, maybe the most promise of all the solutions I add to the pipeline looks good. I think that we've just had some good things turn our way in the federal space. I'm hopeful for a solid 2021 in the federal market. Also state and local, where we've made additional, we've made some efforts slightly to take our success on the road, and see if we could do as well in state and local as we've done in the federal space and no results yet, but the early indications look good.
Fred Havemeyer: Thank you there and as a follow-up question. So I'm interested in a number of different topics here. But in particular, the three points quarter-over-quarter decline in sales and marketing expense here. You've been talking about some different aspects of your business where you're hiring, you're expanding, and you're going to market more aggressively. Love to understand, is there anything to call out in terms of that sales marketing decline that was helping margin this quarter?
Matt Calkins: I think part of it is the on-prem seasonality that on-prem number. So it kind of distorts the percent of revenue costs for sales and marketing.
Mark Lynch: And then it's the travel.
Matt Calkins: Yes, but like you so for example. Sales and marketing is sequentially up costs, quarter-over-quarter is $33.7 million in Q4, and then Q1 it's $34.9 million. So, it's going in the right direction.
Fred Havemeyer: Got it. Thank you there. And then just last one I'll get in then. And then I'll hop off the queue or back into the queue here. So, overall, how would you take a look at the competitive landscape and just rank where you believe you stand in the competitive landscape this time, because we certainly heard from a number of enterprise software platforms out there about their low code capabilities. Some of them showing some momentum there. So, I'd love to hear about your perspective on your competitive landscape, and generally, where you see your win rate standing? Thank you.
Matt Calkins: That's right. You're right. A lot of organizations are talking about low-code. I love it when they do that, actually, because low-code means workflow. And workflow is something you can be really good at, or just okay at, and we've spent a long time building our capability in workflow. Low-code is about workflow and also automation is about workflow, we feel that our long standing advantage in workflow and process management is going to give us a meaningful advantage in the current market. And a lot of the hype that's generated around low-code is going to send potential buyers researching, to figure out which vendor can meet their requirements most fully. Appian intends to be the vendor that can meet their requirements most fully, the vendor with the best functionality and the happiest customers that is and remains our mission in this space. In order to be the pioneer, we also have to be the pioneer in the emerging definition of low-code automation. The merging of these two markets, which we have done, we shipped out of the box with the components that comprise automation in addition to the components that comprise low-code, bringing together these markets, and creating that new industry perimeter is an essential part of our leadership. You'll see us continue to establish and defend that new perimeter, which gives us a real edge over those who provide just one part of it. Overall, I'd say our ability to be competitive is at least as strong as it has been in the past, I feel good about our odds, no matter who we're up against in any deal. And our customers, as you saw in the Gartner Peer Insights Survey, rank us as their number one choice in our industry, not only by the way did we come out at the top of that analysis in terms of the quality, right of our product and our experience. But we also received the most votes or I'm sorry, the most reviews, which is to say, we're also the most considered and the most responded to product in our industry, in addition to being the favorite product. I think it says a lot for our ability to maintain and then to deliver in this high end space that we've chosen for ourselves that the customers have noticed over here, have an opinion about Appian. And that opinion is very strong.
Operator: This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.
