Appian Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2023

There are 12 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Appian First 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. You will then hear an automated message advising your hand is phrased.

Operator

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.

Speaker 1

Thank you, operator. Good afternoon and thank you for joining us to review Appian's Q1 2023 financial results. With me today are Matt Calkins, Chairman and Chief Executive Officer and Mark Mathias, Chief Financial Officer. After prepared remarks, we will open the call for questions. Today, you will want to follow along with our earnings presentation.

Speaker 1

You can download it from the main page of our Investors 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 Q2 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 up 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.

Speaker 1

These statements reflect our views only as of today. They do not represent our views as of any subsequent date. They are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For a discussion of the material risks and other important factors that could affect our actual results, refer to our 2022 10 ks, Our 10 Q filing for Q1 2023 and other periodic filings with the SEC. These documents are also available on our Investors section of Additionally, non GAAP financial measures will be discussed on this conference call.

Speaker 1

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 results. With that, I would like to I'll turn the call to our CEO, Matt Calkins. Matt?

Speaker 2

Thanks, Sri, and thank you, everyone, for joining us today. In the Q1 of 2023, Appian's cloud subscriptions revenue grew 31% year over year to $69,700,000 Overall, subscriptions revenue almost broke the 100 1,000,000 line was finished at $99,000,000 Total revenue grew 18% year over year to $135,200,000 Our cloud subscription revenue retention rate was 115% as of March 31. Our adjusted EBITDA was a loss of 15.8 $1,000,000 Our non GAAP gross margin set a post IPO record at 75%. These results exceeded our guidance. We hosted our annual conference Appian World in San Diego last week.

Speaker 2

I'm pleased with the attendance and the enthusiasm. More than twice as many prospects came to Appian World this year as last. Our conference theme was process automation. Customers talked about the benefits of running the whole process lifecycle on Appian's platform. On stage, I explained the emerging split between what I call public AI and Private AI.

Speaker 2

Public AI involves sharing data with a cloud AI provider and that's unacceptable to many of our clients. Companies want to keep control of their data. They may have legal restrictions as well, and they don't want to help train an algorithm that could then be used by their competitors. Private AI, By contrast means every company cultivates their own AI algorithms, starting with a public model, but training it privately and using it privately. I predict that in the long run Private AI wins, which is to say that it becomes the more popular model for our customers.

Speaker 2

I think customized AI algorithms will someday be as normal as custom applications inside big firms. Private AI will feature strong accuracy despite having smaller training datasets because the data is more pertinent and the scope of each AI will be narrower. These AIs won't write limericks or make images, they'll just do the one thing that they were made for. Appian will facilitate both kinds of AI. We prefer the private model.

Speaker 2

We announced some new features, which I call Low code AI that make it easy for customers to cultivate their own AI on Appian connected datasets. This public private split separates Appian from its largest competition. By being a champion of Private AI, we appeal to buyers who prefer not to share their data assets. Our ability to assemble large datasets To train the private AI algorithms comes from a feature called Data Fabric. Data Fabric is a fancy term for a virtual database And it means that we can address data from across the enterprise like it was together, even though it remains apart.

Speaker 2

This strategy is preferable for our clients who dislike having to relocate data. Data is the hardest part of building and running processes, so this feature constitutes a substantial advantage. Our data fabric in turn gives us a critical edge at inventing the next generation of process mining. We call our new vision Process HQ and we're starting a beta program for it next quarter. It uses Appian's capabilities to overcome the limitations of process mining as it exists Today, process mining projects are notorious for taking a lot of time to gather a dataset and not being immediately actionable.

Speaker 2

In Process HQ, data collectors' data collection can be quick using Appian's data fabric. Recommendations for delegating work to new types of workers like AI or RPA can be instantly applied using Appian's full suite of automation tools. Process HQ will quantify the efficiency gains made by Appian Run processes at the same time as helping owners make further improvements. All 3 of these critical advances are data related. We see lasting advantage over competitors and capability for clients in our data For example, a leading European automotive manufacturer uses Appian to better leverage its data and boost productivity.

Speaker 2

The company currently automates supply chain processes with Appian saving tens of 1,000,000 of dollars annually. In Q1, it purchased a 7 figure software deal to build more apps and further optimize operations. OneApp will manage warranty claims. Appian will integrate the company's systems to run the end to end claims assessment and review process. Our platform will feed the customers' data in machine learning model to predict which claims need intervention.

Speaker 2

The customer expects to improve operational efficiency of this process by 20

Speaker 3

The U.

Speaker 2

S. Public sector contributed half of our Q1 new logo ACV becoming We recently announced some new advances for this market. First, Appian Cloud is now StateRAMP certified. This is the state level cybersecurity equivalent of FedRAMP. It will enhance our likelihood of winning deals with sensitive workloads.

Speaker 2

We also launched 2 new solutions for government customers, contract writing for federal and constituent case management for state and local. Contract writing completes our Government Acquisition Management Suite, our GAM Suite, so customers can now run the entire acquisition lifecycle on Appian. Constituent case management is Appian's first solution for state and local customers. It's a flexible case management solution that governments can use to serve residents. I'll share this evening 2 public sector customer stories.

Speaker 2

First, a large U. S. State government is under executive mandate to simplify its process for

Speaker 4

registering new businesses. In Q1, the government purchased

Speaker 2

a 7 figure Appian In Q1, the government purchased a 7 figure Appian software deal and became a new customer. Appian will replace a decades old Business Registration and Ancillary Filings System. Our platform will run the end to end process for establishing LLCs and renewing for millions of entrepreneurs and growing businesses. We won this deal after a proof of concept that integrated the customer's systems and leveraged A U. S.

Speaker 2

International Affairs Agency also became a new Appian customer. Our platform will a series of old logistics management applications that are too costly to maintain. They'll begin with a vehicle fleet management process and plan to follow with others. These apps are core to the organization's mission and represent 1 of the largest IT spends on logistics management in the federal government. Partners continue to drive growth this quarter.

Speaker 2

For example, a partner helped us land a leading financial services and credit card provider as a new logo in Q1. One of the company's largest business segments manages expenses for corporate clients and must monitor all client interactions in accordance with federal regulations. Appian will create a single tracking application that monitors relationships across the company's various interaction channels, including voice, chat and e mail. Before Appian, agents manually audited interactions because their systems were siloed. We won this competitive deal after our partner built a proof Forrester, the analyst firm, is currently completing a commissioned total economic Impact study on Appian's customers.

Speaker 2

I shared the preliminary results last week at Appian World. This study finds that a complete composite organization comprised of Appian customers experienced a 90% reduction in development time, Realized a positive return on investment in just 6 months and a full ROI of 2 57% over 3 years And accelerated their process execution by a factor of 20 times. Good stuff. These results explain while Appian prospects and customers purchase our software. Our quick return on investment appeals to the cautious buyer.

Speaker 2

We doubled our new 7 figure software deals in Q1 compared to the same period last year. This growth was split about evenly between new logos And existing customers, here's a new logo example. A U. S. Federal law enforcement agency purchased a 7 figure software deal to unify The agency will manage its entire criminal investigation lifecycle on Appian.

Speaker 2

16,000 agents and contractors will open cases and run investigations using a single tool. The customer expects to deploy this mission critical app in just a few months. Aptop Global Bank uses our platform to onboard new clients and manage ongoing relationships. The organization became a new Appian customer in 2019 and we delivered its first project in just 8 weeks with the Appian Guaranty at that time. It's purchased more software every year since.

Speaker 2

In Q1, it selected our platform to automate credit payment and trade related processes for more than 1,000 users globally. Finally, a global packaging and logistics company is an existing Appian customer and uses our platform to onboard clients And Manage Global Supply Chain Logistics. In Q1, it expanded with a 7 figure software purchase to license new users that oversee consumer They will manage the lifecycle of containers like bottles and milk cartons using Appian. They will also deploy an internally facing Appian portal to engage over 100,000 constituents in the recycling process. Our plan this year is growth with scrutiny.

Speaker 2

That means we'll examine all of our investments, reducing those we find unproductive and keep growing at the We are hiring in all offices and all departments. The bar is higher than in other years, but we're still willing to make major new investments when the upside justifies it. Our expanded development of new solutions is a good example. This year's scrutiny drive has helped us become more efficient, which will ease our path to profitability in a way that does not diminish our growth rate. Now, I'll hand the call to Mark

Speaker 4

Full year 2023. Total revenue, cloud subscription revenue and adjusted EBITDA were above guidance, while non GAAP EPS was at the top end of guidance. We saw continued healthy contribution from existing customers and strong growth from key industry verticals, especially the U. S. Public sector.

Speaker 4

Let's go into the details. Cloud subscription revenue was $69,700,000 an increase of 31% year over year and above guidance. On a constant currency basis, cloud subscription revenue grew 32% year over year. Subscriptions revenue was 99,000,000 An increase of 18% year over year. On a constant currency basis, subscriptions revenue grew 19% year over year.

Speaker 4

It was impacted by lower on prem license revenue as some customers converted to the cloud this quarter and from a higher mix of new cloud bookings during the quarter. Professional services revenue was $36,300,000 an increase of 19% year over year. This quarter, Services revenue benefited from new large projects with existing customers and recognition of revenue that was on hold from Q4. As previously noted, we have limited visibility in services and the few large projects can influence professional services revenue in any given quarter. Long term, we believe partners will drive the majority of our implementations.

Speaker 4

Our professional services will continue to be strategic by 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 135,200,000 An increase of 18% year over year and above our guidance. On a constant currency basis, total revenue grew 19% year over year. Subscriptions revenue was 73% of total revenue, consistent with the year ago period and 74% in the prior quarter.

Speaker 4

Our cloud subscription revenue retention rate was 115% as of March 31, 2023, consistent with the prior quarter. 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 33% of total revenue, consistent with the year ago period. Our cloud software net new ACV bookings were approximately 85% of the total net new software bookings in the Q1 of 2023, An increase from 80% in 2022. Now I'll turn to our profitability metrics.

Speaker 4

Non GAAP gross margin was a record 75%. It was 74% in the year ago period and 73% in the prior quarter. Subscriptions non GAAP gross margin was 90%, consistent with the year ago period and prior quarter. Professional services non GAAP gross margin was 34% Compared to 29% in the year ago period and 27% in the prior quarter, higher than expected professional services revenue drove the gross margin upside in the quarter. We expect professional services non GAAP gross margin to decline to the mid-twenty percent range in 2023 And low 20% range beyond 2023 as we continue to invest in non billable resources to help our customers maximize the value from $89,700,000 in the year ago period.

Speaker 4

Adjusted EBITDA loss was $15,800,000 versus our guidance for the loss $21,000,000 $17,000,000 compared to an adjusted EBITDA loss of $3,400,000 in the year ago period. In the Q1, we had approximately $600,000 of foreign exchange gains compared to foreign exchange losses of $1,900,000 in the same period a year ago. We don't forecast movements in FX rates. Therefore, they aren't considered in our guidance. Non GAAP net loss was $19,700,000 or $0.27 per basic and diluted share compared to non GAAP net loss of $4,400,000 or $0.06 per basic and diluted share for the Q1 of 2022.

Speaker 4

This is based on 72,900,000 basic and diluted shares outstanding for the Q1 of 2023 72,200,000 basic and diluted shares outstanding for the Q1 of 2022. Turning to our balance sheet. As of March 31, 2023, cash and cash equivalents and investments We're $254,500,000 compared with $196,000,000 as of December 31, 2022. In the Q1, cash used by operations was $25,300,000 versus $20,600,000 for the same period last year. Total deferred revenue was $198,700,000 as of March 31, 2023, an increase of 34% from the year ago period.

Speaker 4

As we have stated on past calls, the majority of our customers are invoiced on an annual upfront basis, but we also have some customers that are billed quarterly or monthly. Due to the variability of our billing terms, changes in our deferred revenue are generally not indicative of the momentum in our business. Continue to believe cloud subscription revenue is a better indicator of our business momentum than billings or remaining performance obligations. The latter metrics can fluctuate based on the timing of invoicing, seasonality of on prem license revenue 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, their private cloud or on prem.

Speaker 4

Now I'll turn to guidance. For the Q2 of 2023, cloud subscription revenue is expected to be between $72,000,000 $74,000,000 representing year over year growth of 26% 30%. Total revenue is expected to be between $123,000,000 125,000,000 representing year over year growth of 12% 14%. Adjusted EBITDA loss for the Q2 of 2023 It's expected to be between $30,000,000 $26,000,000 Non GAAP net loss per share is expected to be between $0.46 $0.40 This assumes 73,000,000 basic and diluted weighted average common shares outstanding. For the full year 2023, We are increasing cloud subscription revenue to between $296,000,000 $298,000,000 representing year over year growth of 25% 26%.

Speaker 4

This is an increase from prior guidance of between $294,000,000 $296,000,000 representing year over year growth of 24% 25%. For the full year 2023, we are increasing total revenue to between 533,000,000 538,000,000 representing year over year growth of 14% 15%. This is an increase from prior guidance of between $530,000,000 $535,000,000 representing year over year growth of 13% and 14%. Adjusted EBITDA loss is expected to be between $70,000,000 $65,000,000 An improvement from prior guidance of between $75,000,000 $70,000,000 Non GAAP net loss per share is expected to be between $1.16 $1.09 This assumes 73,200,000 basic and diluted weighted average common shares outstanding. Our guidance assumes the following.

Speaker 4

1st, Q2 professional services revenue will be down by a low single digit rate on a sequential basis. For the full year 2023, we assume services revenue will grow at a low single digit rate year over year. 2nd, on prem license revenue seasonality will make Q2 our weakest quarter of the year. Hence, you should expect on prem license revenue to decline materially on a sequential basis. 3rd, Q2 adjusted EBITDA loss Excludes severance FOSS of approximately $1,300,000 Q2 adjusted EBITDA loss will be higher than Q1 levels Due to a combination of on prem license seasonality and the cost of running our annual conference at Appian World.

Speaker 4

We'll continue to maintain greater scrutiny of any discretionary related expenses. This is consistent with previous years. 4th, net interest expense of approximately $1,300,000 in Q2 $4,500,000 in 2023 5th, Capital expenditures will be between $3,000,000 $4,000,000 in Q2 and between $12,000,000 $14,000,000 in 2023. This is primarily related to build out of additional office space. Finally, our guidance assumes FX rates as of May 8, 2023.

Speaker 4

Before we take your questions, I want to briefly touch on severance costs of $4,200,000 related to recent personnel changes. As part of our growth with scrutiny strategy, we've flattened hierarchies, optimized some support functions and reduced headcount in non strategic areas. Our increased scrutiny should result in continued slowing of OpEx growth during the remainder of 2023. Accordingly, we now expect non GAAP adjusted EBITDA loss margin to improve to better than 10% in the second half of twenty twenty three. These changes will allow us to invest in areas that will drive growth and generate superior returns long term.

Speaker 4

In summary, we're excited about the growth opportunities ahead of us. With that, let's turn it over to questions.

Operator

Thank you. Please stand by while we compile the Q and A roster.

Speaker 3

Our first question comes from the

Operator

line of Steve Enders with Citi. Your line is now open.

Speaker 5

Okay, great. Thanks for taking the question here. I guess I just want to start and ask about What you're seeing out there in the deal environment currently, and if you're seeing any change in kind of the deal cycles or if automation And low code workflow solutions are becoming a bigger part of the discussion points as maybe the macro begins Just a little bit more. So, yes, it's just great to get more details on

Speaker 6

what you're seeing out there.

Speaker 2

Yes. Okay, great. We are seeing some deal delays and extra scrutiny, but it's not much more than last quarter. So, it's just a gradual progression in that. And I wouldn't say it was overly disruptive to this quarter.

Speaker 2

As for whether it shines a Brighter spotlight on automation. I believe that in the long run, having to do more with less in a year of not plenty We'll encourage the kind of creativity that will turn people toward an automation solution and increase The popularity of this industry, I think that's going to take time. So we're definitely not seeing that yet.

Speaker 5

Okay, got you. That's helpful. And then maybe just on how you ended the call there just On the severance side and kind of more scrutiny on the cost structure, I guess, I appreciate the commentary about Getting above 10% in the second half of the year on EBITDA, but I guess maybe would have expected a little bit more built into the Guide there versus kind of what you showed there. So I guess is there anything that we should be thinking about for timing or is there How do we think about incremental investments that are coming in here as well?

Speaker 4

Yes. So, I mean to be clear, we're still in growth mode, right? And we're still Overall, I think the point to pay attention to is in certain areas we will kind of reinvest in backfill. And I think on a net basis, there certainly will be savings. And we've kind of shown that with our $5,000,000 improvement in our full year adjusted EBITDA Adjustment there.

Speaker 4

So, yes, I think we're definitely continuing kind of our growth with scrutiny path forward.

Speaker 5

Okay. Thanks for taking the questions.

Operator

Thank you. Our next question comes from the line of Sanjit Singh with Morgan Stanley. Your line is now open.

Speaker 6

Mark, I had a question for you on the on premises versus cloud dynamics this quarter. It sounded like and I think you mentioned the script, there was, you saw more customer migrations on to cloud. Any color there on what's driving that on premise customer base moving more to cloud and What sort of the impact on on premise revenue because of those migrations?

Speaker 4

Yes. So we saw some renewals that were Slated to be on prem, that actually renewed as cloud. And there were only a couple, but they were Pretty sizable. They weren't small. So that did move the needle.

Speaker 4

In addition, we had, As I noted an 85% cloud rate on our new deals as opposed to the more typical 80%. But on the former, on kind of the kind of renewal based question, we hadn't seen much movement in that Historically, over the past couple of 3 years, but we did notice that in Q1, just for a couple of those customers, we don't necessarily expect a trend Kind of emerge here, so to speak on a renewal basis, we do have a good bit a good portion of them already on the cloud and it's been pretty Stable in recent history. And

Speaker 6

so just a follow-up there, I guess, two questions. For the customers that do migrate over, is it seems to be that those customers that move from on premise to cloud, do you think they have the potential to be higher expanding customers Going forward. And the second question, Matt, is for you just coming off of Appian World. What sort of your assessment of Kind of the non public sector pipeline going into the rest of the year, when you look at your health and life sciences customers, financial services customers, How is that shaking up post Appian World?

Speaker 2

Okay, great. First of all, with regards to whether there's an Additional expansion possibility on cloud customers versus on premise. In my opinion, the To being an Appian Cloud customer is slightly superior to the experience of being an Appian on premise customer. And therefore, I would expect Those customers to be maybe a little bit faster to expand, but just a little, right? The experience is very close and I don't want Overplay now, we think we have a slight positive effect there.

Speaker 2

And then secondly, with regards to the non Public sector pipeline, it is strong relative to last year.

Speaker 7

And yes, I don't want

Speaker 2

to break it out by sector. Don't have it broken out by sector, but the overall non public is good.

Speaker 6

I appreciate the thoughts, Matt. Thank you.

Operator

Thank you. Our next question comes from the line of Kevin Kumar with Goldman Sachs. Your line is now open.

Speaker 3

I had one on the increased sales capacity that's been added over the last couple of quarters. I'm just curious where the incremental capacity is being deployed and are you starting to see that positively impact KPIs such as Pipeline, conversion rates or maybe new logo growth. Thanks.

Speaker 2

Sorry, what's your voice there at once? Okay. Well, I won't answer the question, but we'll just be careful about having one voice at a time. The question Let me get back to it. It was about incremental pipeline and sales From the new cohort of account executives that we added late last year, I believe.

Speaker 2

And I would say it's Yes to the pipeline and no to the bookings. There's been enough time for that to help us with pipeline And later this year, maybe second half, we'll see that start to contribute to bookings.

Speaker 3

Okay. That's helpful. And then maybe just one on the new public sector solutions. GAM has been really successful Government is a meaningful part of the overall revenue base. So just curious kind of on the new solutions, And what type of government departments will Appian be targeting and maybe how impactful do you think they are in terms of broadening the overall government TAM?

Speaker 3

Thank you.

Speaker 2

Yes. Let me clarify that this new government solution is part of GAM. We have 6 modules in GAM And it covers the life cycle of the acquisitions process. So we're now able to sell all 6 We execute them sequentially for the same public sector customer. This is to say we're doubling down on a winner.

Speaker 2

We're getting good traction with this solution. We have buyers. We feel confident that we can sell those buyers an additional module that's Built to be compatible with the modules they already have. So we are hitting the same need, but more With this latest module. So that's what we're doing.

Speaker 2

And we're also, as you noted, branching into state and local with state ramp And with partnerships that target the state and local business with GAM like functionality. So that's our primary avenue into the government. And as for whether that's a major value add, absolutely. These Acquisitions is a primary process for government buyers. It's done very systematically.

Speaker 2

It's done in great volume And we've shown a substantial advantage over our competitors. So it's very good business.

Speaker 5

Thanks for taking my questions.

Operator

Thank you. Our next question comes from the line of Joe Mears with Truist Securities, your line is now open.

Speaker 8

Hi, guys. Thanks for taking the questions. Appreciate it. It's great if you can speak to any cross sell or up sell that has been a result of the new process mining Functionality that you guys have and or any recent wins that have to do with the process mining app?

Speaker 2

Yes. Well, process mining has definitely allowed us to upsell. I have not deployed it To gather the first sale because the initial step in process mining is a services intensive and somewhat slow step. And you can see the way we're working around that in our new process mining vision, which has to do with Leveraging Appian's data fabric in order to rapidly collect the data to create an assessment about the efficiency of your process By using our own data gathering capabilities, we're going to sidestep that flaw In the data mining, so the process mining industry, so we're using it as an expansion tool now. But going forward, we plan to use it as an awareness tool, putting a spotlight on Appian's greatest strengths.

Speaker 2

That's our capability of handling data, the data fabric, exploring data from end to end of the enterprise, Being able to deploy any kind of automation tool in real time to start handling work and comparing it A versus B, Appian has specific advantages, right? We're playing for certain synergies, United factors and now we need to make that pay. And whether that set of factors is end to end coverage of process or the total suite of automation technology Or just access to all the data in an enterprise, we need those synergies to pay off. And the Process HQ product is going to showcase Those three synergies and spotlight the value of process mining along the way. I know that was a long answer, maybe more technical than you wanted, but Process HQ is very strategic to us in that it polishes and displays the kind of Full suite advantages that Appian has technologically.

Speaker 8

Super helpful with the detail. And then just as a follow-up, in our conversations at Appian World, it sounds like a big reason why a lot of customers choose Appian's products Is the security that's embedded? And so I'm just curious if you could kind of explain how having Impact Level 5 Set you guys apart from competitors. Thanks so much.

Speaker 2

All right. Well, IL-five is going to be necessary to some buyers. So that will set us apart in a big way. It only makes us eligible to bid on specific public sector high security projects, but IL-five impresses Many buyers who do not have that as a formal requirement, it reassures them as to the security of their information when they work with Appian.

Speaker 4

We intend to be

Speaker 2

the high end leader in this space and it's calls like IL-five that Substantiate our leadership and encourage our customers, be they public sector or not, to trust us.

Operator

Thank you. Our next question comes from the line of Jacob Rehberg With William Blair, your line is now open.

Speaker 9

Great results and thanks for taking my questions. Just wanted to touch on generative AI. I think one of the more compelling use cases that I've heard on the generative AI front has been around increases to developer productivity. So Curious how you think that productivity increase flows into the low code and automation space given that's one of the core value props for the tech?

Speaker 2

Yes. It absolutely is an accelerator in low code. We're using it right now. Our CoPilot feature Suggest smart services to enhance and finish the application you're trying to create. And so it's already a nice We've also shown how some generative AI can literally write the sale code that underlies Appian Applications, so we're approaching it from different directions.

Speaker 2

We're very excited about the Acceleration demonstrated, but we also want to caution people against thinking AI is a magic answer, particularly for our customers, Generally, industry leaders doing distinctive, maybe unique things, you can't get your answer From AI, if they've never seen an application like this before. So AI is an accelerant. It's not a substitute. It's a partner and not a replacement. When we treat it that way, we get great benefits out of AI, but it's nowhere near able To take away the human in the chair.

Speaker 9

Some of the demand you're seeing for some of your newer products like process Mining, RPA and portals, have any of those been more or less prioritized as a result of the macro? And then I'm curious if you think that any of those products Could see outsized benefits or even headwinds from the adoption of generative AI.

Speaker 2

Yes, that's interesting. Well, you could say that AI is a tool in an automation portfolio and thus A substitute for other tools in an automation portfolio and perhaps if AI were exceptionally much better, it might diminish The demand for RPA or business rules or something else, but right now, I don't see it that way. I see AI as being good in its lane And other automation tools being good in their lane. And so I still think there's plenty of demand for, say, RPA or these others. So I don't want to call a distortion on the automation market right now.

Speaker 2

And as for which of them is popular, I think that with every one of them, the best feature is the synergy, is the combination, The availability of all of them to serve the client if and when they need it, and therefore, I'm Kind of dodging your question because I don't think that one of them headlines the offering or drives the adoption. It's the convenience and the totality That are the

Speaker 9

virtue. Thank you.

Speaker 8

Thank you. Thank

Operator

you. Our next question comes from the line of Derrick Wood with TD Cowen. Your line is now open.

Speaker 10

Great. Thanks, guys. It's Andrew on for Derek. Matt, financial services is a pretty big vertical for you. Just wondering if you saw any impact from the banking Crisis on customer decision making there and how our pipelines for that vertical tracking versus 3 months ago?

Speaker 2

Yes, that's good. First of all, we didn't see any blowback from the banking industry Episode this quarter. I don't know what it has affected some Financial Services decision makers to apply extra scrutiny, that's possible, but that would be a second order consequence. I can speak to the absence of first order consequences. So that's my answer.

Speaker 10

And then last quarter you mentioned Tega competition was a factor in some deals as customers are noticing, what's going on there. Did you see that again Quarter and is that helping drive up win rates this year at all?

Speaker 2

Yes. Well, our win rate against Pega is pretty good, But it's actually pretty good against everybody. We tend to do well once we get into the competition, Once we're on the shortlist. So I don't know that it's changed much quarter to quarter. In fact, I haven't noticed any change Serially versus Q1 with regards to any of these competitors, including Pegasystems remains our most common competition And against whom we have a solid record.

Operator

Thank you. Our next question comes from the line of Andrew DeGasperi with Berenberg, your line is now open.

Speaker 3

Thanks for taking my question. Relative to your federal customers, which I know have been pretty meaningful in terms of the opportunities for you, with the State Farm certification, how big is the market For state customers and then other.

Speaker 2

Yes. Well, the challenge With the state side is being able to address them. The reason we haven't touched that market before It's because we didn't have the expertise and the connections in state houses. And I felt in the past that that was a good market For a very large firm with a well developed and extensive sales organization, we mean now to approach that market by partnering With a firm that does have those connections and by at least expanding the resources internally to be sure that our product is well targeted for Those buyers' needs, which are a little bit different from the federal buyers' needs, but not so terribly that our Successes in federal don't qualify us and put us in a favorable light. We'll have to see how much of this market we can access And how much state and local buyers are willing to spend on this technology.

Speaker 2

Initial feedback is good. I mentioned one institution, a state and local institution that made a purchase this quarter. I mentioned another major one last quarter. We're picking up some wins At the state level, but I believe it's early to state how large this could be for us. So I'll just leave it at that.

Speaker 3

Thanks, Matt. And then maybe on the partnerships, you've had quite a few partners at Appian World this year, I think over 300. And I noticed many were from international end markets. I was just wondering, are we still is there potential for growth from those ex U. S.

Speaker 3

To accelerate, do you see a lot of activity outside the U. S?

Speaker 2

Okay. First of all, yes, the partners attended Appian World very well. I gave my first speech of the week was to The partner gathering and they were overflowing their room. The people were standing on the sides and at the back and it was a pretty big room. So we're very pleased with the partner participation.

Speaker 2

I think that's because they see a lot of opportunity. They're doing this because the demand is real And they're making good money on Appian and the demand is resilient as well. And so as to whether it's international, I would say it may be Slightly more international than it was before, but it hasn't been a big shift. It's probably just that where we're getting More attention in India than we did before, though it was already pretty good, but maybe it's even more over the past year. But I don't think there's been a substantial shift internationally in our partner base.

Speaker 3

Great. Thank

Operator

you. Thank you. Our next question comes from the line of Vinod Govind with Barclays, your line is now open.

Speaker 3

Hi, thanks for taking my question. I just wanted to ask about Appian Protecta. You released that about 2 months ago. Can you just talk about kind of how this product is positioned to the market and your overall vision for it?

Speaker 5

Yes. This goes back to a

Speaker 2

theme that we mentioned on one of the earlier questions about how essential it is to be perceived as the high end offering, The SAFE offering and we do a lot to emphasize this. Protect is part of that play, but it's only the beginning of it. We put a lot of work into establishing our credibility as the most reliable vendor because we understand that for mission critical processes, the buyer is betting their Career to some degree on the solidity and security and scalability, safety of our platform And for that matter, of the expertise that comes with it and the success of the deployment, we believe that in a market Where purchases bear substantial risk, one of the primary ways that a Best of breed player differentiates itself from its competition is by providing safety. You'll see the same theme come up repeatedly in our solutions. A solution is about safety.

Speaker 2

It's about knowing what you're going to get before you have to pay for it, talking to people who've used it, the same thing in the past, Knowing that it's worked at a company you respect, so what is it? It's safety, right? The answer to your question, we're selling safety. We're selling Reliability and a lack of risk. And this is just one way we And of course, I love the idea that we put a brand, right, on top of our safety attribute.

Speaker 2

We'll do that as much as we can. But this is a market where people do important things and they ask a lot of processes. It's not just that the process has to be easy to create. It has to be rock After they build it and we understand that to be one of our primary advantages in the market. So we may not be the biggest vendor In this market, but we mean to be the best.

Speaker 3

That makes sense. And just one more for me. I think at your Investor Day, you mentioned you were transitioning A lot of your customers over to your microservices based cloud. Can you just give us a sense of how much Kind of that impact on gross margin throughout the year as you transition more customers and when again do you expect that to be completed? Thank you.

Speaker 5

Yes. Okay. Well, so our Kubernetes

Speaker 2

initiative is a multi year large project, which will provide us the microservices you're talking about. And it's not going to affect our margin this year, not materially. It is a long evolutionary thing. We're covering enough modules to handle some customers, not to handle others, But I make no financial projections around this. None.

Speaker 2

We've just got to See the technology play out and move carefully and understand that this is the toll for getting to the future. So we're just going to pay the toll. This is how Yes. We want to organize software going forward and we're committed to being in the lead. So we thought about it carefully and this is the way we want to structure our software.

Speaker 2

But it says I want Dial down the expectations that it's a financial play or will lead to something tangible.

Speaker 3

Understood. Thank you.

Operator

Thank you. Our next question comes from the line of Fred Haftmeyer with Macquarie Capital. Your line is now open.

Speaker 11

Hey, thank you very much. Matt, I was interested to hear, I think you had said in your prepared remarks that 7 figure deals doubled year over year in the quarter. Would love to get a little more context around that in addition to what you're describing in terms of specific clients there, because it sounds like despite some of the Scrutiny and perhaps macro headwinds that are out there that you're seeing this significant growth. So we'd love to just understand better what's going on there.

Speaker 2

Yes. All right. Well, we did get twice as many new crossings of the 7 figure threshold during the first Quarter of 2023 as we achieved in the Q1 of 2022, wording that carefully. If you'd like more detail, It is in the packet of reports, which we have distributed. And you can say, I think it's in the lower right of a Quadrant report that shows the increase in customers of certain threshold sizes.

Speaker 2

So, pleased with that movement for sure. I don't believe that all of those went from 0 to 1,000,000 though. You understand some of those probably went 500,000 and cross the 1,000,000 threshold. So what we're really doing is tracking how many have gone over the 1,000,000 threshold. But it's great to see them do it no matter where they came from.

Speaker 2

And so it is a sign of confidence. Just a question of whether it's a confidence in our product or in our marketing. It depends on whether they come from nothing or come from something. Either way, We're very pleased to see that it's still possible to sign big deals in 2023 That the macro environment has not turned off our clients from wanting to take Appian up a notch, That's what I read in it, and I'm grateful for their confidence.

Speaker 11

That is definitely encouraging. And I wanted to ask with respect to the growth with scrutiny strategy, understand what you're saying And that you'll have a higher bar for any new investments that you're making. But could you just describe perhaps where you're continuing to hire and how you're thinking about that Hiring strategy under this present growth with scrutiny strategy.

Speaker 2

Yes. The intention here is to keep up a very robust hiring pattern At the same time as internally, we are finding investments that we do not wish to continue, right? I don't want to have A cautious year in which we simply slow things down. I believe that would be counterproductive. Our intention here is to remain dynamic, while also dynamically detecting inefficiency.

Speaker 2

So that's the act of strenuous counter position that I am attempting to have us Execute in 2023. So it's exciting growth at the same time as Meaningful consideration of what investments should continue.

Speaker 11

Thank you for that context.

Operator

Thank you. Our next question comes from the line of Fred Lee with Credit Suisse. Your line is now open.

Speaker 7

Hi. This is Tim Yashut on for Fred. Thank you for taking my questions. First, given the mix Shift to the cloud in the quarter, it is somewhat hard to tease apart how much of the cloud outperformance is coming from a higher than expected shift to cloud Versus an acceleration in the underlying business dynamics, could you provide any metrics that would help us better understand the underlying business growth trends you saw in the quarter?

Speaker 4

Yes. So, it's actually almost 0 is related to that shift. If you're looking at our Relative strength in the cloud growth, that's all kind of organic cloud growth without any reference to the shift. And that's because Our bookings kind of end up landing towards the end of the quarter. And so we wouldn't have recognized much cloud revenue From those conversions, anyway, so.

Speaker 7

That's super helpful. Thank you. And then I wanted to circle back On the thinking behind the transition to microservices architecture, and maybe at a high level, Are you containerizing your current platform and functionality in order to take advantage of the scalability offered by microservices? Or are you more thinking about writing a new set of features enabled by microservices that are not currently enabled by your platform?

Speaker 2

No, it's throughout, which means it's the former. We're containerizing the existing functionality And setting a pattern that we can continue with all further functionality.

Speaker 3

Thank you.

Operator

Thank you. And I'm currently showing no further questions at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Appian Q1 2023
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