Appian Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2024

There are 11 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Appian First Quarter 2024 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 Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Regan Redmond, Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Good morning and thank you for joining us. Today, we will review Appian's Q1 2024 Financial Results. With me are Matt Calkins, Chairman and Chief Executive Officer and Mark Mathias, Chief Financial Officer. After prepared remarks, we will open the call for questions.

Speaker 1

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 2024 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 reflect our views as of any subsequent date.

Speaker 1

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 2023 10 ks, our Q1 2024 10 Q filing and other periodic filings with the SEC. These documents are available on the 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 for a reconciliation of these measures to their most directly comparable GAAP financial measures.

Speaker 1

With that, I'd like to turn the call over to our CEO, Matt Calkins. Matt?

Speaker 2

Thanks, Regan. In the Q1 of 2024, Appian's cloud subscription revenue grew 24 percent year over year to $86,600,000 Subscriptions revenue grew 19 percent to 117 point $7,000,000 Total revenue grew 11% year over year to $149,800,000 Our cloud subscription revenue retention rate was 120% as of March 31. Adjusted EBITDA was a loss of $1,300,000 2 weeks ago, we held our annual user conference. Many of the people on this call were there. We had 46% more customers and prospects in attendance than a year before.

Speaker 2

This show featured a series of major customers discussing the success they've had with our platform. Attendees heard how Novartis reduced risk assessment approval times by over 50 percent using Appian. The Navy developed an employee onboarding app in a fraction of the time other technologies would have required. We heard how TELUS integrated siloed systems into a single Appian app to manage cross functional planning and expects to reduce planning cycles by 55% and save from misallocation up to $42,000,000 We also heard speakers from Merck, the U. S.

Speaker 2

Army, Acxiom Space and T. Rowe Price among others. Aside from the customers, my favorite part of the show was our new feature announcements. Not all of them were about AI, but I'll start there. Our unique edge in AI comes from strength in complementary technology, specifically processes and data.

Speaker 2

We're a leader in all three areas. This year every company is looking for ways to validate AI. Big budgets will come later. For now they need quick proof of ROI. A process is the perfect place to start using AI.

Speaker 2

A process offers structure, a ready built framework of activity pointed towards an important goal. A set of workers human and digital with whom to collaborate and metrics that measure what improvement AI has created. We're so confident in our ability to show strong ROI by dropping AI into a process that we've launched a 30 day fixed price offering we announced at Appian World. Our other main advantage in AI is our controlled data. Appian's data fabric connects data sources without having to move them.

Speaker 2

We can inform AI with the right information from across the enterprise. If we filter that data set through the data fabric sending only the most pertinent bits to AI. There are important implications for privacy, cost efficiency, auditability, security clearance observance and more. Our goal is to make AI powerful and easy. For this purpose, we announced last month a strategic collaboration agreement between Appian and AWS.

Speaker 2

We've been working together for a long time ever since Appian led our industry into the cloud about 15 years ago. We run an incredible amount of volume on AWS already 16,000,000,000 transactions per day. This announcement will intensify our long standing partnership as we work together to make enterprise use of AI both powerful and easy. When we acquired a process mining company in 2021, we did it because we saw an opportunity to create what I call the future of process mining. Process mining was cool, but it was missing a few critical features and we could provide them.

Speaker 2

Because we are a process leader, our process mining could be actionable. Because we had great data connection capabilities, our process mining could be real time. That's the revolution we anticipated. And 2 weeks ago at Appian World, we delivered it. Our new product is called Process HQ and it is real time actionable process mining, But it's also more than that.

Speaker 2

It allows a user to navigate the whole enterprise of information traversing Appian's data fabric. You can drill all the way down to individual rows and processes. You can glide across data sources from one end of the enterprise to the other. Process HQ can give you the heartbeat of your processes and boardroom level statistics on your efficiency. You can detect even momentary disruptions and efficiencies and take quick action.

Speaker 2

And maybe best of all, it intelligently recommends what changes you should make to the process. It's now easy to observe and tune your processes with moment to moment feedback. Let's pause here to discuss how a multinational life sciences company used Process HQ to improve one of their critical applications. This customer sells medical devices and pharmaceutical products in over 100 countries. Every country has unique industry regulations.

Speaker 2

Each product must be reviewed for compliance before it can be sold locally. Our customer manages the review of hundreds of thousands of products on Appian. The processes complexity and data volume make it a prime candidate for optimization. Without months of data prep or teams of data scientists, business users analyzed the process using Process HQ. They discovered many ways to reduce cycle times.

Speaker 2

The company is implementing these changes and expects to save 40,000 labored days annually, 40,000 days. In a nice validation of our efforts to reimagine this industry, Appian was named a leader this week in Gartner's process mining platforms Magic Quadrant. I'm pleased with the attention Process HQ has been receiving from customers and analysts and I hope a lot of people see what we've done with the synergies between process mining, process and data. At Appian World, we also announced our Elastic Process Execution feature, EPIX for short. It scales infrastructure on demand.

Speaker 2

Some of our customers have predictable usage spikes like a weekly or monthly filing time. Others cannot guess when the traffic will rise, but need to be ready like an insurer being prepared for the aftermath of a natural disaster. EPIX increases throughput by 10 to 100 times. This is on top of a process engine that could already run millions of complex processes daily. This is a stake in the ground that Appian is serious about being the best choice for high end use cases.

Speaker 2

Epix further cements our leadership in scalability. At Appian World, we also launched an AI backed website called ProcureSite with technology built on the Appian platform. Procurement professionals will use it to search major public data sets, glean insights from past government procurements and write new procurement requests. It's offered for free for now to test the concept with maximum exposure. This effort aligns with my belief about the future of this sector.

Speaker 2

There's a lot of public excitement about AI the content generator, but not enough about AI the data synthesizer. ProcureSight will complement our government acquisition management suite so that users of the latter will get extra benefits from use of the former. Now let's discuss a few notable deals from Q1. First, a major U. S.

Speaker 2

City wants to modernize its budget review process. The city's Office of Management and Budget manages 1,000,000,000 of dollars of annual funding. In Q1, it selected our platform to automate these processes and became a new customer. Before employees receive physical proposals and process them manually. Now with Appian the office expects to reduce approval times by 50%.

Speaker 2

Next is a story about a leading European automotive manufacturer and existing customer. 1,000 of its employees use Appian to manage supply chain operations, finance and warranty claims. It saves tens of 1,000,000 of dollars every year with our platform. In Q1, it purchased a 7 figure software deal to automate more warranty and finance workflows to extend its app to additional users. It saves 1,000,000 of dollars more with this next set of projects.

Speaker 2

Today's final story is with a top global medical devices company. It uses Appian to manage the order to installation process for medical devices in one of its 3 global divisions. In Q1, the firm purchased additional software to automate a similar process for a second division. Before Appian, the customer ran these processes on an expensive and unscalable homegrown system. Now the company will streamline its installation processes and recognize tens of 1,000,000 of revenue dollars earlier than expected this fiscal year.

Speaker 2

As you can see from our recent announcements, Appian will continue to push the technological boundaries in our industry from AI backed services to process mining. We will deliver to our customers both power and simplicity. This year promises to be one of rapid technological change and we feel well equipped to thrive in that circumstance. Now I'll hand the call to Mark for a discussion of our financials.

Speaker 3

Thanks, Matt. I'll review the financial highlights for the quarter and then we'll provide guidance for the Q2 and full year 2024. Cloud revenue, total revenue and adjusted EBITDA came in at or above the high end of our guidance ranges. Cloud subscription revenue was $86,600,000 an increase of 24% year over year and above guidance. Our cloud subscription revenue retention rate was 120% as of March 31, 2024, up from 115% a year ago and 119% in the prior quarter.

Speaker 3

We continue to target a cloud subscription revenue retention rate of 110% to 120% on a quarterly basis. Approximately 82% of our total net new software bookings in the quarter was for the cloud compared to 85% in the prior year's Q1. Total subscriptions revenue was $117,700,000 an increase of 19% year over year. Professional services revenue was $32,100,000 down 11% year over year. As we've mentioned previously professional services revenue can fluctuate from quarter to quarter due to the timing of large projects.

Speaker 3

We continue to leverage professional services to enable partners and to drive customer success. However, long term we expect professional services revenue to continue to decline as a percentage of total revenue. Total revenue was $149,800,000 an increase of 11% year over year and at the top of our guidance range. Consistent with our strategy, subscriptions revenue was 79% of total revenue compared to 73% in the year ago period and 80% in the prior quarter. We continue to see global demand for our platform with our international operations contributing 37% of total revenue compared to 33% in the year ago period.

Speaker 3

Note that foreign exchange movements provided a revenue benefit of 1% to 2% this quarter on a constant currency basis. Now I'll turn to our profitability metrics. Non GAAP gross margin was 76% compared to 75% in the year ago period and 78% in the prior quarter. Subscription's non GAAP gross profit margin was 90%, consistent with the year ago period and compared to 91% in the prior quarter. Professional services non GAAP gross margin was 20 5% compared to 34% in the year ago period and 26% in the prior quarter.

Speaker 3

We continue to invest in non billable areas of our services organization to help our customers achieve the most from our technology and increase adoption of our platform. As a result and previously communicated, we expect professional services non GAAP gross margin to decline to the low 20% range in 2024 and beyond. Total non GAAP operating expenses were $117,300,000 down 2% from $119,300,000 in the year ago period. Adjusted EBITDA loss was $1,300,000 for the quarter, well ahead of our Q1 guidance of a loss between 9,000,000 5,000,000 dollars and significantly better when compared to an adjusted EBITDA loss of $15,800,000 in the year ago period. In the Q1, we had approximately $11,500,000 of foreign exchange losses compared to $600,000 of foreign exchange gains in the same period a year ago.

Speaker 3

Just to note, we don't forecast movements in FX rates. Therefore, they aren't considered in our guidance. Non GAAP net loss was $17,700,000 or $0.24 per share compared to non GAAP net loss of $19,700,000 or $0.27 per diluted share for the Q1 of 2023. This is based on 73,300,000 diluted shares outstanding for the Q1 of 2024 72,900,000 diluted shares outstanding for the Q1 of 2023. As noted above, Q1 2024 non GAAP net loss was impacted by $11,500,000 in foreign exchange losses or a loss of $0.16 per share, which was not included in our original guidance.

Speaker 3

Turning to our balance sheet. As of March 31, 2024, cash and cash equivalents were $170,100,000 providing us significant liquidity to run and invest in our business. This is an increase of $11,100,000 as compared with cash and cash equivalents and investments of $159,000,000 as of December 31, 2023. For the Q1, cash provided by operations was $18,900,000 versus cash used in operations of $25,300,000 in the same period last year. Our cash provided by operations was bolstered by strong cash collections in the quarter and reflects a milestone on our journey towards profitability.

Speaker 3

We also completed a $50,000,000 share repurchase program in Q1 during which we bought back a total of 1,320,000 shares. We're bullish on the long term growth prospects of our company. We see this buyback as an avenue to deliver value to shareholders. Finally, total deferred revenue was $226,200,000 as of the Q1 of 2024, an increase of 14% from the year of that period. As a reminder, the majority of our customers are invoiced on an annual upfront basis, although we have large customers that are billed quarterly or monthly.

Speaker 3

Consequently, we continue to believe cloud subscription revenue is a better indicator of our business momentum than deferred revenue, 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. Our Q2 2024 guidance is in line with how we've historically approached guidance setting. As a reminder, due to seasonality, Q2 tends to be our weakest quarter, while Q4 tends to be our strongest.

Speaker 3

For the Q2 of 2024, cloud subscription revenue is expected to be between $86,000,000 $88,000,000 representing year over year growth of between 16% 18%. Total revenue is expected to be between $140,000,000 $144,000,000 representing year over year growth of 10% and 13%. Adjusted EBITDA loss for the Q2 of 2024 is expected to be between $17,000,000 $13,000,000 Non GAAP net loss per share is expected to be between $0.34 $0.28 This assumes $72,300,000 diluted weighted average common shares outstanding. This includes the reduction of the share count from our share repurchase during the Q1. For the full year 2024, we are reaffirming our previously announced cloud revenue and total revenue guidance.

Speaker 3

We are improving our full year adjusted EBITDA guidance. We now expect the adjusted EBITDA loss to be between $22,500,000 $17,500,000 for the full year 2024. This is an improvement of $2,500,000 dollars or 11% from the previous guidance range midpoint. We are pleased with the efficiencies we are seeing in our cost structure and we'll continue to look for opportunities to optimize costs on our path towards profitability. Our full year 2024 non GAAP net loss per share guidance is updated to a range of $0.85 to 0 point 7 $9 dollars This new full year range includes the reduction of the share count from our share repurchase during the Q1.

Speaker 3

Our guidance assumes the following. 1st, as previously disclosed, the variability in our services revenue can be swung by 1 or 2 large transactions. For Q2 and the full year, we expect professional services revenue to be flat over the comparison periods. 2nd, on premise license revenue will grow by mid single digit growth rate and will track the seasonality that is consistent with prior periods. 3rd, our 2nd quarter adjusted EBITDA loss will be better than the 1st quarter's adjusted EBITDA loss.

Speaker 3

This is due to the seasonality in our business and the cost of running our world class global user conference, Appian World. 4th, total other income and interest expense are expected to be between $4,000,000 in Q2 $18,000,000 for the full year of 2024. 5th, capital expenditures are expected to be between $1,000,000 $2,000,000 in Q2 $10,000,000 $12,000,000 for the full year of 2024. Finally, our guidance assumes FX rates as of April 29, 2024. In conclusion, it's an exciting time to be part of Appian as we continue to invest in growth and optimize our cost structure to drive profitability.

Speaker 3

We are well positioned to continue to demonstrate the value of our world class platform and capitalize on the opportunities ahead of us. And with that, we'll open the line for questions. Operator?

Operator

Our first question comes from Steve Enders with Citi. Your line is open.

Speaker 4

Okay, great. Thanks for taking the question. I guess maybe just to start, it'd be I guess, good to hear an update on what you're hearing out there in the deal environment. And I think you made a comment at the Investor Day that you felt like the macro maybe getting a little bit better. So I guess it would be good to get a little bit clarity on exactly how that deal environment has shifted and evolved and how you're kind of viewing that today?

Speaker 2

Yes. Okay. I think that the macro isn't perfect. There's definitely some consternation around the U. S.

Speaker 2

Government, around international affairs, around whether inflation is going where it's going, but it's workable. And with regards to AI, which is almost a macro effect for us, I don't see big budgets around AI amongst our customers. So that's not something that we're working with and drawing energy from this curiosity, but there's not big line items.

Speaker 4

Okay. That's helpful there. And then I guess just on the conference and it'd be good to get an update on the feedback we heard from customers on maybe how they're thinking about AI investments, how they're thinking about some of the new products and the adoption there. And I think also on the pricing and packaging changes that were announced there. So yes, we get a little bit more clarity on feedback from the customer side.

Speaker 2

Yes. First of all, let me say that conferences went through a bit of a lull with COVID, right? When they went remote, they lost energy. This in my opinion was the best conference we've had since before COVID. I love the energy.

Speaker 2

I love the enthusiasm. The attendance was good. Prospects showing up. Very pleased with the conference. I think that the changes in our pricing approach which serve to both simplify and raise our prices have been broadly welcomed.

Speaker 2

I think there's a willingness to see value in the new features that we have announced 2 weeks ago. And I didn't get any complaints, why isn't this free? Instead, there was just appreciation for what we'd created. And the simplicity, I don't get any pushback on that. Used to be we had so many different ways to price the software.

Speaker 2

Now we got one that's it's not drawing additional friction. In fact, it's simplifying and accelerating the process.

Speaker 4

Okay, perfect. Thanks for taking the questions.

Operator

Thank you. One moment for our next question. Our next question comes from Jake Roberge with William Blair. Your line is open.

Speaker 5

Hey, thanks for taking the questions. Mark, I guess just to start off, can you help us better understand the cloud revenue guidance? It was a solid quarter, but when we look at the sequential increase from Q1 to Q2, it looks a bit softer. But then the guidance implies a few points of back half acceleration. So could you just walk us through some of the building blocks that you have in the model for that acceleration, whether it be the pricing increases, packaging increases or some of the new products that give you confidence in that guide?

Speaker 3

Sure, Jake. I think you've got the right question, the right analysis that is kind of in the background, those price increases and things like that. But it's really just more about our seasonality in our business. And we tend to have Q2 being the lowest revenue quarter for us in terms of what quarter is the weakest. And a lot of that is also what happened in Q1 from a bookings and billings perspective, right?

Speaker 3

So I think it's mostly seasonality and we do expect traction and recovery and that's why we reaffirmed our full year guide.

Speaker 5

Okay. Very helpful. And then can you just talk about the uptake you've seen with your new data fabric solution? And just from a competitive positioning perspective, we've heard a few other vendors in the space launch their own fabric solutions over the past few months. So could you walk us through the differentiation of your product?

Speaker 5

And then just also how the monetization path has been going over the past few quarters?

Speaker 2

Yes. Thanks for asking. Those products are completely different. Our data fabric is meant to reach across the enterprise and integrate every data source, whereas our competitors are liable to offer a data fabric that is built just to connect their own data sources to each other because their own data internal architecture is so convoluted that there isn't natural compatibility between these products in the first place, their own products I'm talking about. So their data fabric is to integrate their own products.

Speaker 2

Ours is expansive. And the other thing ours is that theirs is not is it creates a semantic layer so that all of these data sources are not merely integrated but addressable through a common language and you can treat them like objects like they were local objects all through the same nomenclature. So it's an entirely different product what we've got except that they've borrowed the data fabric terminology. That's a rough guide. The products are quite different.

Speaker 2

As for uptake, our data fabric uptake is very high. It's one of the best adopted features we've ever launched. And we anticipate having it even more deeply launched in the future as customers reach out to connect a greater share of their enterprise with the data fabric. I like to joke around here that it's such a powerful differentiated feature that we're almost a data fabric company. So we I do mean that as a joke, but it's a very important differentiator for us.

Speaker 5

Very helpful. Thanks for taking the questions.

Operator

Thank you. One moment for our next question. Our next question comes from Derrick Wood with TD Cowen. Your line is open.

Speaker 6

Great, thanks. It's Andrew on for Derrick. Hey, guys. How are you doing? Mark, the comment you made 2 questions ago about Q1 bookings impacting the guide, Was there anything maybe a bit of slowness to start the year after a strong Q4 from a bookings perspective?

Speaker 6

And how is linearity and did any deals slip into Q2?

Speaker 3

Yes. I think it's more typical for us, right? We do have a seasonal effect to our bookings and it's not abnormal to have the phenomena that we've seen so far in 2024, which is that Q1 is much weaker than Q4. And that's I think that's kind of almost ubiquitous in the software industry. But we certainly had that this year and it's nothing abnormal though.

Speaker 6

Okay, good. And then Matt, you made a comment about the new pricing model potentially accelerating things. Would you expect that to accelerate sales cycles potentially this year?

Speaker 2

Like I absolutely have that in mind when I roll out the new pricing plan. I also have in mind that we'll shift the basis for our discussions with customers away from price. I don't want to be price engineers. I want to be feature engineers. And I want to talk about the features and the scalability, the reliability, the things that make Appian actually different.

Speaker 2

That's where I want to spend our time. So I am hopeful that it will help us to reduce sales cycles, but I can't put anything on the table. I do think that it will guide the conversation in a more productive and pro Appian direction.

Speaker 6

But with the focus on quality over quantity, it seems like. Has that kind of improved the quality of leads and pipeline flow from partners?

Speaker 2

I'd say that the we're early days on this shift. We've emphasized a few partners. You're absolutely right. I think that's going to be healthy for the business. Right now, we're getting a little bit more than we did in the past from partners.

Speaker 2

So if you take all of our partners added up, even the ones that we drop, right, total sum, right, addition to our pipeline, yes, it is up. But I think it's still early to see the long term ramifications of this prioritization. And all I can say is that the first indicator looks like we're probably making the right decision. But I already have more confidence that we're making the right decision based on other things, based on internal analysis. So this is just one of the smaller confirmations that we've made the right choice.

Speaker 6

Okay, great. Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from Kevin Kumar with Goldman Sachs. Your line is open.

Speaker 7

Thanks for taking my question. I wanted to ask about net revenue retention. That's been ticking up last couple of quarters. Just curious kind of the trends you're seeing there and whether some of the go to market changes that you've been making to focus on your largest customers and maybe some of the pricing changes are impacting that kind of expansion motion?

Speaker 2

Yes. Well, first of all, I would love to see this in the kind of range where it is. We always talk about 110 to 120, but between those I got a preference. And I think that this is the kind of net revenue retention rate that is encouraged by the moves we have made just like you pointed out. I think it's too early to say that these changes which have just happened, right?

Speaker 2

We're just making them now at the top of the year have had any impact on the net revenue retention rate. Honestly, that's a trailing indicator. That's it's going to take a long time for the changes we've made to filter into that metric slowly over the course of a year or 2, but they should help. If we focus on large opportunities, if we put more of our attention on our top customers and our top partners, I believe that will be a net revenue retention positive. And I'm not asking to see it in Qs 1 or 2 or even 3, but I do think in the long run it's going to boost us.

Speaker 7

That's helpful. And then maybe can you talk a bit about procure side and how that expands the federal opportunity for Appian? It's probably still a bit early, but what's been the initial response

Speaker 2

there? I've been itching to talk about this for quarters. So thank you for bringing it up. I'll be happy to address it. As you know, we've got something called the Government Acquisition Management Suite, which is a series of solutions, interlocking solutions that cover the entire acquisitions process for a public sector buyer.

Speaker 2

Those can be adopted singly or in serial and all at once or sequentially. That's been really popular. It's established itself as an emerging standard in the U. S. Government.

Speaker 2

The users are very pleased. And this new offering reinforces it. It capitalizes on the market leadership that we've established in procurement by offering a service, an AI backed service that taps into a number of different data sets very deep, very wide data sets that give you the history of procurements of the past, including awards of the past and solicitations of the past. So we're going to give expert AI based advice on what's happened before in the world of procurement. And then also AI will help you to write your new procurements.

Speaker 2

This is an extraordinary accelerator. I wouldn't recommend using it without a person in charge, right? This is for the procurement professional, not a substitute for the procurement professional. But it does allow that procurement professional to be far more efficient. And if they're already working with Appian then they've got the confidence and they've got a framework into which to use the results they get out of procure site.

Speaker 2

So we've got high hopes for this one. I've been excited about it for a while. Great.

Speaker 7

Thanks for taking my questions.

Operator

Thank you. Our next question comes from Tom Blakey with KeyBanc Capital Markets. Your line is open.

Speaker 8

Hi, good morning guys. Thanks for taking my question here. I just I guess my question is, riding on a couple of the prior questions, one of Andrew's bookings, but what the 1Q booking sounded a little soft and just wondering looking out then with the acceleration expected in the second half, if it's what kind of bookings assumptions were made there, Mark? And maybe dovetailing in the pricing as well, a 25% price lift, I think, is the number sounds high. Is this just for new processes?

Speaker 8

Is this just for new work? Or is this going to come upon each contract renewal for a larger set of customers? And I have a follow-up.

Speaker 2

You take the first part and then Exactly and then I'll That's right.

Speaker 3

Yes. So Tom, it's really not an abnormal story for us. Again, it's seasonality. One thing I didn't mention, which I should, is that we did have an FX weakness since our last guidance in February. And so we did have a few $1,000,000 leave our backlog for the year.

Speaker 3

And so we've absorbed that. Of course, we're not we're able to reaffirm our full year cloud guide despite that. But that took a toll on Q2 and the full year and it was an impact as well. But there's no there's nothing about our bookings pattern this year that's different than any other year in our assumptions for guidance or anything like that.

Speaker 2

Great. Now I'm going to talk about our 25%. This is the higher tier and the new higher tier in our pricing system and all of the new features that we just announced at Appian World they're all in the advanced tier. So customers like this we had a lot of momentum. Process HQ or case management or they're going to have to buy the higher tiers 25% more.

Speaker 2

I think that this is likely to come up in our renewal negotiations. So it's not all at once. But when customers talk about renewing, we're going to discuss why they should renew at the higher rate. It is not a mandatory 25% increase. It's optional and we're trying to lure them up with these new features.

Speaker 2

I don't expect a rapid impact from this, but I do think that Appian has a large consumer surplus, which is to say that our customers get more than they pay for. And so by creating a new higher pay rate we can sort of take some of that back with features, which I hope soon will be considered mandatory, de rigueur for any Appian customer because they're such good features. That's the plan here.

Speaker 8

That's a great answer, Matt. And just as a follow-up to that, was the is the surplus being shifted to these higher tiers or is it just all incremental in terms of these higher tiers and a leading question to Gaye, consider if you'd wager a percentage of revenue that you would expect to take this higher tier, especially given the fact that you have the power to move some of that surplus to those higher tiers?

Speaker 2

Yes. I'm going to hold back on making a prediction. Okay. I mean, look, I love the question. I asked this of myself, but I just don't want to answer this.

Speaker 2

I want to just see if we fight this and get back with more knowledge. Okay.

Speaker 8

And especially with TCO and other benefits, I'm sure if you could push the surplus to the higher tiers and the consideration of continuing to save the company and customers money, maybe we'll see a considerable move over. Matt, as a follow-up to your budget kind of commentary, Appian still continues to grow double digits in a kind of flattish to up low single digit IT budget environment. Where do you see the budgets coming? I think it was Steve Ender's question on terms of AI budgets. Where do you see Appian's budgets coming?

Speaker 8

And in the context, if you could answer, I saw your ARR, dollars 1,000,000 plus ARR deals that chart has been phenomenal over the last few years, kind of flattened out a little bit. If you could just kind of combine the 2 points in terms of an answer, that would be helpful. And thank you very much.

Speaker 2

Yes. Let me just say, I know some people are watching that chart by the quarter. I wouldn't watch it too closely. I do think there's some natural volatility in Q1 is Q1 for us. So don't get too absorbed in the ticks on $1,000,000 counts.

Speaker 2

However, let me say that the real space for us long term in this market is at that high end, right? That's where our best of breed player belongs. And so for us to focus on larger businesses and bigger deals and higher feature sets and elevated prices, this is strategically where we belong. Epix fits right into that, for example, the new elastic scale feature. What we've done recently and you could see it in our show and the way we dropped a bunch of great features and they all have price tags, the way we're reorganizing the priorities in the market to focus more on the larger opportunities.

Speaker 2

It's all under the understanding that there's a place that we can live comfortably in this market space and it's at the high end.

Speaker 8

That makes sense and it could coalesce around maybe Mark's model producing some profits in the future to coalesce around that. So thank you very much.

Speaker 9

Yes.

Operator

Thank you. Our next question comes from Raimo Lenschow with Barclays. Your line is open.

Speaker 9

Hey, thank you. Thanks for squeezing me in. Matt, if you think about the data platform and the AI adoption, does data have to come first? So if you think about like how the world is going to evolve here, like you mentioned earlier, there's not that much on the AI budgeting side. You think the bigger move and people don't talk about it is actually that they need to clean up the data first and hence your data fabric should be or could be and will be the more interesting offering for the time being?

Speaker 9

Thank you.

Speaker 2

I think the data conversation is under pursued in AI generally. As a society, we don't give data enough credit. As businesses, we're not broadly giving data enough credit for the value it creates inside AI. And now let me take that point one step further and say, AI will truly be valuable when it's about you. This is true for you personally.

Speaker 2

If you were to type a question into a public AI algorithm, you would get back a generic answer. But if it knew you, it would give you an answer that was valuable to you. And the way people get around this right now is they try to explain themselves very briefly like if I care about this or if my priority were X and Y, then what would you recommend for me, right? They're basically kind of prompting the AI with a little bit of themselves. But at that level, when the AI knows little to nothing about you, it's a novelty.

Speaker 2

When AI moves from being a toy to being a tool, it's going to be because it knows you. And that's true right now as when you as a person interact with public AI and it's also true for businesses. When they interact with AI, it's just a toy until the AI understands the business. And that's the real hurdle because understanding the business means exposure to the data that the business owns, the crown jewels of the business. And there's privacy concerns, there's regulatory concerns, there's a lot of fear in that system.

Speaker 2

For us to get serious as a civilization about AI, we're going to have to figure out how to make AI about you, in this case you being the business. And that's going to mean getting across this how do we share question. How will we share our information? And I propose one answer to that question and that is that the data fabric will allow you to filter, select and share only a tiny slice of your data, but the right slice with AI in order that you can get a valuable answer and reply without triggering any privacy or regulatory concerns. That's one answer to a critical question that constitutes right the frontier of real business value in AI.

Speaker 2

We're going to have to have an answer to that question. We have one proposal. Appian's got a proposal to how we're going to do it. And data fabric is utterly central to our ability to offer that proposal. So, I'm a huge believer in the synergy between data and AI, between the the capability of data fabric to facilitate a certain sort of personalization around AI.

Speaker 2

That's what we're going for. And we've positioned ourselves to be the leader in a specific kind of valuable and yet private AI. That's I'm going on a little long here, but I want to make a point. It's really important to us strategically what we're trying to do. And since you asked about it, I figured I'd just lay it out.

Speaker 2

That's our intention with Data Fabric.

Speaker 9

Yes. No, it makes total sense. Yes, it's really valuable. And then one follow-up, Mark, for you. Like, obviously, the big question you got is like the if you look at the bookings this year, you said like it's all fine.

Speaker 9

Can you 2 maybe talk a little bit about the shape of the pipeline? I mean, was that kind of always kind of that always the plan for the year? So can you give us a little bit more handholding here, because that's where I get the most pushback? Thank you.

Speaker 3

Yes. I mean the pipeline has kind of shown the exact behavior we expected. So there's no change. The linearity has been typical for us, which is back end loaded quarters. And as we've said for years, Q1 is our weakest quarter and that was just the seasonal pattern, buying patterns of our customers.

Speaker 3

So the only other missing piece is what I'll reiterate, which is the FX piece, which did cause a departure of our cloud revenue backlog of about $2,500,000 for the full year. So that's one thing that you could see obviously in Q2 as well. But I would caution anyone to read into anything abnormal, but it's really more the rule versus the exception for us.

Speaker 9

Okay, perfect. Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from Steve Enders with Citi. Your line is open.

Speaker 4

Okay, great. Thanks for taking my questions again and letting me back in the queue here. I guess I just want to clarify the FX impact that you are seeing and I guess maybe either framing what was embedded in the guide for the year? I guess what's now kind of being embedded in the guide for the year now and maybe also kind of the impact for the 2Q guide would be helpful?

Speaker 3

Sure. Yes. So we don't forecast changes in FX. And what I'm pointing out is that when we set our guidance for the year, after our Q4 results were presented in February, the foreign currency rates yielded a certain amount of revenue, right. And since that time in the passage of 3 months, those essentially the European exchange rates have weakened to the point that we saw $2,500,000 of cloud subscription revenue leave that forecast or that guidance or that backlog however you want to put And so by maintaining our full year guide, right, we've absorbed that $2,500,000 impact.

Speaker 3

For the Q2, that impact was around $1,000,000 Is that helpful?

Speaker 4

Yes. No, that's clear. So you're saying that if FX constant currency basis, you would have raised the guide by $2,500,000 for the year, but because you're absorbing that, it's maintained.

Speaker 3

Yes, I would hesitate to use the word of constant currency because that implies prior year's rates, but just using the rates as of February, if we use those rates certainly would have had those numbers $2,500,000 increase for the full year and then $1,000,000 for the Q2.

Speaker 4

Okay, perfect. No, I appreciate the clarification there.

Operator

Yes. Thank you. Our next question comes from Oscar Saavedra with Morgan Stanley. Your line is open.

Speaker 10

Hi, thank you for taking my question. Oscar Saavedra on for Sanjit Singh. I want to ask a question on just the macro demand environment and the health of like your core verticals that being financial services, government and healthcare, it's nice to see like your net retention rate uptick in over the past several quarters. So just your view on the general demand environment and what you're seeing that is allowing you to see that consistent uptick while others are in software seeing that deteriorate? Thank you.

Speaker 2

Yes. I would say that our customers are getting a lot of value out of Appian Software. You can see in all these new features, the innovation we're doing that we're very attendant on delivering benefit, being reliable, satisfying them with outcomes of well at 98%. And they also turn up for us on industry satisfaction surveys. So like I can't speculate on what's happening for other firms, but I will say that our customers are enthusiastic and loyal and it's because we make sure that their experience is great.

Speaker 10

Got it. But so in terms of just like the broader demand environment, are you seeing any particular like still budget constraint or just anything around that?

Operator

No, not particularly.

Speaker 10

No. Okay. And just one more. On your AWS partnerships driving deals, like any additional details on what's driving that those early deals?

Speaker 2

We announced that part of it that I wanted to announce. So I don't want to get into anything more other than to say that we're enthusiastic about our long standing relationship with AWS.

Speaker 10

Got it. Thank you very much.

Operator

Thank you. I'm 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 2024
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