Good day, and thank you for standing by. Welcome to Appian Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded.

I would now like to hand the conference over to your first speaker today, Sri Anantha, Vice President, Finance and Investor Relations. Please go ahead..

Thank you, operator. Good afternoon and thank you for joining us to review Appian’s third quarter 2023 financial results. With me today are Matt Calkins, Chairman and Chief Executive Officer and Mark Matheos, Chief Financial Officer. After prepared remarks, we’ll open the call for questions.

Today, you’ll want to follow along with our earnings presentation. You can download it from the main page of our investor site at investors.appian.com.

During this call we may make statements related to our business that are forward-looking under federal securities laws and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

These include comments related to our financial results; trends and guidance for the fourth quarter and full year 2023; the benefits of our platform, industry, and market trends; our go-to-market and growth strategy; our market opportunity and ability to expand our leadership position; our ability to maintain and upsell existing customers; and our ability to acquire new customers.

The words anticipate, continue, estimate, expect, intend, will, and similar expressions are intended to identify forward-looking statements or similar indications of future expectations. These statements reflect our views only as of today. They do not represent our views as of any subsequent date.

They are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For a discussion of the material risks and other important factors that could affect our actual results, refer to our 2022 10-K, our 10-Q filings for 2023, our 8-K filings, and other periodic filings with the SEC.

These documents are also available on our Investors section of our website. Additionally, non-GAAP financial measures will be discussed on this conference call. Refer to the tables in our earnings release and the Investors section of our website for a reconciliation of these measures to their most directly comparable GAAP financial measures.

With that, I’d like to turn the call to our CEO, Matt Calkins.

Matt?.

My first case is a federal agency that manages procurement processes for the Department of Defense. The agency selected Appian two years ago to unify disparate contract writing systems. This quarter, it signed a seven-figure software deal to license thousands more users.

Now, Appian will manage end-to-end contract writing processes for tens of billions of dollars in contracts annually. Another DoD group signed a seven-figure software deal in Q3 and became a new Appian customer. The group will manage law enforcement investigations in a secure, Impact Level 5 environment on Appian Government Cloud.

Before, the agency manually conducted investigations using paperwork and offline channels. Now, over 1,000 field agents and back-office employees will create cases, review evidence, and dispatch law enforcement support within a single Appian app. As you know if you’ve heard this call in the past, I like the solutions business.

I like it because the sales cycles are shorter, competition narrower, pricing power higher, the addressable market in total larger. We’re making progress on solutions this year. Here’s an example. A leading global investment manager increased its annual recurring spend on Appian software by 40% in Q3.

The firm purchased our Customer Lifecycle Management solutions a few quarters ago when it became a new Appian customer. Our solutions automated manual processes so the company can onboard and manage clients faster. In Q3, it decided to add its legal department to the process and purchased additional platform licenses to build new workflows.

For example, it will automate legal agreement processes so lawyers can readily collaborate on tasks and the company has real-time visibility on the contract’s status. Let me offer you a few marketing updates. Two to be precise. First, Randy Guard joined Appian as our new Chief Marketing Officer.

Randy brings decades of experience leading marketing, product strategy, and technology teams. Second, we were named a leader in the Gartner Magic Quadrant for Enterprise Lowcode Applications platforms two weeks ago. Before I hand the call over to Mark for a deeper look at our financials, I want to mention something.

Looking past the numbers for a moment, the Company is boiling with activity beneath the surface. Appian has made substantial investments in our platform over the past few years and introduced new features and solutions. We’re realizing a data-centric AI offering.

We’re evolving our go-to-market activities and driving a new set of sales plays that will open new opportunity. Out of sight of the news and the numbers, we’re working hard to prepare Appian for a strong future. With that, I’ll hand the call over to Mark..

First, professional services revenue will decline at a high single digit rate compared to the year ago period; Second, on-prem license revenue will increase by a low double digit rate compared to the year ago period; Third, other non-operating expenses will be approximately $2.5 million in Q4; Fourth, capital expenditures will be approximately $2 million; Finally, our guidance assumes FX rates as of October 25, 2023.

In summary, we are excited about the growth opportunities ahead of us. We remain focused on investing in areas that will drive growth and generate superior returns long-term. With that, we’ll turn it over to questions..

Thank you. [Operator Instructions] Our first question comes from the line of Jake Roberge of William Blair..

Matt, when you’re talking to customers, where is the budget for AI spend coming from? Is it coming from existing IT budgets and maybe crowding out other areas of spend? Are you seeing customers create net new budget dollars and expand IT spend for their AI investments?.

Yes. I think that there’s a budget for AI talk and there’s separately a smaller budget for AI purchasing. No, I’m kidding. I think that right now there’s most of the AI economy is done in words.

And I think we’re transitioning right now and pivoting toward where the legitimacy in AI is going to come from installations, from accomplishments, from practical value. And I think it’s going to be IT at first. I don’t see a separate budget for this. No. I think it needs to be justified.

I think that the way people envision IT right -- sorry, AI right now is not actually practical on a large scale. And so, the pipe dream is going to have come down to size and prove itself in order to grow a larger budget. I talk to a lot of CIOs. I do not hear that they are inventing a new AI specific budget.

Instead, this is -- it’s going to compete for funds and it’s going to have to show value to achieve those funds..

And then, Mark, if you could just add any commentary on the linearity of demand throughout the quarter and into October. You had a nice beat in the quarter, but the Q4 guide came in a bit lower than expected.

So have you seen any change in the macro over the past few months that would cause that, or is it just the conservative assumptions you called out around the federal segment and, potential government shutdown?.

Yes. I mean, we have reason to continue our caution into Q4. I think there hasn’t been any sort of improvement where we’re leaving a sigh of relief and saying macro is getting better. It’s still a factor for us..

And the federal..

The federal thing is still looming, as we all know..

Our next question comes from the line of Steve Enders of Citi..

I guess, Matt, maybe to start, just wanted to get a better sense for the comment you made about, there’s a lot going on, bubbling under the surface with Appian.

I guess, high level, how should we be thinking about, like, what that means for the business going into next year and how you’re thinking about the product set and development, moving forward here?.

Yes. What I don’t want you to do is model that. That was a statement of ambition of activity. I want you to know how much energy we’re putting into the future. But I don’t mean that to end up on a spreadsheet..

Okay. Got you.

And then, I guess, maybe for Mark, just on the timing of the expenses that you called out here, just anything that we should be thinking about what that means moving forward into ‘24 and I guess any kind of more specificity around the EBITDA performance and the shift that’s going on into 4Q here?.

Yes. So I mean, we’re pleased with our EBITDA performance, and our glide path that we set forward has been something we’ve executed pretty well on. And as you can see, I’ve improved the EBITDA guide by $5 million for the full year.

We just note that the third quarter performance obviously was a little bit beyond what we expected in terms of an improvement. And a lot of that was because of just the timing of some employee related expenses that will occur in Q4 versus Q3. But all in all, it’s kind of what we had promised and said before, continued improvement on adjusted EBITDA..

Our next question comes from the line of Sanjit Singh of Morgan Stanley..

I was wondering if you could walk us through the rationale for the insurance policy, maybe go through like some of the terms, and when would you expect a potential payout from the policy? Any sort of detail there would be super helpful..

I appreciate the question. I’m going to have to direct you to our 8-K, which is our full statement on this matter..

Then, looking at maybe just your core verticals, whether it’s banking, life insurance, health and life sciences, government, how do you see the demand trends and the spending trends and the priority of like sort of automation as you go into Q4 and how does that sort of set up for 2024? Any sort of color around the industry verticals?.

I think that when we settle into realization, the real value of the theme of the year, which of course is AI. We and our buyers are going to understand that AI is an incomplete solution that it’s a part of a team, not a solo act. It’s going to require a lot of cross actor coordination.

It’ll require a lot of low code workflow, right, routing and partnership with other forms of automation. And as such, I see it complementary and enhancing the demand for automation. Even though right now, I’m not sure the market understands that. That’s where I see it going.

And so, what we see here, I think it’s a multiyear lift coming from AI, which brings with it technologies that are naturally complementary to AI. When I think of technologies that are naturally complementary to AI.

Number one is data, data like Appian’s Data Fabric that creates a virtual database across the enterprise and allows you to address data from anywhere as if it were local. That’s essential to AI, to training, to provisioning, to answering questions well.

And then the other technology that would be naturally complementary and should arise with the AI economy would be process. And process automation in this case, because process includes the technologies that do the work in addition to the technology throughout the work. So that’s my belief about where automation is going.

I don’t have that differentiated by sector. I think that’s going to be true across the sectors. But, that’s what I anticipate..

Our next question comes from the line of Kevin Kumar of Goldman Sachs..

Curious on the performance of the government sector in terms of bookings.

How do that maybe compare to prior quarters? And also can you talk a bit about the new case management solution for the public sector and what type of use cases do you expect with the end of the solution?.

Yes. All right. Public sector is one of our best -- one of our best growing, one of our best already in size. And the government acquisition management solution has added a spark to that sector that I -- and it’s going to add spark next year as well. We’re getting good growth out of that, successful uptake and have good prospects.

With regards to case management, case management -- if you look at our use cases, what Appian has bought for, at least half of it is case management. You can look at a lot of the things we do as a case. A case passes through workflow and it reaches a resolution. We do a lot of cases.

And so what we’ve done here is enhanced the way we handle cases and configure it specifically for some federal use cases. I believe what we’ve got is powerful. And the pipeline reflects that the customers may believe it too. I’m excited about where that’ll take us next year.

And I want to add that there is no reason why case management needs to remain a public sector offering. Appian is, as you know, located near to the federal government, I am from my office at this very moment looking at the beltway, the beltway that goes around Washington D.C.

We start some patterns and offerings in the government just because it’s here. And so, we may find that this solution has its greatest impact eventually outside of the public sector. That’s -- I just want to clarify that it is not suitable only for that industry..

And then, maybe one on kind of the net new business in the quarter in terms of the mix of new customers versus expansion. How does that compare to prior quarters? I saw the uptick in net expansion rate this quarter kind of within your historical range, but curious if you’d call out any specific drivers of strength there. Thank you..

Yes. You’re right, 117% to 115%, I don’t think it’s important. As for the mix this quarter, yes, it was a little bit more for the existing customers, I would say. And you could see that not only in the 117% NRR, but also in the stat that has us passing $100 million per year customers, in both cases. That’s where the energy was this quarter..

Our next question comes from the line of Derek Wood of TD Cowen..

It’s Andrew on for Derek. Matt, speaking of that 1 million customer cohort chart, it looked like a solid uptick there.

What exactly is driving the upsell strength there? What are the new products they’re buying to get them up to that level?.

Yes. Well, I think happy customers are driving it. I think we’re just creating value is a very fundamental answer. But I think that’s really what comes down to it. There’s been no shock to the equilibrium. We just have happy customers and they buy more.

I think that we are going to focus more on this next year, because we believe we can go deeper with the customers that we’ve got. I mentioned sales plays, right, in my talk. Part of that is uplifts and expansion. I believe we can do more in these customers. But that doesn’t mean that we’ll neglect the customers we don’t have.

We’re going after those two..

And then, Matt, I’m not sure I heard as much about partners in the prepared as they usually do.

How would you characterize partner performance in the quarter and kind of on the new program you talked about earlier this year, the incentives there, any early impact to talk about on the partner side that’s helping you?.

Yes. It’s funny that I didn’t mention them because, of course, this is a major time for us with regards to partners. I guess, I probably left it out because we have yet to reach conclusions with the new efforts, but we’re making them. Our key theme here is focus and intensive advocacy in both directions.

That’s what we want to give, that’s what we want to get. And so, we’re shaping new closer relationships with our partners at this moment to achieve that..

Our next question comes from the line of Joe Meares of Truist Securities..

Just regarding OpEx, it seems like each quarter for the last couple of quarters, you’ve been driving about a $5 million upside to the guidance.

Is that the cadence that we should expect going through the end of this year into next year in terms of just how you guys can drive profitability, or are there any plans in place around cost savings that could make that increase a little more exponentially? And I have a follow-up..

We’re certainly not looking to increase it exponentially or do anything in terms of accelerating our path here. We’re on a steady path, we’re happy that we’re over-performing. But it’s not on purpose that we’re beating those numbers necessarily. It’s just the way we’ve shaken out so far. But we continue to be pleased with that.

And I think it’s one of those problems that we’re happy to keep..

And then, I’m just curious, with bringing Randy Guard on as the Chief Marketing Officer, are there going to be any shifts in the marketing strategy? And then, could you remind us what the split is in that sales and marketing bucket between sales and marketing spend? Thanks, guys..

First of all, Randy is a real pro. Very pleased to have him on board. It’s been a pleasure working with him already. He comes in with a lot of great ideas. That said, we’ve got a high degree of continuity between he and founder Mike Beckley, who has been running the marketing department on an interim basis. And so, I don’t expect any discontinuity.

I just expect a evolution toward effective new priorities and ideas that Randy brings to the table.

And as the cost issue, want to say anything…?.

We don’t disclose that breakout. But safe to say our sales is larger than our marketing..

This is true..

Our next question comes from the line of Raimo Lenschow of Barclays..

Matt, a quick question. When you talk about case management, how do you think this will play out? Because obviously, there is a large vendor in your space as well that kind of makes a lot of noise around that.

How do you think customers will kind of look and then add more into the individual capabilities, or do you think they’re going to be like segments? Like, they will do IT, case management, et cetera, while you do all the other cases? How do you kind of position yourself against them? Thank you..

Yes. That’s right. It’s a great question. Case management is a broad tool. As I was saying in that earlier answer, it really applies to quite a lot of our business.

And it applies to quite a lot of other people’s business as well, right? There are many products, not just one, but many competitors, many products that are implicated in a case management situation, depending in some cases on what specific case we’re talking about. And so, yes, it invites a lot of competition.

And yet I’m quite optimistic about it, because I believe that it’s powerful product. We have a really strong platform that can be turned capably toward new use cases.

And our solutions enterprise is an exercise in realizing the advantage that we believe we will find in new use cases if we just put our mind to it and customize the platform a little bit. So, I recognize that competitors will have their strengths, incumbency, scale, name recognition.

But I think that in many cases, if not all cases, that we’ll have something to say on the feature side that gets the customers’ attention..

And then one follow-up for Mark. Mark, I’ve got a few guys still kind of asking about the guidance a little bit.

So do I think about it just in case there’s government shutdown that kind of the guidance becomes true and in case there’s not, it’s going to be completely different or are there other factors that we should consider there?.

Yes. I wouldn’t expect a significant difference either way. It’s definitely a factor in our guidance, but I wouldn’t look for a material difference..

Our next question comes from the line of Fred Havemeyer of Macquarie Capital. Your line is now open. Fred, can you hear us? We are not hearing, Fred. For some reason, we are not able to hear Fred. So, at this time, we want to thank you so much for your participation in today’s conference. This concludes the program. You may now disconnect..