Greetings and welcome to the Appian Corporation's Second Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Staci Mortenson, Investor Relations.

Thank you, operator. Good afternoon, and thank you for joining us today to review Appian's second quarter 2017 financial results. With me on the call today are Matt Calkins, Chairman and Chief Executive Officer, and Mark Lynch, Chief Financial Officer. After prepared remarks, we will open up the call to a question and answer session. During this call, we may make statements related to our business that are forward-looking statements under federal securities laws and are pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995, including statements related to our financial results, trends, and guidance for the third quarter and full year 2017, the benefits of our platform, industry, and market trends, our go-to-market and growth strategy, our market opportunity and ability to expand 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. These statements reflect our views only as of today and should not be reflected upon as representing our views as of any subsequent date. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For a discussion of the material risks and other important factors that could affect our actual results, please refer to those contained in the final prospectus related to our initial public offering and our other periodic filings with the SEC. These documents are available in the investor relations section of our website at www.appian.com. Additionally, non-GAAP financial measures will be discussed on this conference call. Please refer to the tables in our earnings release and the investor relations portion of our website for a reconciliation of these measures to their most directly comparable GAAP financial measure. With that, I'd like to turn the call over to our CEO, Matt Calkins. Matt?

Thanks, Staci. And thank you all for joining us today on our first conference call as a public company. Our IPO this May was an important event for Appian, particularly for the way it drew attention to our low-code market and to Appian as a low-code leader. As a result of this event, tens of thousands of people heard that it's possible to build their next unique application on a platform rather than in lines of code. In the second quarter of 2017, Appian grew subscription revenue 38% year-over-year to $19.9 million. Subscription growth has been accelerating across three successive quarters, from 34% in Q4 to 36% in Q1 to 38% now. Our subscription revenue has tripled over the last two years. Our non-GAAP gross profit in the second quarter was $27.9 million, a 65% margin versus the year-ago total of $18.9 million and a 58% margin. This dual trend of simultaneous rising gross profits and expanding markets expresses well our intention for the business. To be precise, that intention is to deliver elite level margins in both software and services, in this case 91% and 38% respectively, 91% for software, 38% for services, plus a beneficial mix shift toward software. Appian has been highly successful on a per customer basis. We averaged $475,000 in revenue per customer in 2016, and nearly one-tenth of our subscription clients pay more than $1 million for our software on an annualized basis. We intend not only to expand within our existing customers, but also and specifically to gather more customers. We added 23 net new subscription customers in the first half of 2017 versus 28 in all of last year. We will continue to focus on customer acquisition with prioritization of partners as a complement to our direct sales model, a published price…

Thanks, Matt. I'd like to reiterate that we are pleased with Appian's financial performance in our first quarter as a public company. Before discussing the details of results, I wanted to start with an overview of the four key aspects of our financial profile, as this is our first call with the investment community. First, we primarily have a subscription-based model which provides us with a high level of visibility into future revenue. Second, as demonstrated by our 38% year-over-year increase in Q2 subscription revenue, we have a consistent strong growth track record. Third, our sales and customer success model is highly effective. We have strong subscription revenue retention rates, a proven ability to expand our customer relationships, and highly attractive customer economics with an LTV to CAC ratio that has exceeded 6 over each of the past three years. And fourth, we have high gross margins that provide us with significant operating leverage as our subscription revenue mix continues to scale over time. Let me provide a bit more color on the components of our revenue and typical pricing and billing terms. As I mentioned earlier, we have a recurring subscription-based software revenue model. 98% of our 2016 and 99% of our year-to-date 2017 software revenue was subscription-based. The very small remaining percentage of our software revenue was related to perpetual licenses. Whether the customers chose to deploy our platform in the cloud, on premises, or in the hybrid cloud environment, it's a subscription agreement and our pricing methodology is generally the same. Our contracts are usually priced on a per user basis, and they typically range from one to five years, with three years being most common. This provides us with a high level of predictability and visibility into this revenue stream. With respect to our billing terms,…

[Operator Instructions] Our first question is from Sanjit Singh of Morgan Stanley.

I just had a couple of questions, the first one related to your hiring plans. This is going to be a year where you guys are expected to really fuel investments in sales and marketing. Matt, you talked a little bit about your international initiatives. But just in terms of hiring, were you able to meet plan this quarter? And if you weren't, do you expect to be on target for 2017?

Our hiring is operating as we wish it to. We're on our plan. The recruiting department is doing great. We expect that we'll be able to fulfill our plans.

And then I guess maybe on a more strategic level question, some of the players in this space, you can take a ServiceNow or Salesforce.com, are really in -- when they talk about their long term opportunities, they're talking about automating workflows, automating service opportunities across the IT department and among business departments. I wanted to get your view of where is it that Appian plays. What type of workflows are up for grabs for you guys versus someone like a ServiceNow, or are all of you guys going after the same opportunities?

Yes. Well, I could draw it in Venn diagrams for you, but let me try to put it in a simple explanation. I think we could absolutely address workflows and processes, be they simple or complex. Appian's specialization lies in being able to automate something complicated in a simple way. We will minimize how much work it takes to instantiate that new process, to execute that new process, to upgrade and modify that process, and also, as the user, to engage with that process. We're trying to take a complex, sophisticated, and important application, or process if you prefer, and make it extremely easy to make it real. Our competitors, and they include the ones you mentioned but they include others as well, may be able to make you a simple thing. But if you want to create a complex application, they won't be able to do that as simply as Appian technology can do it. We've been doing this for a long time. This market is our home. And I believe we've achieved a degree of capability in the simplification of creating complex processes that right now nobody else in this market can match. So, their presence in the market -- the market's got a lot of opportunity, a lot of growth here. There's plenty of upside. But I think in a way they're helping us by creating some commotion, creating some interest around low-code or around workflow or process automation. I believe that the additional publicity and higher profile is a good thing for Appian, and it allows customers who are feature sensitive to first realize that this market exists and then to explore their options within the market. Some of those customers are going to find that trail leads right to Appian.

Mark, I wonder if you could update us on the renewal rate that you saw this quarter. It seemed like you guys were consistently doing 95% plus, so wondering if you could update us on that. And then secondly, on the gross margin improvement this quarter, specifically on the software side, what are the factors that are driving that 90% plus gross margin? Is that just scale impacts or there's something else going on there?

Well, if you look at it historically -- I'll take your second question first. If you look at it historically, the software margins have been historically around 90%. There's really two components. We have our on-prem subscription licenses, which consist of the term licenses along with maintenance, and then you also have the cloud. And if you break out those two components, the cloud margins are in the high 80%'s, and then the on-prem margins are in the low 90%'s, which gets you to the 89% to 90% and to 91%. It kind of bounces around a little bit, but they're been very consistent over the past several years. One of the benefits that we've found is that our code base is identical for being in cloud or on-prem. And it allows us to have a very small team that can take care and update the code, and we don't need a ton of people to do it. So, we're very good at that. On the other question, could you refresh my memory?

Renewal rate.

The renewal rates, if you look at it historically in the prospectus, I think the last time we talked about it was 98%, and our renewal rates are very strong. We're basically planning on talking to the renewal rates on an annual basis. But let me just say that for Q2 it was very strong, as you can see by the 120% net revenue retention rate.

Our next question is from Raimo Lenschow of Barclays.

Matt, can you talk -- one of the kind of benefits of being a public company is that your recognition in the industry is going up. And that was kind of I guess one of the reasons to go public. As I listen to the momentum you had this quarter with kind of some of the larger accounts and larger banks, is that already driven by that? And if not, then do you expect that to be kind of a factor in the coming quarters?

Yes, I agree with you that increased legitimacy and higher profile are some of the big reasons to do an IPO and certain some of the big reasons why Appian chose to do an IPO. Of the large deals that we inked in the second quarter, I would attribute little to none of that to the IPO event. We have a long sales cycle, and there isn't time to have the IPO, impress somebody, and close a deal in this quarter. But I will say not only are we coming to the attention of more customers, which is great, and not only is our market coming to the attention of more customers, but it also helps us come to the attention of potential employees in the Washington, D.C. area. And that's been really advantageous. And it's a mark of legitimacy that compels systems integrators to take our concept and our company more seriously. So, we are trying to advance on all fronts with regards to the profile benefits that obtain in the wake of an IPO.

And to follow up on the international expansion, Matt, if you look, at a lot of U.S. companies that went into Europe had to try the partner model or tried a very country-focused model. And most of them started in the U.K. and then never really got much out of it. You've talked a lot of success in, for example, Spain already. What's your model and how are you trying to drive that going forward? Because obviously the opportunity is huge considering kind of how small you still are there.

Yes. I would say there's a bit of an Appian model, so I'll walk through some of the basics of it. I believe that it doesn't make sense to enter a new market unless you can enter it with critical mass. Critical mass means a support network, a team on the ground, the ability to create a level of reputation and awareness amongst possible buyers that would lead them to you. I and we don't believe in putting one person in-country and having them build a partner network and hope that that's going to go somewhere. We don't arrive but what we arrive in force. And I think that that may have something to do with our success in Spain, but we try to play that out everywhere we are. We're doing that in Italy, in Switzerland, Germany, France, of course the U.K., which was our first European office, as per your example. But that is our model, and it will continue to be as we expand in the future.

Our next question is from Jesse Hulsing of Goldman Sachs.

Matt, I have kind of a longer term question about your philosophy of investing versus showing margins over time. Historically, you've kind of run this business around break-even, and then you ramped investment as you kind of ran towards the IPO and I think your underlying market took off. How do you think about investment versus margin expansion? And I guess as a follow up, how are you thinking about leverage over I guess the medium term?

Okay. First of all, you're absolutely right. We've been through a long bootstrap phase in which we covered our own expenses, and I think we're a lot stronger for it. For the majority of the history of Appian, we've had a relatively low profile and not much cash to spend. And we encountered this market and we found that we had an ideal offering for this market. And so we have, as a result of that, found ways to increase our profile and our spending commensurate with the opportunity and timing the moment. So, coming out of the IPO, we obviously see some of that opportunity, even leading into it, as you pointed out. Now, we believe that we should spend -- we should invest proportional to the opportunity, which is not the same as the revenue growth, but it's indicated by revenue growth and by some other factors as well. And when we ramp up spending, it's in reflection of that opportunity. So, for example, take the fact that our OpEx is slightly increasing in the second half relative to prior. That is a reflection partly of our outperformance relative to internal estimates in the quarter just completed. But it is also a more nuanced take on the state of the market and the state of the opportunity as it's shaping up for us. So, we look, for example, at the fact that our net revenue retention rose to 120%, up from 117% and up from 112% in the prior two quarters. We look at our margins, up to 38% from 36% last quarter, 34% two quarters ago. We're seeing this rising of the market, the receptivity, for example the rising demand for Appian professional services and the relative price insensitivity that you see in the 38% margins we…

Our next question is from Ben McFadden of KeyBanc Capital Markets.

Matt, I wanted to start with just kind of a question around -- you've talked a lot about sort of citizen developers, but I wanted to ask a question kind of as we think about growth of the platform of different users, you have power users, you have maybe less sophisticated internal users, and external users as well. Kind of how should we be thinking about the growth that you're seeing across these different personas?

Right. Thank you for that question. I love questions like this because the long term vision is interesting and it'll be interesting to see how we evolve into it. I believe that there's potential in the long term to bring a lot more development capability to the non-developer, to democratize the specification of processes and software. But for the most part, that's not where we are today. Our job is to increase -- today our job is to increase the productivity of the developer, of the IT employee so that their development hour goes further than it used to. Every IT department's got a major backlog. We mean to help them work that off. Every IT product developed tends to be developed and abandoned. We mean to give them enough time so they can develop it and then return to it and upgrade it and sustain it and modify it according to changes in strategy or circumstance, to create living objects where otherwise they would have made dead objects. These are the first stages in the easy software revolution, as it were. We are already touching non IT developers for certain, but we do it in a way that empowers them to follow on the coattails of the developers who have to go first. The developers go first and they create all the objects out of which an Appian application will be built. And you can think of that as like a tray of LEGO bricks or building blocks. And then the citizen developers, the non IT employees, are at liberty to assemble those blocks into applications, very simple applications, of course. And by virtue of the fact that they were made of the blocks that were built by IT, they're really part of a centralized whole instead of being separate and isolated fringe applications, which is typically what happened if you empowered non IT developers to make their own applications. Those would be incompatible and alienated from central IT systems. So, that is our step one, to broach the wall that's kept non-developers from being useful at all or contributing at all to the common development of logical systems. But this has to be done in baby steps, and you've got to be so careful about not letting non-developers run amok. There's so many things that can go wrong. You give the non-developer the power to build software, and pretty soon they've brought down your system or eaten up all your memory or misdefined a key variable, or built something that's fundamentally at odds with other systems or something that constrains data into its silo and doesn't share it more broadly. We're taking a cautious step to incorporate all of the energies of non-developers in a way that still centralizes and makes safe their efforts at process creation. So, that's the delicate balance we're trying to strike today. And we'll continue to innovate new ways to get every voice to be productive in the creation of unique software.

And then, Mark, I wanted to follow up on the thought process around these new sales rep hires. You're hiring at a decent page, and that seems to be showing up in net new subscription deals. But I'm just curious, underneath the covers a bit, as we look at sales rep productivity, how well new sales reps are ramping up from a productivity standpoint. And what's the productivity like with the more mature existing reps? And has that changed relative to just the maturity of the company, or have the new sales reps potentially changed the productivity of the mature base? Just any color on that would be great.

Okay. Basically we've been -- over the past couple years, we've been fine-tuning the sales engine, and then particularly looking for and identifying the type of salespeople that are successful here. And what we've identified in the past couple years is that sales athletes -- people from ServiceNow, people from Salesforce, etc., coming in here and being able to sell complicated processes and applications are much more successful and are doing much better than historically a few years ago we tried to hire people out of different companies that had point solutions. And they were used to selling things from -- certain widgets, and they just didn't do well. So, we learned to basically identify the right type of sales reps. And as you can see from the results that are starting to materialize here, especially from the significant investment we put into 2015 and 2016 is starting to bear fruit. And so, we're very optimistic about where we're headed. Obviously, you can see in the results in the first half of the year we're continuing to invest in the sales and marketing engine. And we're very optimistic that the momentum will continue to play itself out over the next couple years.

One of the things we're focused on here is accelerating the time to productivity for salespeople. And we're doing some interesting managerial experiments in order to facilitate that. But acceleration is a theme for us as we pass the midpoint in this year. We're trying to accelerate the speed at which we can place a new deal, which is to say the sales cycle. We're trying to accelerate the speed at which a salesperson can become fully productive and equally likely to sell the next big deal as a more experienced rep. We're trying to accelerate above all the time it takes for a customer to get value out of our product, because the shorter that is the more addictive and viral the product becomes. You take away that period of uncertainty. I think that accelerating these key delay cycles will be terrific for the expansion of our business and the proving of our value proposition. So, that was one of our primary areas of focus at our most recent executive retreat.

[Operator Instructions] Our next question is from Gregg Moskowitz of Cowen & Company.

Matt, from a user productivity standpoint, can you talk about the new or relatively new user interface and just how the uptake of that has been tracking?

Sure. We're excited about changing our interface. Let me give you more of the history here. You roll the clock back a couple of years, and Appian had one interface. And that one interface was good for power users. It gave you a very broad view of all the data, all the interactions, all the activities going on in your combined set of applications at the given moment. That appealed to a certain kind of user, but we believed that it would be good for our ability to grow if we appealed to users who didn't want all that distraction. And so, we spent the last few years, maybe it was two to three, innovating new ways to reach single purpose users. And throughout all this period, by the way, we've kept equal attention on the mobile. So, we've had very strong mobile interfaces, and they've run natively on all major devices throughout this entire transition. But we have put emphasis into a new interface which we call Sites, which essentially looks like a single page. And there's very little navigation component on it. You're just looking at your one dashboard. And you've got a couple of other pages you can go to, but it keeps you very focused. And it's great for users who don't have time to get training, who don't care about other things going on, who maybe even shouldn't get distracted by the conversations and the alternative themes that are bouncing around the business today. This, I predict, will become our most popular interface. It is not yet. Right now what we see is most of the Appian users -- and I can measure it, by the way, far better for our cloud users, not so much for our subscription on-premise users. But speaking of our…

A question for Mark as well. So, over each of the last three quarters, we've seen professional services gross margins in the high 30%'s, which obviously is well above industry average. And I suspect you may be loathe to rely on that continuing, but the improvement over these three quarters is certainly not trivial. So, wondering if you can give us your latest thoughts on services margin going forward.

I think going forward -- these are exceptionally high even for our standards. So, I would look at historical rates in kind of the 30%, low 30%'s, as being something more enduring, if you will. Right now we're enjoying these high margins, but I think over time you probably want to not model those out.

Our next question is from Richard Davis of Canaccord.

So, where are you guys in terms of kind of attending machine learning kind of data ingestion and workflow routines so you can run logistic regressions on both a supervised and unsupervised basis?

Yes, that's right. As you know, we announced our integration into machine learning. And we did that for Amazon and for Google at Appian World last quarter. We're serious about not just bringing the fruits of machine learning to our users, but also, and this is the critical bit, making it easy. We know that there are a lot of people who wish they were doing machine learning and AI who aren't because it's too complex because it's too raw. Appian's goal is to bring the power of that to the casual developer, to the non-expert, and still make it useful. We demonstrated that. We've built applications in public that show how easy that is. And our goal -- I said democratize earlier in this call. I must say again we're here to democratize technology. We're going to take AI and make it approachable. And we're going to allow you to chose the AI that you want and plug into it quickly and upload a dataset, get value right away. This has immediate applicability. This is useful in call centers recommending actions. This is useful predicting need. This is something that we're really excited about. I know everybody's talking about AI, and I even joked last quarter that if you don't feature AI at your annual conference you don't get to be a software company anymore. So, there's a bit of me-too in this market, but we mean to do something fundamentally different from what everybody else is doing. We're not going to write AI. We're going to incorporate it. We're not going to make it for PhDs. We're going to make it for regular developers. Our intention is to make AI approachable and productive, and I think that would be something of a breakthrough right now in what is a very popular topic, but one which is not broadly in use.

And would you connect in or are you going to create your own versions of Octave and MATLAB in that scenario?

No, no, we don't mean to create our own versions. We're connecting. This is a wonderful time to be connecting and harvesting the fruits of large companies' innovation. We mean to bring that to our customers, not to write it ourselves. So, we'll stick with that strategy.

Ladies and gentlemen, we have reached the end of the question and answer session. I would like to turn the call back to Matt Calkins for closing remarks.

Well, I just want to say thank you all very much for your interest. Have a good evening.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.