Appian Corporation (APPN) Q4 2019 Earnings Report, Transcript and Summary

Greetings. Welcome to the Appian Fourth Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. Please note this conference is being recorded. At this time, I’ll turn the conference over to Will Maina, Investor Relations. Please go ahead.

Thank you, Rob. Good afternoon and thank you for joining us to review Appian’s fourth quarter and full year 2019 financial results. With me on the call today are Matt Calkins, Chairman and Chief Executive Officer; and Mark Lynch, Chief Financial Officer. After our prepared remarks, we will open up the call to a Q&A session. During this call, we may make statements related to our business that are forward-looking statements under the federal securities laws and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements related to our financial results, trends and guidance for the first quarter and full year 2020, 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, expect, estimate, intend, will, and similar expressions are intended to identify forward-looking statements or similar indications of future expectation. These statements reflect our views only as of today and should not be reflected upon as representing our views at any other subsequent date. These statements are subject to a variety of risks and uncertainties that could cause our actual results to differ materially from expectations. For a discussion of the material risk and other important factors that could affect our actual results, please refer to those contained in our 2019 10-K filed with our other periodic filings with the SEC. These documents and the earnings call presentation are available in the Investor Relations Web site at appian.com. Additionally, non-GAAP financial measures will be discussed on this conference call. Please refer to the tables in our earnings press release and in the Investor Relations portion of our Web site for a reconciliation of these measures to their most directly comparable GAAP financial measures. With that, I’ll turn the call over to our CEO, Matt Calkins. Matt?

Thanks, Will, and thank you all for joining us today. Under ASC 605 in the fourth quarter of 2019, Appian subscription revenue grew 28% year-over-year to $43.1 million and our non-GAAP operating loss was $8.7 million. For the full year, subscription revenue grew by 34% to $155.1 million and our non-GAAP operating loss was $32.7 million. Our subscription revenue retention remained strong at 116% as of December 31, 2019. These results exceeded our guidance. Also, we don't guide into this but at 68% Q4 has the highest gross margin we’ve ever announced. We added 109 net new subscription customers last year. At the same time, we maintained total annual revenue per client of about $0.5 million. We finished the year with 48 seven-figure ARR customers and doubled the number of customers producing at least $3 million of ARR. Last month, we acquired Novayre, the producer of Jidoka robotic process automation or RPA. It’s the highest rated RPA product on Gartner Peer Insights of those above a minimum threshold of reviews. It's Java-based, built for the cloud and highly regarded by customers making it a perfect fit for our platform and our enterprise customer base. Adding RPA to our platform makes Appian a one-stop shop for automation capable of natively orchestrating humans, bots and artificial intelligence within a workflow. Appian has built strong partnerships with the leaders of the RPA market, like Blue Prism, Automation Anywhere and UiPath. We're planning to keep and even strengthen these relationships to the degree that our partners will facilitate. That’s because of the way I think this market is going to mature. RPA is sold in a decentralized fashion to the bottom of the enterprise, so what’s likely to happen is that the typical enterprise will own multiple RPA tools. If so, that puts value on the orchestration layer to manage and monitor all those bots, and here Appian has a unique advantage. We are already in the market of orchestrating bots. So we’re a reputable firm with happy customers. We have a commitment to openness. So that's our priority as we approach RPA is openness. According to Forrester's Q2 2019 robotic process automation survey, 79% of enterprises have deployed two or more RPA vendors and 55% of them expect to deploy even more vendors three years from now. So you see we’re not the only ones saying it. Automation as we’re calling this market is a combination of workflow and new workers. New workers like RPA and artificial intelligence and rules. This merger of markets brings Appian and our RPA partners into a state of cooptation, but we're going to emphasize cooperation. We're already a leader in the part of this market we want to win using workflow to bring together bots from multiple vendors. We will enhance the experience of our customers – that are customers have with each of our partners no matter if they’re working with Blue Prism, UiPath, Automation Anywhere or any combination of the three. And of course, if our customers want, they can use our bots as well. Back to the Forrester survey for a second, Forrester also found that 69% of respondents ranked security and robot governance among the primary technical concerns with RPA. These two areas are Appian’s strengths. We believe RPA purchase decisions will come to be made at higher levels in the organization and more often involve the CIO. That's convenient for us because we customarily sell to the CIO. At the high end, the purchase will be made less for convenience and more for reliably, scalability, security and governance. These are Appian strengths. These are the reasons we’ve been successful in workflow and low code, so we’re well positioned for the way I expect automation to evolve. An example of our ability to coordinate work between RPA, AI and people is a governmental agency that became a new Appian customer in Q4. The agency registers, processes and adjudicates the veteran benefits. They purchased Appian to process almost 2 million disability compensation forms per year. Employees used to manually sort mail and type information into their claims management system. With Appian, they’ll digitize forms using intelligent document scanning technology. That’s the AI. Deploy Blue Prism bots to populate data into the system. That’s the RPA. And create cases for employees to adjudicate. That’s the humans. Appian will orchestrate this entire workflow coordinating bots, AI and people. Another notable example is a Fortune 500 analytics provider and longtime Appian customer. The firm uses Appian to coordinate bots, AI and people to publish news articles. Blue Prism bots gather data from market information sources, proprietary AI finds trends in the data and then the firm's analysts draw insights to finalize the articles. This entire process was automated in just six weeks with Appian, boosting employee efficiency by 50% to publish tens of thousands of news articles per week. In Q4, this firm purchased over $0.25 million dollars of Appian licenses to expand this application to new users in another department. Our partners continue to be a large part of our success. In Q4, they doubled their new logo contribution compared to Q4 2018. In 2019, overall they contributed 70% more new logos than they did in 2018. Notably, partners used our platform’s speed to their advantage in 2019. For example, a partner helped us win a $0.25 million deal with a top regulatory agency in the United States, making them a new customer in Q4. Appian will replace the legacy constituent case management system in a major division. Our competitor requested one month to complete their demo, while our partner delivered an Appian demo in just three days. Our partner won this deal by leveraging the speed and flexibility of our platform. Speed was also instrumental for a partner who won a Q4 deal with a faith-based health insurance organization. The firm became a new customer with $0.5 million purchase to replace their legacy benefits and claims software. Appian will consolidate medical data and make it available on mobile devices for hundreds of traveling missionaries around the world. Our partner won this deal because they completed an Appian proof of concept in just three days. Our patented, low code technology allowed them to build the application once and easily deploy it to all required devices. In 2019, a partner’s quick deployment helped us expand one of the largest buyers of secondary market mortgages. The partner was engaged to build an operations command center and financial management application in Q2 2019. Because our partner delivered that Appian project ahead of schedule, the customer purchased another $0.5 million of software in Q4. They’ll add more users to their command center and build a new enterprise-wide risk management application. Our speed also helped us win direct deals. For example, our top five global elevator manufacturer became a new Appian customer in the fourth quarter by purchasing almost $1 million of software. Their first application will be a global billing management system. We won this deal because just one of our sales consultants accomplished more in a three-day proof of concept than has been produced by the incumbent’s project team in four months. We sold an expansion at a Fortune 500 banking financial institution leveraging our eight-week Appian guarantee. The bank became a new Appian customer just two quarters ago when they purchased a license to build a lending application for their wealth management and commercial lending divisions. The Appian guarantee project demonstrated the speed and flexibility of the platform, giving the bank confidence to make an additional multimillion dollar purchase in Q4. They'll use the new licenses to build 30 new applications. They increased their Appian investment by 500% just months after becoming a customer. Appian Cloud is a differentiator, especially with the new logo customers. In 2019, 93% of TCV for new logo customers was related to Appian Cloud. This is a significant increase compared to 79% and 66% in 2018 and 2017, respectively. Our customer growth in the cloud supports our belief that our cloud offering is the most robust among our competition. We keep our edge by constantly enhancing our offering and making it easier for our customers to run their applications. With the addition of five regions in 2019, Appian Cloud now operates in 19 regions across 14 countries. We also added three new cloud certifications in 2019; HITRUST for our healthcare clients, ISO 27001 for our global customers, and NIST Cybersecurity to demonstrate our ability to manage cybersecurity. Additionally, we established a partnership with Smartronix to deliver Impact Level 4, also known as IL4 cloud security for defense agencies. These additional features helped attract new customers and expand within our existing customer base. In Q4, a top 15 global biotechnology firm became a new Appian customer. At this point, about half of those leading biotech companies are Appian customers. This new customer purchased almost $1 million of Appian licenses to replace its inflexible research grant system. For Appian, researchers submitted grant applications online and the system notified its award panel to review. However, the panelists could not collaborate in the system, so they retreated the email and offline channels. Now they will run the entire processing Appian Cloud providing real-time visibility and allowing grants to be awarded faster. We won this deal after proving our platform’s flexibility with a feature-rich custom demo and passing IT’s stringent cloud requirements. In Q4, a governmental agency overseeing employment regulations expanded their use of Appian Cloud by purchasing over $1 million of licenses. Three years ago, the customer selected Appian to replace 39 disparate case management systems agency wide. With this purchase, our customer will expand the use of Appian to almost half of their sub-agencies. They chose our platform because of its ability to securely automate their unique workflows in the cloud. Finally, last example. A top 5 oil and gas services provider became a new Appian customer in 2019 –excuse me, they became a new Appian customer in 2018. In Q4 2019, it doubled its Appian investment with a multimillion dollar software purchase that uses our software to mobilize resources to service remote oil rigs. With this new purchase, it will expand Appian into nine new business units increasing its deployment to tens of thousands of employees. They chose our platform because Appian Cloud allowed them to quickly deploy scalable applications. Our growth last year demonstrates that companies increasingly choose our low code automation platform to write and run unique applications. Appian enables them to fully automate any process, integrate with the data anywhere it resides and build their apps up to 20x faster than with traditional methods. Our strong customer outcomes and newly augmented automation platform capabilities will allow us to address a larger market and expand within our base in the new year. Now, I'll turn the call over to Mark for a deeper discussion of our finances.

Thanks, Matt. Before I go through our results in more detail, I’d like to provide you with an update on our adoption of ASC 606. As we noted last quarter, we were required to adopt ASC 606 in our 2019 10-K which we filed with the SEC after the market closed today. We adopted the standard on a modified retrospective basis and have included these details in our earnings press release. As a reminder, Appian licenses our software on a subscription basis which can be deployed either in the cloud or on prem. Our contract terms are generally one to three years in length, approximately two-thirds of our subscription revenue is in the cloud and is materially unchanged under 606. The remaining subscription revenue is on prem. Under 606, approximately 80% of the on-prem subscription revenue is recognized upfront. The remainder is recognized over the subscription term as support revenue. Given the mechanics of revenue recognition under ASC 606, we will report cloud subscription revenue and cloud subscription revenue retention rate as our new key metrics. We believe these metrics appropriately measure the growth of our subscription business under ASC 606. In addition, we will report total subscriptions revenue which includes support and all subscription revenue regardless of whether the customer deploys Appian in the cloud or on prem. We believe that total subscriptions revenue reflects the true scale of the business. It is important to note that regardless of the 606 accounting impacts on the financial statements, we’re a subscription software business. As such, the vast majority of our subscriptions revenue is recurring with very high gross renewal rates. ASC 606 is going to diminish the apparent size of our business in 2020 by approximately $40 million of loss reportable revenue due to the on-prem licenses that were sold prior to January 1, 2020. Of the $40 million, 29 million is related to a reduction in our current deferred revenue. Under 605, this revenue would have been recognized in 2020. The remaining $11 million of loss reportable revenue for 2020 was due to an increase in our unbilled receivables or contract assets for on-prem revenue that would have been recognized in prior periods under 606, but not yet billed. Of the $40 million of loss reportable revenue, 10.6 million would have been recognized in Q1 2020 under 605. Another way that ASC 606 will negatively impact us in 2020 is that we are replacing most of our multiyear on-prem contracts with one year renewable contracts. As a result of the conversion, we won’t have the benefit of windfalls from upfront recognition of multiple year on-prem contracts. We realize that there will be some offset to the loss reportable revenue as on-prem revenue under ASC 606 will be recognized upfront versus rate [ph]. However, similar to what happened in 2019 where our subscription revenue was $9 million lower under ASC 606 versus ASC 605, we believe that the upfront revenue recognition will not compensate for all of our loss reportable revenue in 2020. Bottom line, from a revenue perspective, ASC 606 is going to make us look smaller than we would have looked under 605. Under ASC 605, we capitalized and amortized sales commissions over the contract term, generally one to three years. Under ASC 606, we still capitalize sales commissions and other incremental costs incurred to obtain a contract, however, the majority of these costs will be amortized over the estimated economic life of a customer which we estimate to be five years for these purposes. We’ve posted a presentation on the Investors section of our Web site that provides additional details on the impact of ASC 606 on the financial information and disclosures, and the financial impact is also presented in our earnings release and our 10-K. Within these documents we provide our financial results under ASC 606 and other relevant metrics to help analysts and investors with their models. Now, I'll review the financial highlights of the quarter and full year and then we'll provide details on our Q1 and full year 2020 guidance. When discussing our 2019 year-over-year growth rates and other key trends in our business, we will be compared ourselves on an ASC 605 basis as we don't have prior year operating results under ASC 606. Moving forward in 2020, all results in year-over-year comparisons will be under ASC 606. Under ASC 605, subscription revenue for the fourth quarter was $43.1 million, an increase of 28% year-over-year and above the top end of our guidance. The increase would have been 31% year-over-year removing the impact of $1 million one-time subscription acceleration in Q4 2018. Our total subscriptions revenue, including support, was 44.3 million, an increase of 26% year-over-year. Professional services revenue was 26.2 million, up from 25.1 million in the prior year period and down from 27.8 million in the prior quarter. Partners continue to be a larger part of our ecosystem and are increasingly helping us sell more software. Total revenue in the fourth quarter was 70.5 million, up 17% year-over-year and above our guidance. Our subscription revenue retention rate as of December 31, 2019 was 116% well within the 110% to 120% range that we target on a quarterly basis. Our new metric cloud subscription revenue retention rate at year end was 115%. We continue to be pleased with our customers’ expanded use of our platform. Our international operations contributed 32% of total revenue for Q4 compared with 27% in the prior year period. This reflects the growth we've experienced – we’re experiencing both domestically and internationally. Under ASC 606, cloud subscription revenue for the fourth quarter was 26.4 million. Total subscriptions revenue, including support, was 42.1 million and total revenue was $68.6 million. Now I’ll turn to our profitability metrics. Under ASC 605, for the fourth quarter, our non-GAAP gross profit margin was 68% compared to 65% in the same period last year and 66% in the prior quarter. Subscriptions non-GAAP gross profit margin was 89% in the fourth quarter compared to 91% in the fourth quarter of 2018. Our non-GAAP professional services gross profit margin was 33% in the fourth quarter compared to 29% in the same period last year. Under ASC 606, our fourth quarter non-GAAP gross profit margin was 67%, subscriptions non-GAAP gross profit margin was 89% and non-GAAP professional services gross profit margin was 34%. Total non-GAAP operating expenses under 605 were $56.9 million, an increase of 19% from 47.7 million in the year ago period. Total non-GAAP operating expenses under 606 were $56 million. Non-GAAP loss from operations under 605 was $8.7 million in the fourth quarter, ahead of our guidance and consistent with our non-GAAP loss from operations of $8.5 million in the year ago period. Non-GAAP loss from operations under 606 was $9.7 million. As you know, foreign exchange gains and losses can fluctuate. During the quarter, we had $2.1 million of foreign exchange gains compared to $0.9 million of foreign exchange losses in Q4 2018. Our guidance does not consider any additional potential impact to financial or other income and expense associated with foreign exchange gains or losses as we don't estimate movements in foreign currency exchange rates. Non-GAAP net loss under 605 was $6.6 million for the fourth quarter of 2019 or a loss of $0.10 per basic and diluted share compared to non-GAAP net loss of $9.1 million or a loss of $0.14 per basic and diluted share for the fourth quarter of 2018. This is based on 67.3 million and 63.8 million basic and diluted shares outstanding for the fourth quarter of 2019 and the fourth quarter of 2018, respectively. Non-GAAP net loss under 606 was 7.4 million for the fourth quarter or a loss of $0.11 per basic and diluted share. Turning to our balance sheet. As of December 31, 2019, we had cash and cash equivalents of $159.8 million compared with 94.9 million as of December 31, 2018. Under 605, total deferred revenue was 143.2 million for the fourth quarter. With respect to our billing terms, a majority of our customers are invoiced on an annual upfront basis. However, we also had some large customers who are billed quarterly, others that are billed monthly. We continue to remind investors that changes in our deferred revenue are generally not indicative of the momentum in the business. Under 606, total deferred revenue was 89.3 million. The reduction between 605 and 606 is principally due to the upfront recognition of on-prem subscription revenue under 606. As of year-end, we were also required to adopt the new lease accounting standard Topic 842. As of December 31, 2019, we recorded operating lease right-of-use assets in operating lease liabilities of approximately $24 million and $48 million, respectively. This was for leases that were previously classified as operating leases under prior lease guide. There was no material impact on our consolidated statements of operations from the adoption of this standard. Backlog as of December 31, 2019 was 176 million under 606 compared with 230 million as of December 31, 2018 under 605. The reduction is primarily attributable to the upfront recognition of on-prem subscription revenue and to the ongoing conversion over on-prem contracts to one-year durations. Now, I will quickly recap our full year 2019 results. Our ASC 605 subscription revenue was $155.1 million, representing growth of 34% year-over-year. Our total subscriptions revenue, included support for the year under 605, was $160.1 million, an increase of 27% year-over-year. Professional services revenue for 2019 was 106.3 million, up 5% compared to 2018. Total revenue for 2019 under 605 was $266.3 million, up 17% compared to 2018. Our ASC 606 cloud subscription revenue was 95 million, subscriptions revenue for the year was 151.3 million and total revenue was $260.4 million. Non-GAAP loss from operations under 605 for 2019 was $32.7 million compared with a loss of 30.7 million in 2018. This is in line with our stated strategy to invest for growth to capture the long-term opportunity. We will continue to build on our momentum by supporting our go-to-market initiatives and the continued development of our platform. Non-GAAP loss from operations under ASC 606 was 34 million for the full year 2019. Non-GAAP net loss under 605 was 32.8 million in 2019 or a loss of $0.50 per basic and diluted share compared to non-GAAP net loss of 33.4 million or a loss of $0.54 per basic and diluted share for 2018. This is based on 65.5 million and 62.1 million basic and diluted shares outstanding for 2019 and 2018, respectively. Non-GAAP net loss under 606 was 34.1 million in 2019 or a loss of $0.52 per basic and diluted share. For the full year 2019, cash flow used from operations was $26 million, excluding the reimbursement of $17 million in tenant improvement allowance. Now, let me turn to guidance. After today, we’ll no longer report results on an ASC 605 basis. Therefore, our guidance is being provided on an ASC 606 basis. In addition, we will be guiding to adjusted EBITDA instead of non-GAAP loss from operations as we believe it's a better measure of the company's performance prospectively. The principal difference between the two metrics is the depreciation expense that we’re now incurring from our new headquarters. For the first quarter of 2020, cloud subscription revenue is expected to be in the range of $27.8 million and $28.1 million, representing year-over-year growth between 31% and 32%. Had we provided subscription revenue guidance under 605 for Q1 2020, the range would have implied a slightly higher growth rate of approximately 32% to 33%. Total revenue is expected be in the range of $71 million and $71.5 million. Adjusted EBITDA loss is expected to be in the range of $12 million and $11 million. Non-GAAP net loss is expected to be between $0.20 and $0.18. This assumes 67.6 million basic and diluted common shares outstanding. Our Q1 guidance reflects the fact that our global user conference Appian World will be held in Q1 instead of holding it in Q2 as we have historically. For the full year 2020, our cloud subscription revenue is expected be in the range of $121.3 million and $123.1 million representing year-over-year growth between 28% and 30%. Total revenue is now expected to be in the range of $296 million and $298 million, adjusted EBITDA loss is expected to be in the range of $34 million and $32 million and non-GAAP net loss is expected to be between $0.58 and $0.55 per basic and diluted share. This assumes 68.3 million basic and diluted common shares outstanding. Similar to what occurred in 2019 where our reported subscriptions revenue was $9 million less under ASC 606 versus 605, our full year 2020 revenue guidance reflects the expected negative impacts of ASC 606 on our subscriptions revenue. Our adjusted EBITDA guidance predominantly reflects a commission expense of approximately $5 million lower due to the adoption of 606 offset by the previously mentioned impacts on revenue from ASC 606. In addition, we plan to modestly increase investments in sales and marketing and R&D throughout the year. We expect capital expenditures to be around $5 million, down from $32.4 million in 2019. We normally do not guide to operating cash flow, but in order to give investors better transparency due to the 606 conversion, we expect this spend to be less than 2019 excluding the $17 million received for tenant improvement allowances. Our guidance is in keeping with a goal to drive subscriptions revenue growth and to have subscriptions revenue be the primary fuel for our business. We’ll continue to make investments in R&D to improve the speed, power and usability of the platform. In addition, we are making sales and marketing investments to deliver on our subscription growth goals and create an organization that can scale. In summary, we were pleased with the progress we made this year and our execution during this ASC 606 transition. And I’d like to thank the finance team for all of their related extra effort and work. With that, let’s turn it over to questions.

Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions]. Thank you. Our first question is coming from the line of Raimo Lenschow with Barclays. Please proceed with your question.

Hi. Thanks for taking my questions. And Mark, congrats to your finance team as well. That was kind of a lot of work as I can see. Let’s start – can we kind of – you gave the revenue guidance for the year in 606 and for Q1 you still gave us like an offset, like what would have been on the 605. Do you think you could do that for the full year as well? And then a question for Matt. That open approach that you kind of alluded to on the call earlier on RPA, but then we also have like process mining coming in there. How does that go into – is that what you see from customers, because your competition will probably not do that and then will have more close system. Can you just talk what drove that decision of yours? Thank you.

Would you like to go first with regards to the annual --?

Yes, I’ll go ahead and take that. So for Q1 guidance we didn’t talk about any deltas for the guide. In fact, what we did which is rare from what I’ve seen previous companies doing is we actually gave what guidance would have been under 605 and guidance under 605 would have implied a 31% to 33% growth rate or 32% to 33% growth rate. Under 606, it looks slightly lower – slower growth rate. For the full year there is a delta from the headwinds from 606 that we kind of called out. It’s going to be a bit more than what we saw in 2019, but we’re definitely facing those headwinds and we were losing $40 million of revenue. And we’re also at the same time reducing the durations on our on-prem subscription licenses to one year, and so there’s a couple of headwinds there that are creating that.

Okay.

I’m going to jump in to talk about the second part of your question, Raimo. You want to know about how this open strategy has come to be and whether it’s going to last, whether we’re going to cooperation in return? Well, I think a good guide would be to figure out what the customers would want us to do and then do it. I think customers right now would like to see the various elements that make up their automation suite play well with each other. In my opinion, the most succinct definition of automation is that it’s workflow with the new workers. And by that I mean that the foundation is workflow and we’re just bringing on new workers instead of this typical human workforce that we would have had in decades past. Now we’ve got a workforce that has human plus – RPA bots plus artificial intelligence plus some rules and whatever new technologies might come along to get work done. And I believe that the customer is going to want the orchestrator of all that work to cooperate well, to be highly compatible with the elements that execute the work. And so we’re coming into this market with a customer interest in mind. And it wouldn’t make sense to try to be the best at all of these things. I think the customer is going to want a central hub and a trusted manager, and I believe that you’ll see – there’s so much excitement around these elements that are coming together to make automation. There’s excitement around them, but in some cases the diversity of institutions that are providing these technologies and perhaps even in some cases the experimental nature of some of the institutions that are providing these technologies could give CIOs pause. I believe that we need to up the reliability. We need to demonstrate the potential of all of these different technologies when working in concert, and I believe that Appian is relatively well positioned to be the demonstrator of that cohesive maturity due to the fact that we have exceptionally happy customers and a reputation for the same, due to the fact that we’ve been in the market for a long time. We’ve been in this market for 20 years. We’re a public firm and we’re well known in that regard. And we deal with the top of the IT organization habitually. So we are the CIO’s friend, so to speak. So I believe that we’ve got the credibility to lend a missing factor to an exceptionally valued and vibrant market. And so we look forward to doing that in full cooperation with all of the other components.

Okay, perfect. Thank you.

The next question is from the line of Arjun Bhatia with William Blair. Please proceed with your question.

Hi, guys. Thanks for taking my questions. And Mark, I want to echo the thanks on putting together 606 materials. Those are very helpful. Maybe I want to start off with the partner channel. It seems like you definitely ended the year on a strong note with partners doubling new deal contributions. How should we be thinking about partner contribution going into 2020 and progressing throughout the year as the partners have spent a lot of 2019 ramping up their Appian practices? And how should we think about kind of the mix between software revenue and professional services revenue for the year?

Yes, I’ll tell you I don’t think the partner component of Appian’s business has reached a plateau at all. I think it’s on a ramp. And so the evolutions that we have seen, reliable to continue to see. As for what that will mean for a revenue mix, we’ve been saying for years that we intended our license revenue to grow at twice what our services revenue grew at. And while we’ve made – I think it’s fair to say almost no effort to actually maintain that ratio, it was a general intention, right. And it hasn’t always hued to that, but I know I don’t have any reason to retire that intention. We mean to create more demand for Appian services by far than we are capable of fulfilling. And we eagerly turn that over to the partners who give us the complementary skills that we require; the access, the credibility, the reach and the strong team of trained service providers that dwarfs what we are capable of fielding ourselves.

Got it, very helpful. And then on the RPA acquisition of Jidoka, how should we be thinking about the monetization and kind of the pricing model there? Are you going to make any tweaks to it from what the company had on a standalone basis? And is there any revenue contribution from that acquisition baked into the full year guide that we should consider?

All right. I believe that we haven’t baked anything say for a rough assumption of breakeven on that. However, I think mostly we have just dodged the topic. I believe that the real impact – let me clarify. We are not selling standalone RPA. That’s the most important thing for me to say. We are not entering the RPA market. We’re entering the automation market. And to us, the automation market is about orchestrating its workflow with new workers. And so RPA are some of those workers and it’s important for us to be able to bring those factors to bear for our customers, be it Appian owned or somebody else owned. Now there will be a charge for Appian RPA, all right, but it won’t be sold standalone. And we’re not going to be break it out. And so we were absolutely – begin by asking whether we’re going to change their pricing model, you bet we are, because for us we’re selling a suite.

So they’re going to buy --

Yes, they’re going to basically be required to buy the platform. And if they want bots on top of – they’ll pay an extra fee for bots.

Got it. That makes a lot of sense. All right. Thank you very much.

The next question is from the line of Chris Merwin with Goldman Sachs. Please proceed with your question.

Hi. This is Kevin on for Chris. Thanks for taking my question. Can you talk a bit about the makeup of the large customer adds in 2019? And is there any significant change in terms of verticals that saw more traction or changes in sales cycles for those new customers? Thanks.

All right, okay. The verticals in which we performed best were the verticals in which we were already performing best. We’ve seen a further strengthening of places that we already had an advantage and you can see this, and I say that the way the number of $3 million a year customers for us doubled last year. We’ve gone from strength to strength essentially and I think that’s – I don’t see any change to that pattern right away. We know that our technology hits the bull’s eye for certain customers. And I think a lot of our plan going into 2020 actually is to understand exactly where that bull’s eye is and be sure the arrow is pointed right at it.

Okay. Thank you.

Thank you. Our next question comes from the line of Sanjit Singh with Morgan Stanley. Please proceed with your question.

Thank you for taking the question. I had two questions actually. Maybe first to start off with Matt and to dovetail on Chris’ questions before. The net new customer adds this year accelerated pretty meaningfully. I think it was a 25% year-over-year growth on the 109 new customer adds versus last year. So I guess the question there would be was that mostly a function of the ramping partner contribution or more sort of greater market awareness of low code? And the follow up to that is in terms of that cohort of 109 new customers, how are they ramping in terms of going on from application 1, application 2, what’s the sort of adoption curve going beyond the initial use case that you’ve seen thus far?

Yes. First of all, I’m happy to give our partners credit for the increase in net new logos. I think they deserve it and they’re going to be a powerful engine for us in adding logos going forward. My favorite statistic with regards to these new logos is the fact that even though we did add a record number and it was pretty good growth over the prior year, the average revenue per client actually did not decline; or if it did, it trivially. It’s been in the same place despite multiple years of substantial logo count expansion. I think that’s a great sign and it does go a long way toward answering the second part of your question, which is what happens when a new customer signs up with Appian. And the answer is, they find their way to $0.5 million. And they don’t do it immediately, but that’s where the median – that’s where the average is across our customer base. And I think that really speaks to the amount of value that an Appian customer gets from using our technology and we’re proud of that number. And I think it says a lot about our potential. As we touch more customers year after year, we don’t seem to be – this number doesn’t seem to be changing, which demonstrates that every untouched customer is – has high potential for us.

Understood and pretty exciting. Moving on to Mark, I have a question on guidance, Mark. So I guess I’m trying to understand a little bit is historically you guys have guided to total subscription revenue and as we get into 606, you’re guiding specifically to cloud revenue but a big – still a meaningful chunk whether it’s 30% or 40% of the overall subscription mix is still sort of on-prem subscriptions and it seems like that’s where the headwind is in terms of 606 you called that is going to be greater this year than last year. Implied in the fiscal year 2020 guidance, what should we be assuming for the total subscription piece relative to the cloud revenue piece?

So the easiest way to look at it, we put out in gory detail all of the details of the – the breakout of all the revenue line items on the Web site to help you guys with your models. And so you can just come up with – I would suggest coming up with what you’re estimating growth rate for services is. And then you can pretty easily back into the implied guidance that we have there for the on-prem. That’s how I would do it. But the reason why we didn’t guide – we actually internally [indiscernible] we’re guiding to subscription revenue, but because of the upfront recognition is kind of perpetual and it just gets dicey. So the total revenue we feel comfortable with, the cloud subscription gives you a sense of – the growth rates are normalized and it gives you a sense of the growth rates of the companies very similar to what subscription revenue was. And so that’s how we’re guiding it.

Got it. Okay, great. Thank you.

Is that helpful? We can talk offline about it too.

Absolutely. We’ll talk offline.

Thank you. The next question is from the line of Alex Kurtz with KeyBanc. Please proceed with your question.

Hi. Great. This is Steve Enders on for Alex. I guess just kind of to the same point about how to think about the on-prem subscription as we look at it next year, how should we be thinking about the seasonality of that and potential renewal opportunity as those come back up?

Yes, so we’ve got auto renewals baked in so that – generally our growth renewal rates are very high. So we feel confident that once we get a customer in and then we build the fill applications, they’ll generally renew. The seasonality – so if you see in the implied guidance in Q1, the term licenses – if you kind of back into what we’re applying for guidance for the full year, Q1 is strong. And part of that is because you have 12/31 deals that close and yet the subscription license doesn’t actually start until Q1. And so you get the revenue under 606 in Q1 versus starting in Q4. But I think for Qs two, three and four, I think they’re going to be fairly consistent with the way they were last year. So you can just take a look at kind of how the term license laid out, it’s fairly linear. It’s not very seasonal. But hopefully that helps.

Okay, yes, that’s very helpful. And just one other thing I want to touch on the shift from three year deals to one year, just trying to get a better sense of what’s driving that shift and what kind of impact that had to the backlog number this year?

A pretty significant impact to the backlog. What we’re doing is we’re still signing two to three-year contracts, but we have auto renewal clauses in those contracts. And the purpose of it is under 606, if you think about it, you get a three-year deal and you recognize almost all the revenue upfront, it’s hard to figure out the growth rates of the company, it’s hard to manage the business as far as visibility and all that stuff. And so we just – having seen kind of companies going into that situation about a year and a half, two years ago, we decided to basically put in our renewal language. Once we guided to 606, we didn’t quite get everything converted over, but we’ll be pretty much converted over by the end of 2020. That way we’ll have – pretty much we’ll have good visibility of what’s going to renew that year from an auto renewal perspective or from a contract renewal perspective and it just helps out from our perspective. And it gives – candidly it gives investors a better sense of the true growth rates of the company once we get through this headwind.

Okay, great. Thank you.

Our next question is from the line of Jack Andrews with Needham. Please proceed with your question.

Good afternoon. Thanks for taking my question. I was wondering if you could drill down a little bit more on your largest customers. I think you mentioned that you doubled the number that are paying you more than $3 million in ARR. I’m just wondering if you – is there any commonalities among that group of customers or the lessons learned that can be applied to your broader customer base to increase the revenue opportunity to that size?

There definitely are some lessons. Like, don’t quote an enterprise price upfront. That’s a good lesson. Yes, I jest. But what I think this shows is the depth of value that we’re capable of creating which in my opinion actually is well in excess of $3 million per year for a substantial organization. Appian is a high saturation point prospect, which is to say you can use a lot of it before it doesn’t help you any more on the margin. As such, we need to be consistent with our pricing and negotiate in pieces, right. Negotiate one project at a time or stick to fair prices because we know there’s a long road ahead. Add a customer once we succeed. It tends to be the case that the leverage that a company has varies positively with the duration of the relationship. So the more we’ve established on a customer site, the stronger our negotiating position is. So given that there is a great deal of value ahead for us at every one of our clients, we have learned to negotiate in a way that preserves our long-term value and to not flash our prices or offer an enterprise price for an enthusiastic customer in order to get them on board. I think that’s certainly been a lesson. But the primary thing I take away from this is a demonstration of the depth of the value that we can add, which I believe is only enhanced by the recent acquisition and by the broadening of our value proposition into automation generally and out of merely workflow. Now, it’s also the workers. I think this is going to be a very good shift for us. We’re already kind of a specialist at this deep value and this is just going to help us get deeper.

I appreciate the color. And just as a quick follow up, you talked about new customer adds being concentrated in terms of your existing – the strength of your existing verticals. Moving forward, is there may be an emerging vertical that we should be keeping an eye on that you think are starting to get increasing traction in?

Well, if I had to pick one, it might be energy. We’ve seen some very good work in energy over the course of 2019. But whenever I’m presented with a question like this, what I want to say is I think we belong everywhere. I think every medium to large organization could benefit a lot from having the kind of orchestration and agility that the Appian platform provides. So I don’t want to write off any of these industries. I was thinking in some cases we’ve got such a fast lane in some of the industries, like financial services that we should be doing all we can there and racking up the demand that comes our way, and there will be time to scoop up demand in other places. But we should focus on the fast lanes predominately.

Understood. Thanks for taking the questions.

Our next question is from the line of Derrick Wood with Cowen and Company. Please proceed with your question.

Great. Thanks. Andrew on for Derrick. Matt, I was just wondering if you could give us the sense for what you plan for sales capacity additions for this year, anything around the linearity of hiring, how aggressive are you hiring and what areas that would be in?

Okay, great. I can tell you that we are hiring. We continue to hire. We continue to believe that the Appian platform should be introduced to many more prospects than it today is introduced to. We’ve got a number of approaches that we’re going to take to make that happen. We’re a higher profile than we used to be and we’ve got a new batch of customer reference videos that we’ve created toward the end of last year and we’re going to hope to get our profile higher so more customers have heard the name and they think of us when they think about automation or low code. We are hiring more sales people. We are addressing more customers. We are engaging more partners. And we’re having those partners create targeted solutions that are going to take us to markets that maybe didn’t take us seriously in the past but would if we offer them something that seemed directly pertinent to the problem that we know they face, and comes by the way with solid references and a complete demo and a more or less plug and play adoption cycle. I think it’s essential for the growth of this business that we create easy paths for more customers to get onboard Appian. And by easy paths I mean so it’s easy to know about us, it’s easy to buy from us and it’s easy to use us. And if we can take those three components and minimize the friction, we can expand to so many more customers. The size of the Appian community is not limited by the number of companies who could benefit from using Appian. It’s limited by our ability to shout loud enough so that the world hears us and understands the value that we’re offering. So anything we can do here, whether it’s more sales people and definitely we continue to grow that. We’re not slowing down. We’re going to grow that, but we’re going to grow in so many ways to try to reach out to a larger customer base and get our awareness up.

Great. Thanks. And I have one more for you. The international had another good year. I think you’re in 12 countries now. Any color on markets that are doing the best there, anything new planned internationally and what you’re hearing from customers in any particular regions and whether the macro is having any impact there? Thanks.

Yes, that’s right. We saw very strong performance from some of our international regions. I’ll call out the UK and Spain, but that’s just a few among many. And I think we’ve got the potential to have more breakout countries as we go forward. It has to do with interesting combination of factors in order to really be a local winner that you need great leadership, you need presence, customers, testimonials, active partners. So you got to put all of these together and then add heat, and then it starts working. So in some places it really is and it’s given us a playbook that we can follow and try to replicate in other places. For what it’s worth, I’m more interested right now in taking offices that exist and making them break out successes than I am in creating new offices, which is somewhat similar to the strategy I outlined with regards to industries. I want to double down where it’s working and where we’ve made an investment.

Great. Thanks.

Thank you. We’ve reached the end of our allotted time for question-and-answer today and that will also conclude today’s conference. You may disconnect your lines at this time. We thank you for your participation.