Greetings, and welcome to Appian Corporation Third Quarter 2020 Earnings Conference Call. [Operator instructions] As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. Scott Walker, director of IR. Thank you. You may begin.

Thank you, operator. Good afternoon, and thank you for joining us today to review Appian's third-quarter 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 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 fourth quarter, and full year 2020, the impact of COVID-19 on our business and on the global economy, 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 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 our Q3 2020 10-Q filing, our 2019 10-K filing, and our other periodic filings with the SEC. These documents and the earnings call presentation are available in the investors 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 measures. With that, I'd like to turn the call over to our CEO Matt Calkins. Matt?

Thank you, Scott, and thank you, all, for joining us today. In the third quarter of 2020, Appian's cloud subscription revenue grew 40% year over year to $34.3 million, and our adjusted EBITDA was a loss of $2.4 million. Total revenue grew 17% year over year to $77.3 million. Our cloud subscription revenue retention was 115% as of September 30, 2020. These results exceeded our guidance. We also set an all-time high for gross profit margin of 73%, exceeding our previous record by 299 basis points. Appian is the leader in digital transformation, which we address with low-code and automation technology. The demand for these technologies is growing and has been accelerated by the pandemic. Appian stands to benefit from the newfound urgency around agility and digital transformation for a few reasons. First, we believe that Appian is the leading pure-play, low-code vendor. We were the first to the public markets. We also have the most experience and the highest revenue of these vendors. Furthermore, we own lowcode.com, so we must be the leader. Being ahead in low-code means our platform can create powerful applications, and they can do so quickly. We use that advantage to differentiate against our competition. The Appian guarantee, for example, is our promise that a customer's first application will be finished in eight weeks. Second, Appian combines low-code with automation. Automation means using a workflow to coordinate people, bots and AI to get a job done together. These worker types complement each other. They're better together. More broadly, automation means using a workflow to unify dispersed assets, and there's never been more dispersion of assets than there is today. People are all working from different locations. Data is scattered across the enterprise, and there are now different worker types like AI and RPA bots. Companies…

Thanks, Matt. I'll review the financial highlights for the quarter and will provide details on our Q4 and full year 2020 guidance. Cloud subscription revenue for the third quarter was $34.3 million, an increase of 40% year-over-year and above the top end of our guidance. Our total subscriptions revenue was $50.8 million, an increase of 34% year over year. Subscriptions revenue was 66% of total revenue in the third quarter, an increase from 57% over the prior-year period. Professional services revenue was $26.5 million, down 6% from $28.4 million in the prior year period and up from $25.4 million in the prior quarter. Partners continue to be a larger part of our ecosystem and are increasingly helping us sell more software. All our services engagements, both cloud and on prem, continue to be performed remotely. Total revenue in the third quarter was $77.3 million, an increase of 17% year over year and also above our guidance range. Our cloud subscription revenue retention rates at September 30 was 115%, within the 110% to 120% range that we target on a quarterly basis. We remain pleased with our customers' expanded use of our platform. Our international operations contributed 32% of total revenue for Q3 compared with 31% in the prior year period, demonstrating the balance of our businesses, both domestically and internationally. Our cloud bookings were 79% of total software ACV bookings for the first nine months of 2020, consistent with the first nine months of 2019. Now, I'll turn to our profitability. For the third quarter, our non-GAAP gross profit margin was 73%, a decrease of 9% compared to the same period last year. Subscriptions non-GAAP gross profit margin was 90% in the third quarter compared to 89% in the third quarter of 2019. Our non-GAAP professional services gross profit margin…

[Operator instructions] Our first question comes from the line of Sanjit Singh with Morgan Stanley. You may proceed with your question.

Congrats on a really outstanding set of Q3 results. Matt, maybe just to sort of frame out what you saw in the quarter. It's not often that we see this magnitude of acceleration on the SaaS side, given it's sort of ratable. So, if you could sort of parse out what was the sort of key contributors in the quarter that allows you to sort of beat your guidance on the cloud subscription revenue kind of materially. It sounds like government was very strong. But, you know, what did you see sort of on the nongovernment businesses as well coming into the quarter?

Yeah. Well, what I saw was the number of factors hitting their stride. I love this question because it allows me to say that I'm pleased with the way we're executing in several areas. I love the way that our long attention and cultivation of partners is bearing fruit. I think that's a really big step forward for this business. I'm pleased with the current -- the development that we've done in Europe. And this has not been an easy year to sell in Europe and still, we're turning out good results, getting good enthusiasm. I feel great about that. It was a challenge to be relevant through 2020. Not only was it hard to do services or to grab new leads, but it was hard to be on people's radar because they had other things they were urgently caring about, and we succeeded in being relevant and getting that attention. I feel good about what we did in the federal government. I think it's obviously a very sharp improvement over what we did a year ago. So, we've elevated our profile there. We've delivered some notable successes. In fact, I even tried to allude to it in my prepared remarks, talking about how one of those successes of our selections was directly derived from experience that we had before with another DoD customer who recommended us for an acquisition purpose. I think it's kind of a reputation kind of flywheel. We feel like we're building on our success to gain more. Actually, I feel that within federal and in partners as well. So, what we're seeing here is a number of factors coming online, and each one of them is a function of a lot of work that's gone into a lot of buildup, a lot of investment, and also a lot of echoes of success that we've already had. That's what it takes to get a partner momentum going like we have, or our federal momentum. I think that what you're really seeing is a lagging signal of a lot of success that's happened over the past, a lot of investments that's happened over the past, and it's good to see it coming online.

And just to add onto that, from a financial perspective, we had a lot more in orders subs revenues than we normally do. So, we closed deals earlier in the quarter. We have the benefit of that from the subs revenue to be recognized within the quarter. So, that was also a dynamic that occurred.

That's very helpful context, Mark. My follow-up question for you, Matt. There's two sort of words in your script that sort of caught my ear that are maybe a little bit different than what we've been hearing for the past couple of years. I think workflow was a key theme of your script. And then I also heard you talk about automation, which to my mind, means sort of low-code plus the RPA value proposition. It seems like it drove a couple of wins. So, related to that, workflow is something, I think, you guys have always sort of done. What's -- in terms of the messaging to your customers, what is there to say in terms of your emphasis on driving -- on your workflow capabilities? And then on the RPA side, is there sort of any change that you're seeing in your own -- as customers look to Appian for RPA to get those elements versus looking to like a third-party solution?

Yeah. On the RPA side, it is our strategy to remain extremely open because we feel this market needs a best-of-breed facilitator. And so that's our strategy. And so that's the totality of my response with regards to RPA. With regards to workflow, we have long been in this business. You could say almost 20 years, actually, not 10 years, like I said in my remarks, been in workflow, but we haven't generally used that term. I believe, in general, that a tech company should use the simplest term possible, and especially at the moment a market is widening, when you get more participants, those participants expect to be addressed in terminology they can understand. Workflow is an easily understandable word that is -- suggests the technology is approachable. And that's where I'm going with the use of that word. I think also it's fallen back into some favor, where for a time, workflow meets suggested triviality. I believe it no longer does that. And it is a good description of what it is that we're doing. We're creating process flows in order to specify the way an application will behave. So, workflow is a very apt description, and it's also an approachable term. And it speaks to the middle of the market. And I think it's no longer in disfavor. So, for all those reasons, I like the word, just like I like low-code. I preferred low-code, and we latched onto that early because it is so intuitive. It's simple. Tt's made of understandable words. I like simple terminology. And I think that, as a tech company, we should be at pains to find it.

Understood. Congrats on the quarter.

Our next question comes from the line of Mohit Gogia with Barclays. You may proceed with your question.

Hi, guys. Thanks for taking my question, and I will offer my congrats on a really solid quarter here as well. One question for Matt, then I have a follow-up for Mark. So Matt, I know it's -- I mean, it's too early to guide for next year. So, I'm not going to go into the numbers. But from your perspective, from a high level, if you look to next year, what are some of your priorities and some of the investment areas that you're seeing you will sort of like keeping -- be giving a keen eye on for next year? We recognized that, obviously, this year, there were some cost savings because of lower T&E, right? So, assuming that we can go back into investment mode next year, like what are some of the areas, if you can talk about that qualitatively. And then I have a follow-up question for Mark.

Yeah. I believe we're going to be in investment mode next year. But I didn't mean to slow down much this year either. When we got savings, you mentioned the T&E savings, that was incidental. I mean, not part of the plan. We are -- we mean to hire across the board. We are particularly focused on engineering and sales, but really, it's across the board. We're growing, we need more capacity. We are developing in our new office in Seville that we got as a result of an acquisition in the first quarter. We're growing at all of our major offices. We are absolutely planning to aggressively continue our growth path.

Understood. And Mark, from a financial perspective, I was wondering if the last couple of quarters, things have improved in terms of visibility, right? So, if I look at your prior guidance before all of us sort of like started working from home and COVID sort of like made things optically less visible, I'm wondering if you're getting that visibility back. Because it seems like on a cloud subscription revenue, you are ahead of your prior guidance to the start of the year, and total revenues already where you were planning to be at the beginning of the year, realizing the conservatism back then. Just curious as to how the visibility is trending. Thank you, guys.

I would say, going into the pandemic, all bets were off, right? I think every company realized that. So, I feel that right now, we had a very solid quarter, as you can see, and the pipeline looks really strong. So, we've got pretty good visibility. And you guys know how we guide. We're generally conservative in our guides. And so right now, we feel pretty good about that line of business. You know, PS is a little bit different because we've got a lot more partner involvement, and there's headwinds with that as well as headwinds from COVID. But from the software perspective, we've got pretty decent visibility.

Thanks. I appreciate it, Mark.

Our next question comes from the line of Bhavan Suri with William Blair. You may proceed with your question.

Hey, thanks for taking my questions. Let me echo my congrats. Really, really nice job and we see the acceleration. I see that partner channel. I think, Matt, you and I have been talking about it for a while now, actually start to deliver. So that's really cool. I guess, I want to talk a little bit about new customers because they are a big part of the story. You've got really healthy sort of growth with existing customers, but you've got this idea to capturing new customers, especially with some of the new products you created. I'd love to understand how you think you're tracking relative to expectations on the new customer adds, kind of the partners starting to contribute to that or the partners sort of -- or is it mostly still direct through you? How should we think about the new customers additions to the expectations and kind of what's driving that partners versus your direct sales force?

We're trying to align ever more with partners as a part of our standard operating procedure. So, when we approach a new logo, we would like to do it arm and arm with a partner. We'd like to have a partner at our side, influencing the sale all the way through. And if they didn't find us, we might have to find them in order to do that. And so, it's going to be hard to separate where the new logos come from because of this doctrine that we are pursuing right now. Relative to my expectations on acquiring new logos, we are doing well. I'm pleased with our process, and I'm particularly pleased given the set of conditions we ran into during the course of 2020 that would have -- we would have been expected to diminish our ability to make connections with new customers. And so especially under those conditions, when we had to scramble to create new solutions to get their attention and to be pertinent to the problem they were facing, the extreme problems they're facing. I think that we've adjusted well, and I'm pleased with the progress.

Got it. That's helpful. And then I just want to touch on competitive environment a little bit. You've got sort of traditional sort of legacy BPM players out there, Pega, etc., but you're hearing some from newer players that were not necessarily in the low-code space. But they developed applications for IT asset manager and IT service manager, I'm talking about ServiceNow, for example, and other vendors about low-code. I'd love to understand how you're seeing that competitive landscape change. Has it changed given some of the noise you guys are making and who you're seeing in deals? Thanks.

That's a great question. We do see some ServiceNow, some Salesforce. You're right. And then, of course, there's going to be some automation firms, and there's some specific low-code pure plays that we'll see sometimes as well. Our difference is a few-fold here. We have work flow, and many of the firms I mentioned do not. Many approaches to low-code are simply a toolbox for developers, and we're a draw-your-application environment. So that's going to give us one difference. Another is that we've been in this space a long time, longer than any of them, any of the vendors I just mentioned anyway. And so, we've thought about workflow to process and low-code for longer. So that's going to be an advantage. And then third advantage is we have the commitment to open this. We have a commitment to being a best-of-breed vehicle, and that is an attractive alternative for organizations that seek the benefit that low-code has always traditionally brought, which is the freedom to pick the products you want, the strength and negotiations of knowing that every time you negotiate for the price of one product, you're not held hostage by every other product you're dependent on. You know, I think that it's a very appealing proposition, low-code generally as a philosophy. For an enterprise making purchases of software, I think low-code has a lot of compelling things to offer. And I believe many organizations would prefer to be a low-code-style buyer than to adopt a stack top to bottom, which gives them rather less freedom and, on average, generally, lower-quality software because they probably wouldn't have picked every one of those elements in the software suite as their favorite product. So, there are some downsides to buying a full stack. There are some upsides to buying best-of-breed, and I believe that the market would benefit from an organization that focused on enabling best-of-breed. That's another edge that we're going to have against our largest competitors who are tech giants and who will have a long stack and an agenda, essentially, of products and many buyers may not want to get entangled in all that.

Gotcha, gotcha, gotcha. Very helpful. Thank you, guys. Good day.

Our next question comes from the line of Alex Kurtz with KeyBanc. You may proceed with your question.

I have a clarification on that last question, which was a good one. And then a separate question. So Matt, you see a lot of larger software companies, like ServiceNow, offering low-code. And I think what you're trying to say and your answer was being independent of the scaling of the licensing, right, is good because that, ultimately, will drive a better ROI than being -- you know, buying low-code from your core vertical app. So, is that how you see it playing out over time, that as people adopt low-code across the whole software universe, that kind of being best-of-breed and separate from the licensing will be a big driver for you?

I think there are some classic reasons evident in this market that will favor a best-of-breed champion. I think that there is a customer desire to select or they have already selected a portfolio of separate options, which takes away some of the integration advantages of buying a cohesive suite. That's part of it. Secondly, I believe that features are still important in this market, and will continue to be important, which is to say an organization that prioritizes this market, has history in this market, has a reputation, has a laser focus on this market is liable to be differentiated in the utility they can deliver over a company that does not have those priorities nor that focus. So, I think that this is a classic place for a best-of-breed champion to thrive, and so that's our direction.

OK. And then just on the quarter. Maybe you could rank what really drove the upside, whether it was, you know, partners, Europe, federal government. Maybe some kind of one, two, and three would help us frame what happened here.

All right. Well, this is a -- I can't pick, but I guess my very favorite would be partners. And I love the confluence that we're offering. By the way, we're a -- bringing together important things that customers need. We're uniting disparate assets. We're uniting functionalities, low-code and automation. I think that, you know, the business is gelling in addition to having a few strong systems firing. It is tough to rank them. It really is. I mean, I could rank by dollar value, and then I can rank by visibility. Like here's one. Like solutions drove a lot of visibility for us. It's not really a dollar generator, but at this point, it's not really supposed to be a dollar generator. The purpose of solutions in Qs 2 and 3, especially this year, was to keep us relevant and they did. And so, I could say solutions were a great thing about this business, though you wouldn't see much of it on the income statement. But they kept us in the game. They kept us front-of-mind. They meant -- they showed that we had something to say, and they demonstrated our value proposition to people who wouldn't otherwise have known it. So, solutions were a big win for us. Europe absolutely came through. I'm delighted with federal and the momentum that have been shown in federal. I've long felt that we were capable of big growth there. So that was a fulfillment of some expectation. I'm very pleased with it.

And just to clarify in the solution sale. Is that something that you're driving with, you know, accelerators and the channel accelerators with your own reps? Is there something that you're doing differently now that you weren't doing, you know, a year ago?

These things do need to mature over time. It's not just a product, it's a new business model for us. So, we've had to teach ourselves and our partners the new tricks in order to get this to market. And that takes some working through. Partners are now offering a lot of solutions, and so a lot of our solutions success is through our partners. They're not only providing a solution, they're providing the lead, they're selling the lead. That's a great new thing, and it is novel for us. Also, we have more sanction support. We launched one Q3. We launched the Workforce Safety in Q2. Each of those that had a neat little contribution to our momentum in the current quarter. So, yeah, it's partly more product, it's partly better coordination, and it's getting our game plan together.

Thank you.

Our next question comes from the line of Jack Andrews with Needham & Co. You may proceed with your question.

Hi. Thanks. Good afternoon, and congratulations on the results. I just wanted to maybe follow up on the last question a little bit. I was wondering if you're seeing some sort of cultural change around low-code. I mean, as some of these solutions like Workforce Safety and CampusPass get in the hands of more decision-makers across four organizations, are people seeing basically what is the art of the possible? And is this really having, potentially, an impact on your business?

I do believe that low-code is becoming democratized. Truly, low-code is a big tent. It's a very big tent. And we occupy the high end of the low-code space, which, by the way, to address a previous question, separates us somewhat from the primary hunting grounds of ServiceNow or Salesforce or even recent entrants into the space who are smaller. We are in a niche, right, in the space in this market where we are very strong, very strong. And then we can contest. From that base, we can contest the big center of the market. But we have a base, right? And that's important to note. At the same time, low-code is democratizing. More people are being exposed to low-code this year by far than have ever been exposed to it before. And low-code is coming to mean a lot of things to a lot of different people. This is why I love the elevation of the terminology. And for some of those people who learn about low-code, Appian is going to be their best choice. So, we continue to be more intuitive, empowering and appealing to the middle of the low-code market. And at the same time, the low-code market continues to grow, high, middle and low, all -- everywhere it's growing. And I think that these trends all go well for us.

I appreciate that perspective. And just as a quick follow-up. Any -- are there any specific trends you could call out in terms of what's happening on the life sciences vertical, in particular?

Well, life sciences continues to be one of our strongest verticals, as you know. Financial services, life sciences, those are our top two. I didn't count government. Government is about as big as life sciences for us. We are very well-adopted. I think I mentioned in my prepared remarks that 9 out of the top 10 largest life sciences companies are now Appian customers. What I didn't mention in those prepared remarks was that they are customers in a big way. Like the average annual dollar commitment across all those customers is multiple millions of dollars. So, we are an organization that life sciences as an industry has come to really rely upon. And this is our goal in a lot of industries. And it's terrific to see it achieved here. We've -- and then furthermore, we're very fortunate, of course, that our largest industries have been relatively immune to the effects of, you know, the downturn in 2020. So, the fact that life sciences has avoided that downturn, the fact that they have come to rely very much on Appian and our near ubiquity across the world's top firms means it's a really good picture for us.

Great. Thanks very much.

[Operator instructions] Next question comes from the line of Derrick Wood with Cowen and Company. You may proceed with your question.

Thanks. Hey, it's Andrew, on for Derrick. Congrats on the quarter. For Matt, I wanted to ask about your sales rep hiring. How do you feel that's going? Do you think you have enough feet on the street heading into next year? And has work-from-home opened up that talent pool at all? And any color on how sales rep productivity has trended?

Yes. I feel solid about sales rep productivity. As for the number of them, we want more. We keep wanting more. We're hiring more. We definitely need more next year, and we've got plans for it. But the ones we have there, they're doing well.

Great. And on the international, you called out the strong EMEA growth. Given some of the new lockdowns there, how should we think about that impacting Q4? And then on your conference there, you saw the attendance double. What have you seen there from a lead-gen perspective?

First of all, you're right. You're going to the second lockdowns. Anything could happen. But I will say that we have been able to stay relevant. Through the first lockdown in Europe, in North America, we maintained a place in the customer's mind. And we had something they needed. We were able to adapt to the circumstance. We were able to deliver our services at a distance, have our meetings at a distance. We can adapt to situations like this. We've shown it, and I feel confident about that. Organizations see how important it is to be agile. And whether it's your second lockdown or your first lockdown, the message is the same. You've got to be able to change your business in the face of external shocks. You've got to be able to adapt. And the shock doesn't have to be a pandemic. It could be a new regulation, it could be a change in customer attitudes or desires, but you've got to be able to change. And we as an organization are going to enable that change. So, the more people are reminded that change is essential and the more they come to demand change in their software, the more it's going to direct their eyes toward technology like ours.

Great. Thank you.

Ladies and gentlemen, we have reached today’s question and answer session. This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation. Have a great rest of your evening.