APPIAN CORPORATION The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (1) our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and (2) the audited consolidated financial statements and the related notes and management's discussion and analysis of financial condition and results of operations for the year endedDecember 31, 2019 included in our Annual Report on Form 10-K, filed with theSecurities and Exchange Commission , orSEC , onFebruary 20, 2020 . This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "plan," "project," "will," "would," or the negative or plural of these words or similar expressions or variations, including statements regarding our future financial and operating performance, anticipated expansion of the usage of partners to perform professional services, the increase of our subscriptions revenue as a percentage of total revenue, the fluctuation of gross margin in the short term and improvement of gross margin over time, our future capital requirements, and uncertain negative impacts that COVID-19 may have on our business, financial condition, results of operations, and changes in overall level of spending and volatility in the global economy. Such forward-looking statements are subject to a number of risks, uncertainties, assumptions, and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein and those discussed in the section titled "Risk Factors," set forth in Part I, Item 1A of our Annual Report on Form 10-K filed with theSEC onFebruary 20, 2020 and in our other filings with theSEC . You should not rely upon forward-looking statements as predictions of future events. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
Overview
We provide a low-code automation platform that accelerates the creation of
high-impact business applications, enabling our customers to automate the most
important aspects of their business. Global organizations use our applications
to improve customer experience, achieve operational excellence, and simplify
global risk management and compliance.
With our platform, organizations can rapidly and easily design, build, and
implement powerful, enterprise-grade custom applications through our intuitive,
visual interface with little or no coding required. Our customers have used
applications built on our platform to launch new business lines, automate vital
employee workflows, manage complex trading platforms,
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--------------------------------------------------------------------------------accelerate drug development, and build global procurement systems. With our platform, decision makers can reimagine their products, services, processes, and customer interactions by removing much of the complexity and many of the challenges associated with traditional approaches to software development.
We have generated the majority of our revenue from sales of subscriptions, which include (1) software as a service subscriptions bundled with maintenance and support and hosting services and (2) term license subscriptions bundled with maintenance and support. Our subscription fees are based primarily on the number of users who access and utilize the applications built on our platform or, alternatively, non-user based single application licenses. Our customer contract terms generally vary from one to three years with most providing for payment in advance on an annual, quarterly, or monthly basis. Due to the variability of our billing terms and the episodic nature of our customers purchasing additional subscriptions, we do not believe changes in our deferred revenue in a given period are directly correlated with our revenue growth. Since inception, we have invested in our professional services organization to help ensure customers are able to build and deploy applications on our platform. We have several strategic partnerships, including withKPMG , PwC, Accenture, and Deloitte, for them to refer customers to us in order to purchase subscriptions and then to provide professional services directly to the customers using our platform. We intend to further grow our base of strategic partners to provide broader customer coverage and solution delivery capabilities. In addition, over time we expect professional services revenue as a percentage of total revenue to decline as we increasingly rely on strategic partners to help our customers deploy our software. We believe our investment in professional services, including strategic partners building their practices around Appian, will drive increased adoption of our platform. Our customers include financial services, life sciences, government, telecommunications, media, energy, manufacturing, and transportation organizations. Generally, our sales force targets its efforts on organizations with over 2,000 employees and$2 billion in annual revenue. Revenue from government agencies represented 19.0% and 16.8% of our total revenue in the three and six months endedJune 30, 2020 , respectively, as compared to 16.8% and 17.3% of our total revenue in the three and six months endedJune 30, 2019 , respectively. No single end-customer accounted for more than 10% of our total revenue in the three and six months endedJune 30, 2020 orJune 30, 2019 . Our platform supports multiple languages to facilitate collaboration and address challenges in multi-national organizations. We offer our platform globally. In the three and six months endedJune 30, 2020 , 36.8% and 35.0%, respectively, of our total revenue was generated from customers outside ofthe United States as compared to 32.9% and 32.4% in the three and six months endedJune 30, 2019 , respectively. As ofJune 30, 2020 , we operated in 12 countries. We believe we have a significant opportunity to grow our international footprint. We are investing in new geographies, including through investment in direct and indirect sales channels, professional services, and customer support and implementation partners.
Basis of Reporting - ASC 606
We adopted ASC 606, the new revenue recognition guidance, onJanuary 1, 2019 using the modified retrospective method. Under this method of adoption, we recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of accumulated deficit and applied the new standard only to contracts that were not completed prior toJanuary 1, 2019 . Because we were an emerging growth company untilDecember 31, 2019 , the Jumpstart Our Business Startups Act allowed us to delay adoption of ASC 606 until such time it was made applicable to private companies. We elected to use this extended transition period, and accordingly, did not report revenues under ASC 606 in our Quarterly Reports on Form 10-Q during 2019. Refer to our Annual Report on Form 10-K for the year endedDecember 31, 2019 , filed with theSEC onFebruary 20, 2020 , for a complete reconciliation of our revenues under the old and new guidance. Prior period amounts in this Form 10-Q have been recast as if we had reported under ASC 606 for the applicable periods.
Recent Developments
Public Offering
InJune 2020 , we completed an underwritten public offering of 2,500,000 shares of our Class A common stock, of which 1,931,206 shares of Class A common stock were sold by us and 568,794 shares of Class A common stock were sold by existing 25 -------------------------------------------------------------------------------- stockholders. The underwriter purchased the shares from us and the selling stockholders at a price of$56.50 per share. Our net proceeds from the offering were$107.9 million , after deducting underwriting discounts and commissions and offering expenses. We did not receive any of the proceeds from the sale of shares by the selling stockholders.
COVID-19
Beginning in late 2019 and continuing into the second quarter of 2020, the outbreak of the novel coronavirus disease, or COVID-19, has resulted in the declaration of a global pandemic and adversely affected economic activity across virtually all sectors and industries on a local, national, and global scale. The impact of COVID-19 on the economy and our business continues to be a fluid situation. Operationally, we remain focused on supporting our customers, employees, and communities during this time. We have responded quickly to adopt a virtual corporate strategy consisting of enabling most of our employees to work productively from home while continuing to guard the health and safety of our teams, support our customers, and mitigate risk. We are focused on ensuring continuity for our customers. To the extent possible, we are conducting business as usual, with necessary or advisable modifications to employee travel, employee work locations, and marketing events. ThroughJune 30, 2020 , we have not seen a meaningful adverse impact to our financial position, results of operations, and cash flows and liquidity as a result of COVID-19. While the verticals from which we have historically generated the majority of our revenue have been less impacted by COVID-19 to date, there may be impacts to our financial condition and results of operations in the third quarter of 2020 and beyond as a result of reduced demand for our products and services and longer sales cycles. The ultimate impact of COVID-19 on our business is not estimable at this time and will be largely dependent upon a number of factors outside of our control including the extent and duration of the outbreak as well as any mitigating actions which may be undertaken by global governments and the general public.
Our Business Model
Our business model focuses on maximizing the lifetime value of customer relationships, which is a function of the duration of a customer's deployment of Appian as well as the price and number of subscriptions of Appian that a customer purchases. We incur significant customer acquisition costs, including expenses associated with hiring new sales representatives, who generally take more than one year to become productive given the length of our sales cycle, and marketing costs, all of which, with the exception of sales commissions, are expensed as incurred.
Key Factors Affecting Our Performance
The following are several key factors that affect our performance:
•Market Adoption of Our Platform. Our ability to grow our customer base and
drive market adoption of our platform is affected by the pace at which
organizations digitally transform. We expect our revenue growth will be
primarily driven by the pace of adoption and penetration of our platform. We
offer a leading custom software automation platform and intend to continue to
invest to expand our customer base. The degree to which prospective customers
recognize the need for low-code software that enables organizations to digitally
transform, and subsequently allocate budget dollars to purchase our software,
will drive our ability to acquire new customers and increase sales to existing
customers, which, in turn, will affect our future financial performance.
•Growth of Our Customer Base. We believe we have a substantial opportunity to
grow our customer base. We define a customer as an entity with an active
subscription or maintenance and support contract related to a perpetual software
license as of the specified measurement date. To the extent we contract with one
or more entities under common control, we count those entities as separate
customers. We have aggressively invested, and intend to continue to invest, in
our sales force in order to drive sales to new customers. In particular, we have
recently made, and plan to continue to make, investments to enhance the
expertise of our sales and marketing organization within our key industry
verticals of financial services, life sciences, and government. In addition, we
have established relationships with strategic partners who work with
organizations undergoing digital transformations. Our ability to continue to
grow our customer base is dependent, in part, upon our ability to compete within
the increasingly competitive markets in which we participate.
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•Further Penetration of Existing Customers. Our sales force seeks to generate
additional revenue from existing customers by adding new users to our platform.
Many of our customers begin by building a single application and then grow to
build dozens of applications on our platform. Generally, the development of new
applications on our platform results in the expansion of our user base within an
organization and a corresponding increase in revenue to us because we charge
subscription fees on a per-user basis for the significant majority of our
customer contracts. As a result of this "land and expand" strategy, we have
generated significant additional revenue from our customer base. Our ability to
increase sales to existing customers will depend on a number of factors,
including the size of our sales force and professional services teams,
customers' level of satisfaction with our platform and professional services,
pricing, economic conditions, and our customers' overall spending levels. We
have also refocused some of our professional services personnel to become
customer success managers. Their role is to ensure the customer realizes value
from our platform and support the "land and expand" strategy versus delivering
billable hours.
•Mix of Subscription and Professional Services Revenue. We believe our
professional services have driven customer success and facilitated the adoption
of our platform by customers. During the initial period of deployment by a
customer, we generally provide a greater amount of support in building
applications and training than later in the deployment, with a typical
engagement extending from two to six months. At the same time, many of our
customers have historically purchased subscriptions only for a limited set of
their total potential end users. As a result of these factors, the proportion of
total revenue for a customer associated with professional services is relatively
high during the initial deployment period. Over time, as the need for
professional services associated with user deployments decreases and the number
of end users increases, we expect subscriptions revenue as a percentage of total
revenue to increase. In addition, we intend to further grow our base of
strategic partners to provide broader customer coverage and solution delivery
capabilities. These partners perform professional services with respect to any
new service contracts they sign. As the usage of partners expands, we expect the
proportion of our total revenue from subscriptions to increase over time
relative to professional services. For the three and six months ended June 30,
2020 , 62.0% and 63.1% of our revenue, respectively, was derived from sales of
subscriptions while the remaining 38.0% and 36.9%, respectively, was derived
from the sale of professional services. For the three and six months ended
June 30, 2019 , 56.5% and 56.9% of our revenue, respectively, was derived from
sales of subscriptions while the remaining 43.5% and 43.1%, respectively, was
derived from the sale of professional services.
•Investments in Growth. We have made and plan to continue to make investments
for long-term growth, including investment in our platform and infrastructure to
continuously maximize the power and simplicity of the platform to meet the
evolving needs of our customers and to take advantage of our market opportunity.
In addition, we continue to pursue strategic acquisitions that enhance our
product offerings as evidenced by our recent acquisition of Novayre. We also
intend to continue to invest in sales and marketing as we further expand our
sales teams, increase our marketing activities, and grow our international
operations.
Key Metrics
We monitor the following metrics to help us measure and evaluate the
effectiveness of our operations. All dollar amounts are presented in thousands.
Cloud Subscription Revenue
Six Months Ended June
Three Months Ended June 30, 30,
2020 2019 2020 2019
Cloud subscription revenue $ 29,580 $ 22,796 $ 57,970 $ 44,074
Cloud subscription revenue includes SaaS subscriptions bundled with maintenance
and support and hosting services. As we generally sell our SaaS subscriptions on
a per-user basis, our cloud subscription revenue for any customer is primarily
determined by the number of users who access and utilize the applications built
on our platform as well as the price paid. We believe increasing cloud
subscription revenue is an indicator of the demand for our platform, the pace at
which the market for our solutions is growing, the productivity of our sales
force and strategic relationships in growing our customer base, and our ability
to further penetrate our existing customer base.
Cloud Subscription Revenue Retention Rate
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As of June 30,
2020 2019
Cloud subscription revenue retention rate 113 % 122 %
A key factor to our success is the renewal and expansion of subscription
agreements with our existing customers. We calculate this metric over a set of
customers who have been with us for at least one full year. To calculate our
cloud subscription revenue retention rate for a particular trailing 12-month
period, we first establish the recurring cloud subscription revenue for the
previous trailing 12-month period. This effectively represents recurring dollars
we should expect in the current trailing 12-month period from the cohort of
customers from the previous trailing 12-month period without any expansion or
contraction. We subsequently measure the recurring cloud subscription revenue in
the current trailing 12-month period from the cohort of customers from the
previous trailing 12-month period. Cloud subscription revenue retention rate is
then calculated by dividing the aggregate recurring cloud subscription revenue
in the current trailing 12-month period by the previous trailing 12-month
period. This calculation includes the impact on our revenue from customer
non-renewals, pricing changes, and growth in the number of users on our
platform. Our cloud subscription revenue retention rate can fluctuate from
period to period due to large customer contracts in any given period. The cloud
subscription revenue retention rate as of June 30, 2019 was elevated as we
continued to focus on converting customers with on-premises term license
subscriptions to cloud subscriptions.
Key Components of Results of Operations
Revenue
We generate revenue primarily through sales of subscriptions to our platform as well as professional services. We generally sell our software on a per-user basis and, to a lesser degree, non-user based single application licenses. We generally bill customers and collect payment for subscriptions to our platform in advance on an annual, quarterly, or monthly basis. In certain instances, we have had customers pay their entire contract value up front.
Our revenue is comprised of the following:
Subscriptions
Subscriptions revenue is primarily derived from:
•SaaS subscriptions bundled with maintenance and support and hosting services; and
•On-premises term license subscriptions bundled with maintenance and support.
Our maintenance and support agreements provide customers with the right to unspecified software upgrades, maintenance releases and patches released during the term of the maintenance and support agreement on a when-and-if-available basis, and rights to technical support. When our platform is deployed within a customer's own data center or private cloud, it is installed on the customer's infrastructure and generally offered as a term license. When our platform is delivered as a SaaS subscription, we handle its operational needs in third-party hosted data centers.
Professional Services
Our professional services revenue is comprised of fees for consulting services, including application development and deployment assistance and training related to our platform. Over time, as the need for professional services associated with user deployments decreases and the number of end users increases, we expect professional services revenue as percentage of total revenue to decrease. Additionally, if there is a decline in our procurement of new customers as a result of the COVID-19 pandemic, we may also see a similar decline in professional services revenue. We have several strategic partnerships, including withKPMG , PwC, Accenture, and Deloitte. Our agreements with our strategic partners have indefinite terms and may be terminated for convenience by either party. We intend to further grow our base of strategic partners to provide broader customer coverage and solution delivery capabilities. These partners refer software subscription customers to us and generally perform professional services with respect to any new service contracts they originate, increasing our subscriptions revenue without any change to our professional services revenue. As we expand the 28 -------------------------------------------------------------------------------- network of strategic partners, we expect professional services revenue to decline as a percentage of total revenue over time since our strategic partners may perform professional services associated with software subscriptions that we sell. Cost of Revenue Subscriptions Cost of subscriptions revenue consists primarily of fees paid to our third-party managed hosting providers and other third-party service providers, personnel costs, including payroll and benefits for our technology operations and customer support teams, and allocated facility costs and overhead. We expect cost of revenue to continue to increase in absolute dollars for the foreseeable future as our customer base grows. Professional Services Cost of professional services revenue includes all direct and indirect costs to deliver our professional services and training, including employee compensation for our global professional services and training personnel, travel costs, third-party contractor costs, and allocated facility costs and overhead as well as the costs of billable expenses such as travel and lodging. The unpredictability of the timing of entering into significant professional services agreements sold on a standalone basis may cause significant fluctuations in our quarterly financial results.
Gross Margin
Gross profit and gross margin, or gross profit as a percentage of total revenue, has been, and will continue to be, affected by various factors, including the mix of subscriptions revenue and professional services revenue. Subscription pricing, the costs associated with third-party hosting facilities, and the extent to which we expand our professional services to support future growth will impact our gross margins. Our gross margin may fluctuate from period to period based on the above factors. Subscriptions Gross Margin. Subscriptions gross margin is primarily affected by the growth in our subscriptions revenue as compared to the growth in, and timing of, costs to support such revenue. We expect to continue to invest in customer support and SaaS operations to support growth in the business, and the timing of those investments is expected to cause gross margins to fluctuate in the short term but improve over time. Professional Services Gross Margin. Professional services gross margin is affected by the growth in our professional services revenue as compared to the growth in, and timing of, the cost of our professional services organization as we continue to invest in the growth of our business. Professional services gross margin is impacted by the amount of services performed by subcontractors as opposed to internal resources. Our professional services gross margin is also impacted by the amount of services performed by partners as opposed to internal resources. Operating Expenses Operating expenses consist of sales and marketing, research and development, and general and administrative expenses. Salaries, bonuses, and other personnel-related costs are the most significant components of each of these expense categories. In general, our operating expenses are expected to continue to increase as we invest resources in growing our various teams. However, our hiring activity in the near term will likely be lower in comparison to prior periods as a result of cost controlling measures we are implementing in response to the ongoing COVID-19 pandemic.
Sales and Marketing Expense
Sales and marketing expense primarily includes personnel costs, including salaries, bonuses, commissions, stock-based compensation, and other personnel costs related to sales teams. Additional expenses in this category include travel and entertainment, marketing and promotional events, marketing activities, subcontracting fees, and allocated facility costs and overhead.
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In order to continue to grow our business, geographical footprint, and brand
awareness, we expect sales and marketing expense to increase in absolute dollars
as we continue to invest to acquire new customers and further expand usage of
our platform within our existing customer base.
Research and Development Expense
Research and development expense consists primarily of personnel costs for our employees who develop and enhance our platform, including salaries, bonuses, stock-based compensation, and other personnel costs. Also included are non-personnel costs such as subcontracting, consulting and professional fees to third party development resources, allocated facility costs, overhead, and depreciation and amortization costs. Our research and development efforts are focused on enhancing the speed and power of our software platform. We expect research and development expenses to continue to increase as they are critical to maintain and improve our quality of applications and our competitive position.
General and Administrative Expense
General and administrative expense consists primarily of personnel costs, including salaries, bonuses, stock-based compensation, and other personnel costs for our administrative, legal, information technology, human resources, finance and accounting employees, and executives. Additional expenses included in this category are non-personnel costs such as travel-related expenses, contracting and professional fees, audit fees, tax services and legal fees, as well as insurance and other corporate expenses, along with allocated facility costs and overhead.
We expect our general and administrative expense to increase in absolute dollars as we continue to support our growth.
Other (Income) Expense
Other (Income) Expense, Net
Other (income) expense, net consists primarily of unrealized and realized gains and losses related to changes in foreign currency exchange rates, interest income on our cash and cash equivalents, and gains or losses on the disposal of property and equipment. Interest Expense
Interest expense consists primarily of interest on our finance leases and debt, unused credit facility fees, and commitment fees on our letters of credit.
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--------------------------------------------------------------------------------Results of Operations
The following table sets forth our consolidated statement of operations data (in
thousands):
Six Months Ended June
Three Months Ended June 30, 30,
2020 2019 2020 2019
Revenue
Subscriptions $ 41,418 $ 36,860 $ 91,854 $ 71,417
Professional services 25,357 28,415 53,785 54,162
Total revenue 66,775 65,275 145,639 125,579
Cost of revenue
Subscriptions(1) 4,701 4,036 10,084 7,621
Professional services(1) 16,455 19,015 35,191 39,496
Total cost of revenue 21,156 23,051 45,275 47,117
Gross profit 45,619 42,224 100,364 78,462
Operating expenses
Sales and marketing(1) 29,086 29,992 63,258 58,583
Research and development(1) 17,178 12,765 33,216 26,721
General and administrative(1) 11,450 9,261 24,591 18,277
Total operating expenses 57,714 52,018 121,065 103,581
Operating loss (12,095) (9,794) (20,701) (25,119)
Other (income) expense
Other (income) expense, net (682) (79) 2,432 (381)
Interest expense 128 69 271 140
Total other (income) expense (554) (10) 2,703 (241)
Loss before income taxes (11,541) (9,784) (23,404) (24,878)
Income tax expense 274 267 80 389
Net loss $ (11,815) $ (10,051) $ (23,484) $ (25,267)
(1) Stock-based compensation as a component of these line items is as follows:
Six Months Ended June
Three Months Ended June 30, 30,
2020 2019 2020 2019
Cost of revenue
Subscriptions $ 229 $ 161 $ 442 $ 315
Professional services 317 244 529 2,218
Operating expenses
Sales and marketing 657 814 1,410 3,195
Research and development 619 435 1,172 2,550
General and administrative 1,792 1,035 3,537 1,636
Total stock-based compensation expense $ 3,614 $ 2,689 $ 7,090 $ 9,914
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The following table sets forth our consolidated statement of operations data expressed as a percentage of total revenue:
Six Months Ended June
Three Months Ended June 30, 30,
2020 2019 2020 2019
Revenue
Subscriptions 62.0 % 56.5 % 63.1 % 56.9 %
Professional services 38.0 43.5 36.9 43.1
Total revenue 100.0 100.0 100.0 100.0
Cost of revenue
Subscriptions 7.0 6.2 6.9 6.1
Professional services 24.6 29.1 24.2 31.5
Total cost of revenue 31.7 35.3 31.1 37.5
Gross profit 68.3 64.7 68.9 62.5
Operating expenses
Sales and marketing 43.6 45.9 43.4 46.7
Research and development 25.7 19.6 22.8 21.3
General and administrative 17.1 14.2 16.9 14.6
Total operating expenses 86.4 79.7 83.1 82.5
Operating loss (18.1) (15.0) (14.2) (20.0)
Other (income) expense
Other (income) expense, net (1.0) (0.1) 1.7 (0.3)
Interest expense 0.2 0.1 0.2 0.1
Total other (income) expense (0.8) - 1.9 (0.2)
Loss before income taxes (17.3) (15.0) (16.1) (19.8)
Income tax expense 0.4 0.4 0.1 0.3
Net loss (17.7) % (15.4) % (16.1) % (20.1) %
Comparison of the Three Months Ended
Revenue
Three Months Ended June 30,
2020 2019 % Change
(dollars in thousands)
Revenue
Subscriptions $ 41,418 $ 36,860 12.4 %
Professional services 25,357 28,415 (10.8) %
Total revenue $ 66,775 $ 65,275 2.3 %
Total revenue increased $1.5 million , or 2.3%, in the three months ended June
30, 2020 compared to the same period in 2019 due to an increase in our
subscriptions revenue of $4.6 million , partially offset by a decrease in our
professional services revenue of $3.1 million . The increase in subscriptions
revenue was driven largely by a $6.8 million increase in cloud subscription
revenue, which was partially offset by a $2.7 million decline in on-premise
software revenue. With respect to new versus existing customers, there was a
$4.7 million increase in subscriptions revenue resulting from the sales of
subscriptions to new customers which was offset by a reduction in expanded
deployments for existing on-premise software customers. The decrease in
professional services revenue was due to a $9.0 million decrease in revenue from
existing customers which was partially offset by a $5.9 million increase in
sales to new customers.
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Cost of Revenue
Three Months Ended June 30,
2020 2019 % Change
(dollars in thousands)
Cost of revenue
Subscriptions $ 4,701 $ 4,036 16.5 %
Professional services 16,455 19,015 (13.5) %
Total cost of revenue $ 21,156 $ 23,051 (8.2) %
Subscriptions gross margin 88.6 % 89.1 %
Professional services gross margin 35.1 % 33.1 %
Total gross margin 68.3 % 64.7 %
Cost of revenue decreased $1.9 million , or 8.2%, in the three months ended June
30, 2020 compared to the same period in 2019, primarily due to a $2.8 million
decrease in contractor costs coupled with a $1.4 million decrease in billable
expenses and a $0.3 million decrease in facility and overhead costs. These
decreases were partially offset by a $2.0 million increase in professional
services and product support personnel costs and a $0.6 million increase in
other cost of revenue. Contractor costs decreased in the three months ended June
30, 2020 compared to the same period in 2019 because of a decrease in the usage
of subcontractors for professional services engagements. Billable expenses
decreased primarily due to lower travel and entertainment related expenses as a
result of our shift to largely remote work while the decrease in facility and
overhead costs was due largely to a reduction in rent expense. Personnel costs
increased due to an increase in professional services and product support staff
personnel headcount of 18.2% from June 30, 2019 to June 30, 2020 . The increase
in other cost of revenue was due to increased hosting costs as sales of our
cloud offering increased in the three months ended June 30, 2020 .
Subscriptions gross margin decreased to 88.6% for the three months ended June
30, 2020 compared to 89.1% in the same period in 2019 due to increased hosting
costs during the three months ended June 30, 2020 as sales of our cloud offering
increased and became a larger proportion of our overall subscription revenue.
Professional services gross margin increased to 35.1% for the three months ended
June 30, 2020 compared to 33.1% in the same period in 2019 due to a decrease in
the usage of subcontractors for professional services engagements, a decrease in
travel and entertainment related expenses, and a decrease in rent expenses. Due
to the higher percentage of subscriptions revenue for the comparable periods and
the aforementioned declines in professional services expenses, gross margin rose
to 68.3% in the three months ended June 30, 2020 as compared to 64.7% in the
same period in 2019.
Sales and Marketing Expense
Three Months Ended June 30,
2020 2019 % Change
(dollars in thousands)
Sales and marketing $ 29,086 $ 29,992 (3.0) %
% of revenue 43.6 % 45.9 %
Sales and marketing expense decreased $0.9 million , or 3.0%, in the three months
ended June 30, 2020 compared to the same period in 2019, primarily due to a $3.7
million decrease in marketing costs and a $2.8 million decrease in facility and
overhead costs, which were partially offset by a $5.0 million increase in sales
and marketing personnel costs and a $0.6 million increase in professional fees.
Marketing costs decreased largely due to reduced costs incurred as a result of
moving our annual user conference Appian World to virtual-only as well as a
reduction in the number of in-person marketing events. Facility and overhead
costs decreased due to lower travel and entertainment related expenses as a
result of our shift to largely remote work. Personnel costs increased due to an
increase in sales and marketing personnel headcount of 9.8% from June 30, 2019
to June 30, 2020 and increased sales commissions driven by our subscriptions
revenue growth. Professional fees increased due to an increase in consulting
fees and contract labor to support our growth.
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Three Months Ended June 30,
2020 2019 % Change
(dollars in thousands)
Research and development $ 17,178 $ 12,765 34.6 %
% of revenue 25.7 % 19.6 %
Research and development expense increased $4.4 million , or 34.6%, in the three
months ended June 30, 2020 compared to the same period in 2019, primarily due to
a $4.7 million increase in research and development personnel costs, partially
offset by a $0.2 million decrease in facility and overhead costs. Personnel
costs increased due to an increase in research and development personnel
headcount by 30.0% from June 30, 2019 to June 30, 2020 . Facility and overhead
costs decreased due to lower travel and entertainment related expenses as a
result of our shift to largely remote work.
General and Administrative Expense
Three Months Ended June 30,
2020 2019 % Change
(dollars in thousands)
General and administrative expense $ 11,450 $ 9,261 23.6 %
% of revenue 17.1 % 14.2 %
General and administrative expense increased $2.2 million , or 23.6%, in the
three months ended June 30, 2020 compared to the same period in 2019 due to a
$1.9 million increase in general and administrative personnel costs and a $0.3
million increase in professional fees, which was partially offset by a $0.1
million decrease in facility and overhead costs. Personnel costs increased due
to an increase in general and administrative personnel headcount by 30.3% from
June 30, 2019 to June 30, 2020 , coupled with a $0.8 million increase in
stock-based compensation expense which was primarily attributable to a stock
option to purchase 700,000 shares of our Class A common stock granted to our
Chief Executive Officer in May 2019 . Professional fees increased due to the use
of consulting services to support our back-office initiatives. Facility and
overhead costs decreased primarily due to lower travel and entertainment related
expenses as a result of our shift to largely remote work.
Other Income, Net
Three Months Ended June 30,
2020 2019 % Change
(dollars in thousands)
Other income, net $ (682) $ (79) ***
% of revenue (1.0) % (0.1) %
*** - Indicates a percentage that is not meaningful
Other income, net increased by$0.6 million in the three months endedJune 30, 2020 compared to the same period in 2019, primarily due to$0.6 million in foreign exchange gains in the three months endedJune 30, 2020 compared to nominal foreign exchange losses in the three months endedJune 30, 2019 . The increase in foreign exchange gains was primarily due to currency fluctuations of the British Pound Sterling, Euro,Singapore dollar, and Swiss franc versus theU.S. dollar during the three months endedJune 30, 2020 compared to the same period in 2019. 34 --------------------------------------------------------------------------------
Interest Expense
Three Months Ended June 30,
2020 2019 % Change
(dollars in thousands)
Interest expense $ 128 $ 69 85.5%
% of revenue 0.2 % 0.1 %
Interest expense increased by $0.1 million , or 85.5%, in the three months ended
June 30, 2020 compared to the same period in 2019, primarily due to commitment
fees on the letter of credit outstanding.
Comparison of the Six Months Ended
Revenue
Six Months Ended June 30,
2020 2019 % Change
(dollars in thousands)
Revenue
Subscriptions $ 91,854 $ 71,417 28.6 %
Professional services 53,785 54,162 (0.7) %
Total revenue $ 145,639 $ 125,579 16.0 %
Total revenue increased $20.1 million , or 16.0%, in the six months ended June
30, 2020 compared to the same period in 2019 due to an increase in our
subscriptions revenue of $20.4 million which was partially offset by a decrease
in our professional services revenue of $0.4 million . Of the increase in
subscriptions revenue, $13.9 million , or 68.0%, was attributable to cloud
subscription revenue while $5.5 million , or 27.0%, was attributable to
on-premise software revenue. With respect to new versus existing customers,
$13.4 million of the increase in revenue stemmed from expanded deployments and
corresponding sales of additional subscriptions to existing customers while the
remaining increase of $7.0 million was the result of sales of subscriptions to
new customers, $2.8 million of which related to a three year on-premise contract
which closed in the first quarter of 2020. The decrease in professional services
revenue was due to a $10.5 million decrease in revenue from existing customers
which was substantially offset by $10.1 million in sales to new customers.
Cost of Revenue
Six Months Ended June 30,
2020 2019 % Change
(dollars in thousands)
Cost of revenue
Subscriptions $ 10,084 $ 7,621 32.3 %
Professional services 35,191 39,496 (10.9) %
Total cost of revenue $ 45,275 $ 47,117 (3.9) %
Subscriptions gross margin 89.0 % 89.3 %
Professional services gross margin 34.6 % 27.1 % Total gross margin 68.9 % 62.5 % Cost of revenue decreased$1.8 million , or 3.9%, in the six months endedJune 30, 2020 compared to the same period in 2019, primarily due to a$4.8 million decrease in contractor costs, a$1.4 million decrease in billable expenses, and a$0.1 million decrease in facility and overhead costs. These decreases were largely offset by a$2.9 million increase in professional services and product support personnel costs and a$1.6 million increase in other cost of revenue. Contractor costs 35 -------------------------------------------------------------------------------- decreased in the six months endedJune 30, 2020 compared to the same period in 2019 because of a decrease in the usage of subcontractors for professional service engagements. Billable expenses decreased primarily due to lower travel and entertainment related expenses as a result of our shift to largely remote work while the decrease in facility and overhead costs was due largely to a reduction in rent expense. Personnel costs increased due to an increase in professional services and product support staff personnel headcount of 18.2% fromJune 30, 2019 toJune 30, 2020 . The increase in other cost of revenue was due to increased hosting costs as sales of our cloud offering increased in the six months endedJune 30, 2020 . Subscriptions gross margin was 89.0% for the six months endedJune 30, 2020 compared to 89.3% in the same period in 2019 due to increased hosting costs during the six months endedJune 30, 2020 as sales of our cloud offering increased and became a larger proportion of our overall subscription revenue. Professional services gross margin was 34.6% for the six months endedJune 30, 2020 compared to 27.1% in the same period in 2019 due to a decrease in the usage of subcontractors for professional services engagements, a decrease in travel and entertainment related expenses, a decrease in rent expenses, a$1.6 million decrease in stock-based compensation expense due to the vesting of restricted stock units granted to three of our co-founders during the six months endedJune 30, 2019 , and the timing of certain contracts which were delivered in 2019 but for which revenue was recognized in 2020. Due to the higher percentage of subscriptions revenue for the comparable periods as well as the aforementioned declines in professional services expenses, gross margin was 68.9% in the six months endedJune 30, 2020 as compared to 62.5% in the same period in 2019. Sales and Marketing Expense Six Months Ended June 30, 2020 2019 % Change (dollars in thousands) Sales and marketing$ 63,258 $ 58,583 8.0 % % of revenue 43.4 % 46.7 % Sales and marketing expense increased$4.7 million , or 8.0%, in the six months endedJune 30, 2020 compared to the same period in 2019, primarily due to an$8.0 million increase in sales and marketing personnel costs and a$1.0 million increase in professional fees, which were partially offset by a$2.4 million decrease in facility and overhead costs and a$1.9 million decrease in marketing costs. Personnel costs increased due to an increase in sales and marketing personnel headcount by 9.8% fromJune 30, 2019 toJune 30, 2020 and increased sales commissions driven by our subscriptions revenue growth, partially offset by a$1.8 million decrease in stock-based compensation expense. Professional fees increased due to an increase in consulting fees and contract labor to support our growth. Facility and overhead costs decreased due to lower travel and entertainment related expenses as a result of our shift to largely remote work. Marketing costs decreased due to reduced costs incurred as a result of moving our annual user conferenceAppian World to virtual-only as well as a reduction in the number of in-person marketing events.
Research and Development Expense
Six Months Ended June 30,
2020 2019 % Change
(dollars in thousands)
Research and development $ 33,216 $ 26,721 24.3 %
% of revenue 22.8 % 21.3 %
Research and development expense increased $6.5 million , or 24.3%, in the six
months ended June 30, 2020 compared to the same period in 2019, primarily due to
a $6.6 million increase in research and development personnel costs, partially
offset by a $0.1 million decrease in professional fees. Personnel costs
increased due to an increase in research and development personnel headcount by
30.0% from June 30, 2019 to June 30, 2020 , partially offset by a $1.4 million
decrease in stock-based compensation expense. Professional fees decreased due to
a decrease in consulting fees to support the development and enhancement of our
platform.
36
--------------------------------------------------------------------------------General and Administrative Expense
Six Months Ended June 30,
2020 2019 % Change
(dollars in thousands)
General and administrative expense $ 24,591 $ 18,277 34.5 %
% of revenue 16.9 % 14.6 %
General and administrative expense increased $6.3 million , or 34.5%, in the six
months ended June 30, 2020 compared to the same period in 2019 due to a $4.3
million increase in general and administrative personnel costs, a $1.4 million
increase in professional fees, and a $0.6 million increase in facility and
overhead costs. Personnel costs increased due to an increase in general and
administrative personnel headcount by 30.3% from June 30, 2019 to June 30, 2020
coupled with a $1.9 million increase in stock-based compensation expense during
the six months ended June 30, 2020 which was primarily attributable to a stock
option to purchase 700,000 shares of our Class A common stock granted to our
Chief Executive Officer in May 2019 . Professional fees increased due to the use
of consulting services to support our back-office initiatives. Facility and
overhead costs increased to support our personnel growth.
Other Expense (Income), Net
Six Months Ended June 30,
2020 2019 % Change
(dollars in thousands)
Other expense (income), net $ 2,432 $ (381) ***
% of revenue 1.7 % (0.3) %
*** - Indicates a percentage that is not meaningful
Other expense (income), net increased by$2.8 million in the six months endedJune 30, 2020 compared to the same period in 2019, primarily due to$2.9 million in foreign exchange losses in the six months endedJune 30, 2020 compared to$0.1 million in foreign exchange losses in the six months endedJune 30, 2019 . The increase in foreign exchange losses was primarily due to currency fluctuations of the British pound sterling, Euro, Australian dollar,Singapore dollar, and Swedish krona versus theU.S. dollar during the six months endedJune 30, 2020 compared to the same period in 2019. Interest Expense Six Months Ended June 30, 2020 2019 % Change (dollars in thousands) Interest expense$ 271 $ 140 93.6% % of revenue 0.2 % 0.1 % Interest expense increased by$0.1 million , or 93.6%, in the six months endedJune 30, 2020 compared to the same period in 2019, primarily due to commitment fees on the letter of credit outstanding.
Liquidity and Capital Resources
As of
InJune 2020 , we completed an underwritten public offering of 2,500,000 shares of our Class A common stock, of which 1,931,206 shares of Class A common stock were sold by us and 568,794 shares of Class A common stock were sold by existing stockholders. The underwriter purchased the shares from us and the selling stockholders at a price of$56.50 per share. Our net 37 -------------------------------------------------------------------------------- proceeds from the offering were$107.9 million , after deducting underwriting discounts and commissions and offering expenses. We did not receive any of the proceeds from the sale of shares by the selling stockholders. We believe our existing cash and cash equivalents, together with any positive cash flows from operations and available borrowings under our line of credit, will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support research and development efforts, the expansion of sales and marketing activities, particularly internationally, the introduction of new and enhanced products and functions as well as platform enhancements and professional services offerings, the level of market acceptance of our applications, spending we may incur on our new headquarters, and the global economic uncertainty and financial market conditions caused by the COVID-19 pandemic and its impact on our business. In the event additional financing is required from outside sources, we may be unable to raise the funds on acceptable terms, if at all. To the extent existing cash and cash equivalents and investments and cash from operations are not sufficient to fund future activities, we may need to raise additional funds. We recently have raised and may continue to seek to raise additional funds through equity, equity-linked, or debt financings. If we raise additional funds through the incurrence of indebtedness, such indebtedness may have rights that are senior to holders of our equity securities and could contain covenants that restrict operations. Any additional equity financing may be dilutive to our existing stockholders. We recently have, and in the future may continue to, invest or acquire stakes in complementary businesses, products, or technologies, which could also require us to seek additional equity financing, incur indebtedness, or use cash resources. We have no present binding agreements or commitments to enter into any such acquisitions. If we are unable to raise additional capital when desired, our business, operating results, and financial condition could be adversely affected.
The following table shows a summary of our cash flows for the six months ended
Six Months Ended
2020 2019
Cash (used in) provided by operating activities
Cash used in investing activities (6,824)
(27,689)
Cash provided by financing activities 109,768 1,987 Sources of Funds We have financed our operations in large part with equity and debt financing arrangements, including net proceeds of$77.8 million from our initial public offering inMay 2017 , net proceeds of$57.8 million from our underwritten public offering inAugust 2018 , net proceeds of$101.3 million from our underwritten public offering inSeptember 2019 , and net proceeds of$107.9 million from our underwritten public offering inJune 2020 . In addition, we have financed our operations through sales of subscriptions and professional services and borrowings under our credit facilities. We also financed$3.7 million of office furniture and fixtures and$0.8 million of equipment, both associated with the build out of our new headquarters. InNovember 2017 , we entered into a$20.0 million revolving line of credit with a lender. The facility matures inNovember 2022 . We may elect whether amounts drawn on the revolving line of credit bear interest at a floating rate per annum equal to either the LIBOR or the prime rate plus an additional interest rate margin that is determined by the availability of borrowings under the revolving line of credit. The additional interest rate margin will range from 2.00% to 2.50% in the case of LIBOR advances and from 1.00% to 1.50% in the case of prime rate advances. The revolving line of credit contains an unused facility fee in an amount between 0.15% and 0.25% of the average unused portion of the revolving line of credit, which is payable quarterly. The agreement contains certain customary affirmative and negative covenants and requires us to maintain (1) an adjusted quick ratio of at least 1.35 and (ii) minimum adjusted EBITDA in the amounts and for the periods set forth in the agreement. Any amounts borrowed under the credit facility are collateralized by substantially all of our assets. We were in compliance with all covenants as ofJune 30, 2020 . As ofJune 30, 2020 , we had not made any borrowings under this revolving line of credit, and we had outstanding letters of credit totaling$11.1 million in connection with securing our leased office space.
Use of Funds
Our principal uses of cash are funding operations and other working capital
requirements. More recently, we have utilized cash to pay for the acquisition of
an entity we believe is complementary to our business. Over the past several
years, revenue
38
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has increased significantly from year to year and, as a result, cash flows from
customer collections have increased. However, operating expenses have also
increased as we have invested in growing our business. Our uses of cash in 2020
to date have included the acquisition of Novayre and modest capital expenditures
while cash uses in 2019 included the build out of our new headquarters, which
included spend approximately $21.0 million above the $18.4 million tenant
improvement allowance provided by the landlord for the build out, of which $17.0
million related to office furniture and fixtures and computer hardware that has
been financed. For the six months ended June 30, 2020 , substantially all of the
$6.8 million of cash used in investing activities was related to the acquisition
of Novayre.
Historical Cash Flows
Operating Activities
For the six months ended June 30, 2020 , net cash used in operating activities of
$7.0 million consisted of a net loss of $23.4 million , offset by $10.1 million
in adjustments for non-cash items and $6.4 million of cash provided by changes
in working capital. Adjustments for non-cash items consisted of stock-based
compensation of $7.1 million , depreciation and amortization expense of $3.0
million , and bad debt expense of $0.2 million . The increase in cash and cash
equivalents resulting from changes in working capital primarily consisted of a
$2.6 million increase in accrued compensation and related benefits as a result
of higher employee benefit accruals such as vacation and bonuses, a $2.4 million
increase in operating lease liabilities, a $2.3 million increase in deferred
revenue as a result of increased subscription sales, a $1.9 million decrease in
prepaid expenses and other assets, and a $1.3 million increase in other
liabilities due to the deferral of social security tax payments pursuant to the
provisions of the CARES Act. These increases to working capital were partially
offset by a $2.1 million increase in accounts receivable stemming from decreased
cash collections during the six months ended June 30, 2020 , a $1.7 million
decrease in accounts payable and accrued expenses primarily due to the timing of
payments, and a $0.3 million increase in deferred commissions.
For the six months ended June 30, 2019 , net cash provided by operating
activities of $12.0 million consisted of a net loss of $25.3 million , offset by
$12.0 million in adjustments for non-cash items and $25.2 million of cash
provided by changes in working capital. Adjustments for non-cash items consisted
of stock-based compensation of $9.9 million , depreciation and amortization
expense of $1.9 million , a loss on disposal of equipment of $0.1 million , and
bad debt expense of $0.1 million . The increase in cash and cash equivalents
resulting from changes in working capital primarily consisted of a $13.5 million
decrease in prepaid expenses and other assets, primarily due to a decrease in
the non-trade receivable resulting from our tenant improvement allowance. In
accordance with accounting principles generally accepted in the United States of
America , or U.S. GAAP, the $17.0 million of tenant improvement allowance
reimbursements received during the six months ended June 30, 2019 are a source
of cash in operating activities, whereas the capital expenditures are recorded
as cash used in investing activities. There was also a $9.3 million decrease in
accounts receivable due to increased cash collections during the six months
ended June 30, 2019 and a $5.5 million increase in accounts payable and accrued
expenses primarily due to the timing of payments. There was also a $4.6 million
increase in deferred rent, non-current as a result of taking initial possession
of the second phase of our new headquarters in February 2019 and recording an
additional lease incentive obligation. There was also a $0.6 million increase in
deferred revenue as a result of increased subscription sales. These increases
were partially offset by a $3.2 million decrease in accrued compensation and
related benefits primarily due to a decrease in accrued vacation expense because
of our new paid-time off policy, which took effect on January 1, 2019 . There was
also a $4.8 million increase in deferred commissions due to increased sales
during the six months ended June 30, 2019 and a $0.3 million decrease in other
current liabilities.
Investing Activities
For the six months ended June 30, 2020 , net cash used in investing activities
was $6.8 million which was primarily the result of $6.1 million in payments, net
of cash acquired, related to the acquisition of Novayre. In addition, there were
approximately $0.7 million in purchases of property and equipment.
For the six months ended June 30, 2019 , net cash used in investing activities
was $27.7 million and related primarily to the build-out of our new headquarters
and the purchase of property and equipment.
Financing Activities
39
--------------------------------------------------------------------------------
For the six months ended June 30, 2020 , net cash provided by financing
activities was $109.8 million , consisting of $108.2 million in proceeds from our
underwritten public offering in June 2020 , net of underwriting discounts and
commissions and the payment of offering expenses and $2.2 million in proceeds
received from stock option exercises, partially offset by $0.7 million in
principal payments on finance leases.
For the six months ended
Contractual Obligations and Commitments
We entered into a Second Amendment to Deed of Lease, or the Lease Second Amendment, with Tamares 7950Owner LLC , or the Landlord, effective as ofJanuary 1, 2020 . The Lease Second Amendment modified the Deed of Lease dated as ofApril 17, 2018 , as amended onDecember 23, 2019 , between us and Landlord, or the Lease, for our headquarters inMcLean, Virginia . Under the Lease Second Amendment, we exercised an option to expand the lease to the fourth floor of theNorth Tower , or the Fourth Floor, adding approximately 34,158 square feet to the premises. We will commence occupancy of the Fourth Floor on the sooner of the completion of certain improvements to the Fourth Floor andOctober 14, 2020 . The monthly base rent for the Fourth Floor will be$87,388 for the first 27 months of the lease term, subject to periodic increases thereafter. Other than as described above, as ofJune 30, 2020 , there was no material change in our contractual obligations and commitments from those disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , filed with theSEC onFebruary 20, 2020 .
Off-Balance Sheet Arrangements
As ofJune 30, 2020 , we did not have any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We do not engage in off-balance sheet financing arrangements. In addition, we do not engage in trading activities involving non-exchange traded contracts. We therefore believe we are not materially exposed to any financing, liquidity, market, or credit risks that could arise if we had engaged in these relationships.
Critical Accounting Policies and Estimates
The preparation of our condensed consolidated financial statements in conformity withU.S. GAAP requires us to make estimates and judgments that affect the amounts reported in those financial statements and accompanying notes. Although we believe the estimates we use are reasonable, due to the inherent uncertainty involved in making those estimates, actual results reported in future periods could differ from those estimates. Significant estimates and judgments embedded in the consolidated financial statements for the periods presented include revenue recognition, stock-based compensation, the valuation of goodwill and intangible assets, leases, costs to obtain a contract with a customer, and income taxes. While we continue to monitor the developments surrounding the COVID-19 pandemic, we are not aware of any specific events or circumstances that would require us to update our estimates, assumptions, and judgments.
There have been no material changes in our critical accounting policies from
those disclosed in our Annual Report on Form 10-K for the year ended
Recent Accounting Pronouncements
See Note 2 to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of recent accounting pronouncements.
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