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, 2021 included in our Annual Report on Form 10-K, filed with theSecurities and Exchange Commission , orSEC , onFebruary 17, 2022 . 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 on a quarterly basis, and our future capital requirements. 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 17, 2022 and in our other filings with theSEC . Forward-looking statements should not be relied on 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
Appian is a unified platform for change. We accelerate customers' businesses by discovering, designing, and automating their most important processes. The Appian Low-Code Platform combines the key capabilities needed to get work done faster, Process Mining + Workflow + Automation, in a unified low-code platform. Appian is open, enterprise grade, and trusted by industry leaders. 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 discover, design, and automate powerful, enterprise-grade workflows and custom applications through our intuitive, visual interface with little or no coding required. Our customers have used workflows and applications built on our platform to launch new business lines, automate vital employee workflows, manage complex trading platforms, 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) cloud subscriptions bundled with maintenance and support and hosting services and (2) term license subscriptions bundled with maintenance and support. Our subscription contracts are priced 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 subscription 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. We invested in our Customer Success organization to help ensure customers are able to build and deploy applications on our platform. We have several strategic partnerships, including withKPMG , Accenture, PwC, Infosys, Wipro, and Deloitte, for them to refer customers to us in order to purchase subscriptions and then our partners 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 27
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investment in professional services, including strategic partners building their
practices around Appian, will drive increased adoption of our platform.
Our customers include financial services, government, life sciences, insurance, manufacturing, energy, healthcare, telecommunications, and transportation organizations. Generally, our sales team targets its efforts to organizations with over 2,000 employees and$2 billion in annual revenue. Revenue from government agencies represented 21.2% and 19.2% of our total revenue for the three and nine months endedSeptember 30, 2022 , respectively. This compares to revenue from government agencies of 19.2% and 20.0% of our total revenue in the three and nine months endedSeptember 30, 2021 , respectively. No single end-customer accounted for more than 10% of our total revenue in the three and nine months endedSeptember 30, 2022 or 2021. We offer our platform globally. Our platform supports multiple languages to facilitate collaboration and address challenges in multinational organizations. In the three and nine months endedSeptember 30, 2022 , 31.3% and 33.2%, respectively, of our total revenue was generated from customers outside ofthe United States as compared to 32.0% and 33.1% in the three and nine months endedSeptember 30, 2021 , respectively. As ofSeptember 30, 2022 , we operated in 15 countries. We believe we have a significant opportunity to continue to grow our international footprint, and we are investing in new geographies, including through investment in direct and indirect sales channels, professional services, and customer support and implementation partners. 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 our platform as well as the price and number of subscriptions of our platform that a customer purchases. We incur significant customer acquisition costs, including expenses associated with hiring new sales representatives, who can take anywhere from six months to a year to become productive given the length of our sales cycle, and marketing costs, 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 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 as of the specified measurement
date. Furthermore, we define a new customer as an entity that has entered into
its first active subscription or maintenance and support contract within one
calendar year of the specified measurement date while existing customers are
defined as entities that have maintained an active subscription or maintenance
and support contract for at least one calendar year from the specified
measurement date. Legacy customers from entities acquired in business
combinations are not counted as new customers until they enter into a new active
subscription or maintenance and support contract with us subsequent to the
completion of the business combination. Additionally, 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
team in order to drive sales to new customers. We continue to make investments
to enhance the expertise of our sales and marketing organization within our key
industry verticals of financial services, government, and life sciences. 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
differentiate ourselves within the increasingly competitive markets in which we
participate.
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•Further Penetration of Existing Customers. Our sales team 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. 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 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 re-focused 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 strategic partners and the
"land and expand" strategy versus delivering billable hours.
•Mix of Subscriptions 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 continue to 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 originate. 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 nine months ended September 30,
2022 and 2021, 72.2% and 71.1% of our revenue, respectively, was derived from
sales of subscriptions while the remaining 27.8% and 28.9%, 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 their power and speed, 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. 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
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 % Change 2022 2021 % Change
Cloud subscription revenue $ 60,621 $ 46,699 30 % $ 171,083 $ 128,238 33 %
Cloud subscription revenue includes cloud subscriptions bundled with maintenance
and support and hosting services. 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 or by the number of application licenses
purchased, 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 team 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 September 30,
2022
2021
Cloud subscription revenue retention rate 115 %
117 %
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 combined 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.
Key Components of Results of Operations
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 or through 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.
Revenue
Our revenue is comprised of the following:
Subscriptions
Subscriptions revenue is primarily derived from:
•Cloud 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. On-premises term
license subscriptions are offered when the customer prefers to self-manage the
deployment of our platform within their own infrastructure. When our platform is
delivered as a cloud subscription, we manage operational needs in third-party
hosted data centers.
Professional Services
Our professional services revenue is comprised of fees for consulting services,
including application development, deployment assistance, and training related
to our platform. Over time, we expect professional services revenue as a
percentage of total revenue to decrease as the usage of our partner network
expands.
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
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teams, amortization of developed technology, and allocated overhead costs. 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, third-party contractor costs, allocated overhead costs, and the costs of billable expenses such as travel and lodging. The unpredictability of the timing of providing services related to significant professional services agreements sold on a standalone basis may cause significant fluctuations in our cost of professional services which, in turn, may impact our quarterly financial results.
Gross Profit and Gross Margin
Gross profit and gross margin (defined as gross profit as a percentage of total revenue), have been, and will continue to be, affected by various factors, including the mix of cloud subscriptions and on-premises term license subscriptions, the mix of total subscriptions revenue and professional services revenue, subscription pricing, the costs associated with third-party hosting providers, and the extent to which we expand our professional services to support future growth. 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 cloud operations to support growth in our business, and the timing of those investments is expected to cause subscriptions gross margin to fluctuate on a quarterly basis.
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 Customer Success organization as we continue to invest in the growth of our business. Professional services gross margin is also impacted by the amount of services performed by subcontractors and partners as opposed to internal resources. In 2021, we had a lower usage of subcontractors and performed fewer in-person professional services engagements and deployments, both of which reduced certain classes of expenses and improved professional services margins. In 2022, these margins have declined but remain subject to fluctuation based on the factors discussed above. Operating Expenses Operating expenses consist of sales and marketing, research and development, and general and administrative expenses. Personnel-related costs such as salaries, bonuses, commissions, payroll tax payments, and stock-based compensation expense are the most significant components of each of these expense categories. Other components of each category include professional fees for third-party services such as contract labor, legal, software development resources, and consulting as well as allocated facility and overhead, which can include, among other types of costs, travel and entertainment expenditures, human resources costs such as placement fees, referral bonuses, training costs, and employee relations spending, office-related expenditures, and information technology costs for such items as infrastructure, software, and cloud computing services.
In general, our operating expenses are expected to continue to increase in
absolute dollars as we invest resources in growing our various teams.
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 activities and promotional events,
subcontracting fees, and allocated overhead costs.
31 -------------------------------------------------------------------------------- In order to continue to grow our business, geographical footprint, and brand awareness, we expect to continue investing resources in sales and marketing by increasing the number of sales and account management teams. Additionally, we expect certain classes of expense such as travel and entertainment and in-person marketing events to increase relative to recent years. As a result, 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, and overhead. Our research and development efforts are focused on enhancing the speed and power of our software platform. We expect research and development expense to continue to increase in absolute dollars as such costs are critical to maintain and improve the 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, as well as our senior executives. Additional expenses included in this category are non-personnel costs such as travel-related expenses, contracting and professional fees for such services as audits, taxation, and legal, insurance and other corporate expenses, including allocated overhead costs, and bad debt expenses. Absent certain non-recurring legal expenses incurred in 2022 and prior years, we expect our general and administrative expense to increase in absolute dollars as we continue to support our growth.
Other Non-Operating Expense
Other Expense, Net
Other 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 investments, and other sources of income or expense not related to our core business operations.
Interest Expense
Interest expense consists primarily of 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 statements of operations data
(in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Revenue
Subscriptions $ 86,520 $ 67,240 $ 246,908 $ 187,952
Professional services 31,356 25,177 95,297 76,319
Total revenue 117,876 92,417 342,205 264,271
Cost of revenue
Subscriptions(1) 9,313 7,092 26,065 19,806
Professional services(1) 24,447 19,415 72,011 56,065
Total cost of revenue 33,760 26,507 98,076 75,871
Gross profit 84,116 65,910 244,129 188,400
Operating expenses
Sales and marketing(1) 54,912 42,071 157,104 118,575
Research and development(1) 37,623 26,510 101,401 71,062
General and administrative(1) 29,357 20,226 90,014 56,726
Total operating expenses 121,892 88,807 348,519 246,363
Operating loss (37,776) (22,897) (104,390) (57,963)
Other non-operating expense
Other expense, net 5,876 2,329 12,815 4,141
Interest expense 89 72 222 233
Total other non-operating expense 5,965 2,401 13,037 4,374
Loss before income taxes (43,741) (25,298) (117,427) (62,337)
Income tax expense (benefit) 255 86 (924) 459
Net loss $ (43,996) $ (25,384) $ (116,503) $ (62,796)
(1) Stock-based compensation as a component of these line items is as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Cost of revenue
Subscriptions $ 284 $ 381 $ 712 $ 973
Professional services 1,401 777 3,788 2,283
Operating expenses
Sales and marketing 2,667 1,448 6,721 3,753
Research and development 3,454 1,263 8,831 3,347
General and administrative 3,530 1,331 7,375 7,336
Total stock-based compensation expense
$ 27,427 $ 17,692 33
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The following table sets forth our consolidated statements of operations data
expressed as a percentage of total revenue:
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Revenue
Subscriptions 73.4 % 72.8 % 72.2 % 71.1 %
Professional services 26.6 27.2 27.8 28.9
Total revenue 100.0 100.0 100.0 100.0
Cost of revenue
Subscriptions 7.9 7.7 7.6 7.5
Professional services 20.7 21.0 21.0 21.2
Total cost of revenue 28.6 28.7 28.7 28.7
Gross profit 71.4 71.3 71.3 71.3
Operating expenses
Sales and marketing 46.6 45.5 45.9 44.9
Research and development 31.9 28.7 29.6 26.9
General and administrative 24.9 21.9 26.3 21.5
Total operating expenses 103.4 96.1 101.8 93.2
Operating loss (32.0) (24.8) (30.5) (21.9)
Other non-operating expense Other expense, net 5.0 2.5 3.7 1.6 Interest expense 0.1 0.1 0.1 0.1 Total other non-operating expense 5.1 2.6 3.8 1.7 Loss before income taxes (37.1) (27.4) (34.3) (23.6) Income tax expense (benefit) 0.2 0.1 (0.3) 0.2 Net loss (37.3) % (27.5) % (34.0) % (23.8) %
Comparison of the Three Months Ended
Revenue
Three Months Ended September 30,
2022 2021 $ Change % Change
(dollars in thousands)
Revenue
Subscriptions $ 86,520 $ 67,240 $ 19,280 28.7 %
Professional services 31,356 25,177 6,179 24.5
Total revenue $ 117,876 $ 92,417 $ 25,459 27.5 %
Total revenue increased $25.5 million , or 27.5%, in the three months ended
September 30, 2022 compared to the same period in 2021 due to an increase in our
subscriptions revenue of $19.3 million and an increase in our professional
services revenue of $6.2 million . The increase in subscriptions revenue was
driven by a $13.9 million increase in cloud subscription revenue, a $4.7 million
increase in on-premises subscription revenue, and a $0.7 million increase in
maintenance and support revenue. With respect to new versus existing customers,
there was a $14.1 million increase in subscriptions revenue stemming from
expanded deployments and corresponding sales of additional subscriptions to
existing customers while $5.1 million of the increase was the result of sales of
subscriptions to new customers. The increase in professional services revenue
was due
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primarily to a
Cost of Revenue
Three Months Ended September 30,
2022 2021 $ Change % Change
(dollars in thousands)
Cost of revenue
Subscriptions $ 9,313 $ 7,092 $ 2,221 31.3 %
Professional services 24,447 19,415 5,032 25.9
Total cost of revenue $ 33,760 $ 26,507 $ 7,253 27.4 %
Subscriptions gross margin 89.2 % 89.5 %
Professional services gross margin 22.0 % 22.9 %
Total gross margin 71.4 % 71.3 %
Cost of revenue increased $7.3 million , or 27.4%, in the three months ended
September 30, 2022 compared to the same period in 2021, primarily due to a
$3.7 million increase in professional services and product support personnel
costs, a $1.5 million increase in hosting costs, a $1.3 million increase in
contractor costs, and a $0.6 million increase in travel and entertainment
expenses. Personnel costs increased due to an increase in professional services
and product support personnel headcount of 15.9% from September 30, 2021 to
September 30, 2022 in addition to increased wages and fringe benefits, coupled
with a $0.5 million increase in stock-based compensation expense. Hosting costs
increased as sales of our cloud offering increased in the three months ended
September 30, 2022 . Contractor costs increased in the three months ended
September 30, 2022 compared to the same period in 2021 due to an increase in the
usage of subcontractors and consultants for professional services engagements.
Subscriptions gross margin slightly decreased to 89.2% for the three months
ended September 30, 2022 compared to 89.5% in the same period in 2021 due to
increased hosting costs as sales of our cloud offering increased. However, this
increase in hosting costs was partially offset by an increase in subscriptions
revenue during the three months ended September 30, 2022 as compared to the
three months ended September 30, 2021 . Professional services gross margin
decreased to 22.0% for the three months ended September 30, 2022 compared to
22.9% in the same period in 2021 due largely to higher personnel and other
allocated costs such as human resources, information technology, and
office-related spending in the comparable periods, partially offset by an
increase in professional services revenue. Furthermore, fewer in-person
professional services engagements and deployments during the three months ended
September 30, 2021 as compared to the three months ended September 30, 2022 led
to temporarily improved margins in the prior year. Gross margin increased
slightly to 71.4% for the three months ended September 30, 2022 compared to
71.3% for the three months ended September 30, 2021 .
Sales and Marketing Expense
Three Months Ended September 30,
2022 2021 $ Change % Change
(dollars in thousands)
Sales and marketing $ 54,912 $ 42,071 $ 12,841 30.5 %
% of revenue 46.6 % 45.5 %
Sales and marketing expense increased $12.8 million , or 30.5%, in the three
months ended September 30, 2022 compared to the same period in 2021, primarily
due to a $8.4 million increase in sales and marketing personnel costs, a
$5.0 million increase in overhead costs, and a $0.4 million increase in
marketing costs, which were partially offset by a $0.9 million decrease in
professional fees. Personnel costs increased due to an increase in sales and
marketing personnel headcount of 24.5% from September 30, 2021 to September 30,
2022 in addition to increased wages and fringe benefits, a $1.3 million increase
in
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commissions expense due to increased sales, and a $1.2 million increase in
stock-based compensation expense. Overhead costs increased due to increases in
certain allocated costs tied directly to our growth such as spending for
offices, human resources costs, and information technology infrastructure.
Additionally, travel and entertainment expense increased due to a higher number
of in-person engagements and events as compared to the prior year. Marketing
costs increased due to an increase in advertising expense stemming from an
increase in the number of advertising campaigns launched in the three months
ended September 30, 2022 relative to the three months ended September 30, 2021 .
Professional fees decreased due to a decrease in the use of third-party sales
and marketing consultants for certain initiatives.
Research and Development Expense
Three Months Ended September 30,
2022 2021 $ Change % Change
(dollars in thousands)
Research and development $ 37,623 $ 26,510 $ 11,113 41.9 %
% of revenue 31.9 % 28.7 %
Research and development expense increased $11.1 million , or 41.9%, in the three
months ended September 30, 2022 compared to the same period in 2021, primarily
due to a $9.3 million increase in research and development personnel costs, a
$1.4 million increase in overhead costs, and a $0.4 million increase in
professional fees. Personnel costs increased due to an increase in research and
development personnel headcount of 25.6% from September 30, 2021 to
September 30, 2022 in addition to increased wages and fringe benefits, coupled
with a $2.2 million increase in stock-based compensation expense. Overhead costs
increased due to increases in certain allocated costs tied directly to our
growth such as spending for offices, human resources costs, and information
technology infrastructure. Professional fees increased due to an increase in
consulting fees stemming from higher usage of external resources to assist in
our platform development efforts.
General and Administrative Expense
Three Months Ended September 30,
2022 2021 $ Change % Change
(dollars in thousands)
General and administrative expense $ 29,357 $ 20,226 $ 9,131 45.1 %
% of revenue 24.9 % 21.9 %
General and administrative expense increased $9.1 million , or 45.1%, in the
three months ended September 30, 2022 compared to the same period in 2021,
primarily due to a $6.6 million increase in general and administrative personnel
costs and a $2.8 million increase in overhead costs, both of which were
partially offset by a $0.3 million decrease in professional fees. Personnel
costs increased due to an increase in general and administrative personnel
headcount of 38.2% from September 30, 2021 to September 30, 2022 in addition to
increased wages and fringe benefits, as well as a $2.2 million increase in
stock-based compensation expense. Overhead costs increased primarily due to an
increase in certain allocated costs tied to our growth such as insurance
premiums, information technology spending, human resources costs, and
office-related expenses. Professional fees decreased due to a $2.1 million
decline in legal fees incurred relative to the three months ended September 30,
2021 , which was substantially offset by a $1.7 million increase in consulting
fees.
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Other Non-Operating Expense, Net
Three Months Ended September 30,
2022 2021 $ Change % Change
(dollars in thousands)
Other expense, net $ 5,876 $ 2,329 $ 3,547 ***
% of revenue 5.0 % 2.5 %
*** Indicates a percentage that is not meaningful.
Other expense, net was$5.9 million in the three months endedSeptember 30, 2022 compared to other expense, net of$2.3 million in the three months endedSeptember 30, 2021 . This change was primarily due to$6.1 million in foreign exchange losses in the three months endedSeptember 30, 2022 as compared to$2.3 million in foreign exchange losses in the three months endedSeptember 30, 2021 . The primary reason for the increase in foreign exchange losses was the strengthening of theU.S. dollar against the British pound, Euro, and Swiss franc. Interest Expense Three Months Ended September 30, 2022 2021 $ Change % Change (dollars in thousands) Interest expense $ 89$ 72 $ 17 23.6 % % of revenue 0.1 % 0.1 %
Interest expense increased by a nominal amount in the three months ended
slightly higher commitment fees on the letters of credit outstanding.
Comparison of the Nine Months Ended
Revenue
Nine Months Ended September 30,
2022 2021 $ Change % Change
(dollars in thousands)
Revenue
Subscriptions $ 246,908 $ 187,952 $ 58,956 31.4 %
Professional services 95,297 76,319 $ 18,978 24.9 %
Total revenue $ 342,205 $ 264,271 $ 77,934 29.5 %
Total revenue increased $77.9 million , or 29.5%, in the nine months ended
September 30, 2022 compared to the same period in 2021 due to an increase in our
subscriptions revenue of $59.0 million and an increase in our professional
services revenue of $19.0 million . The increase in subscriptions revenue was
driven largely by a $42.8 million increase in cloud subscription revenue, a
$14.3 million increase in on-premises subscription revenue, and a $1.9 million
increase in maintenance and support revenue. With respect to new versus existing
customers, there was a $46.4 million increase in subscriptions revenue stemming
from expanded deployments and corresponding sales of additional subscriptions to
existing customers while $12.3 million of the increase was the result of sales
of subscriptions to new customers. The increase in professional services revenue
was due primarily to a $14.8 million increase in sales to new customers, in
addition to a $4.2 million increase in revenue from existing customers.
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Cost of Revenue
Nine Months Ended September 30,
2022 2021 $ Change % Change
(dollars in thousands)
Cost of revenue
Subscriptions $ 26,065 $ 19,806 $ 6,259 31.6 %
Professional services 72,011 56,065 $ 15,946 28.4 %
Total cost of revenue $ 98,076 $ 75,871 $ 22,205 29.3 %
Subscriptions gross margin 89.4 % 89.5 %
Professional services gross margin 24.4 % 26.5 %
Total gross margin 71.3 % 71.3 %
Cost of revenue increased $22.2 million , or 29.3%, in the nine months ended
September 30, 2022 compared to the same period in 2021, primarily due to a
$13.6 million increase in professional services and product support personnel
costs, a $4.0 million increase in hosting costs, a $2.2 million increase in
contractor costs, a $1.2 million increase in travel and entertainment expenses,
and a $1.2 million increase in overhead costs. Personnel costs increased due to
an increase in professional services and product support personnel headcount of
15.9% from September 30, 2021 to September 30, 2022 in addition to increased
wages and fringe benefits, coupled with a $1.2 million increase in stock-based
compensation. Hosting costs increased as sales of our cloud offering increased
in the nine months ended September 30, 2022 . Contractor costs increased in the
nine months ended September 30, 2022 compared to the same period in 2021 due to
an increase in the usage of subcontractors and consultants for professional
services engagements. Travel and entertainment expenses increased due to a
larger number of in-person engagements, events, and other business-related
traveling. The increase in overhead costs was due largely to an increase in
certain allocated costs tied directly to our growth such as spending for
offices, human resources costs, and information technology infrastructure.
Subscriptions gross margin was 89.4% for nine months ended September 30, 2022 as
compared to 89.5% for the nine months ended September 30, 2021 . Revenue from our
cloud offering increased and became a larger proportion of our overall
subscriptions revenue. However, the increase in revenue was offset by increased
hosting costs. Professional services gross margin decreased to 24.4% for the
nine months ended September 30, 2022 compared to 26.5% in the same period in
2021 due largely to higher personnel and human resources costs in the current
year, partially offset by an increase in professional services revenue.
Furthermore, fewer in-person professional services engagements and deployments
during the nine months ended September 30, 2021 as compared to the nine months
ended September 30, 2022 led to temporarily improved margins in the prior year.
Based on the above offsetting factors, gross margin remained consistent at 71.3%
for the nine months ended September 30, 2022 and 2021.
Sales and Marketing Expense
Nine Months Ended September 30,
2022 2021 $ Change % Change
(dollars in thousands)
Sales and marketing $ 157,104 $ 118,575 $ 38,529 32.5 %
% of revenue 45.9 % 44.9 %
Sales and marketing expense increased $38.5 million , or 32.5%, in the nine
months ended September 30, 2022 compared to the same period in 2021, primarily
due to a $23.4 million increase in sales and marketing personnel costs, an $11.3
million increase in overhead costs, and a $5.5 million increase in marketing
costs, which were partially offset by a $1.6 million decrease in professional
fees. Personnel costs increased due to an increase in sales and marketing
personnel headcount of 24.5% from September 30, 2021 to September 30, 2022 , in
addition to increased wages and fringe benefits, increased sales commissions
driven by our revenue growth, and a $3.0 million increase in stock-based
compensation expense. Overhead costs
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increased due to increases in certain allocated costs tied directly to our
growth such as spending for offices, human resources costs, and information
technology infrastructure. Additionally, travel and entertainment expenses
increased due to a higher number of in-person engagements and events relative to
the prior year. Marketing costs increased due to an increase in the number of
marketing events held during the nine months ended September 30, 2022 as
compared to the nine months ended September 30, 2021 , including spending on our
annual user conference Appian World , which resumed its in-person format in April
2022 . Additionally, marketing costs increased due to an increase in spending on
advertising campaigns. Professional fees decreased due to a decrease in the use
of third-party sales and marketing consultants for certain initiatives.
Research and Development Expense
Nine Months Ended September 30,
2022 2021 $ Change % Change
(dollars in thousands)
Research and development $ 101,401 $ 71,062 $ 30,339 42.7 %
% of revenue 29.6 % 26.9 %
Research and development expense increased $30.3 million , or 42.7%, in the nine
months ended September 30, 2022 compared to the same period in 2021, primarily
due to a $25.1 million increase in research and development personnel costs, a
$3.9 million increase in overhead costs, and a $1.3 million increase in
professional fees. Personnel costs increased due to an increase in research and
development personnel headcount of 25.6% from September 30, 2021 to
September 30, 2022 in addition to increased wages and fringe benefits, coupled
with a $5.5 million increase in stock-based compensation expense. Overhead costs
increased due to increases in certain allocated costs tied directly to our
growth such as spending for offices, human resources costs, and information
technology infrastructure. Professional fees increased due to an increase in
consulting fees stemming from higher usage of external resources to assist in
our platform development efforts.
General and Administrative Expense
Nine Months Ended September 30,
2022 2021 $ Change % Change
(dollars in thousands)
General and administrative expense $ 90,014 $ 56,726 $ 33,288 58.7 %
% of revenue 26.3 % 21.5 %
General and administrative expense increased $33.3 million , or 58.7%, in the
nine months ended September 30, 2022 compared to the same period in 2021,
primarily due to a $16.6 million increase in professional fees, an $8.8 million
increase in overhead costs, and a $7.8 million increase in general and
administrative personnel costs. Professional fees increased due to higher legal
fees incurred in connection with two separate lawsuits, one involving an effort
to enforce our intellectual property rights and one involving reciprocal false
advertising and related claims with a competitor. Refer to Item 1. Legal
Proceedings, within Part II of this Form 10-Q for further information. Overhead
costs increased primarily due to an increase in certain allocated costs tied to
our growth such as insurance premiums, information technology spending, human
resources costs, and office-related expenses. Personnel costs increased due to
an increase in general and administrative personnel headcount of 38.2% from
September 30, 2021 to September 30, 2022 in addition to increased wages and
fringe benefits.
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Other Non-Operating Expense, Net
Nine Months Ended September 30,
2022 2021 $ Change % Change
(dollars in thousands)
Other expense, net $ 12,815 $ 4,141 $ 8,674 ***
% of revenue 3.7 % 1.6 %
*** Indicates a percentage that is not meaningful.
Other expense, net was$12.8 million in the nine months endedSeptember 30, 2022 compared to other expense, net of$4.1 million in the nine months endedSeptember 30, 2021 . This change was primarily due to$14.5 million in foreign exchange losses in the nine months endedSeptember 30, 2022 as compared to$4.3 million in foreign exchange losses in the nine months endedSeptember 30, 2021 . The primary reason for the increase in foreign exchange losses was the strengthening of theU.S. dollar against the British pound, Euro, and Swiss franc. Interest Expense Nine Months Ended September 30, 2022 2021 $ Change % Change (dollars in thousands) Interest expense $ 222$ 233 $ (11) (4.7) % % of revenue 0.1 % 0.1 %
Interest expense decreased by a nominal amount in the nine months ended
commitment fees on the letters of credit outstanding.
Liquidity and Capital Resources
The following table presents selected financial information and statistics pertaining to liquidity and capital resources as ofSeptember 30, 2022 andDecember 31, 2021 : As of September 30, December 31, 2022 2021 Cash and cash equivalents$ 51,802 $ 100,796 Short-term investments and marketable securities 40,885 55,179 Property and equipment, net 38,692 36,913 Long-term investments - 12,044 Working capital* 71,531 121,752
* Defined as current assets net of current liabilities, excluding the current
portion of restricted cash
As ofSeptember 30, 2022 , we had$51.8 million of cash and cash equivalents and$40.9 million of short-term investments and marketable securities. We believe our existing cash and cash equivalents and short-term investments and marketable securities, 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. We recently have, and in the future may enter into, investments in or acquisitions of complementary businesses, products, or technologies, which could also require us to seek additional equity financing, incur indebtedness, or use cash resources. We 40
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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.
Sources of Funds
Since becoming a public company in 2017, we have financed our operations in large part with equity 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.
As of
lender, and as of that date, we had no outstanding borrowings and were in
compliance with all covenants.
To further help strengthen our financial position and support our growth initiatives, onNovember 3, 2022 , we entered into a new Senior Secured Credit Facilities Credit Agreement (the "Credit Agreement") which provides for a five-year term loan facility in an aggregate principal amount of$100.0 million and, in addition, up to$50.0 million for a revolving credit facility, including a letter of credit sub-facility in the aggregate availability amount of$15.0 million and a swingline sub-facility in the aggregate availability amount of$10.0 million (as a sublimit of the revolving loan facility). The new Credit Agreement matures onNovember 3, 2027 . We will use the proceeds from the$100.0 million term loan to fund the continued growth of our business and support our working capital requirements. The new Credit Agreement replaces our existing Line of Credit that was in place as ofSeptember 30, 2022 . We expect future sources of funds to consist primarily of cash generated from sales of subscriptions and the related professional services. We may also elect to raise additional sources of funding through draws on our new revolving credit facility, entering into new debt financing arrangements, or conducting additional public offerings. 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, and the level of market acceptance of our applications.
Uses of Funds
Our current principal uses of cash are funding operations and other working capital requirements. Historically, we have also utilized cash to pay for the acquisition of businesses that were complementary to ours, and we may pursue similar opportunities in the future. Over the past several years, revenue has increased significantly from year to year and, as a result, cash flows from customer collections have also grown. However, as we continue to invest in growing our business, operating expenses have also increased. Outside of cash used in operations, other uses of cash in 2022 to date have included capital expenditures related to the expansion of our headquarters and purchases of short-term investments. Non-operating cash uses in the prior year throughSeptember 30, 2021 consisted primarily of the acquisition ofLana Labs and modest capital expenditures. Furthermore, in 2021 we executed a non-cancellable cloud hosting arrangement withAmazon Web Services that contains provisions for minimum purchase commitments. Purchase commitments under the agreement total$131.0 million over five years, including$22.0 million in the first year,$25.0 million in the second year, and$28.0 million in each of the third, fourth, and fifth years. The timing of payments under the agreement may vary, and the total amount of payments may exceed the minimum depending on the volume of services utilized. Spending under this agreement for the nine months endedSeptember 30, 2022 totaled$24.8 million . 41
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Historical Cash Flows
Nine Months Ended September 30,
2022 2021 $ Change % Change
(dollars in thousands)
Beginning cash, cash equivalents, and
restricted cash $ 103,960 $ 112,462 $ (8,502) (7.6) %
Operating activities:
Net loss (116,503) (62,796) (53,707) 85.5
Stock-based compensation and other
non-cash adjustments 31,771 21,349 10,422 48.8
Changes in working capital (9,226) 6,949 (16,175) ***
Net cash used by operating activities (93,958) (34,498) (59,460) ***
Investing activities:
Net cash provided by investing activities 20,342 51,390 (31,048) (60.4)
Financing activities:
Net cash provided by financing activities 25,205 2,375 22,830 ***
Effect of exchange rates (1,694) (1,367) (327) 23.9
Net change in cash (50,105) 17,900 (68,005) ***
Ending cash, cash equivalents, and
restricted cash $ 53,855 $ 130,362 $ (76,507) (58.7) %
*** Indicates a percentage that is not meaningful.
Operating Activities
Net cash used by operating activities was$94.0 million for the nine months endedSeptember 30, 2022 as compared to$34.5 million used by operating activities for the nine months endedSeptember 30, 2021 . The increase in net cash used by operating activities was primarily due to a$53.7 million increase in net losses, most notably driven by the increase in operating expenses as discussed above. In addition, the increase in cash used by operating activities for the nine months endedSeptember 30, 2022 was attributed to a decline in cash flows from working capital of$16.2 million . This change in working capital is comprised primarily of a$14.5 million decrease in accounts payable and accrued expenses due to timing, a$9.5 million increase in prepaid expenses and other assets driven by higher prepayments under the AWS cloud hosting arrangement, and a$3.2 million decrease in other current and non-current liabilities due in part to the decrease in the escrow liability related to theLana Labs acquisition.
Investing Activities
Net cash provided by investing activities was$20.3 million for the nine months endedSeptember 30, 2022 as compared to$51.4 million provided by investing activities for the nine months endedSeptember 30, 2021 . Net cash provided by investing activities was primarily impacted by$31.2 million increase in purchases of investments during the nine months endedSeptember 30, 2022 , a$3.4 million increase in capital expenditures, and a$27.2 million decrease in proceeds from the sale of investments. Partially offsetting these increases was a$30.7 million decrease in payments for business acquisitions due to theAugust 2021 acquisition ofLana Labs .
Financing Activities
Net cash provided by financing activities was$25.2 million for the nine months endedSeptember 30, 2022 as compared to$2.4 million provided by financing activities for the nine months endedSeptember 30, 2021 . The increase in net cash provided by financing activities was primarily due to$23.8 million in proceeds received from the exercise of the 2019 CEO stock option during the nine months endedSeptember 30, 2022 . 42
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Critical Accounting Estimates
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 endedDecember 31, 2021 , filed with theSEC onFebruary 17, 2022 . We are not aware of any specific events or circumstances that would require us to update our estimates, assumptions, and judgments.
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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