What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-11-02 compared with 2023-08-03 · 149 added, 156 removed, 373 unchanged (45% of the section changed)

9 unchanged sentences

Appian is a software company that automates business processes.

The Appian AI-Powered Process Platform includes everything you need to design, automate, and optimize even the most complex processes, from start to finish.

The Appian AI Process Platform includes everything you need to design, automate, and optimize even the most complex processes, from start to finish.

The world's most innovative organizations trust Appian to improve their workflows, unify data, and optimize operations—resulting in better growth and superior customer experiences.

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Our partners then 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.

We intend to continue our focus on adding new customers with our strategic partners.

In addition, over time we expect our 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, 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 20.1% and 20.3% of our total revenue for the three and six months ended June 30, 2023, respectively as compared to 18.2% of our total revenue in each of the three and six months ended June 30, 2022.

No single end-customer accounted for more than 10% of our total revenue in the three and six months ended June 30, 2023 or 2022.

Our customers primarily 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 21.1% and 20.6% of our total revenue for the three and nine months ended September 30, 2023, respectively, as compared to 21.2% and 19.2% of our total revenue for the three and nine months ended September 30, 2022, respectively.

No single end-customer accounted for more than 10% of our total revenue in the three and nine months ended September 30, 2023 or 2022.

We offer our platform globally.

Our platform supports multiple languages to facilitate collaboration and address challenges in multinational organizations.

In the three and six months ended June 30, 2023, 38.4% and 35.8%, respectively, of our total revenue was generated from customers outside of the United States as compared to 35.0% and 34.2% in the three and six months ended June 30, 2022, respectively.

As of June 30, 2023, we operated in 16 countries.

In the three and nine months ended September 30, 2023, 35.3% and 35.6%, respectively, of our total revenue was generated from customers outside of the United States as compared to 31.3% and 33.2% in the three and nine months ended September 30, 2022, respectively.

As of September 30, 2023, we operated in 16 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.

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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.

• 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.

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The degree to which prospective customers recognize the need for our platform, 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.

• 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 or a legacy perpetual license as of the specified measurement date.

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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.

• 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.

• 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.

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Their role is to ensure customers realize value from our platform and to 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.

• 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 lasting from two to six months.

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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 six months ended June 30, 2023 and 2022, 73.3% and 71.5% of our revenue, respectively, was derived from sales of subscriptions while the remaining 26.7% and 28.5%, 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 investing in our platform and infrastructure to continuously maximize their power and speed, meet the evolving needs of our customers, and take advantage of our market opportunity.

For the nine months ended September 30, 2023 and 2022, 74.1% and 72.2% of our revenue, respectively, was derived from sales of subscriptions while the remaining 25.9% and 27.8%, 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 investing in our platform and infrastructure to continuously maximize their power and speed, meet the evolving needs of our customers, and take advantage of our market opportunity.

In addition, we may pursue strategic acquisitions that enhance our product offerings.

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Cloud Subscription Revenue

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 % Change 2023 2022 % Change

4 unchanged sentences

Cloud Subscription Revenue Retention Rate

As of June 30,

As of September 30,

Cloud subscription revenue retention rate 117 % 115 %

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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.

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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.

In 2023, we expect our general and administrative expense to decrease in absolute dollars largely due to an anticipated decline in legal costs.

In 2023, we expect our general and administrative expense to decrease in absolute dollars largely due to an anticipated decline in legal costs, partially offset by amortization expense associated with the judgment preservation insurance (see Note 12 to the Condensed Consolidated Financial Statements for further discussion).

Other Non-Operating (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 investments, and other sources of income or expense not related to our core business operations.

Other (income) expense, net consists primarily of 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

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Results of Operations

The following table sets forth our consolidated statements of operations data (in thousands):

Three Months Ended June 30, Six Months Ended June 30,

The following table sets forth our consolidated statements of operations (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

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Other non-operating expense

Other (income) expense, net (3,886) 6,153 (6,576) 6,940

Other expense (income), net 1,939 5,876 (4,637) 12,815

Interest expense 4,917 89 12,790 222

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Net loss $ (22,251) $ (43,996) $ (101,435) $ (116,503)

(1) Stock-based compensation as a component of these line items is as follows:

Three Months Ended June 30, Six Months Ended June 30,

(1) Stock-based compensation as a component of these line items is as follows (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

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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 June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

14 unchanged sentences

Other non-operating expense

Other (income) expense, net (3.0) 5.6 (2.5) 3.1

Other expense (income), net 1.4 5.0 (1.2) 3.7

Interest expense 3.6 0.1 3.2 0.1

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* Totals may not foot due to rounding.

Comparison of the Three Months Ended June 30, 2023 and 2022

Three Months Ended June 30,

Comparison of the Three Months Ended September 30, 2023 and 2022

Three Months Ended September 30,

2023 2022 $ Change % Change

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Total revenue $ 137,094 $ 117,876 $ 19,218 16.3 %

Total revenue increased $17.7 million, or 16.0%, in the three months ended June 30, 2023 compared to the same period in 2022 due to an increase in our subscriptions revenue of $17.1 million and an increase in our professional services revenue of $0.5 million.

The increase in subscriptions revenue was driven by a $17.4 million increase in cloud subscription revenue and a $0.8 million increase in maintenance and support revenue, both of which were partially offset by a $1.1 million decrease in on-premises subscription revenue.

With respect to new versus existing customers, there was a $7.3 million increase in subscriptions revenue stemming from sales of

subscriptions to new customers, while the remaining $9.8 million of the increase was attributable to expanded deployments and corresponding sales of additional subscriptions to existing customers.

Total revenue increased $19.2 million, or 16.3%, in the three months ended September 30, 2023 compared to the same period in 2022 due to an increase in our subscriptions revenue of $17.3 million and an increase in our professional services revenue of $1.9 million.

The increase in subscriptions revenue was driven by a $16.6 million increase in cloud subscription revenue, a $0.4 million increase in maintenance and support revenue, and a $0.3

million increase in on-premises subscription revenue.

With respect to new versus existing customers, there was a $6.8 million increase in subscriptions revenue stemming from sales of subscriptions to new customers, while the remaining $10.5 million of the increase was attributable to expanded deployments, price increases on renewals, and corresponding sales of additional subscriptions to existing customers.

The increase in professional services revenue was due primarily to a $6.5 million increase in sales to new customers, which was partially offset by a $4.6 million decrease in revenue from existing customers.

Cost of Revenue

Three Months Ended June 30,

Three Months Ended September 30,

2023 2022 $ Change % Change

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Total gross margin 73.7 % 71.4 %

Cost of revenue increased $3.6 million, or 10.7%, in the three months ended June 30, 2023 compared to the same period in 2022, primarily due to a $1.9 million increase in professional services and product support personnel costs and a $1.7 million increase in hosting costs.

Personnel costs increased due to an increase in professional services and product support personnel headcount of 9.9% from June 30, 2022 to June 30, 2023 in addition to increased wages and fringe benefits and a $0.1 million increase in stock-based compensation expense.

Hosting costs increased as sales of our cloud offering increased in the three months ended June 30, 2023.

Subscriptions gross margin slightly decreased to 88.5% for the three months ended June 30, 2023 compared to 88.9% in the same period in 2022 due to increased hosting costs as sales of our cloud offering increased.

The increase in hosting costs was partially offset by an increase in subscriptions revenue during the three months ended June 30, 2023 as compared to the three months ended June 30, 2022.

Professional services gross margin decreased to 23.2% for the three months ended June 30, 2023 compared to 25.8% in the same period in 2022 due largely to the aforementioned increase in professional services personnel costs, which was partially offset by an increase in professional services revenue in the comparable periods.

Gross margin increased to 71.2% for the three months ended June 30, 2023 compared to 69.8% for the three months ended June 30, 2022, driven by more gross profit from subscriptions.

Cost of revenue increased $2.3 million, or 6.8%, in the three months ended September 30, 2023 compared to the same period in 2022, primarily due to a $1.7 million increase in hosting costs and a $1.5 million increase in professional services and product support personnel costs.

These increases were partially offset by a $0.5 million decrease in contractor costs and a $0.3 million decline in billable expenses.

Hosting costs increased as sales of our cloud offering increased in the three months ended September 30, 2023.

Personnel costs increased due to an increase in professional services and product support personnel headcount of 7.8% from September 30, 2022 to September 30, 2023 in addition to increased wages and fringe benefits and a $0.1 million increase in stock-based compensation expense.

Contractor costs decreased as a result of a decline in the usage of subcontractors.

Billable expenses decreased primarily as a result of lower travel and entertainment expenses stemming from fewer in-person engagements.

Subscriptions gross margin was 89.1% for the three months ended September 30, 2023, consistent with a margin of 89.2% in the same period in 2022 due primarily to increased hosting costs as sales of our cloud offering increased.

The increase in hosting costs was partially offset by an increase in subscriptions revenue during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022.

Professional services gross margin increased to 25.5% for the three months ended September 30, 2023 compared to 22.0% in the same period in 2022 due largely to an increase in professional services revenue in the comparable periods coupled with a lower rate of professional services expense growth.

Gross margin increased to 73.7% for the three months ended September 30, 2023 compared to 71.4% for the three months ended September 30, 2022, driven largely by the higher gross profit margin from professional services.

Sales and Marketing Expense

Three Months Ended June 30,

Three Months Ended September 30,

2023 2022 $ Change % Change

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% of revenue 40.6 % 46.6 %

Sales and marketing expense increased $6.4 million, or 11.4%, in the three months ended June 30, 2023 compared to the same period in 2022, primarily due to a $7.6 million increase in sales and marketing personnel costs, a $0.3 million increase in overhead costs, and a $0.2 million increase in professional fees, which were partially offset by a $1.7 million decrease in marketing costs.

Personnel costs increased due to an increase in sales and marketing personnel headcount of 17.3% from June 30, 2022 to June 30, 2023 in addition to increased wages and fringe benefits, a $2.6 million increase in commissions expense due to increased sales, a $0.9 million increase in severance costs, and a $0.5 million increase in stock-based compensation expense.

Overhead costs increased primarily due to expenditures for an internal sales and marketing event.

These increases were partially offset by a

decrease in travel and entertainment expense due to a lower number of in-person engagements and events as compared to the prior year.

Marketing costs decreased primarily due to a decrease in advertising expense stemming from a decrease in the number of advertising campaigns launched in the three months ended June 30, 2023 relative to the three months ended June 30, 2022, as well as a decrease in the cost of marketing events, primarily Appian World.

Sales and marketing expense increased $0.8 million, or 1.4%, in the three months ended September 30, 2023 compared to the same period in 2022, primarily due to a $4.9 million increase in sales and marketing personnel costs.

This increase was partially offset by a $3.4 million decrease in overhead costs and a $0.8 million decrease in marketing costs.

Although sales and marketing personnel headcount fell 0.9% year over year, personnel costs increased due to increased wages and fringe benefits relative to the prior year, a $1.8 million increase in commissions expense due to increased sales, and a $0.6 million increase in stock-based compensation expense.

Overhead costs decreased primarily due to the absence of non-recurring expenditures for an internal sales and marketing event that occurred in the third quarter of the prior year and a decrease in certain allocated costs (primarily IT spending).

Marketing costs decreased primarily due to a decrease in advertising expense stemming from a decrease in the number of advertising campaigns launched in the three months ended September 30, 2023 relative to the three months ended September 30, 2022.

Research and Development Expense

Three Months Ended June 30,

Three Months Ended September 30,

2023 2022 $ Change % Change

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% of revenue 27.1 % 31.9 %

Research and development expense increased $5.9 million, or 17.4%, in the three months ended June 30, 2023 compared to the same period in 2022, primarily due to a $5.8 million increase in research and development personnel costs.

Personnel costs increased due to an increase in research and development personnel headcount of 14.4% from June 30, 2022 to June 30, 2023 in addition to increased wages and fringe benefits and a $0.8 million increase in severance costs.

These personnel costs were partially offset by a $0.2 million decrease in stock-based compensation expense.

Research and development expense decreased $0.5 million, or 1.3%, in the three months ended September 30, 2023 compared to the same period in 2022, primarily due to a $0.4 million decrease in professional fees.

Professional fees decreased due to a decline in consulting fees stemming from a lower usage of external resources to assist in our platform development efforts relative to the prior year.

General and Administrative Expense

Three Months Ended June 30,

Three Months Ended September 30,

2023 2022 $ Change % Change

2 unchanged sentences

% of revenue 17.1 % 24.9 %

General and administrative expense decreased $0.3 million, or 1.0%, in the three months ended June 30, 2023 compared to the same period in 2022 primarily due to a $5.3 million decrease in professional fees.

This decrease was partially offset by a $4.4 million increase in general and administrative personnel costs and a $0.5 million increase in overhead costs.

Professional fees decreased due to a $6.2 million decline in legal fees incurred relative to the three months ended June 30, 2022, which was partially offset by a $0.6 million increase in consulting fees.

Personnel costs increased due to an increase in general and administrative personnel headcount of 5.9% from June 30, 2022 to June 30, 2023 in addition to increased wages and fringe benefits as well as a $1.5 million increase in stock-based compensation expense.

Overhead costs increased primarily due to an increase in lease expense resulting from an expansion of our corporate headquarters.

Other Non-Operating (Income) Expense, Net

Three Months Ended June 30,

General and administrative expense decreased $5.9 million, or 20.2%, in the three months ended September 30, 2023 compared to the same period in 2022 primarily due to a $7.2 million decrease in professional fees and a $0.4 million decrease in general and administrative personnel costs.

These decreases were partially offset by a $1.7 million increase in overhead costs.

Professional fees decreased due to a $7.6 million decline in legal fees incurred relative to the three months ended September 30, 2022.

Personnel costs decreased due to a decrease in general and administrative personnel headcount of 4.3% from September 30, 2022 to September 30, 2023 and a $0.4 million decrease in stock-based compensation expense.

Overhead costs increased primarily due to amortization expense related to our judgment preservation insurance policy.

Other Non-Operating Expense, Net

Three Months Ended September 30,

2023 2022 $ Change % Change

(dollars in thousands)

Other (income) expense, net $ (3,886) $ 6,153 $ (10,039) ***

Other expense, net

$ 1,939 $ 5,876 $ (3,937) (67.0) %

% of revenue 1.4 % 5.0 %

*** Indicates a percentage that is not meaningful.

Other income, net was $3.9 million in the three months ended June 30, 2023 compared to other expense, net of $6.2 million in the three months ended June 30, 2022.

This change was primarily due to $1.2 million in foreign

exchange gains in the three months ended June 30, 2023 as compared to $6.5 million in foreign exchange losses in the three months ended June 30, 2022 as well as a $2.5 million increase in interest income in the three months ended June 30, 2023 relative to the prior year related to our increase in short-term investments from investment of our credit facility proceeds.

Other expense, net was $1.9 million in the three months ended September 30, 2023 compared to other expense, net of $5.9 million in the three months ended September 30, 2022.

This change was primarily due to $4.3 million in foreign exchange losses in the three months ended September 30, 2023 as compared to $6.1 million in foreign exchange losses in the three months ended September 30, 2022.

In addition, there was a $2.1 million increase in interest income in the three months ended September 30, 2023 relative to the prior year stemming from increased investments.

Interest Expense

Three Months Ended June 30,

Three Months Ended September 30,

2023 2022 $ Change % Change

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*** Indicates a percentage that is not meaningful.

Interest expense increased $4.7 million in the three months ended June 30, 2023 as compared to the corresponding period in 2022 primarily due to interest expense incurred on the new credit facility borrowings that we entered into during the fourth quarter of 2022.

Comparison of the Six Months Ended June 30, 2023 and 2022

Six Months Ended June 30,

Interest expense increased $4.8 million in the three months ended September 30, 2023 as compared to the corresponding period in 2022 primarily due to interest expense incurred on the new credit facility borrowings that we entered into during the fourth quarter of 2022.

Comparison of the Nine Months Ended September 30, 2023 and 2022

Nine Months Ended September 30,

2023 2022 $ Change % Change

3 unchanged sentences

Total revenue $ 400,044 $ 342,205 $ 57,839 16.9 %

Total revenue increased $38.6 million, or 17.2%, in the six months ended June 30, 2023 compared to the same period in 2022 due to an increase in our subscriptions revenue of $32.4 million and an increase in our professional services revenue of $6.3 million.

Total revenue increased $57.8 million, or 16.9%, in the nine months ended September 30, 2023 compared to the same period in 2022 due to an increase in our subscriptions revenue of $49.6 million and an increase in our professional services revenue of $8.2 million.

The increase in subscriptions revenue was driven by a $50.3 million increase in cloud subscription revenue and a $1.7 million increase in maintenance and support revenue, both of which were partially offset by a $2.4 million decrease in on-premises subscription revenue.

With respect to new versus existing customers, there was a $14.2 million increase in subscriptions revenue stemming from sales of subscriptions to new customers, while the remaining $18.2 million of the increase was attributable to expanded deployments and corresponding sales of additional subscriptions to existing customers.

The increase in professional services revenue was due primarily to a $12.2 million increase in sales to new customers, which was partially offset by a $5.9 million decrease in revenue from existing customers.

With respect to new versus existing customers, there was a $17.1 million increase in subscriptions revenue stemming from sales of

subscriptions to new customers along with a $32.6 million increase attributable to expanded deployments, price increases on renewals, and corresponding sales of additional subscriptions to existing customers.

The increase in professional services revenue was due primarily to a $16.7 million increase in sales to new customers, which was partially offset by an $8.5 million decrease in revenue from existing customers.

Cost of Revenue

Six Months Ended June 30,

Nine Months Ended September 30,

2023 2022 $ Change % Change

7 unchanged sentences

Total gross margin 72.8 % 71.3 %

Cost of revenue increased $8.6 million, or 13.4%, in the six months ended June 30, 2023 compared to the same period in 2022, primarily due to a $4.7 million increase in professional services and product support personnel costs, a $3.2 million increase in hosting costs, a $0.4 million increase in contractor costs, and a $0.4 million increase in travel and entertainment expenses.

Personnel costs increased due to an increase in professional services and product support personnel headcount of 9.9% from June 30, 2022 to June 30, 2023 in addition to increased wages and fringe benefits and a $0.8 million increase in stock-based compensation expense.

Hosting costs increased as sales of our cloud offering increased in the six months ended June 30, 2023.

Contractor costs increased in the six months ended June 30, 2023 compared to the same period in 2022 due to an increase in the usage of subcontractors and consultants for professional services engagements, while travel and entertainment expenses increased due to a larger number of in-person engagements, events, and other business-related traveling.

Subscriptions gross margin decreased to 89.0% for the six months ended June 30, 2023 as compared to 89.6% for the six months ended June 30, 2022 as an increase in subscriptions revenue was offset by an increase in hosting costs.

Professional services gross margin increased to 26.3% for the six months ended June 30, 2023 compared to 25.6% in the same period in 2022 due largely to the aforementioned increase in professional services revenue.

The increase in professional services revenue was partially offset by higher personnel and other allocated costs such as human resources, information technology, and office-related spending in the comparable periods.

Gross margin rose to 72.3% for the six months ended June 30, 2023 compared to 71.3% for the six months ended June 30, 2022.

Cost of revenue increased $10.9 million, or 11.1%, in the nine months ended September 30, 2023 compared to the same period in 2022, primarily due to a $6.2 million increase in professional services and product support personnel costs and a $4.8 million increase in hosting costs.

Personnel costs increased due to an increase in professional services and product support personnel headcount of 7.8% from September 30, 2022 to September 30, 2023 in addition to increased wages and fringe benefits and a $0.8 million increase in stock-based compensation expense.

Hosting costs increased as sales of our cloud offering increased in the nine months ended September 30, 2023.

Subscriptions gross margin decreased to 89.0% for the nine months ended September 30, 2023 as compared to 89.4% for the nine months ended September 30, 2022 as an increase in subscriptions revenue was offset by an increase in hosting costs.

Professional services gross margin increased to 26.1% for the nine months ended September 30, 2023 compared to 24.4% in the same period in 2022 due largely to the aforementioned increase in professional services revenue, which was partially offset by higher personnel costs.

Gross margin rose to 72.8% for the nine months ended September 30, 2023 compared to 71.3% for the nine months ended September 30, 2022 driven largely by the higher gross margin from professional services.

Sales and Marketing Expense

Six Months Ended June 30,

Nine Months Ended September 30,

2023 2022 $ Change % Change

2 unchanged sentences

% of revenue 45.3 % 45.9 %

Sales and marketing expense increased $23.5 million, or 23.0%, in the six months ended June 30, 2023 compared to the same period in 2022, primarily due to a $22.8 million increase in sales and marketing personnel costs, a $2.9 million increase in allocated overhead costs, and a $0.2 million increase in professional fees, all of which were partially offset by a $2.4 million decrease in marketing costs.

Personnel costs increased due to an increase in sales and marketing personnel headcount of 17.3% from June 30, 2022 to June 30, 2023 in addition to increased wages and fringe benefits, a $5.3 million increase in commissions expense due to increased sales, a $4.5 million increase in severance costs, and a $1.2 million increase in stock-based compensation expense.

Overhead costs increased primarily due to expenditures for internal sales and marketing events and 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 decreased primarily due to a decrease in advertising expense stemming from a decrease in the number of advertising campaigns launched in the six months ended June 30, 2023 relative to the six months ended June 30, 2022, as well as decreases in cost of marketing events, primarily Appian World.

Sales and marketing expense increased $24.2 million, or 15.4%, in the nine months ended September 30, 2023 compared to the same period in 2022, primarily due to a $27.7 million increase in sales and marketing personnel costs which was partially offset by a $3.3 million decrease in marketing costs.

Although sales and marketing personnel headcount fell 0.9% year over year, personnel costs increased due to increased wages and fringe benefits relative to the prior year, a $7.1 million increase in commissions expense due to increased sales, a $5.2 million increase in severance costs, and a $1.7 million increase in stock-based compensation expense.

Marketing costs decreased primarily due to a decrease in advertising expense stemming from a decrease in the number of

advertising campaigns launched in the nine months ended September 30, 2023 relative to the nine months ended September 30, 2022, which was partially offset by an increase in the cost of marketing events.

Research and Development Expense

Six Months Ended June 30,

Nine Months Ended September 30,

2023 2022 $ Change % Change

2 unchanged sentences

% of revenue 29.6 % 29.6 %

Research and development expense increased $17.6 million, or 27.6%, in the six months ended June 30, 2023 compared to the same period in 2022, primarily due to a $17.7 million increase in research and development personnel costs.

Research and development expense increased $17.1 million, or 16.9%, in the nine months ended September 30, 2023 compared to the same period in 2022, primarily due to a $17.8 million increase in research and development personnel costs.

This increase was partially offset by a $0.5 million decrease in professional fees.

Personnel costs increased due to an increase in research and development personnel headcount of 9.1% from September 30, 2022 to September 30, 2023 in addition to increased wages and fringe benefits coupled with a $0.6 million increase in stock-based compensation expense and a $1.2 million increase in severance costs.

Professional fees decreased due to a decrease in consulting fees stemming from a lower usage of external resources to assist in our platform development efforts relative to the prior year.

General and Administrative Expense

Six Months Ended June 30,

Nine Months Ended September 30,

2023 2022 $ Change % Change

2 unchanged sentences

% of revenue 20.6 % 26.3 %

General and administrative expense decreased $1.8 million, or 2.9%, in the six months ended June 30, 2023 compared to the same period in 2022 primarily due to a $13.8 million decrease in professional fees.

General and administrative expense decreased $7.7 million, or 8.5%, in the nine months ended September 30, 2023 compared to the same period in 2022 primarily due to a $21.0 million decrease in professional fees.

This decrease was partially offset by a $9.6 million increase in general and administrative personnel costs and a $3.7 million increase in allocated overhead costs.

Professional fees decreased due to a $16.1 million decline in legal fees incurred relative to the six months ended June 30, 2023, which was partially offset by a $1.8 million increase in consulting fees.

Personnel costs increased due to an increase in general and administrative personnel headcount of 5.9% from June 30, 2022 to June 30, 2023 in addition to increased wages and fringe benefits, as well as a $3.0 million increase in stock-based compensation expense.

Overhead costs increased primarily due to an increase in certain allocated costs tied to our growth, primarily an increase in lease expense resulting from an expansion of our corporate headquarters and an increase in bad debt expense.

Professional fees decreased due to a $23.7 million decline in legal fees incurred relative to the nine months ended September 30, 2022, which was partially offset by a $1.8 million increase in consulting fees.

Although general and administrative personnel headcount fell 4.3% year over year, personnel costs increased due to increased wages and fringe benefits relative to the prior year and a $2.6 million increase in stock-based compensation expense.

Overhead costs increased primarily due to an increase in lease expense resulting from an expansion of our corporate headquarters, and amortization expense related to our judgment preservation insurance policy.

Other Non-Operating (Income) Expense, Net

Six Months Ended June 30,

Nine Months Ended September 30,

2023 2022 $ Change % Change

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Other (income) expense, net

$ (4,637) $ 12,815 $ (17,452) ***

% of revenue (1.2) % 3.7 %

*** Indicates a percentage that is not meaningful.

Other income, net was $6.6 million in the six months ended June 30, 2023 compared to other expense, net of $6.9 million in the six months ended June 30, 2022.

This change was primarily due to $1.9 million in foreign exchange gains in the six months ended June 30, 2023 as compared to $8.4 million in foreign exchange losses in

the six months ended June 30, 2022 as well as a $4.5 million increase in interest income in the six months ended June 30, 2023 related to our increase in short-term investments from the credit facility proceeds.

Other income, net was $4.6 million in the nine months ended September 30, 2023 compared to other expense, net of $12.8 million in the nine months ended September 30, 2022.

This change was primarily due to $2.4 million in foreign exchange losses in the nine months ended September 30, 2023 as compared to $14.5 million in foreign exchange losses in the nine months ended September 30, 2022.

In addition, there was a $6.6 million increase in interest income in the nine months ended September 30, 2023 relative to the prior year stemming from increased investments.

Interest Expense

Six Months Ended June 30,

Nine Months Ended September 30,

2023 2022 $ Change % Change

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*** Indicates a percentage that is not meaningful.

Interest expense increased $7.9 million in the six months ended June 30, 2023 as compared to the corresponding period in 2022 primarily due to interest expense incurred on the new credit facility borrowings that we entered into during the fourth quarter of 2022.

Interest expense increased $12.8 million in the nine months ended September 30, 2023 as compared to the corresponding period in 2022 primarily due to interest expense incurred on the new credit facility borrowings that we entered into during the fourth quarter of 2022.

Non-GAAP Financial Measures

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Our non-GAAP financial performance measures include non-GAAP net loss, non-GAAP net loss per share, and non-GAAP operating loss.

These non-GAAP financial performance measures exclude the effect of stock-based compensation expense, certain litigation-related expenses consisting of legal and other professional fees associated with the Pegasystems cases, which are not indicative of our core operating performance, and severance costs related to involuntary reductions in our workforce.

While these items may be recurring in nature and should not be disregarded in the evaluation of our earnings performance, it is useful to exclude such items when analyzing current results and trends compared to other periods as these items can vary significantly from period to period depending on specific underlying transactions or events that may occur.

Therefore, while we may incur or recognize these types of expenses in the future, the Company believes removing these items for purposes of calculating the non-GAAP financial measures provides investors with a more focused presentation of our ongoing operating performance.

These non-GAAP financial performance measures exclude the effect of stock-based compensation expense, certain litigation-related expenses consisting of legal and other professional fees associated with the Pegasystems cases (net of insurance reimbursements), amortization of the judgment preservation insurance (“JPI”) policy and severance costs related to involuntary reductions in our workforce.

While some of these items may be recurring in nature and should not be disregarded in the evaluation of our earnings performance, it is useful to exclude such items when analyzing current results and trends compared to other periods as these items can vary significantly from period to period depending on specific underlying transactions or events that may occur.

Therefore, while we may incur or recognize these types of expenses in the future, we believe removing these items for purposes of calculating the non-GAAP financial measures provides investors with a more focused presentation of our ongoing operating performance.

We also discuss adjusted EBITDA, a non-GAAP financial performance measure we believe offers a useful view of the overall operation of our business.

We define adjusted EBITDA as net loss before (1) other non-operating (income) expenses, net, (2) interest expense, (3) income tax expense (benefit), (4) depreciation and amortization, (5) stock-based compensation expense, (6) litigation expenses directly associated with the Pegasystems cases, and (7) severance costs.

We define adjusted EBITDA as net loss before (1) other non-operating (income) expenses, net, (2) interest expense, (3) income tax expense (benefit), (4) depreciation expense and amortization of intangible assets, (5) stock-based compensation expense, (6) litigation expenses (net of insurance reimbursements) directly associated with the Pegasystems cases, (7) JPI amortization, and (8) severance costs.

The most directly comparable GAAP financial measure to adjusted EBITDA is net loss.

Users should consider the limitations of using adjusted EBITDA, including the fact this measure does not provide a complete measure of our operating performance.

Users should consider the

limitations of using adjusted EBITDA, including the fact this measure does not provide a complete measure of our operating performance.

Adjusted EBITDA is not intended to purport to be an alternative to net loss as a measure of operating performance or to cash flows from operating activities as a measure of liquidity.

The presentation of these non-GAAP financial measures is not intended to be considered in isolation from, as a substitute for, or superior to the financial information prepared and presented in accordance with GAAP, and our non-GAAP measures may be different from non-GAAP measures used by other companies.

The following tables reconcile our non-GAAP measures to their nearest comparable GAAP measures.

The reconciliation of GAAP operating loss to non-GAAP operating loss for the three and six months ended June 30, 2023 and 2022 is as follows (in thousands):

GAAP Measure Stock-Based Compensation Litigation Expenses Severance Costs Non-GAAP Measure

Three Months Ended June 30, 2023

The following tables reconcile our non-GAAP measures to their nearest comparable GAAP measures (in thousands, except per share data):

GAAP Measure Stock-Based Compensation Litigation Expenses JPI Amortization

Severance Costs Non-GAAP Measure

Three Months Ended September 30, 2023

Subscriptions cost of revenue $ 11,265 $ (211) $ — $ — $ — $ 11,054

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Net loss per share, basic and diluted $ (0.30) $ 0.15 $ (0.07) $ 0.02 $ — $ (0.20)

Six Months Ended June 30, 2023

Nine Months Ended September 30, 2023

Subscriptions cost of revenue $ 32,492 $ (713) $ — $ — $ (30) $ 31,749

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GAAP Measure Stock-Based Compensation Litigation Expenses Non-GAAP Measure

Three Months Ended June 30, 2022

Three Months Ended September 30, 2022

Subscriptions cost of revenue $ 9,313 $ (284) $ — $ 9,029

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Net loss per share, basic and diluted $ (0.61) $ 0.16 $ 0.02 $ (0.43)

Six Months Ended June 30, 2022

Nine Months Ended September 30, 2022

Subscriptions cost of revenue $ 26,065 $ (712) $ — $ 25,353

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Net loss per share, basic and diluted $ (1.61) $ 0.38 $ 0.28 $ (0.95)

The following table reconciles GAAP net loss to adjusted EBITDA for the three and six months ended June 30, 2023 and 2022 (in thousands):

Three Months Ended June 30, Six Months Ended June 30,

The following table reconciles GAAP net loss to adjusted EBITDA for the three and nine months ended September 30, 2023 and 2022 (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

GAAP net loss $ (22,251) $ (43,996) $ (101,435) $ (116,503)

Other (income) expense, net (3,886) 6,153 (6,576) 6,940

Other expense (income), net

1,939 5,876 (4,637) 12,815

Interest expense 4,917 89 12,790 222

Income tax expense (benefit) 178 255 2,137 (924)

Depreciation and amortization 2,364 1,800 4,705 3,573

Depreciation and amortization of intangibles

2,340 1,759 7,046 5,332

Stock-based compensation expense 11,011 11,336 33,215 27,427

Litigation expenses (4,961) 1,810 (2,772) 20,432

JPI amortization

1,485 — 1,485 —

Severance costs — — 6,299 —

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Liquidity and Capital Resources

The following table presents selected financial information and statistics pertaining to liquidity and capital resources as of June 30, 2023 and December 31, 2022:

June 30, 2023 December 31, 2022

The following table presents selected financial information and statistics pertaining to liquidity and capital resources as of September 30, 2023 and December 31, 2022:

September 30, 2023 December 31, 2022

Cash and cash equivalents $ 130,761 $ 148,132

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* Defined as current assets net of current liabilities, excluding the current portion of restricted cash.

As of June 30, 2023, we had $171.5 million of cash and cash equivalents and $65.4 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 twelve months.

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We have historically financed our operations in large part with equity financing arrangements.

Through June 30, 2023, we have completed four public offerings and received net proceeds of $344.8 million.

Through September 30, 2023, we have completed four public offerings and received net proceeds of $344.8 million.

Outside of equity offerings, we have financed our operations through sales of subscriptions and professional services.

To further help strengthen our financial position and support our growth initiatives, in 2022 we entered into a Senior Secured Credit Facilities Credit Agreement, or the Credit Agreement, which provides for a five-year term loan facility in an aggregate principal amount of $150.0 million and, in addition, up to $75.0 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).

To further help strengthen our financial position and support our growth initiatives, in November 2022 we entered into a Senior Secured Credit Facilities Credit Agreement, or the Credit Agreement, which provides for a five-year term loan facility in an aggregate principal amount of $150.0 million and, in addition, up to $75.0 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 Credit Agreement matures on November 3, 2027.

We will use the proceeds from the $150.0 million term loan to fund the continued growth of our business and support our working capital requirements.

We were in compliance with all covenants as of June 30, 2023.

We were in compliance with all covenants as of September 30, 2023.

We believe, based on our current financial forecasts and trends, that we will remain compliant with all covenants for the foreseeable future.

As of June 30, 2023, we had used borrowing capacity of $62.0 million under our $75.0 million revolving credit facility, and we had outstanding letters of credit totaling $11.9 million in connection with securing our leased office space.

As of September 30, 2023, we had used borrowing capacity of $62.0 million under our $75.0 million revolving credit facility, and we had outstanding letters of credit totaling $11.9 million in connection with securing our leased office space.

We expect future sources of funds to consist primarily of cash generated from sales of subscriptions and the related professional services.

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Outside of cash used in operations, other uses of cash in 2023 to date have included capital expenditures related to the expansion of our headquarters, repayments of existing debt, and purchases of investments.

Non-operating cash uses in the prior year through June 30, 2022 consisted primarily of capital expenditures related to the expansion of our headquarters.

Furthermore, in 2021 we executed a non-cancellable cloud hosting arrangement with Amazon Web Services that contains provisions for minimum purchase commitments.

In addition, on September 1, 2023, we entered into a Judgment Preservation Insurance (“JPI”) policy in connection with our $2.036 billion judgment against Pegasystems (see Note 12 to the condensed consolidated financial statements for additional details).

The total cost of the policy was $57.3 million, which we paid with operating cash on hand.

Furthermore, we have a non-cancellable cloud hosting arrangement with Amazon Web Services that contains provisions for minimum purchase commitments.

Specifically, purchase commitments under the agreement total $131.0 million over five years.

The agreement, which is in its second year as of June 30, 2023, contains minimum spending requirements of $25.0 million in the second year and $28.0 million in each of the third, fourth, and fifth years.

The agreement, which started in July 2021 and is now in its third year as of September 30, 2023, contains minimum spending requirements of $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 three and six months ended June 30, 2023, totaled $9.1 million and $18.5 million, respectively.

Spending under this agreement for the three and six months ended June 30, 2022 totaled $8.1 million and $15.9 million, respectively.

Spending under this agreement for the three and nine months ended September 30, 2023, totaled $9.3 million and $27.8 million, respectively.

Spending under this agreement for the three and nine months ended September 30, 2022 totaled $9.0 million and $24.8 million, respectively.

We expect to meet our minimum purchase commitments for the remainder of the contract term.

Silicon Valley Bank

In March 2023, Silicon Valley Bank’s (“SVB”) U.S.

operations were placed into receivership by the Federal Deposit Insurance Corporation (“FDIC”), and its U.K.

operations were placed into a Bank Insolvency Procedure by the Bank of England.

operations were later sold to First Citizens Bank and Trust Company (“First Citizens”), and its U.K.

operations were sold to HSBC UK Bank, Plc (“HSBC”).

We believe the financial institutions holding our cash deposits are financially sound.

We are closely monitoring the ongoing events involving limited liquidity, defaults, non-performance, or other adverse developments that affect financial institutions or other companies in the financial services industry.

In March 2023, we elected to draw down $62.0 million of our available revolving line of credit to protect us against disruptions and volatility in the credit markets.

We continue to believe we have sufficient assets and liquidity to cover our future obligations and to maintain compliance with the covenants contained in our Credit Agreement.

Historical Cash Flows

Six Months Ended June 30,

Nine Months Ended September 30,

2023 2022 $ Change % Change

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Investing activities:

Net cash (used by) provided by investing activities (25,372) 574 (25,946) ***

Net cash provided by investing activities

869 20,342 (19,473) (95.7)

Financing activities:

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Operating Activities

Net cash used by operating activities was $37.2 million for the six months ended June 30, 2023 as compared to $50.3 million used by operating activities for the six months ended June 30, 2022.

The decrease in net cash used by operating activities was primarily due to stronger collections from accounts receivable across the comparative periods.

In addition, there was a decline in legal fees during the six months ended June 30, 2023 as compared to the six months ended June 30, 2022, specifically attributable to two separate lawsuits involving an effort to enforce our intellectual property and to defend against reciprocal false advertising claim with Pegasystems.

Net cash used by operating activities was $102.2 million for the nine months ended September 30, 2023 as compared to $94.0 million used by operating activities for the nine months ended September 30, 2022.

The increase in net cash used by operating activities was due to the $57.3 million payment for our JPI policy.

This increase was mostly offset by a decline in legal fees and stronger collections from accounts receivable across the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022.

Investing Activities

Net cash used by investing activities was $25.4 million for the six months ended June 30, 2023 as compared to $0.6 million in net cash provided by investing activities for the six months ended June 30, 2022.

This change was primarily driven by a $22.2 million increase in purchases of investments, a $3.1 million increase in capital expenditures, and a $0.6 million decrease in proceeds from the sale of investments.

Net cash provided by investing activities was $0.9 million for the nine months ended September 30, 2023 as compared to $20.3 million in net cash provided by investing activities for the nine months ended September 30, 2022.

This change was primarily driven by a $22.2 million increase in purchases of investments and a $2.4 million increase in capital expenditures, both of which were partially offset by a $5.2 million increase in proceeds from the sale of investments.

Financing Activities

Net cash provided by financing activities was $85.7 million for the six months ended June 30, 2023 as compared to $25.0 million of net cash provided by financing activities for the six months ended June 30, 2022.

The increase in net cash provided by financing activities was primarily due to a $92.0 million increase in proceeds from

borrowings during the six months ended June 30, 2023.

Net cash provided by financing activities was $82.4 million for the nine months ended September 30, 2023 as compared to $25.2 million of net cash provided by financing activities for the nine months ended September 30, 2022.

The increase in net cash provided by financing activities was primarily due to a $92.0 million increase in proceeds from borrowings during the nine months ended September 30, 2023.

This increase was partially offset by a $24.5 million decrease in proceeds received from the exercise of stock options, a $7.2 million increase in payments for employee tax withholdings associated with the net settlement of stock awards, and a $2.6 million increase in debt repayments.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis