Appian Corp (APPN) 2017 Q4 法說會逐字稿

Greetings, and welcome to Appian's Fourth Quarter 2017 Earnings Conference Call. (Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to [Kevin Brogan]. Thank you. You may begin.

Thank you, operator. Good afternoon, and thank you for joining us today to review Appian's Fourth Quarter and Full Year 2017 Financial Results. With me on the call today are Matt Calkins, Chairman and Chief Executive Officer; and Mark Lynch, Chief Financial Officer.

After prepared remarks, we will open up the call to a question-and-answer session.

During this call, we may make statements related to our business that are forward-looking statements under federal securities laws and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements related to our financial results, trends and guidance for the first quarter and full year 2018, the benefits of our platform, industry and market trends, our go-to-market and growth strategy, our market opportunity and ability to expand our leadership position, our ability to maintain and upsell existing customers and our ability to acquire new customers.

The words anticipate, continue, estimate, expect, intend, will and similar expressions are intended to identify forward-looking statements or similar indications of future expectations. These statements reflect our views only as of today and should not be reflected upon as representing our views as of any subsequent date. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations.

For a discussion on the material risks and other important factors that could affect our actual results, please refer to those contained in our Q3 2017 10-Q filing and our other periodic filings with the SEC. These documents and the earnings call presentation are available in the Investor Relations section of our website at www.appian.com.

Additionally, non-GAAP financial measures will be discussed on the conference call. Please refer to the tables in our earnings release and the Investor Relations portion of our website for a reconciliation of these measures to their most directly comparable GAAP financial measure.

With that, I'd like to turn the call over to our CEO, Matt Calkins. Matt?

Thank you, [Kevin], and thank you all for joining us today. In the fourth quarter of 2017, Appian subscription revenue grew 42% year-over-year to $23.5 million. Our non-GAAP loss from operations was $4.9 million compared to the loss of $1.8 million in the prior year quarter.

We were cash flow positive in Q4, generating $1 million in cash flow from operations. Our subscription revenue retention remained high at 122% as of December 31, 2017. Our professional services revenue was also high at $25.2 million with non-GAAP gross margin of 37%.

For the full year, subscription revenue grew by 38% to $82.8 million. And finally, of net new subscription customers for all of 2017, we added 85 versus 28 in the prior year. These results exceeded our guidance.

Appian's growth in 2017 has a lot to do with being in the right place, being well positioned. The positioning is very simple. Companies today need to build unique software applications. Traditional methods are expensive and slow. Appian has an easy answer. We let customers draw an application like a flowchart, rather than code it. We let them assemble an application from premade objects like reusable LEGO bricks. This approach is 6 to 20x faster than a regular development. Best of all, the applications built on our platform are powerful. They're scalable, secure, cloud-ready, highly available and native on all major mobile devices.

Appian applications run banks, airports, insurers, retailers, et cetera. We're making it easy to build unique industrial-strength software. That's an ability the world is excited to buy right now.

Our goal in 2018 is to bring this simple winning proposition to more customers. We're learning a lot about how large organizations want to build and use unique software. We channel this knowledge back into vertical marketing and sales campaigns, some of which showed great success in 2017. In pharma, for example, we grew subscription revenue 53% over the full year. Currently, 6 of the top 10 pharma companies use Appian to manage critical business processes like clinical trials management and pharmacovigilance. In Q4, we had new and expansion wins at 3 of the top 5 global pharmaceutical companies, and pharma subs revenue grew 70% versus the prior year period.

The first of these large wins was a significant expansion deal at an existing multi -- an existing $1 million-per-year customer. With this deal, which doubles their annual spend with us, they'll now use Appian to deliver new medical devices to market, replacing a sprawled -- homegrown apps and spreadsheets.

Among the significant new name wins was a European multinational pharmaceutical customer who plans to use Appian to manage its pharmacovigilance process. Their application will manage drug safety reporting and replace a disjointed mix of systems including Microsoft SharePoint, Lotus Notes, databases and e-mail.

We were selected over 2 large competitors because we successfully delivered a powerful application during a 2-day proof of concept.

Following the win, we developed and deployed the full solution in 9 weeks. I mention this to highlight our speed edge. We're fast to show value, and a 2-day POC, or proof of concept, suits us very well, but we're also remarkably quick to get full applications into production.

Our European investments over the past few years bore fruit in 2017. In Q4, European revenue was 20% of total revenue as compared to 11% in the prior year period. For all of 2017, European subscription revenue rose 91%, and total revenue doubled year-over-year. Notably, Europe also provided 32 net new subscription customers in 2017. In Europe, we gained one of the world's major beverage companies as a new customer in Q4. They wanted to replace their restaurant leasing system, currently running on paper, Excel and e-mail, with a more scalable and transparent solution. They chose Appian over 2 large competitors after we showed superior alignment with their team and a fully integrated application in a short proof of concept.

We also had a number of key Q4 expansion deals in Europe. We won a multimillion-dollar deal at MHRA, a governmental agency in the United Kingdom. We added $1 million follow-on deals at 2 of the top 20 global banks and at GRDF, an energy service company that serves 90% of the gas market in France.

GRDF became a customer in 2015 with the purchase of 2,500 user licenses. Over the last 2.5 years, they've expanded their use of Appian by building more applications and adding more users opportunistically. With our platform, they've improved service to their 11 million customers by better managing gas supplier requests, energy loss, gas and network extensions and meter connections.

In 2017, GRDF wanted a more strategic relationship and to use Appian globally so they increased their investment to allow them to grow to 10,000 users.

Perhaps the most important trend in our business today is the one towards stronger partnerships. Partners are sourcing more business for us. In 2017, the total value of partner-referred deals was 3.5x as much as in 2016. Partners brought us 30 new customers last year, which was more than Appian's total increase in new customers in 2016.

Here's a quick example to show how partner relationships facilitate our growth in new places. In Q4, we pursued a $1 million deal in Poland with a large global bank. They wanted to modernize their operations on a platform with strong Robotic Process Automation and case management capabilities. We're leaders in both of those markets, so we're an excellent fit. But because Poland is new to us, we relied on Deloitte's strong local presence and capabilities. Our technical strength and our partnership with Deloitte won this deal against 2 major competitors.

In addition to significantly increasing our subscription customer base in 2017, we were also more successful on a per-customer basis. The average ACV for our 2017 new customers was slightly higher than in 2016, indicating that we maintained deal quality as we captured more customers.

We also raised our average revenue per customer to $496,000.

Finally, for the past 3 years, we maintained an LTV to CAC ratio above 7. We showed value quickly, and we gained quick upsells. For example, there's a large U.S. bank who bought our software last September. We delivered their first application within 5 weeks. As a result, they expanded their investment in Appian with a multimillion-dollar purchase just 3 months following their initial order.

In our judgment, the market opportunity, combined with Appian's demonstrated ability to reach and satisfy that market warrants an incremental increase in investment in 2018. As you may know, investment is not Appian's first instinct, even in a growing market. We broke even, roughly, on a cash flow basis from the day we were founded to our IPO last May. We are instinctively frugal. We plan a $10 million acceleration in our expenditures for 2018, and our justification for this is as follows. First, our market shows high growth potential. We grew full year subs revenue 38% and we more than tripled our rate of new logo acquisition in 2017. Second, our technology creates good outcomes, and our customers are happy. Here, I cite our 122% NRRR and our high LTV to CAC ratio. Third, and finally, we are more able to serve and sustain growth in the business than we were before, thanks to a higher profile and greater partner support. Due to these factors, we believe now is an opportune time for a reasonable level of additional investment.

With that, I'll turn the call over to Mark for a deeper discussion of our financials. Mark?

Thanks, Matt. This was another strong quarter for Appian. I'll review the financial highlights of the quarter and then provide details on our Q1 and full year 2018 guidance.

Subscription revenue was $23.5 million for the fourth quarter, ahead of our guidance, and representing growth of 42% year-over-year. Q4 linearity was better than historical trends, which was helped by a number of deals being completed early in the quarter.

We believe our subscription revenue growth is the most relevant revenue metric on our P&L when evaluating the momentum of our business and market share gains. Our total subscription software and support revenue for the quarter was $25.4 million.

Professional services revenue in the fourth quarter was $25.2 million, up 14% compared to Q3 2017. The significant growth in services year-over-year is due to the low compare in Q4 2016, coupled with a surge in net new customers during the second half of 2017. We have said many times that customers often spend more on services in their first years compared to later years, and the surge in new customers was met by a surge in professional services work. As we continue to work with our partners, we do not expect services to grow in this manner in the future.

Total revenue in the fourth quarter was $50.6 million, up 50% year-over-year. Our subscription revenue retention rate was 122% as of December 31, 2017, which was above the 110% to 120% range that we would expect on a quarterly basis. We are pleased with our customers' expanded use of our platform, which speaks directly to the value they are realizing. We ended the year with 291 subscription customers, adding 85 net new during the year. This compares to 206 subscription customers and the addition of 28 net new for 2016. We ended 2017 with 356 total customers compared to 280 at the end of 2016. Our international business contributed 30% of total revenue for Q4 and 27% for the full year compared with 23% and 20%, respectively, in the prior year periods.

Now I'll turn to our profitability metrics. Our non-GAAP gross margin for the fourth quarter was 64% compared to 69% in the same period last year. If we look at the 2 different components of our gross margin, you will see that they are both elite. Subscription software and support non-GAAP gross margin was 91% for the fourth quarter compared to 90% in the fourth quarter of 2016.

Our non-GAAP professional services gross margin for the fourth quarter remained higher than typical at 36%. Total non-GAAP operating expenses for the fourth quarter were $37.1 million, an increase of 48% from $25 million in the year-ago period. Sales and marketing was 44% of revenue in the fourth quarter compared with 43% of revenue in the prior year period. We continue to make investments to grow our direct sales headcount, both in the U.S. and internationally, support our technology and channel partners in marketing initiatives to drive awareness. With our powerful customer economics and strong subscription revenue retention, you should see accelerated investments on our sales and marketing functions.

R&D was 17% of revenue in the fourth quarter, down from 18% of revenue in the year-ago period. On a dollar basis, R&D remains a key area of investment, further differentiating the platform and adding in vertical-specific functionality.

G&A as a percentage of revenue was 13% in the fourth quarter compared to 13% in the prior year but will continue to increase on a dollar basis as we invest in our infrastructure as a public company.

Non-GAAP loss from operations in the fourth quarter was $4.9 million, well ahead of our guidance of a loss of $9.7 million to $9.2 million and compared to a non-GAAP loss from operations of $1.8 million in the year-ago period.

As you know, foreign exchange gains and losses can fluctuate. During the fourth quarter, we had $0.3 million of foreign exchange gains compared to $1.5 million of foreign exchange losses in Q4 2016.

Our guidance does not consider any additional potential impact to financial and other income and expenses associated with foreign exchange gains or losses as we do not estimate movements in foreign currency exchange rates.

Non-GAAP net loss was $4.8 million for the fourth quarter of 2017 or a loss of $0.08 per basic and diluted share compared to non-GAAP net loss of $4.2 million or a loss of $0.08 per basic and diluted share for the fourth quarter of 2016. This is based on 60.4 million and 52.4 million basic and diluted shares outstanding for the fourth quarter of 2017 and the fourth quarter of 2016, respectively.

Turning to our balance sheet. As of December 31, we had cash and cash equivalents of $73.8 million compared with $72.3 million as of September 30, 2017. Total deferred revenue was $89.1 million, up 27% year-over-year. With respect to our billing terms, the majority of our customers are invoiced on an annual upfront basis. However, we also have some large customers that are billed quarterly and others that are billed monthly. As such, we will continue to remind investors that changes in our deferred revenue are not always indicative of the momentum in the business.

Backlog as of December 31, 2017, was $214 million compared with $167 million as of December 31, 2016. For the fourth quarter, we generated $1 million in cash flow from operations. For 2017, we used $9.2 million in cash flow from operations as compared with $7.8 million used in the prior year period.

Now I will quickly recap full year 2017 results. Subscription revenue was $82.8 million, representing growth of 38% year-over-year. Our total subscription software and support revenue for the year was $91.5 million. Professional services revenue for 2017 was $85.2 million, up 35% compared to 2016.

Total revenue for 2017 was $176.7 million, up 33% year-over-year. Non-GAAP loss from operations for the year was $18.8 million compared with a loss of $11.4 million in 2016.

Non-GAAP net loss was $17.3 million in 2017 or a loss of $0.30 per basic and diluted share compared to non-GAAP net loss of $12.3 million or a loss of $0.23 per basic and diluted share for 2016. This is based on 57 million and 52.4 million basic and diluted shares outstanding for 2017 and 2016, respectively.

Now turning to guidance. First of all, I'd like to remind the listeners that we are an emerging growth company, as defined in the Jobs Act. As a result, we have decided not to adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies. In particular, we will defer adoption of the new revenue accounting standard topic 606 until January 1, 2019.

In addition, we do not believe the recently enacted Tax Cuts and Jobs Act of 2017 will have a material impact on Appian's financials as long as Appian continues to report tax losses domestically and internationally and maintains a full valuation allowance against deferred tax assets.

For the full year 2018, subscription revenue is expected to be in the range of $106.5 million and $107.5 million, representing year-over-year growth of between 29% and 30%. Total revenue is expected to be in the range of $198.1 million and $201.1 million. Non-GAAP loss from operations is expected to be in the range of $39.9 million and $37.9 million with a non-GAAP net loss per share of $0.54 and $0.53. (sic-see press release "$0.65 and $0.62") This assumes 61.1 million basic and diluted common shares outstanding.

For the first quarter of 2018, subscription revenue is expected to be in the range of $24.4 million and $24.6 million, representing year-over-year growth of 30% to 31%. Total revenue is expected to be in the range of $46 million and $46.2 million. Non-GAAP loss from operations is expected to be in the range of $10.9 million and $10.5 million with a non-GAAP net loss per share of $0.18 and $0.17. This assumes 60.6 million basic and diluted common shares outstanding.

Our guidance reflects our stated strategy to invest for growth, to capture the long-term opportunity and build on our momentum. Given our high gross margins and subscription revenue, along with our powerful LTV to CAC metrics, we think it makes sense to continue to invest in the business, to capture new consumers and capitalize on the big upsell opportunity.

We'll now open up the line to your questions.

(Operator Instructions) Our first question is from Sanjit Singh with Morgan Stanley.

I wanted to dig in a little bit into, Mark, the guidance for next year. Was really happy to see the strong net new customer adds. It seemed like it grew over 40% in 2017. But in terms of at least relative to where our model was, didn't see a whole lot of upside in terms of subscription revenue guidance. So I just wanted to understand the dynamics there as it relates to guidance, whether it's some conservatism or you expect some of the contribution from these customers to flow through over a multiyear period.

I'll cut in on that, if you don't mind. First of all, thank you for highlighting what I think is one of the best stats to come out of this quarter, the net new customer adds. I think that bodes really well for us going forward, and it's a highlight for me. I also love the fact that those net new customer adds came without dilution in quality. So we're still getting an excellent average customer value. And I believe that also reflects -- I mean, we're not diluting it. We're just getting more of the same in terms of customer. So I think the potential of those is very high. That said, I don't want to make any assumptions about how they're going to develop. Appian sales cycles tend to be long, and I want to be open-minded about how long it would take a customer to develop and move forward. I think it's a good indicator. But as we've said many times, Appian is aiming at 30% growth, and we are -- we plan to make estimates that are in line with that as we have. And so we're being careful about that, and we're delighted to see the new wave of customers. But we're going to wait and see how it plays out.

Great. And then a couple of things maybe on gross margins, particularly on the professional services side. They've held above 35% for most of the year. I wanted to get your view on whether -- are those types of gross margin on the professional services side sustainable? And then the same sort of similar question on the retention rate, sort of hovering around that 120% range, which is kind of well above what you guys saw in 2016. And so wanted to get your view on the sustainability of those trends on those 2 metrics.

Great. Okay. I'll take that one also. The professional services margins, you're right. These have been really, really elite level margins, and we do not intend to maintain that level of margin. We've been pleased to see it come in, but it is not our business to maximize professional services profits. Our plan with regards to professional services is to be consultative and encourage success amongst our customers, not to make the last possible dollar out of those relationships. We have had traditionally high prices, and that was largely so that we could create a price vacuum under our price point and encourage our partners to fill that vacuum and build healthy Appian-centric businesses. But with regards to the net market for Appian-centric services, we plan and expect to continue to lose market share in that market. We don't want to sustain our place in it. And as we become smaller and more consultative, I expect those margins to drop. With regards to your second question, which was, can we sustain the 122% revenue retention that we reported this quarter, and I believe exactly the same thing last quarter? We are -- we like to estimate between 110% and 120% in net revenue retention. I'm delighted to see it higher. I think it makes a really good statement about the experience that our customers are getting. And you bet, we're asking for a lot. We ask professional services to deliver a lot in terms of happy customers and revenue retention, but we're comfortable estimating that 110% to 120% is where this business belongs.

Great. And then my last question in terms of the margin guidance. It looks like we're going to see an accelerated pace of investments going into next year. In terms of where we're going to see that investment within sales and marketing, is that hiring quota-carrying reps to the sort of same level you saw last year in 2017 -- and we think about the mix between domestic and international, any sort of color you can provide on that in terms of where these investments are going?

Yes, that's right. Okay, we're absolutely going to hire quota-carrying reps with some of that additional investment. And that, of course, drives a lot of the company investment. You bring on a rep, then you got to staff them with BDRs and solutions consultants and appropriate marketing and lead gen. And so you make your decision about adding new reps and then you kind of bring the entourage behind it. So that's driving a lot of the structure around the spend. It will be largely sales and marketing spend, I can tell you that. And we will not neglect the growth in Europe. It's one of our top growth areas in 2017. As we mentioned, the 91% subscription revenue was particularly impressive, and we want to feed that strength that we're seeing in Europe.

And I think from the spend, we will continue to invest heavily in the R&D function as well because that's incredibly important for us, to stay basically creating -- basically improving the simplicity of the platform and making it easier to deploy throughout our customer base.

Our next question is from Raimo Lenschow with Barclays.

Just going back on the investment level, so we -- on The Street, people obviously modeled a level of losses or profitability for 2018, and you clearly are double-clicking on investment. It seems to me that, I don't know if it was post-IPO, that you see something in the market that kind of triggered that you want to be more aggressive. Can you just talk a little bit about kind of what changed over the last few months that kind of drove this decision to kind of say, look, actually I don't want to wait. I don't want to be that measured. I just -- kind of I need to go now.

Yes, there definitely were things. I don't want to characterize our response as unmeasured, Raimo. But I will say, there are certainly triggers that we look at to justify an incrementally larger spend footprint. I think the subs revenue being 38% growing year-over-year, that growth rate was certainly a trigger that said, this deserves some additional investment. The NRRR meant a lot to me. That being on the high end of our range and steady at 122%. I think the LTV to CAC indicates a lot of strength and that, that warrants a follow-up investment. And I also believe that as a company, we're more able to handle spending more money this year than we were a year ago with the stature or the profile we have coming out of the IPO, with the far greater partner support than we had. And that support is so necessary. If we're going to scale up quickly and staff clients to success, I needed that to be there. We need that to be there. I believe we're in a better position to spend carefully and incrementally than we were a year ago.

And then on that note, like a couple of quarters ago, there was a little bit of a debate. Are you kind of low-code? Are you kind of more than low-code, et cetera? Like, how did you see the market understanding evolving of what you do, how you fit into the world versus -- vis-a-vis other players in the market?

That's right. I still prefer an all of the above strategy, which is to say that what we're offering is a little bit divergent from the expectations that any market label carries but that we can fulfill the expectations of many markets. And that we hope we are seen in greater fidelity as we go forward and that a market definition begins to coalesce around exactly what we're offering, which is a great, easy way to build unique software. You don't exactly feel that when you hear about low-code. Low-code gives you the simplicity side but not the power. And you don't feel that in other definitions either, like case management, BPM, high productivity application platform as a service and a few other tongue-twisters. None of them convey the totality of what Appian is offering which, in short, is a combination between simplicity and speed and power of application. Nobody is really hitting that sweet spot, but I do believe that the message is getting out, and it may be getting out most effectively through examples of Appian's success rather than through redefined market parameters. Suffice it to say, the market is still indistinct in many ways, and we are exceeding the expectations of clients who approach us under any one of those market labels. However, competitively, it's landed us in a very good circumstance. We're seeing growth and competitive success no matter which angle the customer comes to us from.

Okay, perfect. And then last question from me. As you think about the European roll out -- or like if you think about how you expand in Europe, can you talk a little bit how you do that? Like, a lot of software companies historically done, like they start in U.K. and use that as a bridgehead to go into other countries in Europe. Like, what's your approach there?

Yes, that's right. Well, we have also followed that game plan. Our first and largest office in Europe is in London, and we have branched out from there. However, as we've matured, we've refined the strategy, the doctrine by which we enter new countries. Whereas in the past, it might have been you drop a sales rep in there and hope that a year or 2 from now, they've got a referenceable customer, and then you hope that customer convinces some partners to train resources. And then you have a viable combination of reputation, resources and presence. We don't do that anymore. Our new doctrine says that when you go into a new office, new country, you go in with a minimum viable team, which is to say you need reps; consultants; adequate support, generally from partners; references, publicity; in-language marketing. We place a minimum winning team in our new offices now, and it gets us the basis for good growth.

For example, we did that in Spain not too long ago, and that model worked incredibly well and, as you saw, the announcement the other day about the significant expansion with Banco Santander.

That was a press release from this week.

Our next question is from Gregg Moskowitz with Cowen and Company.

This is actually Matt Broome on for Gregg. I'm just curious to what extent is your planned new spend targeting new business versus expansions at existing deployments?

Those are both so important to us. I try not to counterpose the 2 against each other. When we bring on new reps, we tend to focus them on new accounts so that they don't get distracted by growing versus seeking. However, both of these components are exceptionally important to us. We have a land-and-expand strategy. And so we mean to get more out of every new customer that we sell. As part of the plan, then, we've got salespeople dedicated to it. So both of these are so important. And depending on how new we are in a vertical or a region, we might favor one over the other, but they're both so essential. I don't want to trade them.

That's fair enough. And I guess, how do you characterize overall industry awareness of low-code today versus sort of 12 months ago?

I think that our IPO did something to put low-code on the map, I hope so. I believe that we've got more attention -- I can tell you we have more attention on our website. We get more attention at trade shows. We get far more attention from partners than we did a year ago. So while it's hard for me to quantify how much of that attention is attached to low-code specifically, and how much of it is just accruing according to our demonstrated value proposition or our larger presence, our greater marketing, that I don't know. But I will say we're getting a lot more attention.

Okay, great. And then finally, just when you look back on 2017, how are hiring levels relative to plan? That's it for me.

Hiring levels were fairly true to plan, and that's saying something. In the past, Appian has been reluctant or challenged in its ability to fill hiring plans. I think I might have something to do with it. We tend to be really tough on who we bring on, and I try to be involved in a lot of those cycles. So we got a great recruiting team. We invested in building up our capability, and now, we are delivering a solid pipeline of no-compromise candidates, which is to say we're hitting our hiring targets with no compromise, no dilution to the quality of the firm, the culture of the firm. I'm really impressed. It's a sort of a low-profile victory for us, is the degree of great candidates we've been able to put through the process and hire in 2017.

Our next question is from Jesse Hulsing with Goldman Sachs.

I wanted to drill back into the net adds, which is very, very encouraging. Were the deal sizes on lands different versus where they've been prior? And I was also hoping that you could give us some color on maybe trends by vertical. Are you seeing any particular strength in health care or financial services or any other vertical on the net adds side?

Okay. First of all, with regards to the size of the net adds, not the count of them, now, but the size, like, have we maintained an equal deal size over time with regards to our lands? Yes, we have. In fact, we've maintained full consistency with past trends. And with regards to the count and where it's falling across different industries, I'll say financial services continues to be terrific for us. We highlighted our success in health care, in the 1 quarter ago earnings release. And we highlighted our success in pharma in the current release. And I believe those 2 industries have excelled for us. So I'd put those as our top 3. Not that I'm not pleased with others. I think we've got a -- we have a great diversity of clients and industries, but those 3 have stood out.

That's helpful. And I understand the rationale for investing, particularly given the inflection that you're seeing in customer growth. But I'm wondering what's the thought process for free cash flow breakeven timing-wise? Do you have any targets in mind?

Okay, yes. You want to take it?

Yes. As we've been saying over the past, I'd say, 9 months or so, we still expect to basically be breakeven cash flow basis towards the end of 2019, or the end of 2019 going into 2020. So that still has not changed. And in fact, if you look at Q4 this year, we were -- we actually generated -- we're modestly cash flow positive in the quarter. So we're going to keep our eye on that, but right now, we're going to continue to invest. At least in 2018, we're bullish about the opportunity we see in front of us, and we're going to do it. But as we've always said, we're going to do it pragmatically. It's kind of against our DNA, but it's something that we're going to do in a deliberate manner.

The incremental spend increase that we mentioned today is a 2018 incremental spend increase and is not about, in any way, 2019.

Our next question is from Bhavan Suri with William Blair.

Let me touch first on a strategic question, then maybe more a tactical one as a follow-up. But strategically, if you think about the product, Matt, you've got sort of Kx. You've got metadata. You sort of built out the suitability to generate at scale. Obviously, you went through the various pieces, code and low-code is a part of it but scale and speed and everything else. But to me, as you think about the roots of BPM that you guys came from, there's also the ability to think about using AI to drive automation as these applications are rolled out, normal stride application improvement and application process improvement. I'd love to sort of think about -- love to get some thoughts from you, not necessarily in the next even 3, 4, 5 quarters. But sort of as you guys think about the long term, the next 2 to 3 years, how the product evolves to embed some of that stuff in there to drive that? Is that something you guys are working on? How do you think that rolls out? Is it a value add? Is it something that's just incremental to the product? Just some thoughts on how you guys and the team are thinking about it, especially given some of the roots around analytics you guys have too, would love to understand that.

Yes, that's a great question. We do have roots in analytics. We love data. We love AI. We've been having a few announcements with regards to AI. You saw something, I think, beginning of last year. We're absolutely thinking about this, working on this. We don't have anything to announce today, but we have announced and surely, we will announce on this topic. I will say, by the way, that I believe that AI belongs a little bit lower in the stack than popular imagination might place it. And I mean that on the technological stack and also on the stack that has a person at the top. So I'm less thinking, say, that AI is going to write your next application and more thinking that AI will provide critical support in interpreting, evaluating, quantifying, recognizing, right? These are things that AI is really well-suited for. Someday, someday, maybe AI will do everything for us. But right now, I believe it's going to master the bottom of the stack first, and we are approaching the AI opportunity that way.

Got it. Got it. Yes, and I tend to agree with sort of the here's a recommendation as opposed to rewriting things, true. I guess something a little more tactical from my perspective. You've talked about some of these really nice expansions at customers, and it's coupled with sort of partners too. But as you think about it, I'd love to understand how, a little more tactically, a partner gets involved, develops the first application -- or sorry, a customer gets involved, develops the first application and they roll it out. And there's great acceptance and it is much more efficient and it is quick. And your team was involved, and maybe your partner was involved, but obviously, the customer was involved. When they get to the second application they think they can roll out, what percentage is that sort of the customer's people doing it now that they've got comfortable and they're trained? And then by the third or fourth, sort of what is that linearity of sort of the customer owning the idea and owning the process to automate these legacy systems and applications using Appian sort of play out? Do you see what I'm trying to get to?

I absolutely do. It's where I'm trying to get to. I'd like to hand off the services to the customer or to a partner, as per the customer's preference, as early as possible in the life cycle, provided that we in no way threaten the success of our value proposition on-site. That's my goal. So we train. We transition. We bring partners on to our original deal team, so that the transition will be easier, and we can move on. We have redirected the services team this year, explicitly in bonuses everywhere from the top-down. We have redirected the team to care more about customer success and net revenue retention than we care about billable hours or service revenue. So we're serious about not treating customers as a cash cow but instead being enablers to their success. That is our goal with services. And we're happy to stand aside as soon as possible in order to be sure that happens.

And I guess, my really quick follow-up would be, so have you seen that happen? Have you seen customers sort of say, hey, we love the technology, thanks for the tech, but we don't need your folks. We don't need your partner's folks because we got this. So I'm just trying to understand what that time line looks like. Like how long before -- say, a large customer who's expanded a couple of times. Looks like any trends would be helpful.

Yes, I've seen customers say that before the first application, right? Say, we've got this. I remember customers occasionally saying, if we need you for services, then we don't want you for software, right? So some customers are very bold about this whether because they've got internal confidence or they insist on simplicity. There are reasons why the number of applications that we service is zero, sometimes. Every -- as we go forward in an account, we're doing less and less, percentage-wise, with services. As I said, we're also intending to lose market share, and we are losing market share in the Appian-related services category overall. So our objective is merely to guarantee quality and get out of the way.

Our next question is Richard Davis with Canaccord Genuity.

So it sounds like the change in strategy is offensive. And so therefore I have a couple of questions on the competitive set and stuff like that, so kind of 2 parts. One, you mentioned, pharmaco -- I can't pronounce it, there's too many syllables, but the pharmacovigilance, whatever, is that competitive at all to Veeva? And then second, have you seen any change in kind of the competitive bakeoffs that you're running into with regard to particularly, companies like Pegasystems, OutSystems, ServiceNow, any of the other folks? Has there been any evolution on that front?

Okay. With regards to Veeva, I am not aware that we have ever competed against Veeva. And pharmacovigilance does not -- is not an overlap with them. With regards to our competitors, we see the same cast of characters as we are used to seeing, with Pegasystems foremost. We see Pegasystems most of the time, and I believe it is still the case that we see Pegasystems more than twice as often as we see any other competitor.

But I think it's important too that from a -- when we go in, it's -- a lot of times, it's Appian or do it themselves. So the first and foremost is do they want to build it themselves. And they realize it's going to be really hard. It's going to take them 3 years, and they don't have all the people to do it. So that's our first incumbent. But when you look at competitive forays, it is definitely Pega, and then after that, it's a smattering of other folks.

I'm glad you brought that up. Our first competitor, so to speak, is just alternative value propositions. We don't actually think too much about our competitors, we think about our value proposition. We think about whether we're adding value on site, whether we're accelerating the ability to make new applications, whether those applications are powerful, whether they're secure and usable and easy and walk-up valuable. That's all extremely important to us, and we spend a great deal of time honing the value proposition compared with really almost no time at all thinking about what our competitors are doing or whether we can match them in some way. We know that this is a wide open market. We know that our -- Appian and its competitors offer fundamentally different roots and different value proposition. And therefore, this is not a parity situation nor a feature matching situation, not for the most part. It is instead a pioneering situation in which we, and others in their own ways, attempt to create a meaningful value proposition.

Got it. And then just a numbers question. So if you're spending $10 million incremental on various hires and stuff like that, is the logic -- should I, as an outsider, think, well, obviously it won't add a bunch of revenues to '18 because you got to cycle people in. But in '19, I assume that you hope and intend that to be accretive. I mean, do you guys run numbers and go, okay, if we spend $10 million, that will get us $20 million in '19? Or how -- at least as an outsider, and I know you're not guiding for '19, but how should we think about that?

We're hoping that our investments bear fruit, obviously. And we don't want to give any guidance or indication of what's going to happen in 2019. But we've said all along, from a subs revenue perspective, we feel comfortable with a 30%-plus growth, which I think everybody on this line would think is a reasonably decent growth for a software company.

I would like to -- I mean, that's the perfect answer, of course, we can't guide to '19. But I would like to say that look what happened in Europe, right? We've been investing in Europe for a couple of years. We've talked about our plans, right, to have a bigger footprint and to do a better job saturating the opportunity on the continent. And then, in these results, you see that, that pays off. So I think it's some reinforcement of our confidence that we can invest well.

Our last question is from Terry Tillman with SunTrust Robinson Humphrey.

I wanted to build on Richard's question and ask about the 2020 guidance. No, I'm kidding. Real quick in terms of, I can't help but look at -- and a lot of us analysts wait with bated breath on these metrics that sometimes you guys will tease us and give us some of these metrics. In the case of the net adds, I mean, it really is a big step up. And part of it's definitely explained, Matt, by the partners driving over 30 deals, which is powerful. But just from an expectation standpoint, I know you're not guiding to net adds for '18, but with these partners still in the earlier stages, could we theoretically continue to see tremendous growth in customer acquisition in '18 even before these investments that Richard had asked about, and you talked about, even bear fruit.

All right. Well, there's a few reasons why we had as much success as we did in net adds. I think our profile rising had something to do with it, maybe a little. We did very well with partners. So you're spot on about that. Europe produced more net adds than the whole company did a year prior. And then I also think that our message met the market very well this year, which is to say, we were selling something that people wanted to buy. It was digital transformation. It was an easier way to build applications. That was a good message, and so it helped us. All these things helped us. And the simplicity of that message helped us. It was an easier thing for a new customer to digest and approve. I believe a lot of these factors will continue to help us in similar ways. And I believe we're going to have a good year in terms of net customer adds. We don't guide to it, and I don't want to. And I do want to be careful to suggest that -- or I want to be careful not to suggest that I think another tripling is in the works. I think that triple had a lot to do with some fortuitous alignments, and we're certainly not expecting that. But we do believe we're going to get good growth in net customer adds in 2018 because a lot of factors are lined up well for us.

And I think it's important for those folks that are listening in, is that from a guidance -- or not a guidance perspective, but from a disclosure perspective, we plan on giving customer net add -- basically customer net adds on an annual basis, not on a quarterly basis.

Yes, right. Right. Okay, got it. And Matt, in terms of with some incremental investment because of the excitement and the opportunity into '18, could we see another beachhead or an onslaught in another vertical market? Or are you just going to take the 3 or 4 where you're seeing major traction and just go deeper and broader with those?

Yes. Well, whenever there's a decision like this at Appian, we always say we want to do fewer things better. That isn't to say that we'll always have the same set of verticals that we've got now. In fact, I'm sure we won't. We don't have a new one to announce today. We feel we've done very well in the investments we've made and the focus that we've shown in key verticals: financial services, pharmaceuticals, health care. So we're going to keep at those. And at such time as we broaden that, we'll announce it then.

Yes. But I think also, if you look at the S-1 and all that stuff, we're relatively vertical agnostic. I mean, our platform resonates within any vertical. It's really, what we're trying to do is focus on certain verticals that has certain pain points that our platform meets really well.

Got it. And Mark, not to keep you out in the cold here, like it is here in Toronto, where I'm at right now. But a question in terms of: the services was significant upside in the quarter, and you explained it pretty well. But at the same time, you are trying to, and as Matt tried to emphasize, you want to lose significant market share in services, which I guess is a good thing. But I'm thinking about how do we look at services either for the full year or off of the fourth quarter? Just trying to be as accurate as we can in the model with that.

Yes, I think -- I mean I think we've said at a high level, and services are kind of lumpy, and they surge at times, as you guys can see you on our historical financials. But what we try to say is that on average, over the long haul, we would expect services to grow about as fast -- about half as fast as our subscription revenue growth, maybe even a little slower than that. But obviously, that didn't bear fruit in Q4, and part of it was the net new customer adds. But I think as the partner ecosystem comes in play, you're going to see more and more of the services ultimately going to them. But we're not going to just see the professional services disappear. You're going to see some growth next year. It just won't be 50% growth kind of thing.

Yes. I want to say a little bit to this. I totally agree with everything Mark said. Services had a few anomalous surprises here in the last [2] quarters. We don't want that to be anybody's expectation going forward. You see our guidance on services, it's not for growth. I believe services is a very good indicator. When it does pop up like this, it means great things for the business even though we're trying to transition to partners. It means that we got a lot of new logos, and it means that we're getting ready to get some good follow-on sales. Those are the 2 things that I see when I see more services dollars for Appian. It's the key link in a chain between a success in gaining customers and a success in upselling customers. And as such, it means good things in all directions, but we're doing -- we're actively transitioning these to partners. You will see that. We will do that. And it will -- we're not going to be shocking you every time with professional services.

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back to Matt for closing remarks.

All right. I appreciate very much the interest, the questions, the support that you've all shown in Appian. I believe we've got a great year here ramping up, and I'm looking forward to 2018. Thank you for your questions and your time tonight.

Thank you. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.