Appian Corp

NASDAQ:APPN

Earnings Call Transcript 2019-Q3

[Operator]

Greetings. Welcome to the Appian Corporation Third Quarter 2019 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.

I will now turn the conference over to your host, Will Maina. You may begin.

[Will Maina, ICR]

Thank you, Daryl. Good afternoon and thank you for joining us today to review Appian’s third quarter financial results. With me on the call today are Matt Calkins, Chairman and Chief Executive Officer; and Mark Lynch, Chief Financial Officer. After prepared remarks, we will open the call to a question-and-answer session.

During this call, we may make statements related to our business that are forward-looking statements under federal securities laws and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements related to our financial results, trends and guidance for the fourth quarter and full year 2019, 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 up-sell 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 expectation. These statements reflect our views only as of today and should not be reflected upon as representing our views of any other subsequent date. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations.

For a discussion of the materials and other important factors that could affect our actual results, please refer to those contained in our 2018 10-K and 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 this conference call. Please refer to the tables in our earnings press release and the Investor Relations portion of our website for a reconciliation of these measures to their most directly comparable GAAP financial measures.

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

[Matt Calkins, Chairman and Chief Executive Officer]

Thanks, Will, and thank you all for joining us today. In the third quarter 2019, Appian subscription revenue grew 38% year-over-year to $40.4 million and our non-GAAP operating loss was $7.2 million. Our subscription revenue retention remains strong at 119% as of September 30. These results exceeded our guidance. Key growth drivers this quarter were EMEA, our three strongest industries and partners. Let’s start with EMEA.

EMEA, including Europe, the UK, the Middle East and Africa, increased subscription revenue about 60% in both Q1 and Q2 of this year. In Q3, it was once again our fastest growing territory with subscription revenue growth of 65% compared to the third quarter of 2018. We signed a notable UK expansion deal with the top 10 global bank had an Appian customer since 2016. In Q1, this leading bank made a multi-million dollar Appian purchase to manage regulatory changes and financial operations for its global services risk department.

This quarter, the bank purchased another $0.5 million of software to expand our platform into its commercial bank. It will use the licenses to deploy a customer onboarding and know your customer application. We will also deliver this division’s first project in eight weeks under the Appian Guarantee. Additionally, EMEA contributed a third of our new logos this quarter, including a top 10 European superstore chain. This organization purchased Appian to replace portions of their legacy system and better coordinate its marketing, procurement and sales teams to execute its food and non-food promotions. We won this deal over two competitors because we delivered a complex custom demo very quickly in just three days.

Financial services continues to be our largest and one of our fastest growing industries. In Q3, subscription revenue for this industry grew 48% compared to the same quarter last year. I’ll mention a few notable expansions in financial services this quarter. Top five global investment banks has been an Appian customer for three years. In Q3, it purchased millions of dollars of new Appian software. With this expansion, the bank will add 50% more users to its existing consumer banking app, bringing the bank closer to meeting its goal of standardizing customer case management in Appian. Additionally, they’ll develop a new asset servicing application to notify institutional clients when market events affect their portfolios. This application will allow the bank to inform clients up to two times faster and will be delivered in eight weeks under the Appian Guarantee.

Additionally, top five global asset management firm and existing Appian customer since 2018 purchased licenses in Q3 to build their 16th Appian application. They will use these licenses to replace the legacy system with Appian. Prior to this purchase, financial advisers would submit documents requesting changes to their clients’ accounts and the firm’s employees would manually enter the changes into multiple systems. With Appian the information from the documents will be updated into those systems automatically. They did not evaluate any competitors for this project because of the proven impact of their existing Appian applications.

Our U.S. federal sector grew subscription revenue 50% compared to Q3 last year and we closed deals at a few notable agencies this quarter. A department of defense command bought an additional $0.5 million in new software licenses in Q3. They’ll build two new applications: one to manage procurement and another for HR onboarding. The group purchased Appian because of our ease of use, which they have experienced firsthand with our cloud trials and existing Appian projects. A civilian federal agency and one of the largest researchers in the world became a new Appian customer this quarter. They’ll build a recruitment management application with their purchase. Before Appian, it took days for research group to understand the status of open jobs and their remaining staffing budgets. With Appian, they’ll be able to coordinate work across multiple teams to give instant visibility on the status of recruiting activities. Several vendors competed for this deal, but our reputation in the federal government set us apart.

The customer selected Appian after receiving references from other agencies and viewing demos of their Appian applications. Half of the world’s 10 largest life sciences companies are Appian customers making it our third largest industry. This quarter we saw a couple of notable expansions in life sciences. A top five U.S. biotechnology firm has been an Appian customer for two years. In Q3, it doubled its total software purchases with a multimillion dollar deal that expands our platform across its enterprise. The firm currently uses Appian in three of five business lines for customer onboarding, regulation management and external engagement tracking.

We won this enterprise wide deal because key decision makers across all business areas recognized our platforms flexibility. Additionally, a top five global pharmaceutical company purchased over a million dollars of Appian software this quarter. They’ll use these licenses to expand their Foreign Corrupt Practices Act application into the Asia Pacific region. This app has already reduced their process cycle time in Latin America by 90%. Ultimately, the customer plans to deploy it to about half of its operational countries reusing existing Appian components to standardize global compliance. They chose us because our platform is simple to scale across their company.

Partners also continued to play a strong role in capturing new logos. This quarter, they doubled their new customer contribution compared to Q3 last year. This list of new customers includes one of the top 10 U.S. oil and gas service providers. Before Appian, field engineers recorded usage information about oil and gas equipment on paper and spreadsheets and making it difficult to evaluate the quality of equipment vendors. They chose Appian for our built-in mobile functionality. Now, hundreds of field engineers are using Appian on offline mobile devices to track equipment usage in remote locations.

Also this quarter a partner helped us to win a deal at one of the world’s largest entertainment companies, making them a new Appian customer that company chose Appian to standardize their human resources request process, which was managed using disjointed spreadsheets and hard to change applications. A single sales engineer met their requirements with a custom demo built in just one week. And our partner will deploy their first project in eight weeks under the Appian Guarantee. Across industries and regions, our ease of use and speed continue to differentiate us in sales cycles allowing us to sell into new organizations and expand within our existing customers.

Now let’s turn the call over to Mark for a discussion of our financials. Mark?

[Mark Lynch, Chief Financial Officer]

Thanks, Matt. I’ll begin by reviewing the financial highlights of the quarter and then we’ll provide details on our Q4 and full year 2019 guidance. Subscription revenue for the third quarter was $40.4 million, an increase of 38% year-over-year and above the high-end of our guidance. Our total subscription software and support revenue was $41.6 million, an increase of 35% year-over-year. Professional services revenue was $27.8 million, up 60% from $24 million in the prior year period and consistent with $27.7 million in the second quarter. Our partner ecosystem and Appian Guarantee continue to gain momentum helping us to sell more software.

Total revenue in the third quarter was $69.4 million, an increase of 26% year-over-year and also above our guidance range. Our subscription revenue retention rate as of September 30th was 119% within the 110% to 120% range that we target on a quarterly basis and up from 117% in the prior quarter. Our consistently strong revenue retention rate is reflective of our value proposition and the mission-critical nature of our offerings and we continue to be pleased with our customers expanded use of our platform. Our international operations contributed 32% of total revenue for Q3 compared with 29% in the prior year period. Reflecting continued strong growth both domestically and internationally.

As a reminder, we will adopt ASC 606 on a modified retrospective basis when we publish our 2019 10-K. As a result, Q4 2019 will be the first time we report under ASC 606. As we have noted, under ASC 606, revenue recognition on cloud subscriptions will remain materially unchanged. Our cloud subscription revenue was approximately 66% of total subscription revenue for both the third quarter and first nine months of 2019, an improvement from approximately 63% and 62% respectively for the same periods last year.

Now we’ll turn to our profitability metrics. For the third quarter, our non-GAAP gross profit margin was 66%, compared to 64% in the same period last year and 66% in the prior quarter. Subscription software and support non-GAAP gross profit margin was 90% in the third quarter, consistent with the third quarter of 2018. Our non-GAAP professional services gross profit margin was 31% in the third quarter, consistent with the third quarter of 2018. Total non-GAAP operating expenses were $53 million, an increase of 22% from $43.3 million in the year ago period. Non-GAAP loss from operations was $7.2 million in the third quarter, ahead of our guidance in compared to a non-GAAP loss from operations of $8.1 million in the year ago period.

In the third quarter, we had $2.2 million of foreign exchange losses compared to $200,000 in foreign exchange losses in Q3 2018. Our guidance does not consider any additional impact, potential impact to financial and other income and expense associated with foreign exchange gains or losses as we don’t estimate movements in foreign currency exchange rates.

Non-GAAP net loss was $9.3 million for the third quarter of 2019, or a loss of $0.14 per basic and diluted share, compared to non-GAAP net loss of $8.2 million, or a loss of $0.13 per basic and diluted share for the third quarter of 2018. This is based on 65.5 million and 62.5 million basic in diluted shares outstanding for the third quarter of 2019 and the third quarter of 2018 respectively. We ended the quarter with 67.1 million shares outstanding, compared to 64.8 million at the end of the second quarter. The majority of the difference in common shares is relative to June 30, 2019 reflects the increase of 1.8 million primary shares issued in our September follow-on offering.

Turning to our balance sheet, as a September 30, 2019 we had cash and cash equivalents of $165.6 million, compared with $81.1 million as of June 30, 2019. This cash increase primarily reflects the completion of our follow-on equity offering in September, which resulted in approximately $101.3 million of proceeds to the company after underwriting discounts, commissions, and expenses.

For the third quarter, cash used in operations was $14.9 million. For the nine months ended September 30, 2019 cash used in operations was $3 million, which also included the reimbursement of $17 million in tenant improvement allowances, excluding that our cash used in operations was $20 million.

I’m happy to announce that our headquarters build up was completed during the third quarter, so we are not expecting any material capital expenditures for the remainder of the year.

Total deferred revenue was $114.1 million for the third quarter. With respect to our billing terms, the majority of our customers are invoiced on an annual upfront basis. However, as have discussed, we also have some large customers that are billed quarterly and others that are billed monthly. As a result, changes in our deferred revenue are generally not indicative of the momentum in our business.

Now I’ll turn to guidance. First, let me clarify that this guidance is under ASC 605. Second, I’d like to remind you that we recorded at approximately $1 million of onetime subscription revenue in the fourth quarter of 2018 from a customer cancellation, which accelerated the recognition of the balance of that customer’s contract revenue into Q4 2018. For the full year 2019 subscription revenue is expected to be in the range of $164 million and $154.5 million, representing year-over-year growth of between 33% and 34%. Excluding the acceleration the year-over-year subscription growth will be between 34% and 35%.

Total revenue is expected to be in the range of $265 million and $266 million. We expect non-GAAP loss from operations to be in the range of $35 million and $33 million. Finally, we expect non-GAAP net loss per share to between $0.57 and $0.54. This assumes 65.5 million basic and diluted common shares outstanding.

For the fourth quarter of 2019 subscription revenue is now expected to be in the range of $42 million in $42.5 million, representing year-over-year growth between 24% and 26%. Excluding the acceleration, the year-over-year subscription growth would be between 28% and 30%.

Total revenue is expected to be in the range of $69.1 million and $70.1 million. Non-GAAP loss from operations is expected to be in the range of $10 million and $9.5 million with a non-GAAP net loss per share between $0.15 and $0.14. This assumes 67.3 million basic and diluted common shares outstanding.

With that, let’s turn it over to questions.

[Operator]

At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Raimo Lenschow of Barclays. Please proceed with your question.

[Mohit Gogia, Barclays]

Thanks guys. This is Mohit on four Raimo. I appreciate you taking my question. One for Matt and one for Mark. So I mean obviously great performance in EMEA and that actually contrasts with some of the other vendors who have pointed out that the Brexit tradition is creating some headwinds for numbers. So I just wanted to dig into like what are you guys seeing in EMEA? What is working for you guys? And have you seen any softness or like customer conversations getting dragged out longer? Doesn’t seem from the subscription growth numbers you’re putting, just wanted to get more color around that.

[Matt Calkins, Chairman and Chief Executive Officer]

Yes, well I’ve been watching that carefully because I’ve heard some of the noise about potential disruptions. And I heard the other results, but I’ll tell you, I have not seen that in my observations of our own European operation. I see a value proposition that’s being welcomed I see an operation that is well-run. Quarter-after-quarter I’m pleased with the progress that we’re seeing there.

[Mohit Gogia, Barclays]

Thanks and one for Mark. So I mean, obviously we recognize the one million benefit last year, so that creates a tough comp for subscription revenue in 4Q. But even if I just calculate an implied guidance from a full year number in 3Q, you seem to be guiding down, at least on my math. So I’m just wondering if you can give us the puts and takes as to, is there something going on we should be aware of, apart from just the one million benefit last year. Thanks for that.

[Mark Lynch, Chief Financial Officer]

Do you mind if I just cutting in on that? Yes. Okay, so there’s going to be some lumpiness probably. We do sell big deals to big customers, but big picture we are very confident about the business, about our ability to win here and therefore that’s the meta-theme.

[Mohit Gogia, Barclays]

Okay, understood. Thanks guys.

[Operator]

Our next question comes from the line of Chris Merwin of Goldman Sachs. Please proceed with your question.

[Kevin Kumar, Goldman Sachs]

Hi, this is Kevin on for Chris. Thanks for taking my question. On the Appian Guarantee, KPMG has been the main partner for you on this program and obviously reception has been very positive. At what point would you consider expanding the program out to additional partners?

[Matt Calkins, Chairman and Chief Executive Officer]

We have actually expanded the Appian Guarantee to additional partners already. However, we haven’t expanded it broadly. And as always, when we work with partners, our primary consideration is do we believe that this partner can deliver to the customer the level of quality and excellence in experience that we have built the business on. And so we’re not trying to over democratize the Appian Guarantee. We’re trying to keep it in safe hands. KPMG is safe hands, I believe. And where other partners are authorized to do it as well it’s because we believe in their delivery capability.

[Kevin Kumar, Goldman Sachs]

Got it. That makes sense. And then in the past you’ve talked about focusing in on sales rep productivity. It sounds like you made progress there. Sales and marketing spend was down quite a bit as a percentage of revenue. I think the lowest in several years. Could you talk a bit about progress you are having there?

[Matt Calkins, Chairman and Chief Executive Officer]

Yes. Well, I’m always pleased to see progress here because, I think, it’s a major growth opportunity for us. So I’m seeing what you’re seeing. And I think that there’s actually more we could do. I’m pleased with what we have begun to do. And I think that there’ll be more. Actually we’re in a difficult position trying to communicate the uniqueness of our product to a customer base that does not entirely understand these new terms and how companies fit in them. From my standpoint, what we do is so fundamental. We help organizations to create their own applications as quickly as possible, and to change them and still have those applications to be powerful. So from my perspective that’s a very simple thing.

But the customer is faced with confusion. They see BPM, and low-code and case management, and maybe some other things. And we need to educate through that in order to make the connection and to make the sale. And so when we talk about salesforce efficiency, we’re talking about message efficiency and drilling the message so that even our new reps understand how to convey that message and demonstrate the value proposition behind it.

So it’s kind of a challenge in a conveying an idea more than just educating a person. So I believe we’ve made really good progress this year on streamlining and conveying the idea. I think it’s more powerful than it’s ever been and I also think there’s more to grow.

[Kevin Kumar, Goldman Sachs]

Great. Thanks for the color.

[Operator]

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

[Bhavan Suri, William Blair]

Hey, gents. Thanks for taking my question. I guess I wanted to first touch on a little bit more about the partners. You’ve had the partners develop some of their own applications, KPMG with the LIBOR application. I guess, a) are you seeing more of that Matt, and then b) sort of – are you sort of actively encouraging that and how are you actually incentivizing or actively encouraging them to do that? I’d love to get some color around sort of the actual partners developing their own applications for which they charge subscription. And obviously that’s a nice flywheel on the platform.

[Matt Calkins, Chairman and Chief Executive Officer]

That’s right. And I want to differentiate here. What we’re really looking to encourage with our partner solutions is a solution that’s got sufficient force behind it to break through and succeed. I don’t want them merely to create some marketing material or to claim that they’ve got a solution that’s based on Appian or to have in a database somewhere that this exists that nobody’s ever going to sell or buy. Instead, the intention is to create maybe fewer solutions but more potent one. So that they’re capable of breaking into the consciousness of the partner, the mindshare of the partner executives that bring new solutions to their clients and actually get sold onsite. So what I’m trying to do is focus our efforts around causing these early solutions to break through.

And I believe that we’ve got a few of them that have and I don’t want to get into too much detail here, but we got a few that have exceptionally compelling cases, value propositions. And so I’m trying to put our energies primarily on a top view, not soliciting a broad portfolio of solutions now, but focusing on a few that we feel have real upside. So it’s not so much of a recruitment effort as it is a momentum play where we have to throw our shoulder behind the same application that our partners shoulders behind. And then together, let’s see if we can push this forward. That’s what I’d like to do. It’s more focused and less just volume.

[Bhavan Suri, William Blair]

Got it. Got it. Got it. And then just another product one for me. You didn’t cover too much on the ICC sides. I’d love to understand sort of the attraction. I know it’s still relatively early the product has been around that long, but sort of what are you seeing in the ICC side in terms of adoption and scale wins would be helpful or pipeline would be helpful. Thank you.

[Matt Calkins, Chairman and Chief Executive Officer]

Yes, that’s right. Well, we have essentially bundled the ICC features into the product. So we considered having it as a separate thing and reporting separate sales and having a separate salesforce. But we felt that given our existing success in the call center and the contact center market, that it would be better to just enhance our ability. So we’re not treating it as a separate thing.

However, I can tell you that the features are compelling that we’ve developed even more – we used to talk about it as a separate thing. We’ve been developing more. It is more impressive than it used to be. It is exciting. I speak about it frequently at the CIO level because they’ve all got this issue. They’ve all got call centers that are divergent technologically, that aren’t sharing data, that aren’t relating to the customers as humans.

And so they’re looking for a way to put this together, streamline the process; connect the customer facing apparatus to the case processing apparatus. They’re looking for that golden spike that brings the two together and nobody does that like we do. So I wouldn’t say it’s all that different from what we were doing before. We just have a more potent products that it’s capable of winning bigger and more deals. But we have kept up our success in contact centers.

[Bhavan Suri, William Blair]

Great. Thanks for the color guys. And a nice job there. Thank you.

[Matt Calkins, Chairman and Chief Executive Officer]

Thanks.

[Operator]

Our next question comes from the line of Terry Tillman of Raymond James. Please proceed with your question.

[Terry Tillman, Raymond James]

Hey, gentlemen. Can you hear me okay?

[Matt Calkins, Chairman and Chief Executive Officer]

Yes.

[Mark Lynch, Chief Financial Officer]

Yes.

[Terry Tillman, Raymond James]

Yes. So I’ll just echo the nice job comments. Nice job on the quarter. My first question just relates to, as you’re seeing the strong traction with partners really driving the business, any kind of pattern recognition in terms of when a partner is driving the deal, like what are the deal sizes? Do they vary notably from, as opposed to direct sales rep driving a new deal?

And then secondly, that land and expand motion, how is the velocity then when a partner drove the initial deal, then getting the next app project as opposed to direct, just would love some perspective. And again, I know its early days, but any kind of commentary you can provide.

[Matt Calkins, Chairman and Chief Executive Officer]

Yes. The thing that impresses me about the partner deal sourcing is that it’s not just small deals; it’s not small companies and its not small deals. Now, in some cases, it may be. But what we’re seeing, at least from our most substantial partners is that they can bring in a deal from a top company for a serious project. They’re capable of sourcing us just where we’d want to go with our own sales reps, which is my intention with the partner channel. It’s not meant to be for cats and dogs and for deals that we wouldn’t have wanted to focus on ourselves. It’s supposed to be an augmentation of our ability to get to the market, augmentation and credibility in access and in deployment capability. And that’s what we’re cultivating from our top partners. We want just as big a deal from those partners as we’re getting from our own sales reps and we are getting that. We are seeing that from our partners now.

[Terry Tillman, Raymond James]

Yes. Great. And then just a maybe a follow up question, and this is kind of a tough one because I’m sure you love all your industries you’re attacking, but you have top three industries that have been large and successful for a long while now and you gave some commentary on it. But Matt, do you see any kind of breakout other industries they could start to kind of rival the top three or just anything you could provide on some other interesting vertical market scenario? Thank you.

[Matt Calkins, Chairman and Chief Executive Officer]

Yes, that’s funny. What I saw this quarter was mostly a doubling down on the things that we’re already working. Europe was already great guns and it did even better. Partners were already strong and they got stronger. Our top industries – at this point, our top three are further ahead of the rest of them than they were before this quarter. So what we’re seeing is that that success really follows success. And then once we get a winning model, there’s a long runway ahead. And I believe that has been the case ever since we’ve been a public company at least. And we knew that going out. We knew that we had a very compelling value proposition and that our greatest challenge was making the connection to new customers and showing them that value proposition, whether that be because that the newness of the industry or the general unclarity of the nomenclature that guides people to a market and to a selection.

There’s still a lot of early stage chaos out there. But once we cut through that early stage chaos, whether it’s with a customer or with an industry or with a partner, we’ve got a very compelling message and value proposition. And so where we’ve broken through, you see a really meaningful breakthrough that’s how I read our recent results.

[Mark Lynch, Chief Financial Officer]

But to kind of add on a couple of the verticals that are showing a lot of promise for us are energy. We talked about one of the case studies and I talked about with our offline capabilities, mobile capabilities and allowing workers out in the oil fields or whether to use Appian and then manufacturing is kind of that old late adopter. But if you think about issues that they’ve got all over the place, a couple of our – a couple of big wins we had last quarter, we’re in manufacturing and we’re starting to expand within those two enterprises. So those are two verticals that could be right for expansion over time.

[Terry Tillman, Raymond James]

Thanks a lot.

[Operator]

Our next question comes from the line of Sanjit Singh of Morgan Stanley. Please proceed with your question.

[Sanjit Singh, Morgan Stanley]

Thank you for taking the question. Matt, I think you signed a partnership with another one of the RPA vendors and UiPath this quarter. And I just want to get your take on what you might be looking from this partnership relative to your past partnerships with Blue Prism. And more generally, where are the areas, do you think an Appian can be driving efficiency and these sort of workflow automation, application development process versus partnering with other capabilities. How do you think about the partner versus opportunities that you want to do after yourself?

[Matt Calkins, Chairman and Chief Executive Officer]

That’s a great question. I’m happy to speak to it. We see an emerging world of automation in which not just humans but humans, bots and AI will together be a combined workforce to solve problems for organizations. Those three primary groups of agents that are going to come together to work are going to need an orchestrator, to rationalize, organize, manage, and analyze their combined efforts. And so to oversee that diverse workforce, we propose Appian. We see Appian as the manager and we think that the challenges of managing and orchestrating are going to be substantial.

Not only do you have humans, bots and AI, but in most organizations you’re going to have multiple vendors’ worth of bots. So it wouldn’t be at all surprised to see an organization that has invested in UiPath bots and also in Blue Prism bots. In fact, I think recent studies have shown that that’s the norm, not the exception to have multiple bot companies at the same time. And so it’s just all the more proof that there’s going to have to be an orchestration and management layer to add coherence and furthermore there’s a lot to be gained from rationalizing all of these work factors that you have invested in bringing each to their best light and using them for their best purpose and detecting them when they are under or miss utilized.

So I think we’ve got a vibrant role to play in this emerging automation market. I’m pleased with our partnership with UiPath and we are continuing, of course vibrantly with our partnership with Blue Prism and in fact we continue to resell Blue Prison bots and have done so for many customers. So that’s what we expect out of that and I understand these are dynamic changing companies in a dynamic changing space. But I think that we have an enduring part to play in the emerging automation market.

[Sanjit Singh, Morgan Stanley]

Great. That’s very interesting. And then I had one follow-up for Mark. As we sort of turned to 606, which having been through another companies that had sort of fixed their accounting because cyclicality can certainly be a headache. And I wanted to get your initial thoughts, Mark, how do you see the message to the growth of the business going into next year when you may have 605, 2019 results and 606, 2020 results. Are you just sort of provide a bridge in terms of how to assess growth on a like-to-like basis or any high level thoughts on how we should expect to think about underlying growth of the business as we turn on business, any comments?

[Mark Lynch, Chief Financial Officer]

Yes. I just can’t wait till 606 starts happening. So, yes, in all seriousness it like the last guide 605 will be for Q4 and then Q1 of next year we’re going to guide on a 606 basis. So in the K, you’ll have the quarters under 605 and 606 provided and so that way you’ll have a comparative basis to analyze Q1 of 2019 to then the Q1 2020 guide that we provide. And we’re still kind of mulling with which things we’re going to guide to but with, as you know, with 606 the on-prem subscription licenses get recognized up front. And so I can see us guiding to probably a cloud metric, the subscription revenue for kind of that gives you a flavor of the growth of the company. But then to a total software number, which includes that upfront component as well, because you’ll get the sense of the total totality of the software license of the business. So these things we’re kind of new with right now.

The good news is about two-thirds to 70% of our subscription revenue is cloud. So there will be some lumpiness, but it won’t be anything like some of the other companies that you’ve had to go through that we’re not only transitioning to 606, but they’re also transitioning you from perpetual licensing to subscription licensing as well. And you had a lot of noise there. So it’ll be a little lumpy, little noisy but not – I don’t think it’d be terrible.

[Sanjit Singh, Morgan Stanley]

Great. Thank you, Mark.

[Mark Lynch, Chief Financial Officer]

Yes.

[Operator]

[Operator Instructions] Our next question comes from the line of Alex Kurtz with KeyBanc Capital Markets. Please proceed with your questions.

[Alex Kurtz, KeyBanc Capital Markets]

Yes, thanks and congrats on the quarter. Just wanted to have you guys maybe address retention rate, it’s been very strong a year-over-year, quarter-over-quarter, and maybe just revisit the time of the IPO and what you thought the upside case was in retention rate and kind of where that stands now relative to all the different initiatives that you have put in place since then. Just sort of maybe a reset on what that number could look like over time or maybe at least at a minimum and talk about what drove it in the quarter?

[Matt Calkins, Chairman and Chief Executive Officer]

Well, I don’t want to reset expectations because I feel we’ve been pretty consistent about what we expect and we’ve been in that bracket every quarter, so it’s one of the rare predictive successes, I don’t want to get in the way of it. However, I’m really pleased that as we have scaled as an organization, as we’ve put down some fairly strong growth numbers and put in some more clients and grown our organization to more employees that we haven’t seen the wheels come off, so to speak in any way. Instead we’ve got the same kind of customer loyalty that we used to, the same kind of strong value proposition and I think it takes a lot of care to be sure that, that conveys at scale, and it gives me confidence that it could convey at scale in the future as well, a lot of effort goes into this.

But did you want to add anything to that? Or...

[Mark Lynch, Chief Financial Officer]

No. I mean, as you can imagine Matt would always love it to be higher but I think the bracket that we have out there is reasonable and to Matt’s point we’ve been within it since we’ve been a public company. The good news is we’re at the high-end of it, so we’re pleased with where we’re at right now.

[Alex Kurtz, KeyBanc Capital Markets]

Okay. So no dreaming the dream on what a new bracket could look like at this point.

[Mark Lynch, Chief Financial Officer]

You can dream all you want, but I wouldn’t – I would hold us accountable to it.

[Matt Calkins, Chairman and Chief Executive Officer]

I keep that to private meetings.

[Alex Kurtz, KeyBanc Capital Markets]

All right. Thanks guys.

[Matt Calkins, Chairman and Chief Executive Officer]

Thank you.

[Operator]

Our final question comes from the line of Derrick Wood with Cowen and Company. Please proceed with your question.

[Andrew Sherman, Cowen and Company]

Great. Thanks. It’s Andrew on for Derrick. Matt, clearly the government had a strong quarter, any other commentary on that and maybe just your outlook on that federal business for the next year or so, and any early positive signs from your new IL4 certification?

[Matt Calkins, Chairman and Chief Executive Officer]

Well, I’m glad you brought that up because we are at – we do take pains to be sure that our certifications are ahead of the curve. And we like to be early and we like to remind our federal buyers that we take their priorities, including those certifications very seriously and they can count on us to take it seriously in the future. It’s not just, we happen to have some things that are indicative of our approach to serving the federal customer. So I think that that’s good for us. I also believe we’ve got good momentum in federal. I don’t believe this marks any kind of a long-term high. I think it’s just one more step upward. I see our potential is greater next year than it was this year. And I think that we’re already starting on a positive footing. I think there’s a strong business to be built here.

[Andrew Sherman, Cowen and Company]

Great. And then maybe just touch on head count growth directionally and kind of where you’re adding people and if you’ve had any, any change in the difficulty of attracting talent versus the past six to 12 months or is that pretty steady?

[Matt Calkins, Chairman and Chief Executive Officer]

All right. So it’s always a challenge to attract the caliber of people that we seek to hire. Appian is unusually focused on hiring terrific people and I’ve been over involved in the interviewing and the recruiting for that reason because I think it’s foundational to our success in this kind of skill-led industry. We also look for people who have the character to represent us in the field. That’s very important. It’s not just a capabilities filter that we apply. So it’s never easy to find those people. It got a little easier last year when the Washington post named us the best place to work in the Washington area.

We appreciated that and it drove some interest and it raised our profile amongst the people who were looking for something extraordinary in their career. We continue to grow our recruiting function and I’m pleased with both our ability to recruit this year and our ability to hold onto the talent we’ve got happy. Appian has an unusually low employee attrition rate. That’s part of the secret to keeping a great team together is to not lose the talent you’ve got. So on both sides we’re doing well.

[Andrew Sherman, Cowen and Company]

Great. Thanks guys.

[Operator]

We have reached the end of the question-and-answer session. I will now turn the call over to Matt Calkins for any closing remarks.

[Matt Calkins, Chairman and Chief Executive Officer]

All right. Hey, we appreciate very much your interest in Appian and your time listening to us this evening. With that, I’m going to close the call.

[Operator]

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful evening.