Q1 2024 Appian Corp Earnings Call

Participants

Matthew Calkins; Chairman of the Board, President, Chief Executive Officer, Founder; Appian Corp

Mark Matheos; Chief Financial Officer; Appian Corp

Steve Enders; Analyst; Citigroup Inc.

Jake Roberge; Analyst; William Blair & Company, L.L.C

Kevin Kumar; Analyst; The Goldman Sachs Group, Inc.

Tom Blakey; Analyst; KeyBanc Capital Markets

Raimo Lenschow; Analyst; Barclays Bank PLC

Presentation

Operator

Good day and thank you for standing by, and welcome to the Appian First Quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session to ask a question. (Operator Instructions)
Again, please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, [Reagan Raman], Investor Relations. Please go ahead.

Thank you, operator. Good morning and thank you for joining us. Today, we will review Appian's First Quarter 2024 financial results. With me are Mark Hawkins, Chief Chairman and Chief Executive Officer, and Mark with this Chief Financial Officer. After prepared remarks, we will open the call for questions. During this call, we may make statements related to our business that are forward-looking under federal securities laws and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.
These include comments related to our financial results, trends and guidance for the second quarter and full year 2020 for 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 they do not reflect our views as of any subsequent date. They are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For a discussion of the material risks and other important factors that could affect our actual results refer to our 2023 10 K, our Q1 2020 Form 10 Q filing and other periodic filings with the SEC. These documents are available on the Investors section of our website. Additionally, non-GAAP financial measures will be discussed on this conference call refer to the tables in our earnings release 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.

Matthew Calkins

Thanks, Reagan. In the first quarter of 2020 for Appian's cloud, subscription revenue grew 24% year over year to $86.6 million. Subscription revenue grew 19% to $117.7 million. Total revenue grew 11% year over year to $149.8 million. Our cloud subscription revenue retention rate was 120% as of March 31st. Adjusted EBITDA was a loss of $1.3 million.
Two weeks ago. We held our annual user conference. Many of people on this call were there. We had 46% more customers and prospects in attendance than a year before the show featured a series of major customers discussing the success they've had with our platform. Attendees heard how Novartis reduced risk assessment approval times by over 50% using Appian, the Navy developed an employee onboarding app in a fraction of the time other technologies would have required. We heard how Telus integrated siloed systems into a single Appian app to manage cross-functional planning and expects to reduce planning cycles by 55% and save from misallocation up to $42 million.
We also had speakers from Merck, the US Army, Axiom space, T. Rowe Price, among others, aside from the customers, my favorite part of the show was our new feature announcements. Not all of them were about AI, but I'll start there. Our unique edge and AI comes from strength and complementary technologies. Specifically, processes and data are a leader in all three areas this year and every company is looking for ways to validate a I big budgets will come later for now. They need quick proof of ROI. A process is the perfect place to start using a I have process offer structure already built framework of activity pointed towards an important goal, a set of workers, human and digital with whom to collaborate and metrics that measure what improvement AI. has created. We're so confident in our ability to show strong ROI by dropping a I. into a process that we've launched a 30 day fixed price offering. We announced today that being world, our other main advantage in AI. is our control data happens, Data Fabric connects data sources without having to move.
We can inform AI with the right information from across the enterprise. We filter that dataset through the Data Fabric sending only the most pertinent bits to a I. There are important implications for privacy, cost efficiency, auditability, security, clearance, observance and more. Our goal is to make hay eye powerful and easy for this purpose. We announced last month a strategic collaboration agreement between Appian and AWS. We've been working together for a long time ever since Appian led our industry into the cloud. About 15 years ago, we run an incredible amount of volume on AWS already 16 billion transactions per day.
This announcement will intensify our long-standing partnership as we work together to make enterprise use of AI, both powerful and easy. When we acquired a process mining company in 2021, we did it because we saw an opportunity to create what I call the future of process mining process. Mining was cool, but it was missing a few critical features and we can provide them because we were a process leader. Our process mining could be actionable because we had great data connection capabilities. Our process mining could be real-time.
That's the revolution we anticipated. And two weeks ago at Appian World, we delivered it our new product is called process HQ., and it is real-time actionable process mining, but it's also more than that. It allows the user to navigate the whole enterprise of information traversing Appian's data fabric, you can drill all the way down to individual rows and processes. You can glide across data sources from Wharton one end of the enterprise to the other process HQ. can give you the heartbeat of your processes and boardroom boardroom level statistics on your efficiency.
You can detect even momentary disruptions and efficiencies and take quick action and maybe best of all it intelligently recommend what changes you should make to the process. It's now easy to observe and tune your processes with moment to moment the feedback, let's pause here to discuss how a multinational life sciences company used process HQ to improve one of their critical applications. This customer sells medical devices and pharmaceutical products in over 100 countries every country has unique industry regulations. Each product must be reviewed for compliance before it can be sold locally. Our customer manages the review of hundreds of thousands of products on Appian processes, complexity and data volume, make it a prime candidate for optimization without months of data prep or teams of data scientists, business users analyzed the process using process each cube.
They discovered many ways to reduce cycle times. The company is implementing these changes and expects to save 40,000 labor days annually, 40,000 days in a nice validation of our efforts to reimagine this industry. Appian was named a leader this week in Gartner's process mining platforms Magic Quadrant. I'm pleased with the attention process. HQ. has been receiving from customers and analysts, and I hope a lot of people see what we've done with the synergies between process mining, process and data at Appian World. We also announced our Elastic process execution feature CapEx, for sure, it's scaled infrastructure on-demand. Some of our customers have predictable usage spikes like a weekly or monthly filing time. Others cannot guess when the traffic will rise, but need to be ready like an insurer being prepared for the aftermath of a natural disaster.
Epic's increases throughput by 10 to 100 times. This is on top of a process engine that could already run millions of complex processes daily. This is a stake in the ground that Appian is serious about being the best choice for high end use cases.
Fx further cements our leadership in scalability at Appian World. We also launched an AI backed website called procure site with technology built on the Appian platform. Procurement professionals will use it to search major public datasets, glean insights from past government procurements and write new procurement requests. It suffered for free for now to test the concept with maximum exposure. This effort aligns with my belief about the future of the sector. There's a lot of public excitement about the content generator, but not enough of a data synthesizer secure site will complement our government acquisition management suite so that users of the letter will get extra benefits from use of the phone.
Now let's discuss a few notable deals from Q1. First, a major US city wants to modernize its budget review process. The city's Office of Management and Budget manages billions of dollars of annual funding in Q1. It selected our platform to automate these processes and became a new customer before employees receive physical proposals and process them manually. Now with Appian, the office expects to reduce approval times by 50%.
Next is a story about a leading European automotive manufacturer and existing customer. Thousands of its employees use Appian to manage supply chain operations, finance and warranty claims. It saves tens of millions of dollars every year with our platform in Q1 that purchased a seven figure software deal to automate more warranty and finance workflows to extend its app to additional users, save millions of dollars more with this next set of projects.
Today's final stories with a top global medical devices company uses Appian to manage the order to installation process for metal for medical devices in one of its three global divisions. In Q1, the firm purchased additional software to automate a similar process for a second division Before Appian. The customer ran these processes on an expensive and then scalable homegrown system now the company will streamline its installation processes and recognize tens of millions of revenue dollars earlier than expected this fiscal year. As you can see from our recent announcements have been will continue to push the technological boundaries in our industry from a high back to services to process mining, we will deliver to our customers both power and simplicity. This year, promises to be one of rapid technological change, and we feel well equipped to thrive in that circumstance.
Now I'll hand the call to Mark for a discussion of our financials.

Mark Matheos

Thanks, Matt. I'll review the financial highlights for the quarter, and then we'll provide guidance for the second quarter and full year 2024. Cloud revenue, total revenue and adjusted EBITDA came in at or above the high end of our guidance ranges. Cloud subscription revenue was $86.6 million, an increase of 24% year over year and above guidance.
Our cloud subscription revenue retention rate was 120% as of March 31st, 2024, up from 115% a year ago and 119% in the prior quarter. We continue to target a cloud subscription revenue retention rate of 110% to 120% on a quarterly basis. Approximately 82% of our total net new software bookings in the quarter was for the cloud compared to 85% in the prior year's first quarter.
Total subscriptions revenue was $117.7 million, an increase of 19% year over year. Professional services revenue was $32.1 million, down 11% year over year. As we've mentioned previously, professional services revenue can fluctuate from quarter to quarter due to the timing of large projects. We continue to leverage professional services to enable partners and to drive customer success.
However, long term, we expect professional services revenue to continue to decline as a percentage of total revenue. Total revenue was $149.8 million, an increase of 11% year over year and at the top of our guidance range, consistent with our strategy subscriptions revenue was 79% of total revenue compared to 73% in the year-ago period and 80% in the prior quarter. We continued to see global demand for our platform with our international operations contributing 37% of total revenue, compared to 33% in the year ago period. Note that foreign exchange movements provided a revenue benefit of 1% to 2% this quarter on a constant currency basis.
Now I'll turn to our profitability metrics. Non-gaap gross margin was 76% compared to 75% in the year-ago period and 78% in the prior quarter. Subscriptions non-GAAP gross profit margin was 90% consistent with the year ago period and compared to 91% in the prior quarter. Professional Services non-GAAP gross margin was 25% compared to 34% in the year-ago period and 26% in the prior quarter.
We continue to invest in non-billable areas of our services organization to help our customers achieve the most from our technology and increase adoption of our platform. As a result and previously communicated, we expect Professional Services non-GAAP gross margin to decline to the low 20% range in 2024 and beyond.
Total non-GAAP operating expenses were $117.3 million, down 2% from $119.3 million in the year ago period. Adjusted EBITDA loss was $1.3 million for the quarter, well ahead of our first quarter guidance of a loss between $9 million and $5 million and significantly better when compared to an adjusted EBITDA loss of $15.8 million in the year-ago period.
In the first quarter, we had approximately $11.5 million of foreign exchange losses compared to $0.6 million of foreign exchange gains in the same period a year ago. Just to note, we don't forecast movements in FX rates. Therefore, they aren't considered in our guidance. Non-GAAP net loss was $17.7 million or $0.24 per share compared to non-GAAP net loss of $19.7 million or $0.27 per diluted share for the first quarter of 2023.
This is based on $73.3 million diluted shares outstanding for the first quarter of 2024 and $72.9 million diluted shares outstanding for the first quarter of 2023. As noted above, first quarter 2024 non-GAAP net loss was impacted by $11.5 million in foreign exchange losses or loss of $0.15 per share, which was not included in our original guidance.
Turning to our balance sheet. As of March 31, 2024, cash and cash equivalents were $170.1 million, providing a significant liquidity to run and invest in our business. This is an increase of $11.1 million as compared with cash and cash equivalents and investments of $159 million as of December 31, 2023. For the first quarter, cash provided by operations was $18.9 million versus cash used in operations of $25.3 million in the same period last year.
Our cash provided by operations was bolstered by strong cash collections in the quarter and reflects the milestone on our journey towards profitability. We also completed a $50 million share repurchase program in Q1 during which we bought back a total of 1.32 million shares. We're bullish on the long-term growth prospects of our company. We see this buyback as an avenue to deliver value to shareholders.
Finally, total deferred revenue was $226.2 million as of the first quarter 2024, an increase of 14% from the year ago period. As a reminder, the majority of our customers are invoiced on an annual upfront basis. Although we have large customers that are billed quarterly or monthly. Consequently, we continue to believe cloud subscription revenue is a better indicator of our business momentum and deferred revenue billings or remit remaining performance obligations. The latter method can fluctuate based on the timing of invoicing, seasonality of on-prem license revenue and the duration of customer contracts. The scale of the business is represented by subscriptions revenue, which includes support and all software subscription revenue regardless of whether the customer deploys to the Appian Cloud, their private cloud or on-prem.
Our second quarter 2024 guidance is in line with how we've historically approached guidance setting. As a reminder, due to seasonality, Q2 tends to be our weakest quarter, while Q4 tends to be our strongest for the second quarter of 2020 for cloud subscription revenue is expected to be between $86 million and $88 million, representing year-over-year growth of between 16% and 18%.
Total revenue is expected to be between $140 million and $144 million, representing year-over-year growth of 10% and 13%. Adjusted EBITDA loss for the second quarter of 2024 is expected to be between $17 million and $13 million. Non-GAAP net loss per share is expected to be between $0.34 and $0.28. This assumes 72.3 million diluted weighted average common shares outstanding. This includes the reduction of the share count from our share repurchase during the first quarter.
For the full year 2024, we are reaffirming our previously announced cloud revenue and total revenue guidance, we are improving our full year adjusted EBITDA guidance. We now expect the adjusted EBITDA loss to be between $22.5 million and $17.5 million for the full year 2024. This is an improvement of $2.5 million or 11% from the previous guidance range midpoint. We are pleased with the efficiencies we are seeing in our cost structure, and we'll continue to look for opportunities to optimize costs on our path towards profitability.
Our full year 2024 non-GAAP net loss per share guidance is updated to a range of $0.85 to $0.79. This new full -- this new full year range includes the reduction of the share count from our share repurchase during the first quarter. Our guidance assumes the following. First, as previously disclosed, the variability in our services revenue can be strong by one or two large transactions for Q2 and the full year, we expect professional services revenue to be flat over the comparison period. Second, on-premise license revenue will grow by a mid-single digit growth rate and will track the seasonality, it is consistent with prior periods.
Third, our second quarter adjusted EBITDA loss will be better than the first quarter's adjusted EBITDA loss. This is due to the seasonality in our business and the cost of running our world-class user global user conference conference, Appian World.
Fourth, total other income and interest expense are expected to be between $4 million in Q2 and $18 million for the full year 2024. Fifth, capital expenditures are expected to be between $1 million and $2 million in Q2 and between $10 million and $12 million for the full year 2020. Finally, our guidance assumes FX rates as of April 29, 2024.
In conclusion, it's an exciting time to be part of Appian as we continue to invest in growth and optimize our cost structure to drive profitability. We are well positioned to continue to demonstrate the value of our world-class platform and capitalize on the opportunities ahead of us.
And with that, we'll open the line for questions. Operator?

Question and Answer Session

Operator

(Operator Instructions) Steve Enders, Citi.

Steve Enders

Okay, great. Thanks for taking the question. I guess maybe just to start, maybe I guess good to hear an update on what you're hearing out there in the deal environment. And I think you made a comment at the Investor Day that you felt like the macro is maybe getting a little bit a little bit better. So I guess would be good to get a little bit clarity on exactly how that deal environment has shifted and evolved in higher hand viewing a higher kind of viewing that today.

Matthew Calkins

Yes, okay. I think that the macro isn't perfect, but there's definitely some some consternation around data around the U.S. government around international affairs around whether inflation is going where it's going. But it's workable. And now and with regards to AI., which is almost a macro effect or for us, I don't see big budgets around AI amongst our customers. So that's not something that we're working with and drawing energy from this curiosity, but there's not big line items.

Steve Enders

Okay. And that's some that's helpful there. And then I guess just on the conference in the beginning, you get an update on the feedback we heard from customers on maybe how they're thinking about AI. investments, how they're how they're thinking about that some of the new products and the adoption there. And I think also on the pricing and packaging changes that were that were announced there. So you have got to get a little more clarity on as feedback from the customer side?

Matthew Calkins

First of all, let me say that conferences went through a bit of a lull with COVID right from when they went remote. They lost energy. This, in my opinion was the best conference we've had since before COVID. I love the energy of the enthusiasm. The attendance was good prospect showing up. I'm very pleased to the conference. I think that the changes in our pricing approach, which serve to both simplify and raise our prices have been broadly welcomed. I think there is there is a willingness to see value in the new features that we have announced two weeks ago. And I didn't get any complaints. Why isn't this free? Instead, there was there was just appreciation for what we've created and the simplicity, I don't I don't get any pushback on that used to be. We had so many different ways to price the software and now we've got one. It's not drawn additional friction, in fact, simplifying and accelerating the process.

Operator

Jake Roberge, William Blair.

Jake Roberge

Hey, thanks for taking the questions. And Mark, I guess just to start off, can you help us better understand the cloud revenue guidance and it was a solid quarter. But when we look at the sequential increase from Q1 to Q2, it looks a bit softer, but then the guidance implies a few points of back half acceleration. So could you just walk us through some of the building blocks and that you have in the model for that acceleration, whether it be the pricing increases, packaging increases or some of the new products that give you confidence in that guide surgery?

Mark Matheos

I think you've got the right question, the right analysis, but that is kind of in the background, those price increases and things like that. But it's really just more about our seasonality in our business. And you know, we tend to have a Q2 being the lowest revenue quarter for us in terms of workforce, the weakest. And a lot of that is also what happened in Q1 from a bookings and billings perspective, right so I think it's mostly seasonality. And we do expect traction and recovery, and that's why we reaffirmed our full year guide.

Jake Roberge

Okay. Very helpful. And then can you just talk about the uptake you've seen with your new data fabric solution. And just from a competitive positioning perspective, we've heard a few other vendors in the space launch their own fabric solutions over the past few months. So could you walk us through the differentiation of your product? And then just also how the monetization path has been going over the past few quarters?

Matthew Calkins

Yes. Thanks for asking. Those products are completely different of our data. Fabric is meant to reach across the enterprise and integrate every data source, how whereas our competitors are liable to offer a data fabric that is built just to connect their own data sources to each other because their own data, higher internal architecture is so convoluted that there isn't natural compatibility between these products in the first place their own products I'm talking about. So their data fabric is to integrate their own products.
Ours is expansive. And the other thing, ours is that there's it's not is it creates a semantic layer so that all of these data sources are not merely integrated but addressable through a common language and you can treat them like objects like they were local objects all through the same nomenclature. So it's an entirely different product. What we've got except that they've grown borrow the Data Fabric terminology. That's a rough guide that the products are quite different. As for uptake, our Data Fabric uptake is very high. It's one of the best adopted features we've ever launched. And and we anticipate having it even more deeply launched in the future as customers reach out to us to connect a greater share of their enterprise with the data fabric.
I like to joke around here that it's such a powerful differentiated feature that we're almost a data fabric company. So we we are doing that as a chip, but it is a very important differentiator for us.

Operator

Derrick Wood, TD Cowen.

It's Andrew on for Derrick. Hey, guys, how you doing mark be on a comment you made two questions ago about Q1's Q1 bookings impact in the guide. Was there anything maybe a bit of a slowness to start the year after a strong Q4 from a bookings perspective? And how is linearity and did any deals slip into Q2?

Mark Matheos

Yes, I think it's more typical for us, right. We do have a seasonal effect to our bookings, and it's not abnormal to have the phenomenon that we've seen so far in 2024, which is that Q1 is much weaker than Q4. And that's I think that's kind of almost ubiquitous in the software industry. But we we certainly had that this year and it's nothing abnormal.

Okay. Good. And then, Matt, you made a comment about the new pricing model potentially accelerating things. Would you expect that to accelerate sales cycles potentially this year?

Matthew Calkins

Like, I absolutely have that in mind when I roll out the new pricing plan, I also have in mind that will shift the basis for our discussions with customers away from price that I want to be price engineers. I want to be feature engineers and I want to talk about the features and the scalability, the reliability, the things that make Appian actually different. That's where I want to spend our time. So I am hopeful that it will help us to reduce sales cycles, but I can't put anything on the table. I do think that it will guide the conversation in a more productive and proactive direction.

Yes, that's great. One last one for you, Matt, on you have reduced the number of partners a lot. The focus on quality over quantity. It seems like it has that it kind of improve the quality of leads and pipeline flow from partners.

Matthew Calkins

I'd say that the we're early days on this shift we've emphasized a few partners, you're absolutely right. I think that's going to be healthy for the business right now. We're getting a little bit more than we did in the past. From partners. So if you take all of our partners added up even the ones that we drop right totals some right addition to our pipeline, yes, it is up, but but I think it's still early to see the long-term ramifications of this of this prioritization. And all I can say is that the first indicator looks like we're probably making the right decision, but I already have more confidence that we're making the right decision based on based on other things based on internal analysis. So this is just one of the smaller confirmations that we've made the right choice.

Operator

Kevin Kumar, Goldman Sachs.

Kevin Kumar

Thanks, for taking my question. I wanted to ask about net revenue retention that's been ticking up the last couple of quarters. I'm just curious kind of the trends you're seeing there and whether some of the go-to-market changes that you've been making to focus on your largest customers and maybe some of the pricing changes are impacting that kind of expansion motion?

Matthew Calkins

Yes. Well, first of all, I would love to see this in the kind of range where it is. We always talk about one 10 to 1 20. But between those I got a preference. And I think that this is a kind of net revenue retention rate that is encouraged by the moves we've made.
Just like you pointed out, I think it's too early to say that these changes, which have just happened, right? We're just making them now at the top of the year have had any impact on the net revenue retention rate. Honestly, that's a trailing indicator. That's that's it's going to take a long time for those changes we've made to filter into that metric slowly over the course of a year or two but they should help if we focus on large opportunities. If we put more of our attention on our top customers and our top partners, I believe that will be a net revenue retention positive. And I'm not asking to see it in Q's one or two or even three. But I do think in the long run, it's going to boost.

Kevin Kumar

That's helpful. And then maybe can you talk a bit about procure side and how that expands the federal federal opportunity for Appian, but it's probably still a bit early, but what's been the initial response there.

Matthew Calkins

I've been itching to talk about this for quarters. So thank you for bringing it up. I'll be happy to address it. As you know, we've got something called the government acquisition management suite, which is a series of solutions, interlocking solutions that cover the entire acquisitions process for a public sector buyer. Those can be adopted singly or out in cereal and all at once or sequentially, that's been really popular. It's established itself as an emerging standard in the US government users are very pleased and this new offering reinforces it capitalizes on the market leadership that we've established in procurement by offering a service and a Ibex service that that taps into a number of different datasets, very deep, very wide datasets that give you the history of procurements of the past, including awards of the past and solicitations of the past. We're going to we're going to give expert a I based advice on what's happened before in the world of procurement.
And then also a I will help you to write your new procurements. This is an extraordinary accelerator. I wouldn't recommend using it without a person in charge, right with this is this is a for the procurement professional, not just not a substitute for the procurement professional, but it does allow that procurement professional to be far more efficient. And if they're already working with Appian, then they've got the confidence and they've got a framework into which to use the results they get out of procure site. So we've got high hopes for this one. I've been excited about it for a while.

Operator

(Operator Instructions) Tom Blakey, KeyBanc Capital Markets.

Tom Blakey

Good morning, guys. Thanks for taking my question here. Just I guess my question is riding on a couple of the prior questions that one of Andrew's month bookings, but what the 1Q bookings sounded a little soft. And just wondering, looking out then with the acceleration expected in the second half, if it's you or what kind of bookings assumptions were made there, Mark and maybe dovetailing in the pricing as well at 25% price lift, I think is the number it sounds high. Is this just for new processes? Is this just for new work? Or is this kind of come upon each contract renewal for a larger set of customers?

Matthew Calkins

I'll take the first part of the equity and then I think that's right.

Mark Matheos

Yes. So Tom, it's really not a global story for us. Again, it's seasonality. One thing I didn't mention which I should say, we did have an FX weakness since our last guidance in February. And so we did have a few million dollars leave our backlog for the year. And so we've absorbed that. Of course, we're not we're able to reaffirm our full year cloud guide despite that. But that took a toll on Q2 and the full year, and it was an impact as well. But there's no there's nothing about our bookings pattern this year. That's different than the other year in our assumptions for guidance or anything like that.

Matthew Calkins

Great. I'm going to talk about our 25%. This is the higher tier when the new higher tier in our pricing system and all the new features that we just announced at Appian World, they're all in the advanced tier. So customers like this, we had a lot of momentum, I think is probably the best feature drop we've had in a long time and customers understand that in order to use these features, whether it's process HQ. or case management or they're going to have to buy the higher tiers, 25% more. I think that this is likely to come up in our renewal negotiations. So it's not all at once come, but when customers talk about renewing that, we're going to we're going to discuss why they should renew at the higher rate. It is not a mandatory 25% increase. It's optional and we're trying to lever them up with the with these new these new features.
I don't expect a rapid impact from this. But I do think that Appian has a large consumer surplus, which is to say that our customers get more than they pay for and so by creating a new higher pay rate, we can sort of take some of that back with with features, which I hope soon will be considered mandatory de Rivera for any Appian customer because they're such good features. That's the second line here.

Tom Blakey

That's a great answer, Matt. Just as a follow-up to that, was the is the surplus being shifted to these higher tiers? Or is it just all incremental in terms of these higher tiers? And a leading question to gauge consider if you'd wager a percentage revenue that you would expect to take this higher tier, especially given the fact that you have the power to move some of that surplus from to those higher tiers?

Matthew Calkins

Yes, I'm going to hold back on making a prediction? Look, I mean, look, I love the question I asked this of myself, but I just don't answer. I want to I want to just see if you'll see we fight this and and get back with more numbers.

Tom Blakey

Help us finish this with TCO and other benefits. I'm sure if you can push the surplus to the higher tiers in the consideration of continuing to save the company and customers money. Maybe we'll see we'll see a considerable move over now to a follow-up to your budget kind of commentary on yield, again, still continued continues to grow double digits on a kind of flattish to up low single digit IT budget environment. Where do you see the budgets coming? I think it was the vendors question on terms of AI budgets work, where do you see Appian's budgets come in in the contracts? If you could answer, I saw your AR million-dollar-plus ARR deals that you had that chart's been phenomenal in the last few years, kind of flattened out a little bit. If you could just kind of combined the two points in terms of an answer, there would be helpful and thank you for.

Matthew Calkins

Yes, let me just say I know some people are watching that chart by the quarter. I wouldn't watch it too closely. I do think there's some natural volatility in Q1 is Q1 for us, so don't don't get too absorbed in the ticks on million-dollar accounts. However, let me say that the the real space for us long term in this market is at that high end, right? That's where that's where best-of-breed player belongs. And so for us to focus on larger businesses and bigger deals and higher feature sets and an elevated prices. This is strategically where we belong on Epix fits right into that. For example, the new elastic scale feature we have what we've done recently and you could see it in our show. And in the way, we dropped a bunch of great features and we they all have price tags. The way, we're reorganizing the priorities in the market to focus more on the larger opportunities. It's all under the understanding that there's a place that we can live comfortably in this market. Space and it's at the high end.

Tom Blakey

That makes sense. And I can coalesce around maybe Mark's model producing some profits in the future to coalesce around that. So thank you very much.

Operator

(Operator Instructions) Raimo Lenschow with Barclays.

Raimo Lenschow

Your line is open. Hey, thank you. Thanks for squeezing me in. And Matt, if you think about the digital platform and the AI. adoption is the data have to come first. So if you think about like how the world is going to evolve here, like you mentioned earlier, there's not that much on. Yes, budgeting side I think the bigger move and people don't talk about it is actually that they need to clean up the data first and hence, your data properties should be or could be and will be the more interesting sort of thing for the time being.

Matthew Calkins

I think the data conversation is under pursued in a I generally as a society, we don't give data enough credit as businesses were not broadly giving data enough credit for the value, it creates inside a. And I'll let me take that 0.1 step further and say hey, I will truly be valuable when it's about you. I mean, this is true for you personally, if you were to type of question into a public AI algorithm, you you would get back a generic answer and what is it new you. It would give you an answer that was valuable to you and the way people get around this right now, as they tried to explain themselves very briefly, like if I care about this or if my priority were X and Y, then what would you recommend for me, right there basically prompting the AI with a little bit of themselves. But at that level, when the AI does little to nothing about you, it's a novelty when a guy moves from being a toy to being a tool. It's going to be because it knows you. And that's true right now as you as a person, interactive public AI., and it's also true for businesses when they interact with AI. It's just a toy until the A., I understand the business.
And that's the real hurdle because understanding the business means exposure to the data that the business owns the crown jewels of the business and there's privacy concerns as regulatory concerns. There's a lot of fear in that system with that for us to get serious as a civilization about a I we're going to have to figure out how to make a I about you in this case, you being the business. And that's going to mean getting across this this how do we share question, how will we share our information? And I propose one answer to that question, and that is that the Data Fabric will allow you to filter select and share only a tiny slice of your data, but the right slice with AI in order that you can get a valuable answer and reply without triggering any privacy or regulatory concerns?
That's one answer to a critical question that that constitutes right. The frontier of real business value in AI, we're going to have to have an answer to that question. We have one proposal. Appian's got a proposal to how we're going to do it. And data fabric is utterly central to our ability to offer that proposal. So I'm a huge believer in the synergy between data and AI between between the capability and the capability of data fabric to facilitate a certain sort of personalization around AI. That's what we're going for and we've positioned ourselves to be the leader in a specific kind of valuable. And yet private AI. that's going on a little long here, but I want to make a point it's really important to us strategically what we're trying to do and since you asked about it, I figured I'd just lay it out, but that's our intention with data fabric.

Raimo Lenschow

Yes, no, it makes total sense. And yes, it's very valuable. And then one month follow-up, Mark, could you obviously the big question you've got is like the if you look at the bookings this year and you said like it's all fine. Can you to maybe talk a little bit about the shape of the pipeline? And with that kind of always kind of your intent was that always the plan for the year. And so can you give us a little bit more handholding here because that's where I get the most pushback? Thank you.

Mark Matheos

Yes, I mean, the pipeline has kind of shown the exact behavior we expected. So there's no there's no change. The linearity has been typical for us, which is back-end loaded quarters. And as we've said for years, Q1 is our weakest quarter and that was just the seasonal pattern buying patterns of our customers. So the only other missing pieces, what I'll reiterate, which is the FX piece of which did did cause a departure of our cloud revenue backlog of about $2.5 million for the full year. So that's yes, that's one thing that you could see obviously in Q2 as well. But I would I would caution anyone to read into anything abnormal. It's really more the rural versus the exception for us.

Operator

Steve Enders, Citi.

Steve Enders

I guess I just want to clarify the FX impact that you say you are seeing. And I guess maybe either framing what was embedded in the guide before for the year? I guess what's now kind of being embedded in the guide for the year now and maybe also kind of the impact for us for the 2Q guide would be helpful.

Matthew Calkins

So we don't we don't forecast changes in FX. And what I'm pointing out is that when we set our guidance for the year after our Q4 results were presented in February, the foreign currency rates, it yielded a certain amount of revenue, right. And since that time in the passage of three months. Those essentially the European exchange rates have weakened to the point that we saw $2.5 million of cloud subscription revenue leave that that forecast or that guidance or that backlog, however, you want to put it. And so by maintaining our full year guide, right, we've absorbed that $2.5 million impact for the second quarter that impact was around $1 million. Is that helpful?

Steve Enders

No, that's yes, that's clear. So you're saying that if FX constant currency basis, you would have raised the guide by $2.5 million for the year. But because you're in Florida that it's maintained at?

Matthew Calkins

Yes, I would hesitate to use the word constant currency because that implies prior year's rates but just using the rates as of February, if we use those rates should certainly we would have had those numbers $2.5 million increase for the full year. And then $1 million for the second quarter.

Operator

(Operator Instructions) [Oscar Salejra] with Morgan Stanley.

And I want to ask a question on just the macro demand environment and the health of your core verticals that being financial services, government and healthcare. It's nice to feel like your net retention rate upticking over the past several quarters. So just your view on the general demand environment and what you're seeing that is allowing you to see that consistent uptake while others are on software seen that deteriorate? Thank you.

Matthew Calkins

Yes, I would say that our customers are getting a lot of value out of Appian software. You can see in all these new features, the innovation we're doing that were very high attendant on delivering benefit being reliable satisfying them with with outcomes of their technology investment. I think that that shows in the retention and the support that they give us a gross revenue retention is high as well at 98%. And they also turn up for us on industry satisfaction surveys. So like I can't speculate on what's happening for other firms, but I will say that our customers are enthusiastic and loyal. And it's because of because we make sure that their experience is great, got it.

But so in terms of just like the broader demand environment, are you seeing any in particular, like I'm still a budget constrained or just anything around that?

Matthew Calkins

Not on that particular.

Okay. And just one more on your AWS partnership driving deals like any like any additional details on what what's driving that those early deals?

Matthew Calkins

We announced that part of it that I wanted to announce. So I don't want to get into anything more other than to say that we're enthusiastic about our long-standing relationship with AWS.

Operator

(Operator Instructions) I'm showing no further questions at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.