Appian (APPN) Q2 2026 Earnings Call Transcript
Appian (APPN) Q2 2026 Earnings Call Transcript
Motley Fool Transcribing, The Motley FoolThu, August 13, 2026 at 6:01 PM UTC
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Thursday, Aug. 6, 2026 at 8:30 a.m. ET
CALL PARTICIPANTS -
Investor Relations - Brian Denyeau
Chairman and Chief Executive Officer - Matthew Calkins
Chief Financial Officer - Srdjan Tanjga
TAKEAWAYS -
Cloud Subscriptions Revenue -- $131.7 million, representing 23% growth driven by strong demand for AI capabilities and platform orchestration.
Total Revenue -- $203.3 million, increasing 19% due to broad-based strength across all major geographic regions and industry verticals.
Adjusted EBITDA -- $16.2 million, exceeding the guided range of $5 million to $8 million because of higher-than-expected revenue and the timing of certain expenses.
FY2026 Cloud Subscriptions Revenue Guidance -- $525 million to $529 million, representing 20% growth at the midpoint of the range.
FY2026 Adjusted EBITDA Margin Guidance -- 13%, representing a 2 percentage point increase as management balances growth investments with margin expansion.
Cloud Net ARR Expansion -- 115%, consistent with the prior quarter and up from 113% in the year-ago period.
Rule of 40 -- 36, reflecting the company's weighted balance between revenue growth and profitability.
Professional Services Revenue -- $45.6 million, up 20% primarily due to project strength in the U.S. public sector.
Subscription Gross Margin -- 84%, compared to 85% in the second quarter of 2025.
AI Usage -- 20-fold increase compared to the second quarter of 2025, reflecting rapid adoption of generative AI features by existing enterprise customers.
AI Attachment Rate -- 85% of new customers acquired in the quarter purchased AI-enabled products, validating the company's AI stack positioning.
Share Repurchases -- $43.9 million used to buy approximately 1.8 million shares during the quarter, part of a $100 million total authorization.
Interest Expense Savings -- $4 million annually, expected following the refinancing of the company's credit facility on more favorable terms.
Non-GAAP Net Income -- $9.2 million or $0.13 per diluted share, up from $300,000 in the prior-year period.
Operating Cash Flow -- $12.1 million provided by operations, compared to $1.9 million used in the second quarter of 2025.
Total Subscription Revenue -- $157.7 million, an increase of 19% reflecting stable expansion in both cloud and non-cloud subscription segments.
Cash and Equivalents -- $167.9 million as of June 30, 2026, down from $187.2 million at the end of the previous fiscal year due to share buybacks.
Professional Services Gross Margin -- 31%, improving from 29% in the year-ago period.
Q3 2026 Adjusted EBITDA Guidance -- $30 million to $33 million, projecting sequential improvement in operational profitability.
Seven-figure Deal (Rail Operator) -- Modernizing core operations to reduce claims processing times by 75% for injury, baggage loss, and trip cancellations.
Seven-figure Deal (Global Bank) -- Targeting over EUR 1 billion in business value by 2028 through the deployment of AI-assisted application development.
Go-to-Market Efficiency -- 12th consecutive quarter of improvement, indicating increasingly efficient sales and marketing expenditure relative to revenue.
U.S. Government Revenue -- The U.S. government remains the company's single largest customer, supported by a seven-figure deal to replace 10 outdated systems for federal law enforcement.
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RISKS -
Tanjga stated, "Due to the recent strengthening of the U.S. dollar, we now expect FX to represent a modest headwind to our reported revenue growth in the back half of the year."
Management reported growth in cloud subscriptions and total revenue, attributing the performance to increased demand for AI-driven process automation. The company provides a deterministic layer for AI within an orchestration stack, which facilitates reliable enterprise applications and data access through a unified fabric. Results included broad expansion across geographic regions and industry verticals, notably within the U.S. public sector and global financial services. Strategic initiatives included share repurchases and a credit facility refinancing to improve the company's capital structure and interest expense profile.
CEO Calkins stated, "Appian is part of the AI stack," when explaining the company's role in providing an orchestration layer for enterprise AI.
Calkins noted that customers' "Appian AI usage is 20x greater than last Q2," as large organizations integrate generative AI into mission-critical applications.
CFO Tanjga indicated that the company decided "to start hiring earlier for some of the roles that were originally planned for 2027" to accelerate sales productivity.
Calkins highlighted that Appian is used by two-thirds of the world's largest pharmaceutical companies, insurers, and non-Chinese banks.
Management identified a rising tide of legacy modernization requests, with AI serving as a catalyst for organizations to replace difficult-to-maintain custom-coded applications.
Calkins explained that the company's platform allows customers to operate software on-premise, which provides an advantage in the sovereign AI market where data control is prioritized.
CFO Tanjga noted that approximately 40% of customers have ARR on advanced AI-enabled tiers, with the next growth step being increased AI usage beyond current allotments.
INDUSTRY GLOSSARY -
Data Fabric: A technology that unifies data from across various enterprise systems without requiring data migration.
Rule of 40: A financial metric for software companies where the sum of the revenue growth rate and profit margin should ideally exceed 40%.
ARR (Annualized Recurring Revenue): A metric used by subscription-based companies to predict the total revenue expected from customers over a year.
Low-code: A software development approach that requires minimal manual coding to build applications and workflows.
DocCenter: Appian's AI-powered solution for automated document intake, classification, and processing.
Adjusted EBITDA: A non-GAAP measure of operating performance that excludes interest, taxes, depreciation, amortization, and certain non-cash or non-recurring items.
Full Conference Call Transcript
Operator: Good morning, and thank you for standing by. Welcome to the Appian Second Quarter 2026 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Brian Denyeau. Please go ahead.
Brian Denyeau: Great. Good morning, and thank you for joining us. Today, we'll review Appian's Second Quarter 2026 Financial Results. With me are Matt Calkins, Chairman and Chief Executive Officer; and Serge Tanjga, Chief Financial Officer. After prepared remarks, we'll open the call for questions. During this call, we may make statements related to our business that are considered forward-looking. These include comments related to our financial results, trends and guidance for the third quarter and full year 2026, 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.
These statements reflect our views only as of today and don't represent our views as of any subsequent date. We won't update these statements as a result of new information unless required by law. Actual results may differ materially from expectations due to the risks and uncertainties described in our SEC filings. Additionally, non-GAAP financial measures will be discussed on this conference call. Reconciliations of GAAP to non-GAAP financial measures are provided in our earnings release. With that, I'd like to turn the call over to our CEO, Matt Calkins. Matt?
Matthew Calkins: Thanks, Brian. In the second quarter of 2026, Appian's cloud subscriptions revenue grew 23% to $131.7 million. Subscriptions revenue grew 19% to $157.7 million. Total revenue grew 19% to $203.3 million. Adjusted EBITDA was $16.2 million. For the second consecutive quarter, constant currency cloud revenue accelerated and grew over 20%. Our weighted Rule of 40 was 36, and our go-to-market efficiency metric posted its 12th straight quarter of improvement. We're increasing full-year guidance. We now expect our cloud business to grow 20% for the year, and we're raising EBITDA margin by 2 percentage points to 13%. Those who've heard our earnings calls or our Investor Day last quarter know what's going on here. For others, I'll offer a brief explanation.
Appian is part of the AI stack. Before you can deploy AI in enterprise applications, you need certain supporting functionality. Some call it a harness, a control plane or an orchestration layer. Appian provides it. Let's quickly review what that supporting functionality is. First, you need a deterministic layer since AI is probabilistic. This makes AI reliable enough to run in critical applications. Our process technology fits this need. Second, you need to access information from across the enterprise quickly and securely. Agents need broad access so they can roam for data. Our Data Fabric serves this purpose. Third, you need governance to track AI's actions and outcomes for transparency and for continuous improvement.
Fourth, you need to save tokens by allocating work to the right workers. You've got multiple AI models of different costs plus digital workers and people. AI is expensive, and nobody wants to be locked in. So a layer that allocates work is essential. AI in the enterprise needs support. I've just listed 4 key things it needs. There is growing awareness of these needs. In this emerging space, Appian's capabilities are being validated by our customers. Customers' Appian AI usage is 20x greater than last Q2. And 85% of our Q2 new logos bought our AI. Appian's approach to AI is distinct and appeals to the high end of the market.
Our customers are big organizations in highly regulated industries. Appian is used by 2/3 of the world's largest pharmas, insurers and non-Chinese banks, plus 20 major governments. The U.S. government is our single largest customer. These organizations cannot afford to make mistakes. They're not willing to throw AI at mission-critical applications and see what happens. They need a reliable framework for AI, and Appian provides it. We are all about reliability and security and safety. Next, I'll share a few examples of the value Appian customers are achieving with our AI. First, a leading health insurance provider manages client services and enrollment on our platform.
Before Appian, the insurer's template-based document processing system was unable to handle a diverse range of documents. This quarter, it deployed DocCenter, Appian's AI-powered document intake solution to interpret over 100,000 medical records annually. The organization expects to save more than $10 million in operational costs over the next 3 years. Next, a top global asset management firm runs dozens of Appian applications, saving hundreds of thousands of labor hours annually. This quarter, it deployed our AI into its existing Appian client services and onboarding processes to optimize them further. Our AI automatically classifies and extracts data from millions of customer forms per month, processing 90% automatically and routing the rest for human review.
With this deployment, they expect to save additional tens of millions of dollars annually. Finally, a top global bank and long-time customer runs more than 100 mission-critical Appian applications. In Q2, it signed a 7-figure net new software deal for additional licenses and to access our latest AI features. The bank intends to build a host of new apps, starting in its retail and commercial business. It will deploy DocCenter to process customer-facing documents for onboarding new customers, Know Your Customer checks and closing accounts. It will use our AI-assisted application development features to create new apps at scale.
Appian is an essential part of the bank's plan to use AI to generate over EUR 1 billion of business value by 2028. Appian is seeing a rising tide of legacy modernization requests. AI has ignited demand in this market for 2 reasons. First, AI-driven application development is faster and more efficient than old ways of modernizing. Second, AI can exploit vulnerabilities in legacy systems, making them a liability. Every application built on Appian automatically inherits the latest features and best-in-class security of our platform. I'll share 2 stories from Q2 that highlight our customers' growing appetite to modernize.
First, a European rail operator signed a 7-figure Appian software deal to modernize core operations, starts by unifying its claims process, including injury, baggage loss and trip cancellations. Before Appian, workers swiveled between decades old systems to process each claim. Now Appian will deliver a modern system to reduce processing times by 75%. The customer expects to save millions of dollars in labor costs. Second, a collection of U.S. federal law enforcement agencies aims to reduce transnational crime. Its legacy custom-coded applications are difficult to maintain and can't handle increased workloads. This quarter, it signed a 7-figure Appian software deal to replace 10 outdated systems to ingest and advance classified cases.
In closing, Appian is accelerating due to our position in the AI stack. We help large organizations make AI reliable enough to use in mission-critical applications. When AI is involved, we are more likely to win new logos, and we enjoy stronger revenue growth rates. With that, I'll hand the call to Serge.
Srdjan Tanjga: Thanks, Matt. I'll begin with a detailed review of our second quarter results and then finish with our outlook for the third quarter and full fiscal year 2026. Starting with Q2 results. We had a very strong quarter of new business driven by continued AI traction. We saw strength across all major regions and industry verticals. Appian exceeded the guidance ranges we provided on our key metrics of cloud revenue, total revenue and adjusted EBITDA. Cloud subscription revenue was $131.7 million, an increase of 23% year-over-year. On a constant currency basis, cloud subscription revenue increased 22% year-over-year, our strongest performance in over 2 years. Total subscription revenue was $157.7 million, an increase of 19% year-over-year.
On a constant currency basis, total subscription revenue grew 18% year-over-year. Professional services revenue was $45.6 million, up 20% compared to the second quarter of 2025. Total revenue was $203.3 million, an increase of 19% year-over-year. On a constant currency basis, total revenue grew 18% year-over-year. Our cloud net ARR expansion was 115% in Q2 compared to 113% a year ago and 115% in the prior quarter. As a reminder, we present net ARR expansion on a constant currency basis. Now let's turn to profitability. I'll be discussing our results on a non-GAAP basis unless otherwise noted. Gross margin was 72%, flat year-over-year and down from 74% in the prior quarter.
Our subscription gross margin was 84% compared to 85% in the year ago period and down from 86% in the prior quarter. Professional services gross margin was 31% compared to 29% in the year ago period and in the prior quarter. Total operating expenses were $133.1 million, up from $117.9 million in the year ago period. Adjusted EBITDA was $16.2 million, ahead of our guidance range of between $5 million and $8 million and compared to adjusted EBITDA of $8.1 million in the year ago period. This outperformance relative to our guide was driven by greater-than-expected revenue and timing of certain expenses.
Net income was $9.2 million or $0.13 per diluted share compared to net income of $0.3 million or breakeven for the second quarter of 2025. This is based on 73.3 million diluted shares outstanding for the second quarter of 2026 and 74.6 million diluted shares outstanding for the second quarter of 2025. Our stock-based compensation expense was $10.6 million in Q2 of 2026 or $0.14 per diluted share. In the second quarter, we purchased approximately 1.8 million shares for $43.9 million, bringing our total buyback to $65.7 million under our current $100 million authorization. Turning to our balance sheet.
As of June 30, 2026, cash and cash equivalents and investments were $167.9 million compared to $187.2 million at the end of last year. For the second quarter, cash provided by operations was $12.1 million compared to cash used by operations of $1.9 million for the same period last year. Today, we are also announcing that we have refinanced our credit facility on more favorable terms, reflecting our significantly improved profitability. As a result, our interest expense will be lower by approximately $4 million annually. Turning to guidance. Starting with the third quarter of 2026, cloud subscription revenue is expected to be between $133 million and $135 million, representing year-over-year growth of 18% at the midpoint of the range.
Total revenue is expected to be between $214 million and $218 million, representing year-over-year growth of 16% at the midpoint. Adjusted EBITDA for the third quarter of 2026 is expected to be between $30 million and $33 million. Non-GAAP earnings per share is expected to be between $0.31 and $0.35. This assumes 72.6 million fully diluted weighted average shares outstanding. For the full year 2026, our cloud subscription revenue is expected to be between $525 million and $529 million, representing year-over-year growth of 20% at the midpoint of the range. Total revenue is expected to be between $845 million and $853 million, representing year-over-year growth of 17% at the midpoint.
Adjusted EBITDA is expected to range between $104 million and $110 million for an approximately 13% margin and 39% year-over-year growth at the midpoint. Non-GAAP earnings per share is expected to be between $1.04 and $1.12 or approximately 77% growth at the midpoint. This assumes 73.2 million fully diluted weighted average shares outstanding. Our guidance assumes the following: First, we anticipate our non-cloud subscription revenue to grow in the low double digits in Q3 and low to mid-single digits for the full year. Second, we expect professional services revenue to grow in the mid-teens in Q3 and in high teens for the full year, driven by strength in the U.S. public sector.
Third, net interest income and interest expense will be approximately $3 million in Q3 and $10 million for the full year 2026. Fourth, our guidance assumes FX rates as of early August. Due to the recent strengthening of the U.S. dollar, we now expect FX to represent a modest headwind to our reported revenue growth in the back half of the year. Finally, we are now forecasting approximately 2 percentage points of EBITDA margin improvement in 2026 as we continue to balance investing for growth and expanding margin. In closing, we see our strong Q2 results and increased guidance as continued validation of our AI value proposition.
We are excited about the opportunity ahead, and we'll continue to invest responsibly to maximize our long-term value. Now we'll turn the call over for questions. Operator?
Operator:[Operator Instructions] Our first question comes from the line of Devin Au of KeyBanc Capital Markets.
Devin Au: Yes. Maybe just to start, really strong results here with cloud subscription accelerating again and the full year guide going higher 20% plus. Would love to just hear what specific strength you saw in cloud subscription? What areas or verticals or products that you saw contributing greater strength than expected? And maybe just quickly comment on pub sector like that's going really well for you guys.
Matthew Calkins: Yes, that's great. Well, it was. The pub sector was strong, but we had strength across the board. We showed good outcomes and above expectations in every major region. So I think this is more of an across-the-board win than a specific sector win.
Devin Au: Got it. Okay. And then maybe just a quick follow-up on the EBITDA margin guide. Nice to see the guide going up, implying 2 points of expansion year-over-year. You're clearly executing very well here. Maybe the question here is why not reinvest a little bit more back into the business and expanding sales capacity a little bit more, just given the strong momentum you've seen?
Srdjan Tanjga: Thanks for the question. Yes, in fact, we are investing in capacity, particularly on the sales side. And what we're also doing, and you see this in the back half of our guide, we decided to start hiring earlier for some of the roles that were originally planned for 2027, specifically to get people in the seats earlier and productive faster. But overall, look, I think that our job is to deliver consistent and durable growth as well as continued margin expansion. And we believe that, that is not just the right thing to do, but the responsible thing to do. So we'll continue doing both going forward.
Operator: Our next question comes from the line of Pat McIlwee of William Blair.
Patrick McIlwee: Great results this quarter. So great to see the momentum in cloud growth. Obviously, you raised your guidance nicely as well. But it looks like there was maybe a little bit of decel implied in the bookings growth. So I just wanted to ask, especially given what we've heard from some other software vendors in the market, what are you seeing in the market from a deal perspective? And has the AI-related noise in the end market had any impact as you speak with customers?
Matthew Calkins: Yes. I realize that's been an issue in some recent calls. We have found AI to be an accelerant in our business. If AI is involved in a deal, it means that we're in a good position to win it and to grow it. We are moving faster when AI is a factor. So for us, it is an accelerant, not a decelerant.
Srdjan Tanjga: And the only thing I would maybe add, Pat, is as you think about the guidance for the rest of the year, keep in mind that the FX has flipped from a tailwind to a headwind in the back half of the year. So as you think about constant currency, I think it tells you more of a stable picture.
Patrick McIlwee: Okay. Great. And I think you launched the composer functionality late last year for GA. So I mean, I guess the question is, has that represented a material change for you all as you've gone to market this year? And with that, are you seeing customers bring modernization projects to Appian that historically they may not have? Or is the primary benefit so far reduced implementation and faster time to value?
Matthew Calkins: Right. Okay. So I do think that this market, this modernization market that we have been present in for a decade is gaining momentum and becoming larger due to the factors I mentioned in the prepared remarks. So we are seeing more such opportunities. We are executing more such opportunities. I would not call that change, which is still preliminary, a material change. I think there's a lot yet to do in this space. And I think that as it becomes proven and as people are more motivated in the light of recent AI hacks, there's going to be more momentum to come. But at the moment, I don't consider it a material factor.
But we do have a long-standing presence and success rate track record in that industry, and we stand to benefit as and if it grows.
Operator: Our next question comes from the line of Steve Enders of Citi.
Steven Enders: Maybe just to start on -- I guess I want to dig in a little bit on to just the pipeline opportunity and what you're seeing there for new opportunities coming through and emerging. Just what are you seeing there from either net new customer opportunities or the expansion path and with existing customers? And I guess on top of that, it seems like the pulling forward investments in sales capacity maybe is an indication of what you're seeing on the pipeline side. But yes, it would be great to kind of hear how you're thinking about the investments needed to execute on that as well.
Matthew Calkins: Yes. I think it might be an indication of strong pipeline. It's unusually strong and also our confidence of being able to win in the current environment.
Srdjan Tanjga: Yes. And the other thing that I would add, Steve, is that's absolutely part of the reason why we feel comfortable starting earlier some of the investments for 2027. It is both the pipeline. So we feel like we have stuff to give our new people to work on and our increased -- continued increases in confidence in our sales execution because it's been very strong.
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Patrick McIlwee: Okay. Great. That's good to hear. And then maybe just in terms of I guess, sales productivity rates, I mean, it looks like it's starting to I guess, seeing less expansion on the metrics coming through there. Is that a reflection of the incremental hiring that you have done starting to impact that? Or would you say the ramp rep productivity rates are those starting to maybe slow down a little bit just given the strong expansion over the past few years?
Srdjan Tanjga: Yes. So rep productivity is very strong and continues to improve across all major theaters. As you think about the sales and marketing investment versus the new business, that's looking like it's going to be another quarter -- another year of improvement in 2026. We showed you that history in the Investor Day. And then as you think about the go-to-market efficiency that we report, that's versus total revenue. So yes, that's reflective of the fact that we're investing more into growth. But as you look underlying on our ability to invest for winning new business, it continues going up and to the right.
Operator: Our next question comes from the line of Sanjit Singh of Morgan Stanley.
Sanjit Singh: Congrats on the cloud acceleration once again this quarter. Matt, I think you kind of alluded to it before, but like your primary customer in the market talked about some headwinds from customers sort of getting more hesitant on their software budgets, given their token spend. Other players in software have also talked about that dynamic. Clearly, from the results you guys put up year-to-date, I would say, that doesn't seem to be a dynamic. And so I guess, in some sense, why you guys have been sort of able to avoid that budget scrutiny, if you will, and continue to put up these strong results?
Matthew Calkins: Yes. You mean our primary competitor, not our primary customer, but I understood the question perfectly. And I think it just comes -- I mean, there's an elephant in the room, right? AI is affecting everybody's win rate, speed of closure, competitiveness. And I think it's going to help some and hurt some. And for us, it is clearly an accelerant, not a decelerant, as I was just mentioning. We are benefiting from AI. We're part of the AI stack.
Srdjan Tanjga: Yes. And I think, Sanjit, that goes to the fact that we've been consistent and credible on our AI message, which is that AI needs process, that AI needs a framework. 12 or 18 months ago, that wasn't the consensus view. Now it increasingly is, but we've been kind of first to start explaining this and having this conversation with the customer, and that also helps when it comes time to shepherd deals across the finish line, and we've seen strong win rates. They're stronger when AI is a factor, and we've seen no change in our deal cycles.
Sanjit Singh: Great. And then just one follow-up. I think, Matt, you mentioned that the strength was broad-based across industries. I mean you guys have always been strong in health care, financial services, other verticals. Have you seen any sort of broadening out of the demand outside of your core 3 or 4 verticals?
Matthew Calkins: I would say that our top verticals, whether you call them 3 or 5, depends on whether insurance is part of FS or not and whether you bundle all health together. It's still the center of our business. We have not seen a sector diversification, but we have seen all of those industries grow and all geos grow, terrific on both sides of the Atlantic, public and private this quarter.
Operator: Our next question comes from the line of Raimo Lenschow of Barclays.
Raimo Lenschow: Congrats from me as well. I had 2 quick questions. First, on the -- if I look at the public sector U.S., there's like this you guys are very strong. And there's a company that's also doing a lot more custom projects for them that is also doing very well there. What's the learning for you, Matt, in terms of like how you interact with the government and do AI for them versus how others are doing it? And is there anything where you kind of would consider maybe change the approach there a little bit? And then the second question was on app modernization. That's obviously a very, very nice big opportunity.
Where are we on that kind of practical part of that journey, AI can really help there, obviously, in the long run, but like are we there yet to kind of really see projects kicking off properly?
Matthew Calkins: Okay. Great. We are benefiting from a change in the priorities of the U.S. government. It's more willing to see technology as an answer as a solution to problems. It's more focused on benefits other than mere efficiency out of technology. It's more willing to do business directly with a software vendor instead of through a prime. This is all beneficial to us. But as you point out, there's also another firm, maybe multiple firms who are pioneering a new business model, and those lessons are not lost on us. We see what they're doing, and we can play that game, too.
And I think that we have drawn some inspiration and direction from seeing business plans that are succeeding in a big way in the federal space. You also talked about legacy modernization momentum. We're -- we do see more such business. We are well positioned for such business. I have great hopes for what this may become in years ahead. It is today still a minor factor.
Srdjan Tanjga: And just Raimo, on that, that shouldn't be a surprise to you, as you know, this is a big step for enterprises to take. We're having initial conversations. We're doing first deployments, but the prize is large, exceptionally large, but it will be a multiyear journey and an additional driver of our growth, if you will.
Operator: Our next question comes from the line of Lucky Schreiner of D.A. Davidson.
Lucky Schreiner: Congrats on the results. Nice to hear the strong AI traction and enterprises becoming more AI ready. I wanted to ask on pricing. You guys have been thoughtful about how you price your AI capabilities. So maybe any update on the customers' reaction to your pricing methods? And any early reads on customers who have adopted the enterprise growth plan and have maybe reached the end of their pilots and how growth there has trended for them moving forward?
Srdjan Tanjga: So I'll start with that. So let me take the enterprise growth part first. So we're continuing to see strong traction. It's a product or a pricing scheme best suited for our largest and most enthusiastic customer because it removes variables for adoption. So we've seen some big new deals this quarter, and we'll expect to see more from that. When it comes to AI, I think that the answer is the same as it has been generally, you've been hearing from us for the last couple of years, which is you need to start by selling value.
And if you successfully sell value and convince customer and align with customer on what the value that you're delivering to them, and the pricing conversation is a relatively easy one. That's not to suggest that it's without any friction because, of course, everybody wants to pay less. But once you establish the pie, then the share of the pie is much more easier to have the conversation around. So we're early in terms of AI monetization. The first step in that monetization is, of course, getting more customers onto our AI-enabled tiers. We talked about having nearly 40% of our customers having some of our ARR on the advanced tiers and other AI tiers in Q1.
And we mentioned this quarter that 85% of our new customers are buying at those levels, which is actually really encouraging and speaks to the fact that our AI message resonates even with customers who don't have a prior relationship with us. And then the next step we will be selling more of the ARR at the advanced tier. So obviously, ARR percentage tracks -- follows behind customer percentage, but it will move in the same direction. And then the next step is AI usage as customers exceed their AI usage allotments, then they will come and negotiate and buy more from us. We're starting to see that for the most successful AI use cases.
And again, it comes down to value. And since they're seeing value, those conversations are going well.
Lucky Schreiner: Great to hear. And then to follow up on application modernization opportunity. How were partner contributions in the quarter? You guys have increased your investments with partners. And wondering if you're seeing more opportunities for application modernization with new customers or existing customers? Any difference in demand there for application modernization?
Matthew Calkins: Yes. Okay. I think it's easier with existing customers because there's a bond of trust, and this is a big leap. When you're going to modernize your enterprise, you're talking about dozens, maybe hundreds, even thousands of applications. It's got to be a vendor that you trust. We tend to build high-trust relationships with our customers. And so that's where we've seen the first blossoming of enterprise transformation work is where we've got that bridge already built. I do think, of course, everybody is thinking about vibe coding or natural language development and whether that could replace or create new applications.
And though we've not spoken about it much today, I do think we've got a distinct approach to that market and a different insight. We believe that though many applications which are AI authored will be code applications, there is also going to be a substantial segment of this market where you use AI to build a platform application. And the reason is that you want it to be supported by a community, by a support line, by an organization you can have a commitment with, that's a necessary component of an important application. And so I don't believe that all natural language development will end up with a stack of code.
Sometimes it will end up with a platform application, and we're well positioned to handle that demand.
Operator: Our next question comes from the line of Derrick Wood of TD Cowen.
Derrick Wood: Great. Matt, there's a lot more talk about sovereign AI and enterprises figuring out the best ways to protect their data IP. And this has also brought up a debate around using closed source versus open source or open weight models. So first, how do you play into that sovereign AI discussion? And then are you seeing enterprises wanting to adopt more open source models? And if so, how are you guys enabling that for end customers?
Matthew Calkins: Yes, that's right. I think we've got a great play in the sovereign market because we allow our customers to operate our software on-premise, which puts us in a different category as some of our competitors who require the cloud. We've always offered that flexibility. We give the customer greater degrees of control. We are also agnostic about the layout of the customers' enterprise, whether that be the use of open source software or the location in which they place their data or a list of other things. We are an enabler for an open enterprise.
And as such, customers with diverse or idiosyncratic enterprise requests and configurations are more likely to choose Appian, and we are more likely to be able to satisfy their needs.
Srdjan Tanjga: And, Derrick, just to add specifically on various LLMs that customers can use, we allow considerable choice and not just on a workload level, but components on a workload level so that the customers can have great input in terms of what is done by latest models versus what perhaps can be handled by a less advanced model. And that can also, of course, also be changed over time. And we think that optionality is valuable today and will become more valuable as the market matures.
Derrick Wood: Great. And Serge, one follow-up for you. I think last quarter, you talked about charging for API calls from third-party agents to tap into Data Fabric. Is this off the ground yet? And what's the initial feedback? I guess? And is third-party agent access something happening frequently yet? Or is this more about positioning longer term?
Srdjan Tanjga: The feature is in the market. It's early days. And to your point, we think it will be popular for certain portions of the use of the market. I think it's incremental revenue for us. But -- and the early feedback on the feature is good, but it's a bit of a medium- to long-term play.
Operator: Thank you. At this time, I am showing no further questions. Thank you for your participation in today's conference. This does conclude our program, and you may now disconnect.
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