Good day, everyone. Welcome to the Appian Corporation First Quarter 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Scott Walker from Investor Relations. Please go ahead.
Thank you, operator. Good afternoon, thank you for joining us today to review Appian's first 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 up the call to a question and answer session. During this call, we may make statements related to our business that are forward-looking statements under federal securities laws and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Including statements related to our financial results, trends, and guidance for the second quarter, the impact of COVID-19 on our business and on the global economy, the benefits of our platform, industry and market trends, our go-to-market and growth strategy, our market opportunity and ability to expand our leadership position, our ability to maintain and upsell existing customers, and our ability to acquire new customers. The words anticipate, continue, estimate, expect, intend, will, and similar expressions are intended to identify forward-looking statements or similar indications of future expectations. These statements reflect our views only as of today and should not be reflected upon as representing our views as of any subsequent date. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations.
For a discussion of the material risks and other important factors that could affect our actual results, please refer to those contained in our Q1 2020 10-Q filing, our 2019 10-K filing, and our other periodic filings with the SEC. These documents and the earnings call presentation are available in the Investors 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 release in 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?
Thanks, Scott. Thank you all for joining us today. In the first quarter of 2020, Appian's cloud subscription revenue grew 33% year-over-year to $28.4 million, and our adjusted EBITDA was a loss of $3.6 million. Subscriptions revenue, including on-premises and cloud software, grew 36% year-over-year to $50.4 million. Total revenue, including professional services, grew 31% year-over-year to $78.9 million. Our cloud subscription revenue retention remains strong at 115% as of March 31st, 2020. These results exceeded our guidance. We also set a new high mark for gross profit margin in the first quarter at 70%. This surpasses our previous high of 67% achieved the prior quarter. We are operating in unprecedented times with COVID-19, and I hope you and your families are healthy. COVID is a health crisis first and an economic crisis second.
Our consideration begins with the health of our employees, their families, our customers, and everyone it hurts. Let me discuss the crisis from an economic perspective. In a situation like we are going through now, we were inevitably going to face some disruption in some predictable ways and some unpredictable. It's likely that some sales cycles will lengthen and also likely that services revenue will be lower than we previously expected. In the long term, however, the world is changing in a way that is beneficial for us, becoming more digital and more automated. We are also strengthening so that when the crisis is over, I expect us to be better positioned than we were going in. This deserves a little more explanation. Let me offer five reasons why I believe Appian will emerge from this health and economic crisis stronger than we entered it.
First, we stayed relevant. A crisis is a testing point for any institution. Some step forward, others step back. Appian asserted itself and stayed relevant throughout. We built a solution to help companies monitor their employees' health. Hundreds of companies downloaded it, and some really large firms launched and relied on it. We also built solutions for the U.S. Paycheck Protection Program and employee reentry to substantial customer interest. We garnered plenty of press attention for these applications. We're in the conversation, and we showed that when a crisis strikes, Appian has something to offer. For example, a regional affiliate of the U.K. National Health Service launched a command center using Appian to allow frontline workers to collaborate with each other, coordinate care for discharged patients, and report resource availability using our platform.
Their application was deployed in about a week and protects hundreds of healthcare workers and thousands of patients. A multinational company recognized as one of America's best large employers chose Appian to manage its response to the COVID-19 pandemic and the eventual return of its workforce to its facilities. The application is HIPAA compliant, configurable for any health crisis, and centralizes all employee data on health status, recent travel, and recent symptoms and diagnoses. The company's crisis management team will use this application to respond to incidents and coordinate the safe return of thousands of employees when it reopens its facilities. It was built in just two weeks. During a crisis, you're likely to see a consolidation of buyer attention around leaders. It's a good time to be a leader, a bad time to be an aspirant.
A good time to have quals, a bad time to try to get them. Appian is a leader in low-code and in automation. The events of 2020 will make it harder for others to catch up with us. We advanced the automation industry by acquiring and fully integrating a leading RPA firm in Q1, becoming the only vendor to offer the ability to orchestrate bots, AI, and people in a single workflow on a single platform. Just three months after our acquisition, we already have adoption of Appian RPA. For example, a top labor union and longtime Appian customer will use our bots to onboard new contractors more efficiently. Appian bots will automatically retrieve data from external websites and display it for employees to use as they complete the onboarding process.
This new workflow orchestrates bots and people together to reduce the time it takes to verify a contractor's identity from days to less than a minute. Another example is a Q1 expansion with a top five global insurance broker. This customer uses our platform already to automate their insurance claims and commissions tracking systems for thousands of users. In Q1, they bought over $1 million of additional Appian licenses to expand into more business lines. Before Appian, brokers needed to manually enter data from insurance forms into their systems. Now, Appian will use artificial intelligence to automatically ingest millions of insurance documents annually. AI does this tedious work so brokers can spend their valuable time serving customers. We won this expansion because we demonstrated the value of our automation capabilities. Appian is differentiated automation market because we remain an open platform.
We believe customers will continue to integrate best-of-breed software with their Appian applications. We're maintaining close partnerships with other leaders in RPA and AI so our customers can build applications that best fit their needs. For example, a Fortune 500 insurance company became a new Appian customer in Q1 by purchasing Appian to orchestrate Blue Prism bots and employees to onboard insurance policy resellers. Before Appian, the company struggled to manage its bots and their exceptions. We won this deal because our open platform gives them the governance over their bots, leading to improved accuracy and processing times. One of the primary lessons that this crisis has taught the business world is that you have to be ready for change. This is the third reason Appian will emerge stronger after the crisis. Businesses have to reorganize their safety practices to retain the trust of their employees.
Banks had to be ready to offer a new lending platform at short notice, et cetera. Businesses now know that they need a platform for change. Appian is such a platform. For example, a subsidiary of a top 10 global bank is using Appian to process Paycheck Protection Program loans, a component of the U.S. Coronavirus Aid, Relief, and Economic Security Act. Our platform initiates a case for employees to review before Blue Prism bots submit the request to the Small Business Administration. After the administration banned RPA bots from accessing their website, the bank quickly reconfigured Appian to use recommended API calls instead. Using Appian automation, the bank swiftly responded to the urgent funding needs of their small business customers, adapting quickly to meet the changing environment. This Appian application was built in one week and accepts new loan requests every two seconds. Here's another example.
A top 10 healthcare provider in the U.S. built an Appian application for doctors to submit COVID-19 patients to a clinical trial for a new drug. This medication has limited availability, so the firm is closely managing its patient intake and approval process using Appian. Its speed house team built the app in just 24 hours and deployed it to thousands of doctors. In Q1, our platform speed continues to differentiate us in deals both with new logos and existing customers. A top international grocery retailer became a new Appian customer a year ago. It uses our low-code automation platform to file claims and investigate issues with its supply chain. Its first project was delivered in 8 weeks, and the application reduced processing times from hours to just 15 minutes per claim.
This quarter, the retailer purchased an additional half a million dollars in Appian licenses to deploy a mobile app. Appian will be used to digitize and manage logistics for fleet drivers delivering supplies to stores. The firm estimates the app will save them over $1 million this year. Our speed also won a deal with a top 10 global pharmaceutical company, making it a new Appian customer. It selected our platform to manage its process for designing clinical trials. Trials are planned based on many factors such as market size, existing drugs, and potential patients and geographies. Appian consolidates data about these factors in a single view and allows the firm's employees to quickly specify clinical trial designs based on that data.
We won this deal after demonstrating our speed with a complex proof of concept built in just five days and committing to deliver the firm's first project in eight weeks under the Appian Guarantee. Another notable win in the first quarter was with a top five global asset management firm. This new customer will manage employee registrations and disclosures in Appian, replacing inflexible systems that are too costly to update when compliance requirements change. We won this deal because of our platform's ease of use, which was demonstrated when the firm's employees were able to build a proof of concept that met their requirements in just a few weeks and without Appian training. We'll deliver this first project with the eight-week Appian Guarantee. Fourth, this crisis offers a natural opportunity for introspection and improvement. The global employment landscape has changed due to COVID-19.
Appian can upskill a company with top talent that might have been locked up otherwise. We made two such hires. Pavel Zamudio to lead customer success, and Eric Cross as Chief Revenue Officer to lead our sales division. Pavel started a month ago and is making great improvements. Eric will start on Monday, May 11, transitioning from David Mitchell over the course of the month. We're gearing up a new leadership team, writing new plans, institutionalizing new processes. It's the perfect time to do it. As the world emerges from this crisis, it will demand more digital transformation, more cloud, more SaaS. This surge of demand for new, quick-moving, quick-changing, customer-responsive software processes is the fifth and final reason why our low-code automation platform is well-positioned. Now, I'll turn the call over to Mark for a deeper discussion of our financial.
Thanks, Matt. Before we view the financial performance for the quarter, I want to briefly discuss the effects of COVID-19 on our business. We've not seen a meaningful impact to our reported financial results. It's very difficult to know how the pandemic will impact us over the next two to three quarters. In the short and medium terms, we expect some disruption. In the long term, we're confident that our business is well-positioned to succeed. We're benefiting from our high gross renew rate, currently at 98%, which reflects the mission-critical nature of our platform. Our core verticals, such as financial services, U.S. federal government, healthcare, and pharma, are less affected by the short-term impacts of the pandemic, and we have very little exposure to small and medium businesses.
Our strong and expand business model will also help us get through this crisis, where historically two-thirds of our software ACV growth relates to customer expansion and one-third to new logo acquisition. Having said that, we expect short-term negative impacts to our business, especially as it relates to net new ACV bookings and professional services revenue. With that, I review the financial highlights of the quarter. Cloud subscription revenue for the first quarter was $28.4 million, an increase of 33% year-over-year and above the top end of our guidance. Our total subscriptions revenue was $50.4 million, an increase of 46% year-over-year, which exceeded our expectations for two reasons. First, we recognized approximately $4 million of on-prem revenue associated with deals that closed in Q1 2020 that we anticipated would not close until Q2 2020 when we provided our initial Q1 guidance.
Additionally, we closed a two-year on-prem contract during the quarter where the customer did not want the contract to auto-renew on an annual basis. As a result, we recognized $2.8 million in revenue up front versus recognizing approximately $1 million each year upon auto-renewal. Professional services revenue is $28.4 million, up 10% from $25.7 million in the prior year-over-year period and 7% from $26.5 million in the fourth quarter. Partners continue to be a larger part of our ecosystem and are increasingly helping us sell more software. Total revenue in the first quarter was $78.9 million, an increase of 31% year-over-year and also above our guidance. Our cloud subscription revenue retention rate as of March 31st was 115%, within the 110%-120% range that we target on a quarterly basis. We continue to be pleased with our customers' expanded use of our platform.
Our international operations contributed 33% of total revenue for Q1, compared with 32% in the prior year period, demonstrating our strong growth both domestically and internationally. I will turn to our profitability metrics. For the first quarter, our non-GAAP gross profit margin was 70%, compared to 64% in the same period last year and 67% in the prior quarter. Subscriptions non-GAAP gross profit margin was 90% in the first quarter of 2020, consistent with the first quarter of 2019. Our non-GAAP professional services gross profit margin was 35% in the first quarter of 2020, compared to 28% in the first quarter of 2019. The services gross profit margin was positively impacted by a decrease in the amount of services performed by subcontractors as opposed to our internal resources. We recognized approximately half a million dollars of services in Q1 2020 that had actually been delivered in 2019.
Respectively, we expect the non-GAAP professional services gross margins to return to the mid to upper 20s. Total non-GAAP operating expenses were $60.3 million, an increase of 30% from $46.5 million in the year-ago period. We rescheduled our Q1 annual user conference, Appian World, to be a virtual conference. The conference will be held next week on May 12th and 13th. Our Q2 guidance reflects the cost of the virtual conference. Adjusted EBITDA was a loss of $2.6 million in the first quarter, above our guidance and compared to an adjusted EBITDA loss of $7.3 million in the year-ago period. In the first quarter, we had $3.5 million of foreign exchange losses compared to $0.1 million of FX losses in Q1 2019.
Our guidance does not consider any additional potential impact to other income and expenses associated with FX gains or losses, as we don't estimate movements in foreign currency exchange rates. Non-GAAP net loss was $8.2 million for the first quarter of 2020, or a loss of $0.12 per basic and diluted share, compared to non-GAAP net loss of $8 million, or a loss of $0.12 per basic and diluted share for the first quarter of 2019. This is based on 67.5 million and 64.3 million basic and diluted shares outstanding for the first quarter 2020 and the first quarter of 2019, respectively. Turning to our balance sheet. As of March 31, 2020, we had cash and cash equivalents of $149.2 million compared with $159.8 million as of December 31, 2019. For the first quarter, cash used in operations was $3.9 million.
Total deferred revenue was $87 million for the first quarter. With respect to our billing terms, the majority of our customers are invoiced on an annual upfront basis, but we also have large customers that bill quarterly or monthly. Due to the variability of our billing terms, changes in our deferred revenue are generally not indicative of the momentum in our business. Now let me turn to guidance. For the second quarter, cloud subscription revenue is expected to be in the range of $28.4 million-$28.7 million, representing year-over-year growth of between 25% and 26%. Total revenue is expected to be in the range of $60 million-$61 million. As a reminder, we recognized approximately $4 million of on-prem revenue in Q1 that we expected to recognize in Q2 when we gave our initial guidance in February.
In addition, the total revenue guide reflects a reduction of our professional services business due to COVID-19. Adjusted EBITDA loss is expected to be in the range of $16 million and $14 million. Non-GAAP net loss per share is expected to be between $0.26 and $0.23. This assumes 67.7 million basic and diluted common shares outstanding. For the full year, due to the unprecedented uncertainty surrounding the ongoing impact of COVID-19, we are withdrawing the full year 2020 outlook. Qualitatively, we expect to see headwinds to our professional services business and our ability to close new logos throughout the year. On the cost side, many of the expenses have been naturally adjusted. For example, teaming has been dramatically reduced, virtual marketing events are less costly and efficient, and services and G&A hiring has been downshifted.
Being founder-led, we are inherently long-term oriented and will continue to hire sales reps and software engineers. Before we take any questions, I want to highlight a few areas of Appian's financial strengths given the current environment. Our liquidity position is strong. We have $149 million of cash on hand and no debt. We also have an unused credit facility at our disposal. We have a business model that is built to last. We have a corporate culture that is focused on the long term. Our software revenue is 100% subscription-based, our gross and net renewal rates are best in class, and our software and services margins are 80%. Our LTV to CAC ratio has exceeded seven times throughout the past five years. We've been in business for over 20 years. We've been through several difficult economic cycles.
We're confident that we'll arrive as a stronger company on the other side of this crisis. With that, let's turn it over to questions.
Thank you. Ladies and gentlemen, if you'd like to ask a question today, please press star and then one on your touchtone telephones. If you are using a speakerphone setup, it might be necessary for you to pick up the handset or depress the mute function so the signal can reach our equipment. Again, that is star and then one if you would like to ask a question today. We'll pause for just a moment to give everyone a chance to signal. We'll take our first question from Arjun Bhatia with William Blair.
Hey, guys. Thanks for taking my questions, and hope you're all doing well. First one, maybe aimed for Matt. Matt, you talked about in your prepared remarks a little bit about how you think you'll emerge stronger after the COVID crisis. Can you maybe just flesh out a little bit what you're thinking on the investment side and how you plan to either put your foot on the gas pedal or take it off throughout this crisis to maybe emerge stronger and in a better position competitively on the other side of this?
I'm having a little bit of trouble with the speaker, so I couldn't hear everything that you said. I do strongly feel that we're positioned to be better on the way out. The economy's going to be looking for different skills than they were before COVID-19, and we're fortuitously positioned for some of that, and then the rest of it we're making up for with hard work. I know the economy's going to want digitization, cloud, SaaS, low-code. This all is completely intuitive. Take, for example, our position in automation. We were a little bit ahead, having acquired an RPA company, and we were bringing together the factors of work. Automation, just to remind you, is human and digital workers together in the same workflow. We have been packaging together these digital workers, the RPA and the AI, with humans in a workflow.
Now everything's on pause for a while due to COVID. It could be difficult to do acquisitions, but we're really working behind the scenes to make our integration tighter and better and cohesive, which means I see it as a lengthening of our lead in automation. It's also, coming out of COVID, going to be a hard time to get the attention of organizations to try to be the first or a novel start in the new industry. I feel like you have to have the quals before a moment like this, and we do have the quals. I think that also helps us a little bit. Now, I may have missed some of your question, unfortunately, because I couldn't hear it all.
No, that was good. That was helpful. Thanks. Maybe a follow-up for Mark. Mark, on the guidance, I know you're not doing full year guidance, as you think about Q2 and the rest of the year, can you just maybe flesh out for us a little bit the assumptions in Q2 specifically in terms of how you think new customer deals will be impacted? Are you anticipating any impact from existing customers, either on the positive or negative side in that cloud subscription revenue number? We'd just be good to hear a little bit more on some of the assumptions you're making there.
Okay. Yeah. I'll address the latter part of your question first. Candidly, towards the end of Q1, we had several very large renewal deals coming up, and it was a true test to see whether or not we were going to close them all. We closed them all seamlessly. We've got three big renewal deals in Q2 that are coming up, and they're all trending very positively. Right now, the good news is if you look at the verticals that we're in, our key verticals, 70% of our revenue, are relatively not impacted or less impacted, if you will. I think everybody's going to be impacted by COVID, clearly, but we're less impacted as some other verticals. That's 70% of our revenue. I feel good about the renewals occurring throughout the year.
Obviously, we're not going to renew 100%, but I feel pretty good about the ability to renew these. Most of our customers are building mission-critical applications, and they're basically proactively renewing. For example, we have a governmental agency that is coming to us a couple of months in advance to renew, just in case the funds disappear, so that they're not high up the aisle. Those are encouraging signs from my perspective. As it relates to net new logos, it's going to be more difficult. We're a higher touch sales organization, but you, candidly, have been very impressed with how the sales organization has shifted to kind of working in a virtual manner. We're doing a ton of new webinars. We're getting a lot of activity there. We're doing a virtual conference next week.
At the end of the day, net new logos are going to be difficult and harder to get. As you know, our sales cycles are a little longer. I wouldn't be surprised if we see sales cycles elongating. That's really why, at the end of the day, we decided to withdraw the full year guidance. We thought long and hard about it before doing it, but we just don't know right now. We don't know how it's going to impact us in the next couple of quarters. As Matt said, we feel confident that once we get through this, we'll be better for it, we'll be stronger for it, and we'll be well-positioned.
Perfect. Thank you.
We'll take our next question from Raimo Lenschaw with Barclays.
Hey, guys. It's Mohit Gogia for Raimo Lenschaw. Thanks for taking my question. Hope everyone on the call is staying safe and healthy. My first question is for Matt. Matt, I was just wondering if you can sort of give us some of the high-level priorities for the new CRO, Eric. As to obviously these are very uncertain and very different times. Coming into the door, what are some of the things he's going to sort of look at to maybe optimize, to maybe change? If you can start with that, give us some more color as to behind his appointment and what he has in store for him in the first few months. Then a follow-up question for Mark.
Yeah. Okay. Let me talk about the whole CRO thing generally. I see the COVID crisis as an opportunity to refit and improve the company's management and processes. It's like an untimely winter. We can't harvest, but we can sharpen the tools. It's our intention to exit the COVID episode a much stronger company than we went in. We've hired a couple of stars. We have first-round draft pick kind of people to our team this spring. Pavel in services, Eric in sales. It's important that I note that I don't think our sales or services are deficient. Our sales numbers are strong. On the services side, we have famously happy customers and a very high renewal rate. That's what we're doing here.
Eric's challenge is going to be coming to a team that's performing well, as you can see from the numbers that we're reporting, performing well, and capitalize on the changes in the environment to step up our game and take Appian to a new level. That's absolutely the intention here. We want to capitalize on the change and on the fortuitousness of the alignment between what the world is going to be asking for and what we can deliver. He's got some philosophical approaches about when the sale is made and how it's a lot of touch before. A lot of decision-making happens before the contact of a sale. I think he's right on. I believe that we're going to construct a newer and more effective way to reach the customer, convince the customer, convey our industry message, and be intuitive.
If we can connect more intuitively with the market and convey our value proposition more effectively, I believe that'll do as much as anything could possibly do to take Appian to a new level.
Understood. That's very helpful color. A follow-up question for Mark. Mark, I think you sort of gave us an understanding of the two areas. If I don't want to call it lack of visibility, but two potential areas of weakness maybe that might transpire in the COVID-19 are new logo growth and the professional services. I know you, again, you're not guiding for the full year, but I was just wondering if you can dig into at least the professional services piece. You have been building the Spark partner ecosystem over the last few quarters, few years. What are you hearing from those partners, first of all? How are you thinking of leveraging that ecosystem just to sort of mitigate the impact on professional services from the crisis? Thank you.
As you guys know, forecasting professional services is difficult for us. We can generally do it a quarter out, and it's difficult in good times to be able to forecast it for the full year. That's one element. COVID-19's going to impact it. The good news, Keneley, is that from a deployment perspective and us delivering the projects, we have been able to seamlessly work remotely. If the projects are in cloud, we're obviously able to do it remotely, but even those projects that are on-premise, we've been able to do all those remotely as well. We haven't really skipped a beat there. As it relates to the partners, one of the statistics we didn't talk about in the script was the fact that the partner channel basically was a solid contributor to our new logo performance in Q1. They contributed 71% of the new logos.
That's really good, and as you guys know, the first couple of deployments, the customers generally look to either have the partners or Appian do those deployments. That's another reason why I think the professional services are going to get a headwind. It's COVID-19, but also we're not quite sure how many of these projects can be done by the partners. Keneley, as you guys know, we'd rather have the partners do as many as they can, so long as they bring us those deals. Those two elements combined make it very difficult to even contemplate giving a respectable full-year guide for services. Those are the two dynamics going on there.
Thanks, Chris.
We'll take our next question from Sanjit Singh with Morgan Stanley.
Hi, guys. This is Melissa Dunn on for Sanjit. Thank you so much for taking the question. I was hoping to ask about the subscription business. First, on the timing of term subscription renewals, how should we think about the linearity there? Would this be mostly in Q3 and Q4? Just related to that, last quarter, you talked about converting customers to one-year contracts with auto-renewals. How much of the base has converted to this new billings methodology, and if you have any thoughts on when that process will be done? Thank you.
I think converting the on-prem term licenses or our subscription licenses to auto-renewals will largely be complete by the end of this year. That was one of the headwinds coming in when we converted over to ASC 606 coming into the year, as you recollect, was we were actually doing that, so we weren't actually benefiting from the tail end of multi-year on-prem upfront recognition. We just wanted to normalize our growth rates and smooth out that business. As it relates to seasonality, generally, we're like typical mid-software companies. Q4 is generally our strongest one, so you'd probably expect to see more of that type of business in Q4 than in Q3.
Having said that, Q3 is the new one for Federal government, and Federal government's one of our larger verticals, and thus far, the pipeline's looking pretty healthy as it relates to federal, and we're hoping for some good things to occur there as well. Didn't really answer your question, but kind of answered it.
Do you have any other questions?
No. Thank you, guys. Very helpful.
We'll take our next question from Jack Andrews from Needham.
Good afternoon. Thanks for taking my question. I was wondering if you could just talk about maybe some of the impact of the applications you've rolled out, the COVID-19 response management application, as well as the Workforce Safety and Readiness application. Is this creating pipeline opportunities for Appian that people are able to see the value proposition of Appian in a broader context, or is there any impact of how this may impact your business downstream in the future?
Yeah, definitely. It's a visibility opportunity. It's making introductions for us to new firms. It's getting us a higher profile. I wouldn't say it's much of a revenue event right now, particularly the way we gave away the COVID app for nothing. Even the services related to it was given away for free. It's got us press, it's got us connections with a lot of new customers or potential customers. Of course, the latest app is not free. The Workforce Safety and Readiness, we've got serious interest from big companies on that. There's more than 40 opportunities right now, and two-thirds of them are new logos. It's a strong way to reach out and be relevant in this climate, and I think the way it'll primarily end up helping us is the introductions that it made for us into new potential customers.
That's great. Just as a follow-up, could you touch on the importance of the strategic alliance with Deloitte? Is this giving you more breadth of coverage, or is there some industry-specific expertise that you're going to be able to leverage out of them?
Yeah, definitely. The alliance with Deloitte has been focused primarily on the federal sector to date, where they do have a very strong presence. It's a meaningful sector to us, so that's the primary advantage that we're getting out of that alliance, though of course, we're happy to work with our partners anywhere around the world. We have a few top partners that we focus on, and our preference is to have those partnerships be very strong to the point where those partners see Appian as their secret weapon, their hidden advantage in any bid they go into. I'd rather have a few partners like that than a lot of partners who were just linked by a press release.
Great. Thanks for the call.
We have a question from Derrick Wood from Cowen.
Hey, guys. It's Andrew Sherman on for Derrick. Hope you're all well. Mark, was wondering if on the 2Q guide, if you could help us kind of unpack pro services versus license. How much do you think pro services will be down?
I'm trying to say it in a way that would get you the right answer. Pro services will be down sequentially, but not dramatic.
Okay. License will be a more normal number.
Part of it is that embedded in that license guide is that $4 million that would have been recognized in Q1, or that was recognized in Q1 that would've been recognized in Q2. That's part of the downward guide. That's going to mute the pro services to a certain degree.
Okay. Thanks. As Mark, you said the 70% in core verticals, which aren't impacted as much, but what is your direct exposure to travel, hospitality, and other affected industries, and what are you assuming around those customers?
If you look at kind of the travel, hospitality, and retail, that's less than 5% of the revenue. The exposure to small SMB is minimal. We're kind of lucky there. Obviously, we'd love to have more business in other verticals, but right now, it just happens to be the case that our strongest verticals are the ones that are least impacted by this crisis.
Great. Thanks, guys. Take care.
Once again, ladies and gentlemen, that is star and then one if you would like to ask a question today. We have a question from Chris Merwin from Goldman Sachs.
Hi, this is Kevin on for Chris. Thanks for taking my questions. Maybe one on hiring, as you enter Q2 and beyond. How are any changes to hiring plans, particularly on the sales side, and how you're thinking about that for the rest of the year?
Yeah. We've definitely changed our hiring plan in some areas, but not in all. We have curtailed our hiring in services, but we have maintained our hiring in sales and engineering. Now is a great time to find top employees who wouldn't usually be available. In some areas, we are committed to growing. In services, we can wait now until we see how the market recovers. Appian has committed to sustaining hiring throughout, and I think we're doing some really good recruiting during this period. April was a strong month for recruiting, probably the best of the year to date. I believe it puts us in an advantageous situation. It's also been the source of some good press that we're strongly growing during this period.
Great. Thank you.
We have no further questions at this time. Ladies and gentlemen, that does conclude today's conference. We appreciate your participation today.