Appian's (NASDAQ:APPN) Q2 Sales Top Estimates But Stock Drops

Full Report / August 05, 2021
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Low code software development platform provider Appian (Nasdaq: APPN) beat analyst expectations in Q2 FY2021 quarter, with revenue up 24.2% year on year to $82.9 million. Appian made a GAAP loss of $23.8 million, down on its loss of $11.8 million, in the same quarter last year.

Appian (APPN) Q2 FY2021 Highlights:

  • Revenue: $82.9 million vs analyst estimates of $78.1 million (6.24% beat)
  • EPS (non-GAAP): -$0.24 vs analyst estimates of -$0.23
  • Revenue guidance for Q3 2021 is $90.7 million at the midpoint, above analyst estimates of $90 million
  • The company reconfirmed revenue guidance for the full year, at $356 million at the midpoint
  • Free cash flow was negative -$7.13 million, compared to negative free cash flow of -$3.28 million in previous quarter
  • Net Revenue Retention Rate: 121%, up from 118% previous quarter
  • Gross Margin (GAAP): 68.8%, down from 73.5% previous quarter

Founded in 1999, Appian sells a software platform that lets its users build applications without using much code, allowing them to create new software more quickly.

By empowering existing teams within specialist organisations, Appian lets its diverse customers, from banks to wind farms, build the exact software they need. This might mean creating new interfaces for tellers, or building a process for acquiring and managing wind farm insurance. By making software development easier with pre-existing segments of code, Appian's customers can build and deploy new functionality far more quickly, and potentially at lower cost, than if they had to hire more team members to build it without Appian.

Appian was started by four young friends, including long-serving CEO Matt Calkins who quit his job before settling on a business plan. It wasn't until a few years later that the company began to focus on business process management, helping companies become more efficient. Today, Appian can potentially allow any employee to develop the specific custom software that their business needs.

Automation seems to be an inescapable trend, and the more companies compete to automate their processes with new applications, the more they are likely to need low-code platforms to build faster.

Other providers of low code software include Pegasystems (NASDAQ:PEGA), IBM (NYSE:IBM), and Oracle (NYSE:ORCL).

Sales Growth

As you can see below, Appian's revenue growth has been decent over the last year, growing from quarterly revenue of $66.7 million, to $82.9 million.

Appian Total Revenue

This quarter, Appian's quarterly revenue was up a very solid 24.2% year on year, which is above average for the company. But the revenue actually decreased by $5.85 million in Q2, compared to $7.22 million increase in Q1 2021. However, the sales also similarly dropped a year ago and management is guiding for revenue to rebound in the coming quarter, which might hint at an emerging seasonal pattern.

Analysts covering the company are expecting the revenues to grow 16.5% over the next twelve months, although we would expect them to review their estimates once they get to read these results.

Product Success

One of the best things about software as a service businesses (and a reason why they trade at such high multiples) is that customers tend to spend more with the company over time.

Appian Net Revenue Retention Rate

Appian's net revenue retention rate, an important measure of how much customers from a year ago were spending at the end of the quarter, was at 121% in Q2. That means even if they didn't win any new customers, Appian would have grown its revenue 21% year on year. Significantly up from the last quarter, this a good retention rate and a proof that Appian's customers are satisfied with their software and are getting more value from it over time. That is good to see.


What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Appian's gross profit margin, an important metric measuring how much money there is left after paying for servers, licences, technical support and other necessary running expenses was at 68.8% in Q2.

Appian Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.68 left to spend on developing new products, marketing & sales and the general administrative overhead. This would be considered a low gross margin for a SaaS company and it has dropped significantly from the previous quarter, which is probably the opposite of what shareholders would like it to do.

Key Takeaways from Appian's Q2 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on Appian’s balance sheet, but we note that with market capitalisation of $7.76 billion and more than $242.6 million in cash, the company has the capacity to continue to prioritise growth over profitability.

We were impressed by how strongly Appian outperformed analysts’ revenue expectations this quarter. And we were also glad to see the improvement in net revenue retention rate. On the other hand, it was less good to see the deterioration in gross margin. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The company is down -5.18% on the results and currently trades at $106.48 per share.

Is Now The Time?

When considering Appian, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. Although we have other favorites, we understand the arguments that Appian is not a bad business. However, its revenue growth has been mediocre. But while its cash burn means its business isn't yet sustainable, the good news is its very efficient customer acquisition hints at the potential for strong profitability.

The market is certainly expecting long term growth from Appian given its price to sales ratio based on the next twelve months is 20.7. There are things to like about Appian and there's no doubt it is a bit of a market darling, at least for some. But it seems that there is a lot of optimism already priced in and we are wondering whether there might be better opportunities elsewhere right now.