2446

Appian (NASDAQ:APPN) Q3 Sales Beat Estimates, Next Quarter Growth Looks Optimistic


Full Report / November 04, 2021
Add to Watchlist

Low code software development platform provider Appian (Nasdaq: APPN) reported Q3 FY2021 results topping analyst expectations, with revenue up 19.5% year on year to $92.4 million. Guidance for next quarter's revenue was $95.2 million at the midpoint, which is 1.16% above the analyst consensus. Appian made a GAAP loss of $25.3 million, down on its loss of $3.61 million, in the same quarter last year.

Appian (APPN) Q3 FY2021 Highlights:

  • Revenue: $92.4 million vs analyst estimates of $91 million (1.49% beat)
  • EPS (non-GAAP): -$0.22 vs analyst estimates of -$0.19
  • Revenue guidance for Q4 2021 is $95.2 million at the midpoint, above analyst estimates of $94.1 million
  • Free cash flow was negative $26.5 million, compared to negative free cash flow of -$7.13 million in previous quarter
  • Net Revenue Retention Rate: 117%, down from 121% previous quarter
  • Gross Margin (GAAP): 71.3%, down from 72.1% same quarter last year

Founded by Matt Calkins and his three friends out of an apartment in Northern Virginia, Appian (NASDAQ:APPN) 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 solid over the last year, growing from quarterly revenue of $77.3 million, to $92.4 million.

Appian Total Revenue

This quarter, Appian's quarterly revenue was up 19.5% year on year. On top of that, revenue increased $9.41 million quarter on quarter, a strong improvement on the $5.85 million decrease in Q2 2021, and a sign of acceleration of growth, which is very nice to see indeed.

Analysts covering the company are expecting the revenues to grow 15.8% over the next twelve months, although estimates are likely to change post earnings.

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 117% in Q3. That means even if they didn't win any new customers, Appian would have grown its revenue 17% year on year. Despite the recent drop this is still 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.

Profitability

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, licenses, technical support and other necessary running expenses was at 71.3% in Q3.

Appian Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.71 left to spend on developing new products, marketing & sales and the general administrative overhead. Significantly up from the last quarter, this is around the lower average of what we typically see in SaaS businesses. Gross margin has a major impact on a company’s ability to invest in developing new products and sales & marketing, which may ultimately determine the winner in a competitive market so it is important to track.

Key Takeaways from Appian's Q3 Results

Since it is 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 a market capitalization of $7.03 billion and more than $188.5 million in cash, the company has the capacity to continue to prioritize growth over profitability.

We enjoyed seeing Appian’s improve their gross margin materially this quarter. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. On the other hand, it was less good to see the deterioration in revenue retention rate. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. But investors might have been expecting more and the company is down 1.17% on the results and currently trades at $102.05 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 raises the question if it can sustainably maintain its growth, 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 18.3x. 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 we are wondering whether there might be better opportunities elsewhere right now.

To get the best start with StockStory check out our most recent Stock picks, and then sign up to our earnings alerts by adding companies to your watchlist here. We typically have the quarterly earnings results analyzed within seconds from the data being released, and especially for the companies reporting pre-market, this often gives investors the chance to react to the results before the market has fully absorbed the information.