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Appian (NASDAQ:APPN) Q1 Sales Beat Estimates But Stock Drops


Full Report / June 29, 2022
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Low code software development platform provider Appian (Nasdaq: APPN) announced better-than-expected results in the Q1 FY2022 quarter, with revenue up 28.5% year on year to $114.2 million. Guidance for next quarter's revenue was $103.8 million at the midpoint, 2.79% above the average of analyst estimates. Appian made a GAAP loss of $23.1 million, down on its loss of $13.5 million, in the same quarter last year.

Appian (APPN) Q1 FY2022 Highlights:

  • Revenue: $114.2 million vs analyst estimates of $107.1 million (6.6% beat)
  • EPS (non-GAAP): -$0.06 vs analyst estimates of -$0.13
  • Revenue guidance for Q2 2022 is $103.8 million at the midpoint, above analyst estimates of $100.9 million
  • The company lifted revenue guidance for the full year, from $445 million to $455 million at the midpoint, a 2.24% increase
  • Free cash flow was negative $23.9 million, compared to negative free cash flow of $23 million in previous quarter
  • Net Revenue Retention Rate: 117%, in line with previous quarter
  • Gross Margin (GAAP): 72.9%, in line with 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.

The whole purpose of software is to automate tasks to increase productivity. Today, innovative new software techniques, often involving AI and machine learning, are finally allowing automation that has graduated from simple one- or two-step workflows to more complex processes integral to enterprises. The result is surging demand for modern automation software.

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 strong over the last year, growing from quarterly revenue of $88.8 million, to $114.2 million.

Appian Total Revenue

This quarter, Appian's quarterly revenue was once again up a very solid 28.5% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $9.27 million in Q1, compared to $12.5 million in Q4 2021. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates Appian is expecting revenue to grow 25% year on year to $103.8 million, in line with the 24.2% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 18.7% over the next twelve months.

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 Q1. That means even if they didn't win any new customers, Appian would have grown its revenue 17% year on year. That is 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 72.9% in Q1.

Appian Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.72 left to spend on developing new products, marketing & sales and the general administrative overhead. This is around the average of what we typically see in SaaS businesses, but it is good to see that the gross margin is staying stable which indicates that Appian is doing a good job controlling costs and is not under pressure from competition to lower prices.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Appian burned through $23.9 million in Q1, increasing the cash burn by 631% year on year.

Appian Free Cash Flow

Appian has burned through $80.6 million in cash over the last twelve months, a negative 20.4% free cash flow margin. This low FCF margin is a result of Appian's need to still heavily invest in the business.

Key Takeaways from Appian's Q1 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 a market capitalization of $3.7 billion and more than $160.2 million in cash, the company has the capacity to continue to prioritise growth over profitability.

We liked to see that Appian beat analysts’ revenue expectations pretty strongly this quarter. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. Overall, we think this was a strong quarter, that should leave shareholders feeling very positive. The company currently trades at $50.5 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. Its revenue growth has been solid. And while its growth is coming at a cost of significant cash burn, the good news is its very efficient customer acquisition hints at the potential for strong profitability.

Appian's price to sales ratio based on the next twelve months is 7.3x, suggesting that the market is expecting more moderate growth, relative to the hottest tech stocks. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that Appian doesn't trade at a completely unreasonable price point.

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