Low code software development platform provider Appian (Nasdaq: APPN) reported results in line with analysts' expectations in Q1 CY2024, with revenue up 10.8% year on year to $149.8 million. On the other hand, next quarter's revenue guidance of $142 million was less impressive, coming in 2.7% below analysts' estimates. It made a non-GAAP loss of $0.24 per share, improving from its loss of $0.27 per share in the same quarter last year.
Appian (APPN) Q1 CY2024 Highlights:
- Revenue: $149.8 million vs analyst estimates of $149.8 million (small beat)
- EPS (non-GAAP): -$0.24 vs analyst estimates of -$0.16 (-$0.08 miss)
- Revenue Guidance for Q2 CY2024 is $142 million at the midpoint, below analyst estimates of $146 million
- The company reconfirmed its revenue guidance for the full year of $616 million at the midpoint
- Gross Margin (GAAP): 74.6%, up from 73.3% in the same quarter last year
- Free Cash Flow of $16.67 million is up from -$9.60 million in the previous quarter
- Net Revenue Retention Rate: 120%, in line with the previous quarter
- Market Capitalization: $2.65 billion
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 Software
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 three years, growing from $88.86 million in Q1 2021 to $149.8 million this quarter.
This quarter, Appian's quarterly revenue was once again up 10.8% year on year. However, its growth did slow down compared to last quarter as the company's revenue increased by just $4.52 million in Q1 compared to $8.23 million in Q4 CY2023. While we'd like to see revenue increase by a greater amount each quarter, a one-off fluctuation is usually not concerning.
Next quarter's guidance suggests that Appian is expecting revenue to grow 11.2% year on year to $142 million, slowing down from the 16% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 13.7% over the next 12 months before the earnings results announcement.
Product Success
One of the best parts about the software-as-a-service business model (and a reason why SaaS companies trade at such high valuation multiples) is that customers typically spend more on a company's products and services over time.
Appian's net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 120% in Q1. This means that even if Appian didn't win any new customers over the last 12 months, it would've grown its revenue by 20%.
Trending up over the last year, Appian has a good net retention rate, proving that customers are satisfied with its software and getting more value from it over time, which is always great 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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 74.6% in Q1.
That means that for every $1 in revenue the company had $0.75 left to spend on developing new products, sales and marketing, and general administrative overhead. Despite the recent drop, Appian's gross margin is around the average of a typical SaaS businesses. Gross margin has a major impact on a company’s ability to develop new products and invest in marketing, which may ultimately determine the winner in a competitive market. This makes it a critical metric to track for the long-term investor.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Appian's free cash flow came in at $16.67 million in Q1, turning positive over the last year.
Appian has burned through $73.73 million of cash over the last 12 months, resulting in a negative 13.2% free cash flow margin. This low FCF margin stems from Appian's constant need to reinvest in its business to stay competitive.
Key Takeaways from Appian's Q1 Results
While revenue beat slightly, billings (often analyzed in addition to revenue because it's cash in the door rather than recognized revenue dictated by accounting rules) missed Wall Street's estimates. Also, revenue guidance for next quarter missed analysts' expectations while full year revenue guidance was roughly in line. Overall, this was a mixed quarter for Appian. The company is down 7.3% on the results and currently trades at $34.03 per share.
Is Now The Time?
When considering an investment in Appian, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.
We cheer for everyone who's making the lives of others easier through technology, but in case of Appian, we'll be cheering from the sidelines. Although its revenue growth has been solid over the last three years, Wall Street expects growth to deteriorate from here. On top of that, its growth is coming at the cost of significant cash burn.
Appian's price-to-sales ratio based on the next 12 months is 4.2x, suggesting the market has lower expectations for the business relative to the hottest tech stocks. While there are some things to like about Appian and its valuation is reasonable, we think there are better opportunities elsewhere in the market right now.
Wall Street analysts covering the company had a one-year price target of $44.80 right before these results (compared to the current share price of $34.03).
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