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Appian (NASDAQ:APPN) Surprises With Q3 Sales But Stock Drops 15.8%


Full Report / November 03, 2022
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Low code software development platform provider Appian (Nasdaq: APPN) reported Q3 FY2022 results beating Wall St's expectations, with revenue up 27.5% year on year to $117.8 million. However, guidance for the next quarter was less impressive, coming in at $122.5 million at the midpoint, being 3.8% below analyst estimates. Appian made a GAAP loss of $43.9 million, down on its loss of $25.3 million, in the same quarter last year.

Appian (APPN) Q3 FY2022 Highlights:

  • Revenue: $117.8 million vs analyst estimates of $116.1 million (1.52% beat)
  • EPS (non-GAAP): -$0.43 vs analyst estimates of -$0.23
  • Revenue guidance for Q4 2022 is $122.5 million at the midpoint, below analyst estimates of $127.3 million
  • Free cash flow was negative $44.8 million, compared to negative free cash flow of $30.9 million in previous quarter
  • Net Revenue Retention Rate: 115%, in line with previous quarter
  • Gross Margin (GAAP): 71.3%, 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 two years, growing from quarterly revenue of $77.3 million in Q3 FY2020, to $117.8 million.

Appian Total Revenue

This quarter, Appian's quarterly revenue was once again up a very solid 27.5% year on year. On top of that, revenue increased $7.81 million quarter on quarter, a strong improvement on the $4.2 million decrease in Q2 2022, and a sign of acceleration of growth, which is very nice to see indeed.

Guidance for the next quarter indicates Appian is expecting revenue to grow 16.6% year on year to $122.5 million, slowing down from the 28.6% 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 17.2% 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 115% in Q3. That means even if they didn't win any new customers, Appian would have grown its revenue 15% 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 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.

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 $44.8 million in Q3, increasing the cash burn by 68.8% year on year.

Appian Free Cash Flow

Appian has burned through $122.8 million in cash over the last twelve months, a negative 27.4% 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 Q3 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 $3.43 billion and more than $92.6 million in cash, the company has the capacity to continue to prioritise growth over profitability.

It was good to see Appian improve their gross margin this quarter. And we were also glad to see good revenue growth. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations and that cash burn increased. Overall, this quarter's results were not the best we've seen from Appian. The company is down 15.8% on the results and currently trades at $39.75 per share.

Is Now The Time?

Appian may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. Although Appian is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been solid, though we don't expect it to maintain historical growth rates. But while its very efficient customer acquisition hints at the potential for strong profitability, the downside is that its growth is coming at a cost of significant cash burn and its gross margins aren't as good as other tech businesses we look at.

The market is certainly expecting long term growth from Appian given its price to sales ratio based on the next twelve months is 6.5x. 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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