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Appian (NASDAQ:APPN) Beats Q2 Sales Targets, Provides Optimistic Full Year Guidance


Full Report / August 04, 2022
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Low code software development platform provider Appian (Nasdaq: APPN) reported Q2 FY2022 results that beat analyst expectations, with revenue up 32.6% year on year to $110 million. Guidance for next quarter's revenue was $116 million at the midpoint, 2.67% above the average of analyst estimates. Appian made a GAAP loss of $49.3 million, down on its loss of $23.8 million, in the same quarter last year.

Appian (APPN) Q2 FY2022 Highlights:

  • Revenue: $110 million vs analyst estimates of $103.9 million (5.85% beat)
  • EPS (non-GAAP): -$0.46 vs analyst estimates of -$0.34
  • Revenue guidance for Q3 2022 is $116 million at the midpoint, above analyst estimates of $112.9 million
  • The company lifted revenue guidance for the full year, from $455 million to $468 million at the midpoint, a 2.85% increase
  • Free cash flow was negative $30.9 million, compared to negative free cash flow of $23.9 million in previous quarter
  • Net Revenue Retention Rate: 116%, in line with previous quarter
  • Gross Margin (GAAP): 69.7%, up from 68.8% 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 $82.9 million, to $110 million.

Appian Total Revenue

This was a standout quarter for Appian, with the quarterly revenue up 32.6% year on year, which is above average for the company. But the revenue actually decreased by $4.2 million in Q2, compared to $9.27 million increase in Q1 2022. However, Appian's sales do seem to have a seasonal pattern to them, and since management is guiding for revenue to rebound in the coming quarter we wouldn't be too concerned.

Guidance for the next quarter indicates Appian is expecting revenue to grow 25.5% year on year to $116 million, improving on the 19.5% 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 15.7% 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 116% in Q2. That means even if they didn't win any new customers, Appian would have grown its revenue 16% year on year. Despite it going down over the last year 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 69.7% in Q2.

Appian Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.69 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.

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 $30.9 million in Q2, increasing the cash burn by 334% year on year.

Appian Free Cash Flow

Appian has burned through $104.5 million in cash over the last twelve months, a negative 24.7% 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 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 a market capitalization of $3.99 billion and more than $135.9 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 rest of the year exceeded expectations. On the other hand, it was less good to see the pretty significant deterioration in gross margin. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. The company is up 0.68% on the results and currently trades at $55.8 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 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.

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