Appian (NASDAQ:APPN) Q2: Beats On Revenue But Gross Margin Drops

Full Report / August 03, 2023

Low code software development platform provider Appian (Nasdaq: APPN) announced better-than-expected results in Q2 FY2023, with revenue up 16% year on year to $127.7 million. The company also expects next quarter's revenue to be around $135 million, roughly in line with analysts' estimates. Appian made a GAAP loss of $42.4 million, improving from its loss of $49.4 million in the same quarter last year.

Appian (APPN) Q2 FY2023 Highlights:

  • Revenue: $127.7 million vs analyst estimates of $123.8 million (3.15% beat)
  • EPS (non-GAAP): -$0.39 vs analyst estimates of -$0.43
  • Revenue Guidance for Q3 2023 is $135 million at the midpoint, above analyst estimates of $134.3 million
  • The company raised revenue guidance for the full year of $540.5 million at the midpoint
  • Free Cash Flow was -$15.3 million compared to -$29.7 million in the previous quarter
  • Net Revenue Retention Rate: 115%, in line with the previous quarter
  • Gross Margin (GAAP): 71.2%, up from 69.8% in the 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 $83 million in Q2 FY2021 to $127.7 million this quarter.

Appian Total Revenue

This quarter, Appian's quarterly revenue was once again up 16% year on year. However, the company's revenue actually decreased by $7.52 million in Q2 compared to the $9.45 million increase in Q1 2023. Regardless, we aren't too concerned because Appian's sales seem to follow a seasonal pattern and management is guiding for revenue to rebound in the coming quarter.

Next quarter's guidance suggests that Appian is expecting revenue to grow 14.5% year on year to $135 million, slowing down from the 27.5% year-on-year increase it recorded in the same quarter last year. Ahead of the earnings results announcement, the analysts covering the company were expecting sales to grow 12.8% over the next 12 months.

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 Net Revenue Retention Rate

Appian's net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 115% in Q2. This means that even if Appian didn't win any new customers over the last 12 months, it would've grown its revenue by 15%.

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.


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 71.2% in Q2.

Appian Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.71 left to spend on developing new products, sales and marketing, and general administrative overhead. Appian's gross margin is lower than that of a typical SaaS businesses and its decline over the last year is putting it in an even deeper hole. 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 burned through $15.3 million of cash in Q2 , reducing its cash burn by 50.5% year on year.

Appian Free Cash Flow

Appian has burned through $105.7 million of cash over the last 12 months, resulting in a negative 21.1% free cash flow margin. This low FCF margin stems from Appian's poor unit economics or a constant need to reinvest in its business to stay competitive.

Key Takeaways from Appian's Q2 Results

Although Appian, which has a market capitalization of $3.53 billion, has been burning cash over the last 12 months, its more than $237 million in cash on hand gives it the flexibility to continue prioritizing growth over profitability.

It was good to see Appian beat analysts' revenue expectations this quarter. We were also glad that its full-year revenue and adjusted EBITDA guidance came in higher than Wall Street's expectations. On the other hand, its gross margin is falling. Zooming out, we think this was still a decent, albeit mixed, quarter, showing that the company is staying on track. The stock is up 1.49% after reporting and currently trades at $48.91 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. Although Appian isn't 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, unfortunately its growth is coming at a cost of significant cash burn.

The market is certainly expecting long-term growth from Appian given its price to sales ratio based on the next 12 months is 6.2x. In the end, beauty is in the eye of the beholder. While Appian wouldn't be our first pick, if you like the business, the shares are trading at a pretty interesting price point right now.

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