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Anaplan (NYSE:PLAN) Q3: Beats On Revenue But Stock Drops 12.6%


Full Report / November 23, 2021
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Financial planning software company Anaplan (NYSE:PLAN) reported Q3 FY2022 results that beat analyst expectations, with revenue up 35.2% year on year to $155.3 million. Guidance for next quarter's revenue was $154.5 million at the midpoint, which is 1.04% above the analyst consensus. Anaplan made a GAAP loss of $40.9 million, down on its loss of $36.7 million, in the same quarter last year.

Anaplan (PLAN) Q3 FY2022 Highlights:

  • Revenue: $155.3 million vs analyst estimates of $146.3 million (6.17% beat)
  • EPS (non-GAAP): -$0.05 vs analyst estimates of -$0.11
  • Revenue guidance for Q4 2022 is $154.5 million at the midpoint, above analyst estimates of $152.9 million
  • Free cash flow was negative $833 thousand, compared to negative free cash flow of $23.9 million in previous quarter
  • Net Revenue Retention Rate: 119%, in line with previous quarter
  • Gross Margin (GAAP): 72.8%, down from 74.4% same quarter last year

Founded by Michael Gould in 2006 in a stone barn in Yorkshire, England, Anaplan (NYSE:PLAN) is a financial modelling software that helps large enterprises with complex decision-making around budgets and financial forecasts.

Financial modelling for large companies is unsurprisingly very complex and many organisations still use siloed legacy systems that do not automatically update, and struggle with version control. The Anaplan platform stores all the information in the cloud and enables thousands of concurrent users to access a centralized single source of truth for their data, for anything from modelling to managing supply chains, sales planning, financial reporting or a combination of those.

Anaplan has experienced a lot of success due to its robust integration with other software platforms such as Salesforce.com and its customers range from heavy industries like airlines or food manufacturers to other software companies.

For example, a global foods company was using a mix of hundreds of large spreadsheets and legacy tools to manage their supply chain process and financial planning, and even simple scenarios required up to six hours to run. Adjusting plans to react to demand changes took a full week of reworks and to save time they were using averages and approximations, which led to misalignment in the inventory management and as a result excess inventories and lost sales opportunities. With Anaplan, they are able to collect precise data from across the organization in real time and running a planning scenario now takes less than five minutes.

With the growing complexity of operations and supply chains of many corporations, there is a growing market for cloud-based software solutions that enable collaborative finance reporting and planning.

Anaplan faces competition from companies like Oracle (NYSE:ORCL), SAP (NYSE:SAP), IBM (NYSE:IBM), and Workday (NASDAQ:WDAY).

Sales Growth

As you can see below, Anaplan's revenue growth has been very strong over the last year, growing from quarterly revenue of $114.8 million, to $155.3 million.

Anaplan Total Revenue

And unsurprisingly, this was another great quarter for Anaplan with revenue up 35.2% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $11 million in Q3, compared to $14.4 million in Q2 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Analysts covering the company are expecting the revenues to grow 22.4% over the next twelve months, although estimates are likely to change post earnings.

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.

Anaplan Net Revenue Retention Rate

Anaplan'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 119% in Q3. That means even if they didn't win any new customers, Anaplan would have grown its revenue 19% year on year. Trending up over the last year, this is a good retention rate and a proof that Anaplan'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. Anaplan'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 72.8% in Q3.

Anaplan 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. Despite the recent drop this is still around the 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.

Key Takeaways from Anaplan's Q3 Results

With a market capitalization of $7.89 billion Anaplan is among smaller companies, but its more than $312.3 million in cash and the fact it is operating close to free cash flow break-even put it in a robust financial position to invest in growth.

We liked to see that Anaplan beat analysts’ revenue expectations pretty strongly this quarter. And we were also excited to see the really strong revenue growth. 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. But investors might have been expecting more and the company is down 12.6% on the results and currently trades at $45.5 per share.

Is Now The Time?

When considering Anaplan, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. Although Anaplan is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been strong. But while its customers are increasing their spending quite quickly, suggesting that they love the product, unfortunately its customer acquisition is less efficient than many comparable companies.

Anaplan's price to sales ratio based on the next twelve months is 11.3x, suggesting that the market has lower expectations of the business, relative to the high growth 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 Anaplan doesn't trade at a completely unreasonable price point.

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