Appian (NASDAQ:APPN) reported its third-quarter results on Thursday. The leading provider of low-code software posted total sales growth of 23%. That might seem like a disappointing result since it represents a deceleration from last quarter's revenue growth rate of 39%. However, the slowdown was caused by a sequential decline in Appian's professional services revenue, which is lumpy by nature and is low-margin.

On the plus side, subscription revenue -- which is far more dependable and boasts much higher margin -- showed growth of 42%. That represents a sequential acceleration and is a much better indicator of how the business is actually performing. 

Appian third-quarter results: The raw numbers

Metric

Q3 2018

Q3 2017

Year-Over-Year Change

Revenue

$54.9 million 

$44.6 million

23%

Non-GAAP operating loss

($8.1 million)

($4.9 million)

N/A

Non-GAAP net loss

($8.2 million)

($4.7 million)

N/A

Non-GAAP EPS

($0.13)

($0.08)

N/A

Dada source: Appian. GAAP = generally accepted accounting principles. Non-GAAP = adjusted. EPS = earnings per share. 

What happened with Appian this quarter?

  • Subscription revenue increased 42% during the period to $29.4 million. This result topped management's guidance range.
  • Professional services revenue -- which is lumpy from period to period -- only grew by 9% to $24 million. 
  • The net revenue retention rate was 117%.
  • Consolidated gross margin ticked up 100 basis points year over year to 64% thanks to the higher tilt toward subscription revenue, which boasts a gross margin of 90%.
  • Cash balance at quarter's end was $107.3 million. The big jump was a result of a common stock offering in August that padded the company's bank account by $58 million. 
  • Non-GAAP operating loss and Non-GAAP EPS both exceeded guidance.
  • Appian announced integration with Alphabet's Google Cloud Contact Center AI solution. 
Man smiling in front of computer screen with code on it

Image source: Getty Images.

What management had to say

Appian's founder and CEO, Matt Calkins, kept his commentary focused on why his company continues to win new deals: "We continue to demonstrate that our platform is the most accessible in the market. More companies are finding us to be the fastest way to build and deploy unique software to run their business." 

On the call with investors, Calkins talked up the recent launch of the Appian Guarantee and how it is already helping the company to win new business:

...in this guarantee, we promise that a customer's first Appian project will be completed in just eight weeks for only $150,000 given a few reasonable restrictions. Our partner, KPMG, will deliver the guarantee in North America and Europe. Other partners may soon participate as well. Also, Appian training takes just two weeks, which is to say any developer can become an Appian developer in 10 days. The guarantee substantiates our accessibility advantage, the ease of learning and deployment. We demonstrated this edge in several Q3 deployments and deals.

Looking forward

CFO Mark Lynch remained optimistic about the company's ability to maintain its business momentum. However, the guidance for total revenue growth in Q4 doesn't look very strong in absolute terms because the company expects a weak selling period for professional services sales:

Metric Q4 2018 Guidance Range Implied Change
Subscription revenue $31.4 million to $31.6 million 34% to 35%
Total revenue $55.1 million to $56.1 million 9% to 11%
Non-GAAP operating loss ($10.4 million) to ($9.4 million) N/A
Non-GAAP EPS ($0.17) to ($0.15) N/A

Data source: Appian.

On the plus side, the strong third-quarter results enabled management to increase its full-year guidance for the third time in a row:

Metric New Guidance Range
Old Guidance Range
Subscription revenue $113.3 million to $113.5 million $110.5 million to $110.9 million
Total revenue $221.6 million to $222.6 million $213.8 million to $215.3 million
Non-GAAP operating loss ($32.5 million) to ($31.5 million) ($36.4 million) to ($34.4 million)
Non-GAAP EPS ($0.56) to ($0.54) ($0.63) to ($0.60)

Data source: Appian.

It was a solid quarter all around. Long-term investors should have plenty of reasons to remain optimistic about this company's future. 

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Brian Feroldi owns shares of Alphabet (A shares), Alphabet (C shares), and Appian. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Appian. The Motley Fool has a disclosure policy.