After a hot start following the company's IPO in 2017, shares of Appian (APPN +1.39%) are down 18% year to date as of this writing. Software-as-a-service (SaaS) stocks got doused in October as worry over slowing growth made some investors reconsider the sky-high valuations within this category. Appian was thrown in the mix, even though "low-code" software development is an emerging movement in the tech world. After another quarter in the books, now's a great time to give this small stock -- valued at just a $1.7 billion market cap -- a look.
A brake check is nothing to fret over
Appian's third-quarter 2018 results exceeded its own expectations. Subscription revenue rose 42% to $29.4 million (compared to guidance for 34% to 35% growth), and total revenue of $54.9 million marked a 23% year-over-year increase. Full-year 2018 subscription revenue is now expected to be up 37% to about $113.5 million.
That's nothing to balk at, but it's nevertheless a slight slowdown from the 38% subscription growth rate in 2017 and the better-than-40% rate reported in the fourth quarter of last year. The downtick, as well as a secondary offering of two million Appian shares a couple of months ago, could explain the stock's underperformance so far this year. However, when looking at 2018 as a whole, results are credible:
|
Metric |
9 Months Ending Sept. 30, 2018 |
9 Months Ending Sept. 30, 2017 |
Increase/(Decrease) (YOY) |
|---|---|---|---|
|
Subscription, software, and support revenue |
$90.9 |
$66.1 |
37.5% |
|
Total revenue |
$166.5 |
$126.2 |
31.9% |
|
Gross profit margin |
62.3% |
63.5% |
(1.2 pp)* |
|
Operating loss |
($33.4) |
($24.9) |
N/A |
|
Adjusted operating loss |
($22.2) |
($13.9) |
N/A |
|
Adjusted loss per share |
($0.39) |
($0.22) |
N/A |
*YOY = year-over-year. Pp = percentage point. All dollar figures are in millions. Data source: Appian quarterly earnings.
Why low-code could be huge
Appian does operate at a loss, as it's investing heavily to grow its business. Thus, while the top-line figures are great, risk-averse investors might steer clear because of the lack of profit. That could make for a volatile stock, but there's reason to believe the company will be much bigger in a decade than it is now.
An Appian-sponsored survey conducted by International Data Group found that half of big organizations' internal software projects fail every year. The study finds that the average U.S. company is generating over 150 requests for new software each year and the average European company is generating 230 requests. That makes for a lot of failed projects, not to mention wasted time and money.
Image source: Getty Images.
That's where low-code comes in, a toolkit of visual drag-and-drop building blocks for creating new applications. Appian's fast growth is proof that the easier and faster development process is catching on. The company doesn't reveal its customer count every quarter; however, its 2017 annual report did note that it had 356 customers -- 285 of which were commercial, and 71 were government entities. Those modest numbers are apparently on the rise, according to management.
It's a good start for Appian and the low-code movement, but there is plenty of room for more growth. Not only are there thousands of other organizations around the world that could benefit from a faster and more efficient IT department, existing customers tend to spend more money with Appian over time. Revenue retention was 117% in the third quarter, indicating an average increase in spending with Appian of 17%.
With the all-important subscription services -- and the predictable and highly profitable recurring revenue they generate -- continuing to head higher, Appian is in good shape to continue delivering growth for some time. The outlook is bright, so now's the time to consider adding this small tech company to a growth portfolio.
