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Appian Posts Huge Software Subscription Growth in 2018

By Nicholas Rossolillo - Updated Apr 25, 2019 at 10:53AM

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And 2019 looks like it will be a strong follow-up performance.

Shares of low-code software development platform Appian ( APPN 1.16% ) fell as much as double-digits after the company reported full-year 2018 results and an initial outlook on 2019. However, the small company is still very much in growth mode, and shares have more than doubled since their public debut in 2017 -- even after the recent drop. With demand for low-code services still on the rise, this pullback could be the opportunity some investors were waiting for to pull the trigger.

The year in review

Appian's results have been riding on subscription-based services growth, based primarily on the company's easy-to-use, cloud-based software-building platform for big organizations. In the fourth quarter, the segment surged 44% higher compared to a year ago, sharpening Appian's focus on this more reliable and higher-profit margin business. In addition, subscription revenue retention was 117%, implying that existing customers are spending more with Appian over time.

Metric

Full-Year 2018

Full-Year 2017

Change (YOY)

Subscription revenue

$115.7 million

$82.8 million

40%

Total revenue

$226.7 million

$176.7 million

28%

Gross profit margin

62.5%

63.5%

(1.0 ppt)

Operating expenses

$188.5 million

$144.0 million

31%

Adjusted earnings (loss) per share

($0.54)

($0.30)

N/A

Data source: Appian. YOY = year over year. Ppt = percentage point.

The fourth-quarter numbers were an acceleration on full-year results, but the 2018 was a big success for the company. CEO Matt Calkins said Appian ended the year with 38 customers that spend at least seven figures each year, a 58% increase from the 2017 number of customers at this spending level.

Though Appian still runs at a loss -- even when backing out share-based compensation and other one-time items -- the company ended the year on solid footing. Cash and equivalents were at $95 million, a $21 million year-over-year increase thanks in large part to the sale of 2 million new shares issued last August. The deal slightly diluted existing shareholders, but the infusion provides a couple years' worth of operating cash as Appian keeps its foot on the gas to maximize growth.

Check out the latest Appian earnings call transcript.

Three office workers gathered around a computer displaying charts.

Image source: Getty Images.

A growth story in the making

Appian is still the only low-code software stock out there for investors who want to bet on the technology. The company helps enterprise customers "draw" their app and get it up and running in a matter of weeks or months. Given how quickly the world is transitioning to digital first, the need for low-code, automated software engineering looks like it will only increase. Calkins shared a number of success stories about customers, including a credit card company, an insurance broker, and an Italian postal logistics provider; but this one about a manufacturing outfit stuck out as illustrating the power of low-code particularly well:

We signed a major manufacturing company as a new customer in the fourth quarter. This Fortune 100 firm picked us over a major competitor because the customer specifically wanted a recognized leader in low-code. They needed to replace a legacy system for managing premium brake requests, which are triggered when products or components need to be shipped outside their standard operating procedures. An Appian partner successfully built this application in six weeks to support a 4,000-person division, including executives who will approve requests using their mobile devices. The customer expects the application to save them $9 million to $10 million in the first year. 

That combination of time and money savings could propel Appian higher for years to come, and management's outlook for 2019 backs that up. However, as with any high-octane endeavor, the future is of far more importance than the past. Thus, some investors chose to fret over management's call for "only" 28% to 30% subscription sales growth, a drop from the 40% posted in 2018.

However, the management team has a history of being modest with guidance and then beating it. For example, the 2018 outlook given a year ago was also for about 30% subscription growth, which the company handily bested all year. It's possible a repeat is in the works.

Nevertheless, volatility-averse investors may still want to steer clear of Appian stock; the fact that the company is running at a loss -- even on an adjusted basis -- can cause some wild up-and-down moves. For those looking to hold for a long time, though, Appian's end-of-year report had plenty of good news in it.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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