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Here's Why Appian Is Sinking Today

By Brian Feroldi - May 3, 2019 at 10:48AM

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Shares fall after the company reports first-quarter earnings that miss the mark.

What happened

After the company announced first-quarter earnings and sharing guidance, shares of Appian (APPN 8.60%), a software-as-a-service company focused on low-code software, dropped as much as 13% in early-morning trading on Friday. The stock was down about 10% as of 10:00 a.m. EST.

So what

Here are the headline numbers from Appian's first quarter:

  • Subscription revenue grew 32% to $33.6 million.
  • Total revenue grew 15% to $59.6 million. While this number landed within management's guidance range, it fell short of the $59.7 million that Wall Street was expecting.
  • The subscription revenue retention rate was 116%.
  • Non-GAAP (generally accepted accounting principles) net loss was $10.3 million, or $0.16 per share. This matched what analysts were looking for.
Man typing on laptop

Image source: Getty Images.

Shifting to guidance, here's what the company expects in the upcoming quarter: 

Metric Q2 2019 Guidance Range Implied Change
Subscription revenue $36.5 million to $36.7 million 35% to 36%
Total revenue $63.3 million to $63.8 million 6% to 7%
Non-GAAP operating loss ($11.5 million) to ($11 million) N/A
Non-GAAP EPS ($0.18) to ($0.17) N/A

Data source: Appian.

For context, Wall Street was expecting $63.5 million in total revenue and a non-GAAP net loss of $0.13 per share, so this guidance is a bit light.

Management also took the opportunity to adjust its guidance for the full year:

Metric Old Guidance Range 
Updated Guidance Range
Subscription revenue $148 million to $150 million $150.5 million to $152 million
Total revenue $258.5 million to $262.5 million $255 million and $258 million
Non-GAAP operating loss ($29.5 million) to ($27.5 million) ($35.5 million) and ($32.5 million)
Non-GAAP EPS ($0.46) to ($0.42) ($0.55) to ($0.50)

Data source: Appian.

With management calling for lower total revenue and a higher net loss, it isn't hard to figure out why shares are getting hit today.

Now what

Investors need to remember that Appian makes the bulk of its revenue in primary ways: from selling subscription revenue, which is both high margin and recurring, and from selling professional services, which is low margin and lumpy from quarter to quarter. 

The good news from this quarter is that Appian's subscription revenue continues to grow very quickly. Management also raised its guidance for subscription revenue growth for the remainder of the year, which is a positive sign.

The bad news is that professional services revenue isn't growing at all and is expected to remain weak for the remainder of the year. That's causing the company's consolidated top-line growth rates to look very weak and for its operating loss to expand. That's not something that growth-focused investors like to see, so it makes sense that shares of this high-flying stock are under pressure today.

My view is that investors need to look past the headline numbers and keep their attention focused on subscription revenue growth. As long as that number continues to grow at a rapid pace, the share price should eventually take care of itself.

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