After the company announced first-quarter earnings and sharing guidance, shares of Appian (NASDAQ:APPN), 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.
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.
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|
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)|
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.
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.