Cloud software provider Appian (APPN -0.20%) continued its double-digit sales expansion during the first quarter of 2019, but the stock headed in the opposite direction after its report card was turned in. Such volatility is the norm for small but fast-growing outfits like Appian, but the temporary setback could spell opportunity for those who can stomach the ups and downs. Here's what current and prospective investors need to know following the quarterly numbers.

The first quarter in review

Appian's total revenue was up 15% year over year, driven by a 29% rise in software and subscriptions offset by no gain in the smaller professional services segment. Therein lies the reason for the most recent pullback: Subscription revenue grew at a 40% rate during full-year 2018, pacing a total revenue growth rate of 28% last year.


Q1 2019

Q1 2018

Change (YOY)

Subscription, software, and support revenue

$34.9 million

$27.0 million


Total revenue

$59.6 million

$51.7 million


Subscription gross profit margin



(0.5 p.p.)

Total revenue gross profit margin



0.3 p.p.

Adjusted earnings (loss) per share




YOY = year over year. P.p. = percentage point. Data source: Appian.

The good news is that Appian's low-code cloud software for quickly and inexpensively building digital tools continues to win over new enterprise customers. The segment now makes up two-thirds of total revenue, which is good news for investors, as it carries a lucrative gross profit margin that hovers around 90%. The smaller and now less-important professional services segment Appian has been transitioning away from had a comparative gross margin of only 17% in the first quarter.

On a negative note, losses mounted further during the first quarter. On an adjusted basis (which excludes stock-based compensation and other one-time items), the net loss was $10.3 million, or $0.16 per share. That compares with a loss of $7.3 million, or $0.12 per share, in the same period a year ago. Appian is still in "growth at nearly any cost" mode, so losses have yet to begin narrowing back toward break-even. The good news is that Appian still had $75.3 million of cash on the balance sheet at quarter-end. Nevertheless, the slowdown in Appian's most important segment was enough to give Wall Street pause.

A group of three office workers gather around a computer displaying charts.

Image source: Getty Images.

What's next at Appian

It's possible that the subscription revenue metric is poised for a big rebound. Appian CEO Matt Calkins had this to say during the company's earnings conference call:

We expanded with seven-figure deals in eight of our existing customers. Partners increased their contribution by bringing us 75% more new logos this quarter than they did in the first quarter of 2018. And the Appian guarantee won us deals that we believe we would not have captured otherwise. Our large wins this quarter show that even the most mature Appian customers continue to buy more licenses for years after their first purchase. 

As to existing customers, Calkins said that revenue retention was 116% during the first quarter. That means that on average, Appian's customers spent 16% more on the low-code platform than a year ago, as they found even more needs for the software development tech. The Appian guarantee -- the company's pledge that the first application project will be delivered within eight weeks -- is also helping convert prospective customers into actual clients.

The software outfit has had success in demonstrating its virtues when establishing new customer relationships. Calkins mentioned a top-five U.S. health insurer that has saved $200 million since becoming a client four years ago. A top-10 global bank was cited as well; Calkins says it used Appian's low-code platform to reduce processing times for foreign accounting standards requirements from weeks to mere hours.

Those are just a handful of anecdotal success stories, but management seems to think the company's growth is far from over. Though overall sales are forecast to be up only 13% to 14% for full-year 2019, offset by the sluggish and thin-margin professional services, subscription and software revenue should grow at least 30% year-over-year. That includes an expected 35% to 36% rise during the second quarter. Given the highly profitable nature of those services, that's great news for Appian investors long term.

Of course, the small cloud software operation is still bleeding cash, which means another round of financing might be in order at some point. If the sale of more equity is involved, that could further dilute existing shareholders' stake. Plus, Appian's revenue is volatile, which tends to result in even more up-and-down share prices. However, the thesis for owning this technology stock is still in place: double-digit subscription revenue growth. Thus, there is little to add to the ad nauseam discussion around the potentially fruitful practice of buying on stock pullbacks, Appian's most recent tumble included.