Please ensure Javascript is enabled for purposes of website accessibility

Appian Has a Lot to Prove When the Low-Code Specialist Reports Earnings

By Danny Vena – Feb 19, 2020 at 6:40AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

With the stock at all-time highs, investors have great expectations for this software-as-a-service company.

Calling it a wild ride doesn't begin to describe what Appian (APPN -3.26%) shareholders have experienced since the software-as-a-service (SaaS) company went public in mid-2017.

The stock has gained an impressive 270% in less than three years, but not without a few hair-raising drops along the way, with the most recent occurring late last year. The stock doubled between January and August 2019, before losing more than a third of its value in the months that followed.

Appian just tapped new all-time highs on the eve of its fourth quarter financial release, which is due after the market close on Thursday, Feb. 20. This shows that investors have high expectations for the low-code specialist. Let's look at a few metrics that Wall Street will be watching closely when Appian reports earnings.

A man and woman working on a computer designing a smartphone app.

Image source: Getty Images.

Continued robust revenue growth

In the third quarter, Appian delivered total revenue of $69.4 million, up about 26% year over year, with both segments contributing to the successful results.

The subscriptions, software, and support segment contributed $41.6 million, climbing 35%, and producing gross margins of 90%. The professional services segment -- which tends to be lumpier and unpredictable -- generated revenue of $27.8 million, up 16%, and generated gross margins of 31%.

Management has been historically conservative with its forward-looking guidance, and it is forecasting fourth-quarter revenue in a range of $69.1 million to $70.1 million, representing year-over-year growth of 15.5% at the midpoint of its guidance.

Wall Street observers are meeting management halfway, with analysts' consensus estimates of $69.74 million, just above the midpoint of Appian's guidance.

Recurring revenue will take center stage

One of the most important elements in a subscription-based business is recurring revenue, as it provides the company with stable and predictable income streams, making the stock less of a gamble.

Appian has delivered strong subscription revenue growth, which has served to supercharge the stock's momentum. In the third quarter, subscription revenue was the star of the show, growing to $40.4 million, up 38%.

Its expansion in Europe remains on track, with subscription revenue up 65% year over year. The financial services industry and the U.S. government helped boost growth, with subscription revenue increasing 48% and 50%, respectively, compared to the prior-year quarter.

The subscription revenue retention rate -- which compares how much existing customers are spending compared to the same time last year -- was 119%. Once a business takes the plunge, it will likely increase its use of Appian's tools or add additional users.

Management is anticipating an even larger contribution from recurring sales, guiding for subscription revenue of about $42 million, up 25%.

Profits will remain elusive

Appian has been investing heavily in the future, and has been spending its would-be profits to gain even more repeat customers. This means that not only is Appian not profitable, but it has no plans to be any time soon.

In the third quarter, Appian delivered a net loss of $12.4 million, though it was an improvement from the $15 million loss in the prior-year quarter. This resulted in a loss per share of $0.19, better than the $0.24 loss in the year-ago quarter.

For the upcoming quarter, Appian is forecasting an adjusted loss in a range of $10 million and $9.5 million, resulting in an adjusted loss per share of about $0.15.

A recent acquisition

Early last month, Appian announced the acquisition of robotic-process automation (RPA) company Novayre Solutions SL, developer of the Jidoka RPA platform. By adding RPA to its repertoire, Appian is adding billions of dollars to its addressable market, while remaining true to its low-code roots. It also makes the company a one-stop-shop for automation solutions.

Investors will be watching for an update on the progress of the integration.   

A word on valuation

One of the traits of a high-growth stock is a lofty valuation, and Appian certainly qualifies.

The company sports a price-to-sales (P/S) ratio of 16 and an only slightly more reasonable forward valuation of 14. To put this in context, the S&P 500 typically sports a P/S ratio between 1 and 2, so the expectations for continued growth are already priced in. If Appian were to fall short of Wall Street's expectations, the stock could plummet once again.

It's important to remember that Appian has its eye set firmly on the future, and is foregoing short-term profits for long-term growth. Investors should resist the temptation to get caught up in the market's short-term mindset and focus on Appian's long runway for growth when it reports earnings on Thursday.

Danny Vena owns shares of Appian. The Motley Fool owns shares of and recommends Appian. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Appian Stock Quote
Appian
APPN
$41.49 (-3.26%) $-1.40

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.