In response to the company announcing fourth-quarter 2019 results that missed the mark, shares of Appian (NASDAQ:APPN), a software-as-a-service company focused on low-code software, fell 21% as of 2:36 p.m. EST on Friday.
Appian adopted a new accounting standard called ASC 606 in 2019 that makes its year-over-year comparisons a bit wonky. That's because ASC 606 alters the timing of revenue recognition when compared with its old accounting standard (called ASC 605), which negatively affects Appian's revenue and profitability.
Investors need to remember this when looking at Appian's fourth-quarter results, but here are the headline numbers from the period as presented in ASC 606, the new accounting standard:
- Subscription revenue was $42.1 million. This figure was at the low end of management's previously communicated guidance range.
- Total revenue was $68.6 million. This was slightly below management's guidance range and behind the $69.7 million that analysts were expecting.
- The subscription revenue retention rate -- a measure of customer spending from period to period -- was 115%.
- Gross margin was 67%.
- Adjusted net loss was $7.4 million, or $0.16 per share. That figure was higher than management's guidance range and worse than the $0.14 adjusted loss per share that Wall Street had predicted.
These numbers might not sound great, but they look better when viewed through ASC 605, which is Appian's old accounting standard. Under ASC 605, Appian outperformed its guidance ranges (and Wall Street's estimates) across the board.
Here are the headline numbers for the full-year 2019 as presented in ASC 606:
- Revenue was $260.4 million.
- Gross margin was 65%.
- Adjusted net loss was $34.1 million, or $0.52 per share.
Turning to guidance, here are the numbers being shared with investors for the upcoming quarter (in ASC 606):
|Metric||Q1 2020 Guidance Range||Implied Change|
|Cloud subscription revenue||$27.8 million to $28.1 million||31% to 32%|
|Total revenue||$71 million to $71.5 million||18% to 19%|
|Adjusted EPS (loss)||($0.18 to $0.20)||N/A|
For context, analysts were expecting $70.8 million in total revenue and a loss of $0.12 in adjusted EPS, so the guidance looks mixed by comparison.
It's a simliar story with the guidance for the full year 2020:
|Metric||2020 Guidance Range
|Cloud subscription revenue||$121.3 million to $123.1 million||28% to 30%|
|Total revenue||$296 million to $298 million||14%|
|Adjusted EPS (loss)||($0.55 to $0.58)||N/A|
Wall Street was expecting $309.3 million in revenue and an adjusted net loss of $0.36 a share, so this guidance looks really weak. But management pointed out that the switch to ASC 606 will reduce its 2020 subscription revenue by about $8.8 million, so the numbers are not as bad as they appear.
Nonetheless, traders seem to be disappointed with the company's quarterly results and guidance, and are selling off the stock.
Appian's stock reached an all-time high earlier this month, so Wall Street was probably pricing in strong results across the board from this high growth stock. Appian failed to deliver on those lofty expectations, so it makes sense that the company's valuation is being reset today.
The good news for investors is that the long-term thesis for owning this stock continues to look intact. While the adoption of ASC 606 might slow down Appian's growth rates in the near term, that impact will lessen in the next few quarters.
In other words, if you believe that the shift toward low-code software is still in its infancy, then today's drop might represent a nice opportunity to get in.