Shares of software development company Appian (NASDAQ:APPN) sold off 22% after the company turned in its fourth quarter 2019 report card. It was a solid performance for the small technologist as it continues to convert more large customers and expand relationships with existing ones, but some shareholders may have expected higher growth rates for 2020 than what management forecast.

However, the post-earnings drop has more to do with the 135% run from the start of 2019 to the day of the earnings release than anything else. A breather for the hot stock was inevitable, but there is still plenty to like at the low-code specialist.  

Focusing on subscriptions

Appian's total fourth-quarter revenue grew 17% year over year to $70.5 million, slightly topping the guidance provided a few months prior. Of the total, the important subscription revenue segment (which includes recurring revenue from its cloud computing-based app building software suite) grew 28% to $43.1 million, also topping the figures management provided during the third quarter update.

Growth in subscriptions is an important metric to watch at Appian, as the sales are more predictable and gross profit margins on services sold are higher at 89%, compared with 34% on the professional services revenue that made up the rest of the total.

Though the company still ran at an adjusted net loss of $6.6 million in the fourth quarter, higher gross margins and operating expenses growing more slowly than the top line meant the loss shrank from the $9.1 million net loss reported a year ago.

Metric

Full-Year 2019

Full-Year 2018

Change

Subscription revenue

$155.1 million

$115.7 million

34%

Total revenue

$266.3 million

$226.7 million

17%

Total gross profit margin

64.0%

62.5%

1.5 pp

Operating expenses

$221.6 million

$188.5 million

18%

Adjusted net income (loss)

($32.8 million)

($33.4 million)

N/A

PP = percentage point. Data source: Appian.

Driving sales results last year was the addition of 109 new customers. Those that pay at least $1 million a year to Appian increased to 48, compared with 38 at the end of 2018.

To maintain that pace of new user additions, Appian made its first-ever acquisition in early January: Novayre Solutions, operator of the Jidoka RPA (robotic process automation) software platform to help companies orchestrate their digital workflows.

Shortly after that, the company also announced a new partnership with Celonis, a software company specializing in AI-driven process visualization tools to help organizations find ways to improve their operations. Paired with its easy-to-use low-code software platform, Appian is building out an ecosystem to help businesses make digital transformation and unlock efficiencies for their customers.

A man pictured off-screen holding a tablet. A picture of a brain made of electrical connections hovers above the screen, illustrating AI.

Image source: Getty Images.

A repeat of the recent past?

With the addition of new lines of business, it was no surprise that shares are selling off on "weak" guidance. The initial full-year 2020 outlook for cloud subscription revenues of $121.3 million to $123.1 million (a new segment breakout due to some accounting rule changes) represents growth of 28% to 30% over 2019, and total revenue of at least $296 million represents growth of 14%.

Another loss running somewhere in the low- to mid-$30 million range is also anticipated, although Appian remains well-funded, with $159.5 million in cash on the books at the end of the fourth quarter.  

Don't sweat the guidance. Appian's top brass had said to expect 28% to 30% subscription growth at the onset of 2019, only to top that figure with a 34% gain by year-end. This kind of conservative outlook is par for the course.

Nevertheless, I'm still approaching the stock cautiously for the moment. Share prices have far exceeded revenue growth -- or subscription growth for that matter -- and shares trade for a premium 11.1 times 2020 sales as of this writing (or 27.0 times the more valuable expected 2020 cloud subscription sales).

Thus, the current situation is beginning to look like a repeat of the pullback that began in the late summer last year that hit Appian and some of its high-flying cloud stock peers.

However, that correction brought share prices back in line with current reality, and this most-recent downturn should accomplish the same. With the company still predicting double-digit percentage expansion, Appian stock remains a small holding I'm interested in adding to in the near future.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.