Key Points

  • Third-quarter 2020 cloud subscription revenue increased 40% to $34.3 million, handily beating management’s expectations for as much as $31.9 million.
  • The adjusted bottom line also bested the outlook and reached break-even.
  • Flush with cash, Appian is a company enabling rapid change as the world adapts to new realities brought about by COVID-19.

Our experts issued a rare "Double Down" Buy alert on this one stock... Learn more.


Shares of low-code software and software robotics platform Appian (NASDAQ:APPN) were up double-digit percentages the day after reporting third-quarter 2020 results last week. The stock is up 140% year to date as of this writing, erasing worries in the spring that effects from the coronavirus pandemic would weigh heavily on the company's customers -- and thus on Appian's growth trajectory.

Expectations are now riding high and have pushed the stock's valuation higher in recent months, but the long-term reasons for bullishness on Appian haven't changed.

Someone in a suit holding a tablet. A brain illustrated with electrical connections is hovering above the screen.

Image source: Getty Images.

An exceptional summer for the low-code platform

Appian's total revenue increased 17% year over year during Q3 to $77.3 million. So why the massive run-up in share prices? It all has to do with subscription services, which made up two-thirds of total sales during the period and continuously comprise a larger piece of the whole as the company's primary growth driver (the balance made up of unpredictable "professional services" revenue). Total subscription sales specifically increased by 34% to $50.8 million.  

Breaking down the subscription total further, Appian said subscriptions to its cloud-based portfolio of low-code tools for quick development of applications was $34.3 million -- up 40% year over year and handily beating management's outlook for as much as $31.9 million just a few months ago. There was concern that effects from the pandemic would put a damper on new deals Appian was working on with potential customers, but clearly those concerns were overblown. In fact, strength in this key cloud segment is carrying over into the final quarter of the year, with Appian's top brass saying cloud subscriptions would grow as much as 35% in the fourth quarter of 2020.

Paired with the first half of 2020, this small software vendor is having a more than respectable showing during a challenging year.

Metric

Nine Months Ended
Sept. 30, 2020

Nine Months Ended
Sept. 30, 2019

Change

Subscription revenue

$142.6 million

$109.2 million

31%

Total revenue

$222.9 million

$191.7 million

16%

Total gross profit margin

70%

62.9%

7.1 pp

Adjusted EBITDA

($13.06 million)

($21.08 million)

N/A

Free cash flow, including cash paid for acquisitions

($20.63 million)

($34.31 million)

N/A

Pp = percentage point. Data source: Appian.  

Moving down the income statement, the importance of the subscription business shows up in gross profit on services rendered. Software subs had a gross margin of over 89% through the first nine months of the year, and as the segment grows (and as lower-margin "professional services" becomes a smaller percentage of business overall), it's helping Appian make steady progress toward break-even. In fact, on an adjusted basis, net income had essentially reached that milestone at only negative $34,000 in Q3, compared to an adjusted loss of $11.5 million a year ago.  

Through nine months, free cash flow (revenue less cash-only operating and capital expenses) is still negative. However, the metric does include $6.14 million in acquisition expense, presumably for Jidoka RPA, purchased early in 2020 (more on that in a minute). All in all, while Appian is still all about growth right now and profit later, it is making fast progress on that front. And with $251 million in cash and no debt, it can very well afford to keep prioritizing expansion.  

An agent for change during the pandemic and beyond

I'd encourage all investors and those contemplating making a purchase to spend some time reading about what Appian's platform accomplishes. The last earnings call update with CEO Matt Calkins is a good place to start. But as a quick primer, Calkins summed up the massive opportunity that still lies ahead of his company this way:

Appian is the leader in digital transformation, which we address with low-code and automation technology. The demand for these technologies is growing and has been accelerated by the pandemic.

Calkins expounded on the reasons for his optimistic view. First, Appian is the leading pure-play in the low-code software development space -- a fast-growing industry that includes heavyweights like Microsoft, salesforce.com, and Siemens' Mendix platform -- not to mention numerous smaller pure-play vendors like Appian. The fact that it's still able to muscle its way higher in spite of the crowd is impressive.

Second is the company's integration of robotic software into its platform, a prescient move it made early in 2020 with the purchase of tiny Jidoka RPA. Put simply, RPA (robotic process automation) is a type of AI that can automate tasks within a system and coordinate people with software bots. In a world dealing with social distancing and rapid change, automation tasks have witnessed a spike in uptake as large organizations try to figure out how to keep business moving forward. And being able to build RPA directly into apps with the same low-code platform is a real differentiator for Appian.  

As of this writing, Appian stock now trades for 21 times expected full-year revenue. It's a much higher premium than earlier in the year when apprehension was running high, but no matter. I view any inevitable pull-backs in this small technologist's stock as another buying opportunity for the long haul.

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.