What happened

Shares of Appian (APPN -1.43%) tumbled 25% in May, according to data provided by S&P Global Market Intelligence. The cloud-based company slipped after its first-quarter earnings report failed to live up to expectations. Making matters worse, Appian's overall revenue growth continued to tick lower, which left investors wanting more.

However, the company is in the midst of a transition to higher-quality revenue, so things are not as dire as they might seem.

A man looking at a computer monitor and  working on app development.

Image source: Getty Images.

So what

Investors had high expectations when Appian reported earnings, but the numbers were disappointing. Total revenue of $88.9 million increased 13% year over year, a far cry from the heady 31% growth in the prior-year quarter. 

Appian's cloud-subscription revenue fared far better, jumping 38% year over year to $39.1 million. At the same time, total subscription revenue of $63.8 million climbed 26%. Professional services revenue of $25.1 million slipped 12%.

The raw numbers don't tell the whole story. The low-code leader has been working feverishly on its high-growth, recurring cloud-subscription business. At the same time, the company is shifting much of its lumpy professional services business to partners. These partners, which recommend and help sell Appian's solutions, were responsible for 70% of the new customers that came to the company last year. 

That transition has been accelerating in recent months, so its services revenue will continue to decline. This allows Appian to focus most of its energy on the higher-quality subscription revenue that now makes up roughly 72% of the company's overall sales, up from 52% in 2017.

Now what

It's also important to take a broader view and put the stock's performance into perspective. Between late October and late January, Appian shares more than tripled, so it isn't surprising that the bar of investor expectations was set pretty high. Shares have pulled back sharply since then, but Appian stock is still up more than 50% over the past year compared to a 35% gain for the S&P 500, so it's beating the broader market by a wide margin

Appian is a company in transition. It's purposefully shedding its lumpy, less dependable services revenue in favor of higher-quality, recurring subscription revenue, which is more important to its future success. The temporary slowing of overall revenue growth is a natural consequence of this decision. Revenue growth should return to normal in relatively short order. Appian's keener focus on cloud-subscription revenue will pay dividends over the longer term but might result in some short-term growing pains.