Understanding where a company's revenue comes from is important for any investor. Appian (APPN 4.78%), a low-code software platform, brings in its revenue through a combination of subscriptions and services, but in the years since its IPO, that mix has shifted.
In this episode of "Beat & Raise," recorded on Oct. 8, Fool contributors Jeremy Bowman and Nicholas Rossolillo discuss Appian's revenue mix and what to expect from the company.
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Nick Rossolillo: Let me share the most recent 10-Q. That might shed some insight on the actual financials here, and provide a little bit of insight on the business because we've been talking about it, I think, for the last 20 minutes. The story sounds incredible, but it's not perfect. Let's see. Jeremy, you want to talk about this right here, this subscriptions versus professional services, and then maybe just contrast that.
Jeremy Bowman: Sure.
Nick Rossolillo: With the opening slide of the investment presentation versus the trajectory of cloud subscription, which looks great but -- asterisk.
Jeremy Bowman: The company likes to measure its performance in cloud subscriptions, which I believe in the most-recent quarter here was about $42 million. That's only actually half of its total revenue. That's the highest-value revenue, highest margin, and it's growing the fastest. But they still have a decent chunk of on-premise subscriptions here, and these professional services that I mentioned before that they're gradually outsourcing to their partners, that's why the growth is so slow. It's a good thing that they're making this transition and becoming more of a cloud-based business, but it is providing some headwinds on the overall revenue growth. I think part of reason, too, you have some cloud businesses that launched within the last 10 years and you look at their reports and it's like 100 percent subscription growth. Appian, because they're an older company, they're more of a legacy business model, so they're still making that switch, and their services come at lower margins as well.
Nick Rossolillo: There's two switches going on there, too. There's the switch from legacy software, where you just license out the software and the client takes it and downloads it to their server or their private cloud. They are phasing that out and going just cloud subscription, where a client will subscribe to Appian's cloud to access the toolkit. And then also the services that you were saying, Jeremy, that's the bigger transition at this point, they're almost done with the Cloud transition, but they also have these services that they're phasing out like you said, they're like labor-intensive stuff. Customer comes in and says, "Help build us this app or help us integrate this part of your platform into our operations." It's labor-intensive, not very high profit margin. Some of their partners can do a much better job of that. So they're getting rid of the lower-margin stuff. Lower revenue growth as a result, but in the long term, there should be better profitability metrics as they make that switch, but it's going to take some time though.
Jeremy Bowman: It's one of those moves that will take time to play out, and there's going to be noise in the numbers in the meantime, I think when the company went public in 2017, it was about a 50-50 split between subscriptions and professional services. Now it's about 75-25. They made a lot of progress in that, but still more to come.