Appian (APPN 0.34%) is more than 20 years old, and still not profitable. But the company's gross margin and long-term growth targets indicate a clear path to profitability.
In this segment of "Beat & Raise," recorded on Oct. 8, Fool contributors Jeremy Bowman and Nicholas Rossolillo discuss how Appian's growth drivers and how its cloud subscription are the key to its profitability.
Jeremy Bowman: I think we should talk about the outlook as well. I'll go back to a screen share here. Appian had 44% cloud subscription growth in their second quarter. Part of that might have been because they got some tailwinds from the lockdown quarter, which was Q2 in 2020. The company has a habit of giving conservative guidance. I'd take this with a grain of salt, but for the third quarter, they're calling for 31% to 33%. You might think that's a little disappointing given the 44% in Q2, and then you have full-year guidance with 35% in cloud subscription growth.
The Investor Day Conference, too, I think there might have been some anticipation that they would raise their guidance. Or sometimes companies hold these events and there's a big number that they drop at the end. They didn't really do that. But the long-term guidance in their presentation I thought was pretty eye-opening toward the end here. Here is what I was talking about, too, with this shift from services going to subscription. Here you see where it's 69% subscription-based revenue now from 51% before.
Here we go. This is their target model. They don't give a date for when this is, but the entire business, they're looking at 80% to 85% gross margin. This is what they're spending on sales and marketing. This is research and development and general and administrative costs, which is overhead. This is a real juicy number here for a long-term investor: 20% operating margins. They are also targeting 30% long-term cloud subscription growth. Those are both great numbers. I think if the company can pull that off, the stock will be a long-term winner, so that would take them to something like $1 billion in revenue I think in five years. If they can reach 20% operating margin, that's great. You get $200 million operating profit off of that.
Nick Rossolillo: Yeah. Those are good numbers. Pretty typical numbers to some of the most successful cloud-based software business models out there. If they pull those numbers off over the next, I don't know, Jeremy, you said there is no target date on there. Long-term target, maybe it's five years, maybe it's 10. But if they can continue to compound that, specifically the Cloud subscription business at 30% over time and have a 20% operating margin on that, we're talking a very robust, impressive business. That probably has a lot more of that total addressable market, $60 billion plus today, total addressable market in 5-10 years than it does right now and splitting off a lot of profits along the way.
Jeremy Bowman: 30%, that's a pretty robust number if you can compound at that. That's going to drive your revenue up pretty fast.
