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Here's What Investors Should Expect From Appian's Future Growth

By Jeremy Bowman and Nicholas Rossolillo – Nov 1, 2021 at 9:00AM

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There's a lot to like in the company's long-term path.

Appian (APPN 1.03%) 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.

 

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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.

Nicholas Rossolillo owns shares of Appian. The Motley Fool owns shares of and recommends Appian. The Motley Fool has a disclosure policy.

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