Why Anaplan's Third Quarter Was Better Than You Think

Cloud software company Anaplan (PLAN) beat estimates in its third-quarter earnings report in November, but it still wasn't enough to please the market. In this episode of "Beat and Raise" recorded on Dec. 1, Fool contributors Zane Fracek and Brian Withers break down Anaplan's third-quarter report and explain what the market thinks is missing.

Brian Withers: We got Anaplan, ticker symbol P-L-A-N.

Zane Fracek: Yeah we do. Quick quiz, Brian: Do you know where the name Anaplan comes from? Don't know of your thinking.

Brian Withers: I don't.

Zane Fracek: Mash-up of analysis and planning.

Brian Withers: Analysis and planning. There we go, awesome. I think of Anaplan is like Spreadsheet on steroids.

Zane Fracek: Yeah, and you know what? You're not far off from the truth. Anaplan is a enterprise management software, but they're dealing with planning and they are dealing with a lot of data and trying to find out how can we make this data into decisions? How can we transform what we know in that insight into actual decision-making and make the business efficient in a way to collaboration software as well? It's doing something different, but in my mind it shares in the same basket as companies like Salesforce, Slack. I'm drawing a blank now, but enterprise planning software.

They just reported about a week ago at this point, ticker P-L-A-N, and they gave a pretty solid quarter. Their revenue came in above expectations, and 35% over last year's numbers. Their earnings beat expectations as well, here by a much larger margin of 53%. That said they are still losing money. That's the biggest risk of this company, and I think that's why if you looked at the stock price on the right, the stock is down so much, especially after earnings. I think investors really had high hopes that this was going to be the quarter. This is going to be the one that they turn a profit. They're inching to that, they're getting close. Their free cash flow margin is just negative 4%, up from negative 5% last year, so they're marching closer. On top of that, the outlook remains steady with Q4 revenue around $127 million. They did up their full-year guidance, though. So $572 million to $584 million, pretty significant raise there. I'm surprised that that wasn't enough for investors to hold on to the stock at least, or not come in a little bit, but there are a lot of highlights in the quarter.

The subscription revenue grew pretty significantly and faster than last year, growing 33% this year versus 31% last year, and that's their business. They need the subscription numbers to stay strong. I think that's 80, 90% of their revenue. The number of customers with AR over $250,000. That's annual recurring revenue always up 17% so far this year, and that's as of the quarter. There's still about a month left at that point, and that's really strong growth. You're showing that customers want to stick to the platform. They want to spend more money. That way you can drive profits and drive more revenue with the same number of customers, even if you're not growing.

On top of that, the trending toward profitability, like I mentioned, their operating expenses as a percent of the revenue are down just a little bit, and the free cash flow margin is ticking a little bit higher. They haven't crossed that gap yet, but they're moving in the right direction.

Now this is interesting. I saw on their balance sheet, their debt is down 30% from last quarter. Good to see. You can argue whether or not that's the best use of their cash, but their debt is down 30% from last quarter. They are now past the milestone of servicing half of the Fortune 50, which is just an impressive milestone to have under about a lot of big customers, and that probably is making up a lot of the customers with AR over $250,000.

The biggest concern now is just that they're still not profitable. That's what it comes down to. But I think they're on the right track, and I think that they can continue to scale, and in the next couple of years, I think they're going to hit it for sure and become profitable. It's also worth noting just a couple of other developments. They launched Anaplan Google Cloud in Japan. A bit of a geographic expansion there. They added GNC and Deloitte to their list of customers. That's just some big names there. The team of certified model builders is up 84%. They're on a bit of a hiring spree there, but it's also better to serve their customers. On top of that, they're working on autonomous enterprise system that monitors in real time and provides a real-time decisions. They think, it's not good enough to have somebody input all the data and dealing with older data. We want to consistently update to the real time to give the best decisions we can and get the best insights that we can. These are some of the developments, and that's Anaplan.

Brian Withers: Hey, Zain, can you leave the slide up for a second?

Zane Fracek: Yeah.

Brian Withers: I always like to look at when companies are subscription-based, and primarily a majority of Anaplan's revenue is subscription-based. I always like to look at quarter over quarter. What do they do, and what do they projecting revenue? I was looking at your Q4 revenue at a 127 and I'm like, why is it going down from Q3 to Q4? Actually the numbers are a bit higher. I'm looking at their earnings release. They said total revenue is expected to be between $154 [million]-$155 million, which is better, but still it's flat from Q3 to Q4. As I look at software companies like this, you mentioned growth or the fact that they're still unprofitable. You are either profitable and slow-growing or you're growing like gangbusters, and it doesn't seem like they're doing either.

Zane Fracek: Yes, it's a tough space to be moving slow. It's hard to be the tortoise here. You're either the hare or nothing. 

Brian Withers: Yeah. Exactly. I love the way you put that. I think that's why the stock's been under a good bit of pressure lately. And some of the things, as you mentioned, the large customer growth is exciting. But they're either going to have to up their game on their revenue growth or figure out how to be profitable for the stock to react.

Zane Fracek: I am glad you caught the outlook number there at not $127 million. I think I was looking at a different quarter or something. But yeah, it's still staying flat, so not super-impressed. But overall, Anaplan is probably a company that I would own. I think it's just fits what I like to look at.

Brian Withers: Absolutely. I am a big fan of the subscription-as-a-service or software-as-a-service companies , and one of the companies that I recently put in my portfolio that competes with Anaplan is Monday.com. They are growing significantly faster. They are not profitable at all. I think they're going to announce next week. It'll be interesting to see the comparison between the two.