The most recent earnings report for Appian (APPN 2.61%) showed another positive quarter. In this clip from "3 Minute Stock Updates" on Motley Fool Live, recorded on July 6, Fool.com contributor Brian Feroldi discusses the company's shrewd business shift in the past five years to focus more on cloud computing subscriptions.
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Brian Feroldi: This is a really important slide. When Appian came public, half of its revenue was from those services and only 50% was from subscriptions. Today, 73% is from subscriptions and 27% are from its services. Appian is actively moving to get that to its partners and really focusing on the subscription revenue. That's a positive thing for the company in the long term. That cloud subscription revenue continues to have pretty healthy upsell numbers. Retention rate came in at 117% for the period, and this is why investors should really care about those subscription revenues.
The gross margin in this business is 90%. The professional services revenue, gross margins are only about 30%. That's actually not that bad. There are companies out there with negative gross margins and professional services are break even. Appian is doing a good job there, but overall we want much more subscription revenue, much less professional services revenue, and that's where the company is actually heading.
The rest of the income statement looked OK. The net loss on a GAAP basis and they have some other positive things going on, but let's turn to the guidance for a second. In the upcoming quarter, total revenue is expected to grow 24%-26%. That cloud subscription revenue that we care about is going to grow much faster, a little faster at 30%-31%, and there are still expected to lose money on an adjusted EBITDA basis and earnings per share basis.
For the full year, pretty strong growth, 23% on the top line, 32% on the cloud basis. This is more of the same of what we've seen with Appian over the last couple of years. It's continuing growth in the cloud subscription business, continued de-emphasis of the other professional services business. Total revenue growth looks relatively muted because of that transition in there and they continue to lose money. The company has the balance sheet to support that. But if you're looking at this, you can't help but say to me, thesis on track.