Low-code software specialist Appian (APPN 0.86%) came into the second quarter growing briskly but prepared for an economic downturn.
The company acquired process-mining specialist Lana Labs a year ago, primarily to complete its low-code platform, but the acquisition also offers a selling point during tough times. Process mining can make a business more efficient and lower its costs, desirable attributes in any market, especially in a downturn.
Despite fears of a recession, Appian's second-quarter results show the company putting up consistent growth with no sign of headwinds. Cloud subscription revenue, the metric the company prioritizes, increased 34% year over year to $57.1 million, and overall revenue rose 33% to $110.1 million, beating estimates at $103.9 million. Growth from existing customers was solid, with a cloud subscription revenue retention rate of 116%.
On the bottom line, its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss widened from $16.3 million to $25 million, and its adjusted loss per share expanded from $0.24 to $0.46, which missed estimates of a per-share loss of $0.35. With cloud subscription gross margins hovering around 90%, management believes that investing in growth is worth the near-term losses, especially with the low-code industry at a tipping point.
Appian's latest quarter showed the company steadily growing and continuing to execute as usual, but two developments stuck out in particular.
1. Appian's professional services are surging
Appian reports revenue in two categories: software subscriptions, which include cloud and on-premise, and professional services, the consulting and advisory services it provides to clients in order to ensure they're accomplishing everything they can with the software.
Recently, Appian has downplayed the professional services revenue stream, willing to let its consulting firm partners take that business in exchange for selling and advocating Appian's software. Share of revenue has continued to move to subscriptions and away from professional services.
However, in the second quarter, professional services revenue jumped 28% to $33.4 million, its fastest growth rate in several quarters. For comparison, professional services revenue growth was flat in 2021.
On the earnings call, management explained that the increase in professional services revenue was from selling more premium subscription packages and because it's selling its services alongside partners, positioning itself as a supplemental service.
While professional services carry a much lower gross margin than software, it makes sense for the company to capitalize on the opportunity in services when it's available.
2. The non-federal government opportunity
The federal government has long been a primary source of business for Appian, as its low-code software is a natural fit for complex organizations looking to streamline and automate workflows. Naturally, state and local government, as well as international ones, would seem to be opportunities for Appian as well, though it has been slow to capitalize on them.
That's starting to change, and the company highlighted a deployment with the Italian postal service in the quarter. In an interview with The Motley Fool, CEO Matt Calkins said, "I think we have a blossoming opportunity in the non-U.S. federal public sector, which means U.S. state and local plus international, federal, state, local and everything else." He explained that the company hadn't gotten into those markets earlier because they're "very labor-intensive," and you have to have a salesperson who understands how each government organization works. Traditionally, Appian had ceded those opportunities to bigger companies, but Calkins believes the company is now established enough to compete with them.
Considering that state budgets combined in the U.S. are worth trillions of dollars, there looks to be a massive opportunity for Appian outside of the federal government.
What's next for Appian
Appian's playbook is ready if the economy dips into a recession, but its guidance for the rest of the year calls for continued steady growth with 30% to 31% cloud subscription revenue growth for the current quarter and 32% to 33% in the full year. For the full year, it expects 26% to 27% total revenue growth.
The long-term growth opportunity looks strong as well, and Appian's move into process mining should give it an advantage as more app development in the coming years will be based on low code. Though the SaaS stock may be bound to market sentiment, for now, the business continues to execute and deliver steady growth.