Like the rest of the software industry, Appian (APPN 3.76%) struggled through most of 2021 and 2022 as valuations came down in the sector.
However, shares of the low-code specialist have rebounded this year, up 50% so far in 2023 as the company has continued to deliver strong growth in cloud subscriptions, guided toward narrower losses, and mapped out a new strategy in artificial intelligence (AI) as excitement builds for new generative AI technologies.
Appian just reported second-quarter earnings, topping estimates on the top and bottom lines. Cloud-subscription revenue rose 30% to $74.4 million, and overall revenue was up 16% to $127.7 million, while its loss per share improved year over year from $0.68 to $0.58. The company continues to spend aggressively on sales and marketing and R&D to drive growth in its cloud-subscription business, which generates gross margins of around 90%.
However, the big news in the quarter was the company's rollout of new AI tools as Appian aims for a leading position in private AI.
Image source: Getty Images.
What is private AI?
Appian has long had a focus on automation and AI as its low-code software works by automating workflows to make it easy for enterprises and organizations to deploy applications and software.
In particular, the company sees an opportunity to offer a private form of AI to differentiate itself from big tech companies like Microsoft or Salesforce.
On the earnings call, CEO Matt Calkins outlined a vision of private AI that safeguards customer data, rather than shares it in a public cloud, and where customers are able to own the algorithms that are trained on the customer's data.
Discussing private AI, Calkins said in an interview with The Motley Fool, "I think this is a substantial opportunity for us because our competitors are big enough to assert things that are not in the customer's interest as their business." In other words, big-tech companies don't need to cater as much to their customers' need as they can force them to use their regular protocols. That presents an opportunity for Appian.
Appian has also launched several new AI tools to enhance its product capabilities and meet demand for AI. Those include the Appian AI Copilot, which uses generative AI to support low-code development, and the AI Skill Designer, which allows its customers to create custom AI machine-learning models without sharing data with a public AI platform.
Appian also has an integration with Azures' OpenAI service, and the company plans to release expanded generative AI features later this month.
The company doesn't expect AI to move the needle in the short term, but over the long term, management sees AI as a huge opportunity, especially since it sees little direct competition in private AI.
Appian's path to profitability
Appian has historically operated at a loss, but in response to changing market expectations, the company said last year that it would narrow its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss margin to less than 10%, and it's still on track to hit that target.
For Q3, it projected an adjusted EBITDA loss of $12 million to $16 million on $134 million to $136 million in revenue. Even better, the company said that it would cross the EBITDA breakeven point at some point next year, though management stressed that it would achieve that through revenue growth rather than cost cutting.
As the company makes progress on its EBITDA targets, investors should also pay attention to Appian's new AI products and customer response.
If the market for AI is as big as some analysts are predicting it will be, Appian should have a bright future ahead of it.
