Appian (APPN 3.76%) stock soared last May after the low-code software company won a $2.036 billion award in a case against rival Pegasystems (PEGA 4.60%) over theft of trade secrets. In the case, Appian alleged -- and a jury agreed -- that Pegasystems had "hired a spy to infiltrate Appian," giving Pega trade secrets that Pega then used in its own products. That decision was rendered 16 months ago, and the case is still working its way through the appeals process, which could take years.
Up until now, Appian had no way to ensure that it would benefit from the decision, but the company took a significant step to correct that on Thursday. It signed a $500 million judgment preservation insurance policy that will pay it the difference between the final judgment and $500 million if the final judgment after all appeals is less than $500 million.
Image source: Getty Images.
Appian cashes in
$2 billion is a huge sum of money for Appian. The software company has a market cap of $3.8 billion, and it brought in roughly $500 million in revenue over the last four quarters. Given the size of the award, the news presented something of a dilemma to Appian over how to take advantage of it while the case was going through appeals, and the insurance policy emerged as the best option.
In fact, Appian Chief Technology Officer Michael Beckley said in an interview with The Motley Fool, "When we found out that this was an option, we were thrilled. We were able to essentially lock in a guaranteed high floor, this $500 million backstop. It's a no-brainer."
Appian made a one-time payment of $57.3 million for the policy, which includes a 9.8% premium for the policy, taxes, and an insurance brokerage fee.
The company said that a number of insurers participated in the policy, which was oversubscribed. Beckley said Appian sees the policy as validation from the insurance industry that it has a high level of confidence that Appian will collect on the award. If not, they wouldn't have underwritten the policy.
The policy would not pay off in the event of a Pegasystems bankruptcy, but otherwise, it seems to guarantee that Appian will eventually collect at least $500 million from the judgment.
What it means for Appian investors
Investors cheered the news, sending Appian shares up 4.7% on Thursday, a day when the Nasdaq fell 0.9%.
The legal case has implications beyond just a pending payment headed for Appian. It also appears to be affecting the competitive balance between Appian and Pegasystems, as it's arisen as a concern in sales meetings. Wall Street analysts have also noted that the judgment is influencing customers in the industry.
In other words, the judgment, which was rendered over "unjust enrichment," could have a significant effect beyond the payment Appian receives in that it gives the company an advantage over its chief rival, allowing it to win business it might not have otherwise gained.
In its own statement, Pegasystems said it strongly disagrees with the claims in the case and the verdict, and disputes the charge that it copied any of Appian's features onto its platform.
Investors shouldn't expect a quick resolution to the case, as it's in Pegasystems' interest to drag out the appeals process for as long as possible. But the insurance policy is a win for Appian, not just because it basically ensures that it will collect $500 million, but also because it's a strong indication that the company will emerge victorious after the appeals process plays out.
The policy also gives the company a cash cushion if it chooses to pursue an acquisition or another capital-intensive play.
Meanwhile, Appian continues to deliver solid growth, with cloud subscription revenue up 30% in the second quarter. But investors shouldn't overlook the effect of the Pegasystems case, both in the payoff for Appian and its effect on the competitive dynamics in the industry.
