There's been no shortage of hype around artificial intelligence (AI) among investors. Ever since the launch of ChatGPT in late 2022, tech companies have been plowing billions of dollars into AI technologies, and investors have bid those stocks higher in the hopes of a new opportunity that could be as transformative as the internet, according to a number of tech CEOs and others in the know. However, outside of Nvidia, few companies have seen meaningful jumps in revenue from AI.
One software company that's been busy trying to capitalize on the opportunity in AI is Appian (APPN -2.47%). Appian has traditionally been a low-code software provider, but in recent years, its product suite has evolved to include process mining, data fabric, and, increasingly, artificial intelligence capabilities. Appian's customers count on its software to help deploy applications, automate workflows, and facilitate day-to-day tasks like claims processing.
The company has consistently delivered solid growth in its cloud-software segment, but investors were underwhelmed by Appian's latest earnings report. Shares fell 15.5% last Friday and were hovering around five-year lows following the news.
Cloud-subscription revenue in the quarter rose 24% to $86.6 million, though overall revenue rose just 11% to $149.8 million as revenue from professional services declined, which the company blamed on quarter-to-quarter fluctuations depending on the timing of large projects. That revenue result matched analyst estimates, but the company reported a wider loss than expected, and bottom-line guidance was also underwhelming.
On the earnings call, management noted that the second quarter is generally its seasonally slowest period, and it expected stronger growth toward the back of half of the year. The company continues to target break-even adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in the second half of the year, and an EBITDA profit in 2025, but what the company is doing with AI may be taking center stage among investors.
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Appian's AI strategy
At its annual Appian World user conference in April, the company introduced Process HQ, a new product that is a key component of its AI strategy. Process HQ combines process mining, or the use of data to improve processes, and enterprise AI connected with Appian's data fabric.
Process HQ enables Appian's customers to get a detailed understanding of processes and efficiencies, and when problems arise, the technology uses AI to recommend ways to fix them. One life sciences customer used Process HQ to manage hundreds of thousands of products and regulations in more than 100 countries, saving an estimated 40,000 labor days annually, or work that would require over 100 new employees.
Appian sells to enterprise-level companies, and its technology is well-regarded. Its gross-renewal rate typically ranges around 98% to 99%, showing strong customer satisfaction, and its net-retention rate has improved to 120%, showing that existing customers increase their spending on Appian.
However, CEO Matt Calkins has noticed some hesitancy among its customer base in embracing AI. On the recent earnings call, he said, "I don't see big budgets around AI among our customers so that's not something that we're working with and drawing energy from. There's curiosity, but there's not big line items."
In an interview with The Motley Fool, Calkins elaborated on those points, noting that many customers see significant upside potential to AI but also significant downside risks. As he sees it, among those downside risks are things like data loss or a regulatory violation as the guardrails on the new technology are still evolving. He also noted a reputational risk such as what happened to Google in its recent launch of Gemini.
Unlike other new technologies, Calkins observed, AI has the potential to humiliate early adopters. He described a "wait-and-see" period among customers before they feel more confident that AI can do transformative things and not just generate the novel kinds of responses that ChatGPT is known for.
Is Appian a buy?
Along with Process HQ, Appian also introduced a new multi-tier pricing system that includes an advanced tier with its new AI features at a price 25% higher than its normal package. Calkins said it's too early to discuss uptake on the advanced tier but added there's a lot of appreciation for the new features. The company's guidance doesn't seem to reflect a benefit from the advanced tier yet.
At this point, Appina's share price is clearly beaten down, reflecting weaker overall top-line growth and the slow transition to profitability, but Appian makes a good pitch to be included in a basket of AI stocks.
It's long been a leader in low code and the related niches it serves, and measurable growth from AI could jump-start the stock from here. Still, for investors to return, the company needs to deliver an acceleration in top-line growth or demonstrate sustainable profitability, and it could be several more quarters before that happens. Keep an eye on AI development in the coming quarters to see if Appian can achieve those goals.
