Business context and reporting period
Appian Corporation’s Form 10-Q covers the quarter and nine months ended September 30, 2021. Appian sells a low-code automation platform through SaaS and term-license subscriptions, alongside professional services. Financial figures below are in U.S. dollars; income-statement and cash-flow amounts are unaudited.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $92.4 million | $77.3 million | $264.3 million | $222.9 million |
| Subscription revenue | $67.2 million | $50.8 million | $188.0 million | $142.6 million |
| Professional services revenue | $25.2 million | $26.5 million | $76.3 million | $80.3 million |
| Gross profit / margin | $65.9 million / 71.3% | $55.8 million / 72.1% | $188.4 million / 71.3% | $156.1 million / 70.0% |
| Operating loss | $22.9 million | $7.5 million | $58.0 million | $28.2 million |
| Net loss | $25.4 million | $3.6 million | $62.8 million | $27.1 million |
| Net loss per share | $0.36 | $0.05 | $0.89 | $0.39 |
- Revenue grew 19.6% in Q3 and 18.5% for the first nine months year over year. Subscription revenue grew 32.5% and 31.8%, respectively; professional services revenue declined 5.1% and 5.0%.
- Subscription gross margin was 89.5% in Q3 and for the nine-month period. Professional services gross margin fell to 22.9% in Q3 from 38.0%, and to 26.5% for nine months from 35.7%.
- Operating expenses rose to $88.8 million in Q3 from $63.3 million, and to $246.4 million for nine months from $184.3 million. Management attributed increases to hiring, growth investments, commissions, and, in general and administrative expense, legal fees.
- For the nine months, operating cash outflow was $34.5 million versus $13.5 million in 2020. Investing activities provided $51.4 million, largely reflecting $84.6 million of investment-sale proceeds, partly offset by the Lana Labs acquisition and capital expenditures. Financing activities provided $2.4 million.
- At September 30, cash and cash equivalents were $127.1 million and short-term investments were $61.4 million; working capital was $168.1 million. Total cash, cash equivalents, and restricted cash was $130.4 million.
- No borrowings were outstanding under the $20.0 million revolving credit facility; $11.2 million of letters of credit were outstanding. Appian reported compliance with its covenants. Operating lease liabilities totaled $56.2 million.
- Cloud subscription revenue grew 36% in Q3 to $46.7 million and 39% for nine months to $128.2 million. Cloud subscription revenue retention was 117%, compared with 115% a year earlier.
Material changes and unusual items
- In August 2021, Appian acquired process-mining software developer Lana Labs for approximately $30.7 million, net of cash acquired and debt, funded with cash on hand. The purchase-price allocation was preliminary; Lana Labs’ post-acquisition revenue was immaterial and its pretax loss was $1.2 million.
- Appian recorded $2.3 million of other expense in Q3 2021, versus $4.3 million of other income in Q3 2020, primarily due to foreign-exchange losses versus gains. For the nine months, other expense was $4.1 million versus other income of $1.8 million.
- Nine-month general and administrative expense included $3.3 million of accelerated stock-based compensation after a performance-based CEO option award vested. Total stock-based compensation was $17.7 million for the nine months, compared with $10.7 million a year earlier.
- Professional services margins were lower than the prior year, which Appian partly attributed to unusually favorable prior-year margins during pandemic-related reductions in in-person work, as well as higher personnel costs and lower services revenue in 2021.
Outlook, risks, and contingencies
- The filing provides no specific numerical revenue or earnings guidance. Management expects to keep investing in sales and marketing, research and development, customer support, and international expansion. It expects subscription revenue to rise as a share of total revenue over time and subscription gross margin to fluctuate in the short term but improve over time.
- Management said existing cash, investments, anticipated operating cash flows, and available credit should support working capital and capital needs for at least the next 12 months. However, operating cash use increased year over year, and future funding needs depend on growth, investment plans, acquisitions, and economic conditions.
- A non-cancellable AWS hosting agreement commits Appian to minimum purchases totaling $131.0 million over five years: $22.0 million in year one, $25.0 million in year two, and $28.0 million in each of years three through five. Payments may exceed the minimum depending on usage.
- Appian cited uncertainty from COVID-19, including potential effects on demand and sales-cycle length, but reported no meaningful adverse effect on its financial position, results, or liquidity through September 30, 2021. It said the ultimate impact was not estimable.
- Legal fees increased due to two lawsuits: one involving reciprocal false-advertising and related claims with a competitor, and another seeking to enforce Appian’s intellectual property. The company said no pending legal matter was expected to have a material adverse financial impact.
- Appian operates with dual-class shares: Class B shares carry ten votes per share versus one vote for Class A. No material changes to the risk factors in its 2020 annual report were reported.
Most important facts for investors to verify
- Whether subscription and cloud growth can continue to outpace expense growth while losses and operating cash outflows remain elevated.
- Whether professional services revenue and margins stabilize, and how partner-delivered services affect reported revenue mix and profitability.
- The final Lana Labs purchase-price allocation, integration progress, and contribution to revenue, costs, and cash flows.
- The expected timing and cash-flow impact of the $131.0 million AWS minimum-purchase commitment, alongside lease obligations and available credit.
- Developments and potential costs from the two lawsuits, and the extent of foreign-exchange exposure.