Appian Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods. Amounts are in U.S. dollars. Appian sells a low-code automation platform, primarily through subscriptions, and also provides consulting and training services.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $77.3 million | $66.2 million | $222.9 million | $191.7 million |
| Subscription revenue | $50.8 million | $37.8 million | $142.6 million | $109.2 million |
| Professional services revenue | $26.5 million | $28.4 million | $80.3 million | $82.5 million |
| Gross margin | 72.1% | 63.8% | 70.0% | 62.9% |
| Operating loss | $(7.5) million | $(12.3) million | $(28.2) million | $(37.4) million |
| Net loss | $(3.6) million | $(14.7) million | $(27.1) million | $(39.9) million |
| Net cash used in operating activities | Not provided for the quarter | Not provided for the quarter | $(13.5) million | $(2.9) million |
In Q3, subscription revenue rose 34.4%, led by cloud subscriptions; professional services revenue fell 6.5%. For the nine months, subscriptions grew 30.6%, while professional services declined 2.7%. Subscription revenue increased as a share of total revenue to 65.7% in Q3 and 64.0% year to date. Cloud subscription revenue was $34.3 million in Q3 and $92.3 million year to date. The cloud subscription revenue retention rate was 115% at September 30, down from 121% a year earlier.
Gross-margin improvement reflected a higher subscription mix and lower professional-services contractor and travel costs. Q3 subscription gross margin was 90.0% and professional-services gross margin was 38.0%; nine-month margins were 89.4% and 35.7%, respectively. Operating expenses increased year over year in both periods as Appian continued investing in sales and marketing, research and development, and general and administrative capacity.
Liquidity, cash flow and capital structure
- Cash and cash equivalents were $251.1 million at September 30, 2020, compared with $159.8 million at December 31, 2019. The June 2020 public offering contributed $107.9 million of net proceeds to Appian; some offered shares were sold by existing stockholders.
- Operating cash use for the first nine months increased to $13.5 million from $2.9 million in 2019. The filing attributes significant working-capital use to a $22.6 million increase in accounts receivable, partly offset by higher deferred revenue. Investing cash use was $7.2 million, mainly for the Novayre acquisition; financing provided $110.3 million.
- Appian reported no borrowings under its $20 million revolving credit facility and was in compliance with its covenants. It had $11.2 million of letters of credit outstanding. The facility is secured by substantially all assets if drawn.
- Operating lease liabilities totaled $58.3 million and finance lease liabilities $2.7 million at quarter end. In October, Appian paid $2.7 million to pay off its finance leases.
- Class A and Class B shares outstanding at September 30 were approximately 37.8 million and 32.2 million, respectively. Class B shares carry ten votes per share; Class A shares carry one.
Outlook, commentary and risks
- Management said it had not seen a meaningful COVID-19 impact on financial position, results, cash flows, or liquidity through September 30. It warned that reduced demand, longer sales cycles, customer spending cuts, or collection delays could affect later periods; the ultimate impact was not estimable.
- Management expects subscriptions to increase as a share of revenue over time, in part as strategic partners perform more customer implementation work. It anticipates continued investment in sales and marketing, research and development, and international expansion. It noted subscription gross margins may fluctuate in the short term and could improve over time. No specific financial guidance figures are provided in the supplied filing text.
- Net loss benefited from other income, including foreign-exchange gains and a $1.0 million state-government payment for achieving job-creation and capital-investment goals. These items may not recur at the same level.
- Appian acquired Novayre Solutions, a robotic process automation developer, in January for approximately $6.9 million; acquired revenue and expenses through September were immaterial. The preliminary allocation included $4.3 million of goodwill.
- Other risks include foreign-currency movements, dependence on continued subscription expansion and customer renewals, and execution of leadership transitions in key departments. The filing reports no legal proceedings expected to have a material adverse effect and no material change in contractual commitments from the prior annual report.
- After quarter end, Appian approved a November grant of 190,900 restricted stock units valued at $12.9 million, vesting annually over four years.
Important facts for investors to verify
- Whether cloud subscription growth and customer retention remain strong, given the retention-rate decline to 115%.
- Whether operating cash use improves and receivables convert to cash; year-to-date operating cash use rose despite higher revenue.
- How much of reported earnings improvement depends on foreign-exchange gains and the non-recurring state payment.
- Whether COVID-19, economic uncertainty, or longer sales cycles affect renewals, new sales, and professional-services demand.
- The effects of ongoing hiring, stock-based compensation, equity issuance, and long-term lease commitments on future losses, cash needs, and shareholder dilution.