Appian Corporation — Q3 2019 Form 10-Q
Business and period: Appian provides a low-code application development platform and related professional services. This unaudited filing covers the quarter and nine months ended September 30, 2019, compared with the corresponding 2018 periods.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $69.4 million | $54.9 million | $195.9 million | $166.5 million |
| Subscriptions, software and support revenue | $41.6 million | $30.9 million | $115.8 million | $90.9 million |
| Professional services revenue | $27.8 million | $24.0 million | $80.1 million | $75.6 million |
| Gross profit / margin | $45.4 million / 65.4% | $34.9 million / 63.5% | $124.8 million / 63.7% | $103.8 million / 62.4% |
| Operating loss | $10.3 million | $14.9 million | $37.0 million | $33.4 million |
| Net loss | $12.4 million | $15.0 million | $39.4 million | $35.5 million |
| Basic and diluted loss per share | $0.19 | $0.24 | $0.61 | $0.58 |
Cash flow and liquidity: Cash and cash equivalents were $165.6 million at September 30, 2019, up from $94.9 million at December 31, 2018. For the nine months, operating activities used $3.0 million of cash, investing activities used $31.4 million (primarily headquarters construction and equipment), and financing activities provided $105.4 million. Operating cash use improved from $24.0 million in the prior-year period; the 2019 result included about $17.0 million of tenant-improvement reimbursements classified as operating cash flow.
Debt and obligations: Appian had no borrowings on its $20 million revolving credit facility and reported covenant compliance. Capital lease obligations were $4.2 million; operating lease minimum payments totaled $90.5 million, including commitments for the new headquarters. Total liabilities were $166.4 million and current liabilities were $128.7 million.
Changes and management commentary
- Quarterly revenue increased 26.3%; subscription revenue rose 34.6%. Management attributed subscription growth to expansion at existing customers and new customer sales. Subscription revenue retention was 119%, versus 117% a year earlier.
- Nine-month revenue increased 17.6%, led by 27.4% growth in subscriptions, software and support. Professional services grew 5.9%; management expects that business to decline as a share of revenue over time as partners perform more implementation work.
- Gross margin improved in both comparison periods, partly because subscriptions represented a larger share of revenue. Subscription gross margin eased to 89.5% for the nine months from 90.4%, reflecting higher cloud hosting costs and the prior-year benefit of a perpetual software license. Professional services gross margin fell to 26.4% from 28.6%, reflecting higher stock compensation, greater use of customer success managers and slightly lower utilization.
- Quarterly operating loss narrowed, while the nine-month operating loss widened. Sales and marketing and research and development expenses grew as the company expanded headcount and continued investing in growth. Nine-month net loss increased despite higher revenue.
- Other expense, net was $2.0 million in Q3, mainly reflecting approximately $2.2 million of foreign-exchange losses. Appian said it does not hedge foreign-currency exposures.
- In September, Appian completed a public offering in which it sold 1.825 million Class A shares and received net proceeds of $101.3 million; existing stockholders also sold shares, from which the company received no proceeds. The offering increased cash and diluted existing shareholders.
Outlook, risks and notable items
- Management said cash, expected operating cash flows and available credit were expected to support working capital and capital expenditures for at least the next 12 months. No specific revenue or earnings guidance is provided in the filing.
- Management expects continued investment in sales and marketing, research and development, international expansion and platform capabilities. Results may vary with adoption, customer expansion, revenue mix, professional-services utilization and spending patterns.
- ASC 606 adoption was planned for the 2019 annual report using the modified retrospective method. Management expected changes to the timing of revenue recognition for on-premises term licenses and to capitalization and amortization of contract acquisition costs; it was still quantifying the effects.
- Appian expected lease-accounting adoption in its 2019 annual report to materially increase reported assets and liabilities for operating leases, but not materially affect the income statement.
- Government agencies generated 15.9% of Q3 revenue; foreign customers generated 32.5%. Foreign-exchange movements may affect results. The filing reported no material change to previously disclosed risk factors and no legal proceeding expected to have a material adverse effect.
- The company’s new headquarters build-out was completed in Q3. Management reported spending about $21 million above the landlord’s $18.4 million tenant-improvement allowance. Total payments committed under the headquarters lease were $87.2 million.
Investor verification priorities
- Track whether subscription growth and 119% retention persist, and how much growth comes from existing versus new customers.
- Assess whether revenue mix continues shifting toward subscriptions and whether cloud hosting costs constrain subscription margins.
- Reconcile reported cash generation with the one-time tenant-improvement reimbursements, ongoing losses and headquarters-related capital spending.
- Review dilution from the public offering, equity compensation and the dual-class share structure, under which Class B shares carry ten votes per share.
- Verify the eventual quantified effects of ASC 606 and operating-lease adoption, and monitor headquarters lease commitments and foreign-exchange exposure.