Appian Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless stated otherwise. Appian provides a low-code software development platform, with revenue primarily from subscriptions and professional services.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $59.6 million | $51.7 million | +15.2% |
| Subscriptions, software and support revenue | $34.9 million | $27.0 million | +29.5% |
| Professional services revenue | $24.7 million | $24.7 million | -0.3% |
| Gross profit / margin | $35.5 million / 59.6% | $30.6 million / 59.3% | Margin +0.3 percentage points |
| Operating loss | $(17.4) million | $(10.2) million | Loss widened |
| Net loss / diluted loss per share | $(17.5) million / $(0.27) | $(9.6) million / $(0.16) | Loss widened |
| Operating cash flow | $(4.1) million | $(13.8) million | Cash use decreased |
| Cash and cash equivalents at period-end | $75.4 million | $60.9 million | Compared with March 31, 2018 |
- Subscription revenue growth reflected $4.3 million from expanded existing-customer deployments and $3.7 million from new customers. Management’s separately defined subscription revenue metric was $33.6 million, up from $25.5 million.
- Subscription revenue was 58.6% of total revenue, versus 52.1%; professional services were 41.4%, versus 47.9%. Management attributed the slight services decline partly to greater partner delivery.
- Subscription gross margin was 89.7% versus 90.2%; professional services gross margin declined to 17.0% from 25.6%. Total gross margin edged up as the revenue mix shifted toward subscriptions.
- Operating expenses rose to $52.9 million from $40.9 million. Sales and marketing increased 30.4%, research and development 41.4%, and general and administrative 11.9%.
- Stock-based compensation was $7.2 million versus $2.2 million, partly reflecting vesting of co-founder restricted stock units granted in 2018.
- Cash used in investing was $16.6 million, chiefly for the new headquarters build-out, versus $1.0 million a year earlier. Operating cash use plus investing cash use totaled $20.7 million in Q1 2019.
Financial position and liquidity
- At March 31, 2019, cash was $75.4 million; total assets were $231.5 million and stockholders’ equity was $64.3 million. Current assets were $191.7 million and current liabilities $132.9 million.
- Appian had no borrowings on its $20 million revolving credit facility, which matures in November 2022, and reported compliance with its covenants. The facility is secured by substantially all assets when drawn. Outstanding letters of credit totaled $10.5 million.
- Management said existing cash, expected operating cash flows and available credit should fund working capital and capital expenditures for at least the next 12 months.
- The new headquarters lease carries $87.2 million of total committed payments. The filing also reports $99.1 million of future office lease commitments and $15.8 million of lease-related commitments before a $12.5 million tenant-improvement allowance. Management expected remaining net headquarters build-out expenditures above the allowance to be less than $5 million.
Material changes, outlook and risks
- Revenue growth was driven by subscriptions, but spending on sales, marketing, research and development grew faster than revenue, widening operating and net losses. Subscription revenue retention declined to 116% from 119%.
- Management expects to continue investing in sales and marketing, research and development, customer support and international operations; it also expects cost of revenue to rise in absolute dollars as the customer base grows. No specific quarterly or annual revenue or earnings guidance is provided in the filing.
- Management expects partners to perform more customer professional services over time, potentially reducing Appian’s services revenue as a share of total revenue. It expects subscription revenue to become a larger share over time.
- Appian expects ASC 606, to be adopted using the modified retrospective method for 2019, to change the timing of revenue recognition for on-premises term-license contracts and increase capitalized contract-acquisition costs. The company was still quantifying the effects. Adoption of lease accounting may materially increase reported assets and liabilities.
- Key exposures include growth execution and customer adoption, rising operating costs, foreign-currency movements, and headquarters spending. Government agencies represented 17.9% of Q1 revenue, up from 12.3%; foreign customers accounted for 29.7%, down from 33.3%. No single end customer exceeded 10% of revenue.
- The company reported no material change to previously disclosed risk factors, no material legal proceedings, and effective disclosure controls as of March 31, 2019. It reported no outstanding debt and no material adverse legal contingency.
Important facts for investors to verify
- Whether subscription growth and 116% retention persist, and how customer expansion compares with new-customer additions.
- Whether professional services margin recovers as partner usage and customer-success staffing evolve.
- How much of the widened loss and expense growth reflects ongoing investment versus the Q1 co-founder equity-compensation vesting.
- The cash-flow and total cost impact of the headquarters build-out, lease commitments and remaining tenant-improvement reimbursements.
- The quantified effects of ASC 606 on term-license revenue timing and deferred commissions, and the balance-sheet impact of lease-standard adoption.
- How government revenue concentration, foreign-exchange exposure and credit-facility covenant requirements change over time.