Business context and reporting period
Appian Corporation (Nasdaq: APPN) provides a low-code automation platform, sold primarily through subscriptions, alongside implementation and other professional services. This Form 10-K covers the fiscal year ended December 31, 2019; quarterly figures below identify the three months ended December 31, 2019. Appian reported 533 customers at year-end, including 48 Fortune 500 companies. International customers generated 32.3% of annual revenue.
Financial and operating metrics
| Metric | 2019 | 2018 | Change or context |
|---|---|---|---|
| Total revenue | $260.4 million | $226.7 million | Up 14.8% as reported |
| Subscriptions revenue | $151.3 million | $126.0 million | Up 20.1%; 58.1% of revenue |
| Cloud subscriptions revenue | $95.0 million | $67.4 million | Up 41% |
| Professional services revenue | $109.1 million | $100.7 million | Up 8.3% |
| Gross profit / margin | $166.5 million / 63.9% | $141.8 million / 62.5% | Margin improved 1.4 percentage points |
| Operating loss | $(50.5) million | $(46.7) million | Operating margin improved to (19.4)% from (20.6)% |
| Net loss | $(50.7) million | $(49.5) million | GAAP loss per share $(0.77), versus $(0.80) |
| Cash used in operating activities | $(8.9) million | $(31.3) million | Cash use declined |
| Cash and cash equivalents | $159.8 million | $94.9 million | At December 31 |
| Debt borrowings | None | None | $20 million revolving facility; $10.5 million of letters of credit outstanding |
Annual operating expenses rose 15.1% to $217.0 million, including sales and marketing of $117.4 million, research and development of $58.0 million, and general and administrative expense of $41.5 million. Adjusted EBITDA was a loss of $29.3 million, compared with a loss of $28.6 million in 2018; this is a non-GAAP measure. Working capital was $165.4 million. Year-end liabilities included $48.3 million of operating lease liabilities and $3.8 million of finance lease liabilities.
Fourth-quarter revenue was $68.6 million, up from $60.2 million a year earlier. Fourth-quarter net loss was $10.8 million, versus $13.9 million in Q4 2018.
Material changes versus prior periods
- Reported annual revenue growth slowed to 14.8% from 28.3% in 2018. Subscriptions grew faster than professional services, and cloud subscriptions grew 41% year over year.
- Gross margin improved, principally as professional services margin rose to 29.6% from 27.6%; subscriptions margin declined to 88.7% from 90.5%, partly reflecting higher cloud hosting costs and the comparison with a high-margin perpetual license sale in 2018.
- Appian adopted ASC 606 on January 1, 2019 using the modified retrospective method. Prior-year figures were not restated. The new standard recognizes term-license revenue largely upon software delivery, rather than ratably, and changed the timing of commission amortization. For 2019, ASC 606 reduced reported revenue by $6.0 million and increased net loss by $1.3 million versus the company’s estimate under ASC 605. The filing reports a $60.9 million cumulative-effect adjustment to opening accumulated deficit in the auditor’s discussion.
- Backlog/remaining performance obligations fell to approximately $176 million from $230 million. Appian attributed the decrease primarily to upfront recognition of on-premises term-license revenue under ASC 606 and shorter term-license contract lengths. About 41% of year-end 2019 backlog was not expected to be recognized in 2020; management cautions backlog is not a reliable predictor of future revenue.
- Cash from financing was $105.5 million, largely reflecting net proceeds from a September 2019 public offering. Investing cash use rose to $32.4 million, primarily for the new headquarters build-out.
Outlook, risks and unusual items
- Management said existing cash, expected operating cash flows and available credit should support working capital and capital expenditure needs for at least 12 months. It plans continued investment in product development, sales and marketing, hiring, and international expansion; it expects operating costs to increase in absolute dollars. The filing gives no numerical revenue or earnings guidance.
- Management reported a 97% average cloud subscription renewal rate over the last three completed fiscal years. Cloud subscription revenue retention was 115% in 2019, down from 131% in 2018 and 132% in 2017; prior rates were elevated by conversion of on-premises customers to cloud.
- Key risks include ongoing losses and uncertain path to profitability; competitive pressure and reliance on a single platform; long and unpredictable enterprise sales cycles; customer and U.S. federal government revenue concentration; dependence on AWS for cloud hosting; security, availability and privacy risks; international, foreign-exchange and regulatory exposure; and the ability to scale operations and retain personnel. The filing also identifies the early-2020 coronavirus outbreak as a potential source of uncertainty, with impact not then clear.
- In January 2020, Appian acquired the developer of the Jidoka RPA platform for $7.0 million. Also effective January 1, 2020, it exercised a headquarters lease option adding approximately 34,158 square feet, at base rent of $87,388 monthly for the first 27 months, subject to later increases.
- No legal proceedings were reported as expected to have a material adverse effect. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting; revenue recognition and ASC 606 adoption were identified as critical audit matters.
Important facts for investors to verify
- Separate underlying growth from ASC 606 timing effects; reconcile 2019 reported revenue and profitability to the company’s ASC 605 comparison and review the adoption adjustment disclosures.
- Track cloud subscription growth, retention, renewal rates, customer expansion, and the mix and margins of subscriptions versus professional services.
- Assess cash burn and the sustainability of funding needs, including headquarters lease commitments, finance leases, capital spending, and the undrawn credit facility’s covenants and letters of credit.
- Monitor the fall in backlog and contract duration, while considering management’s warning that backlog is not a dependable revenue forecast.
- Evaluate the integration and returns from the RPA acquisition, execution of the growth strategy, customer concentration, and the risks from AWS reliance and cybersecurity or service disruptions.
- Consider governance and dilution: Class B shares carry ten votes per share, and the CEO and affiliates held approximately 77% of voting power at year-end 2019.