Appian Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; unaudited. Appian provides a low-code software development platform, sold through subscriptions and related professional services. The company completed its IPO in May 2017.
Financial performance
Amounts below are in millions of dollars unless noted.
| Metric | Q2 2017 | Q2 2016 | H1 2017 | H1 2016 |
|---|---|---|---|---|
| Total revenue | $43.2 | $32.5 | $81.5 | $68.4 |
| Subscriptions, software and support revenue | $22.0 | $17.3 | $43.5 | $32.9 |
| Professional services revenue | $21.2 | $15.1 | $38.1 | $35.5 |
| Gross profit / margin | $26.6 / 61.5% | $18.9 / 58.2% | $52.2 / 64.0% | $40.1 / 58.6% |
| Operating loss | ($14.8) | ($4.5) | ($18.3) | ($3.4) |
| Net loss | ($14.5) | ($4.3) | ($17.9) | ($3.5) |
| Net loss per share, basic and diluted | ($0.34) | ($0.13) | ($0.47) | ($0.12) |
- Q2 revenue increased 33.1% year over year; H1 revenue increased 19.1%. H1 subscriptions, software and support revenue grew 31.9%, while professional services grew 7.3%.
- Management attributed Q2 revenue growth to new customers and expansion within existing customers. H1 subscription growth included $7.8 million from existing-customer expansion and $2.7 million from new customers.
- H1 gross margin improved as subscription revenue represented a higher share of sales and professional services margin increased. Q2 services margin also rebounded from an unusually weak Q2 2016, when a large engagement ended and resources were temporarily underutilized.
- Operating expenses rose substantially: Q2 sales and marketing was $22.8 million, R&D $10.0 million and G&A $8.6 million. The company cited hiring and growth investments; reported H1 stock-based compensation was $9.3 million, versus none in H1 2016.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $77.7 million, total current assets $137.6 million and current liabilities $79.8 million. The company reported no outstanding borrowings; it had repaid and terminated its term-loan facilities after the IPO.
- For H1, operating cash use was $5.8 million, compared with $12.3 million in H1 2016; investing cash use was $0.2 million. Financing provided $51.6 million, including $80.2 million of IPO proceeds net of underwriting discounts, offset in part by $40.0 million of debt repayments and a $7.6 million preferred-stock dividend.
- The IPO raised $77.8 million net of underwriting discounts and offering expenses. Management said existing cash and expected operating cash flows should fund working capital and capital expenditures for at least the next 12 months, while noting that future needs depend on growth and investment plans.
Material developments, outlook and risks
- The IPO converted preferred shares to Class B common stock and issued Class A shares to the public. Class B shares carry ten votes per share versus one vote for Class A; the filing says the CEO and affiliates held approximately 54% of voting power.
- No specific quarterly or annual revenue or earnings guidance is provided. Management expects continued investment in sales and marketing, R&D, international expansion and public-company capabilities. It expects professional services to decline as a share of revenue over time as subscriptions grow and partners provide more services; this is an expectation, not a quantified forecast.
- Subscription revenue retention was 120% at June 30, 2017, compared with 122% a year earlier. Government agencies generated 15.8% of Q2 revenue versus 28.2% a year earlier; international customers generated 25.1% versus 19.1%.
- Revenue recognition under the forthcoming customer-contract standard may materially change timing, particularly for term-license subscriptions and professional services. Appian expected to adopt the standard in 2019 under its emerging-growth-company election and was still evaluating the impact.
- Key disclosed risks include continued operating losses, execution of rapid growth and hiring, competition, long and variable sales cycles, reliance on a single core platform and AWS for cloud infrastructure, security and service availability, government-contract exposure, international and currency risks, and customer renewal and expansion. The filing also notes prior financial-reporting control weaknesses that management believed were remediated; disclosure controls were judged effective at June 30.
- The filing reports no legal proceedings expected to have a material adverse effect. It identifies stock-price volatility, potential share sales after IPO lockups and concentrated voting control as risks to public shareholders.
Investor facts to verify
- Whether subscription growth and the 120% retention rate persist, and how much growth comes from customer expansion versus new customers.
- Whether operating-expense growth and stock-based compensation translate into improving operating leverage; losses widened despite higher revenue and gross margin.
- Cash conversion, deferred-revenue and receivables trends, and whether the stated 12-month liquidity outlook remains adequate as investment continues.
- The financial and reporting effects of the new revenue-recognition standard, particularly on term-license and professional-services revenue.
- Customer and government exposure, cloud-service resilience, and the implications of the dual-class voting structure and potential post-lockup share sales.