Appian Corporation (Nasdaq: APPN) — 2017 Form 10-K
Business context and reporting period. Appian sells a low-code application development platform, primarily through per-user subscriptions, and provides related implementation and training services. This 10-K covers the fiscal year ended December 31, 2017; fourth-quarter figures below are unaudited. Appian completed its IPO in May 2017.
Financial performance
| Metric | FY 2017 | FY 2016 | Q4 2017 | Q4 2016 |
|---|---|---|---|---|
| Total revenue | $176.7 million | $132.9 million | $50.6 million | $33.7 million |
| Subscriptions, software and support revenue | $91.5 million | $70.0 million | $25.4 million | $19.4 million |
| Professional services revenue | $85.2 million | $63.0 million | $25.2 million | $14.4 million |
| Gross profit / margin | $112.1 million / 63.5% | $82.8 million / 62.3% | $31.9 million / 63.1% | $23.1 million / 68.6% |
| Operating loss | $(31.8) million | $(11.4) million | $(7.0) million | $(1.8) million |
| Net loss | $(31.0) million | $(12.5) million | $(6.9) million | $(4.2) million |
| Cash used in operating activities | $(9.1) million | $(7.8) million | Not clearly provided by quarter | Not clearly provided by quarter |
FY 2017 subscription revenue, a separately defined operating metric, was $82.8 million, up 38% from $60.0 million. This differs from the financial-statement revenue line for subscriptions, software and support. The company reported annual gross margin of 63.5%; subscription, software and support gross margin was 89.8%, and professional services gross margin was 35.2%.
At year-end, cash and cash equivalents were $73.8 million, working capital was $50.1 million, deferred revenue was $89.1 million, and total debt was zero. Appian had a $20 million revolving credit facility, with no borrowings outstanding and $1.1 million of letters of credit. Total assets were $161.1 million. The company reported an accumulated deficit of $96.2 million.
Material changes versus comparable periods
- FY revenue increased 33.0%; subscriptions, software and support revenue rose 30.8% and professional services revenue rose 35.4%. Growth reflected both new customers and expanded deployments at existing customers.
- Gross margin improved to 63.5% from 62.3%, while operating loss widened to $31.8 million from $11.4 million. Sales and marketing, research and development, and general and administrative expenses all rose substantially as Appian expanded staffing and investment.
- Net loss increased to $31.0 million from $12.5 million. FY 2017 included $13.0 million of stock-based compensation, including IPO-related recognition and option modifications; no stock-based compensation expense for stock options had been recognized in 2016 because the qualifying event had not occurred.
- Operating cash use increased to $9.1 million from $7.8 million. The IPO generated $77.8 million in net proceeds; proceeds were used in part to repay term debt. The November secondary offering was a sale by existing stockholders and provided no proceeds to Appian.
- Revenue from government agencies fell to 15.4% of total revenue from 26.2%; international revenue rose to 27.0% from 19.5%. Customers increased to 356 from 280, and customers spending over $1 million of annual recurring revenue increased to 24 from 19.
- Backlog was approximately $214 million at year-end, up from $167 million, but Appian cautioned that backlog is not a reliable indicator of future revenue; approximately 58% was not expected to be filled in 2018.
Outlook, commentary, risks and unusual items
- No quantified company revenue or earnings guidance is provided in the filing. Management expects continued investment in product development, sales and marketing, hiring, and international expansion, and expects expenses to increase. It believes existing cash, operating cash flows and available credit will support working capital and capital needs for at least the next 12 months.
- Management’s strategy is to grow subscriptions and expand customer use, while relying increasingly on partners for implementation. It expects professional services to decline as a share of revenue over time, but notes that this shift is not assured. The company reported a three-year average subscription renewal rate of 95% and FY 2017 subscription revenue retention of 122%.
- Key risks include continued losses and cash use; rapid growth and hiring demands; competition from larger software vendors; long and unpredictable sales cycles and seasonality; customer and government-contract concentration; service availability, cybersecurity and reliance on Amazon Web Services; and international, regulatory, privacy and foreign-exchange risks. Federal government agencies contributed 15.4% of FY 2017 revenue.
- The Tax Cuts and Jobs Act was enacted in December 2017. Appian recorded provisional tax effects but had not completed its tax accounting; subsequent measurement-period adjustments could affect tax expense and reported results.
- Appian previously identified a material weakness in revenue-recognition controls and a significant deficiency in system access oversight, relating to earlier periods and a restatement of 2013–2014 results. Management stated these issues were remediated by December 31, 2017. Disclosure controls were assessed as effective; the filing does not include management’s Section 404 internal-control assessment because of the newly public company transition period.
- The auditor issued an unqualified opinion on the financial statements, but was not engaged to express an opinion on internal control over financial reporting. The filing reports no legal proceedings expected to have a material adverse effect.
- Appian has a dual-class structure: Class B shares carry ten votes per share, and Class B holders held approximately 97% of voting power at year-end. CEO Matthew Calkins and affiliates held approximately 58% of voting power.
Important facts for investors to verify
- Whether subscription growth, renewals and customer expansion continue to offset rising operating expenses and losses.
- The reconciliation and trend of the $82.8 million subscription revenue metric versus the $91.5 million subscriptions, software and support financial-statement line.
- Cash consumption, working-capital movements, and compliance with the $20 million credit facility’s financial covenants.
- Whether the anticipated subscription mix shift and partner-led services delivery improve margins without weakening customer deployment or retention.
- Final accounting effects of the Tax Cuts and Jobs Act and the adoption impact of the new revenue-recognition standard, which Appian said could materially change timing for some term-license and professional-services revenue.
- Execution of internal-control requirements as a public company, and the effects of stock-based compensation and concentrated voting control.