Appian Corporation — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Appian sells a low-code workflow and automation platform through subscriptions and professional services. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $117.9M | $92.4M | $342.2M | $264.3M |
| Subscription revenue | $86.5M | $67.2M | $246.9M | $188.0M |
| Professional services revenue | $31.4M | $25.2M | $95.3M | $76.3M |
| Gross profit / margin | $84.1M / 71.4% | $65.9M / 71.3% | $244.1M / 71.3% | $188.4M / 71.3% |
| Operating loss | $(37.8)M | $(22.9)M | $(104.4)M | $(58.0)M |
| Net loss | $(44.0)M | $(25.4)M | $(116.5)M | $(62.8)M |
| Operating cash flow | Not separately reported for the quarter | $(94.0)M | $(34.5)M |
- Q3 revenue grew 27.5% year over year; nine-month revenue grew 29.5%. Cloud subscription revenue rose 30% in Q3 and 33% year to date.
- Q3 subscription gross margin was 89.2%, versus 89.5%; professional services gross margin was 22.0%, versus 22.9%. Nine-month total gross margin held at 71.3%, while professional services margin declined to 24.4% from 26.5%.
- Operating expenses rose faster than revenue: Q3 sales and marketing increased 30.5%, R&D 41.9%, and G&A 45.1%. For nine months, these categories increased 32.5%, 42.7%, and 58.7%, respectively. Stock-based compensation was $27.4M for the nine-month period, up from $17.7M.
- Cloud subscription revenue retention was 115% as of September 30, compared with 117% a year earlier.
Cash, liquidity and debt
- At September 30, cash and cash equivalents were $51.8M and short-term investments and marketable securities were $40.9M; cash, cash equivalents and restricted cash totaled $53.9M. Working capital was $71.5M, down from $121.8M at year-end 2021.
- Nine-month operating cash outflow was $94.0M, compared with $34.5M a year earlier. Capital expenditures were $5.9M; cash and restricted cash declined by $50.1M during the period.
- At quarter-end, Appian had no borrowings on its $20M revolving line and had $11M of outstanding letters of credit. Management said available liquidity and expected operating cash flows should support requirements for at least 12 months.
- After quarter-end, on November 3, 2022, Appian entered a secured credit agreement providing a $100M five-year term loan facility and up to $50M of revolving capacity, replacing the prior line. Interest margins vary with leverage; the facilities are secured by substantially all assets, including intellectual property, and include customary covenants.
Outlook, risks and unusual items
- The filing provides no specific numerical revenue or earnings guidance. Management expects continued investment in sales and marketing, R&D, customer support and international growth; it anticipates operating expenses will rise in absolute dollars. It expects professional services to become a smaller share of revenue over time as strategic partners deliver more services.
- Management cited inflation-driven cost increases and warned persistent inflation could pressure costs and margins. Currency exposure is material: nine-month foreign-exchange losses were $14.5M, primarily associated with the stronger U.S. dollar. Appian does not currently hedge foreign-currency transactions.
- A non-cancellable AWS hosting agreement commits Appian to $131M of minimum purchases over five years; spending was $24.8M in the first nine months of 2022. Actual payments may exceed the minimum based on usage.
- In the Pegasystems trade-secret case, the court entered judgment on September 15 for $2.036B in damages plus $23.6M in attorney fees and statutory interest. Pegasystems appealed; payment is not due until appeals are exhausted. Appian has not recorded the award and cautions that collection is uncertain. A separate Pegasystems case was scheduled for trial in January 2023.
- Appian reported effective disclosure controls and no material changes in internal control over financial reporting. It reported no material changes to the risk factors in its 2021 Form 10-K.
Most important facts for investors to verify
- Whether subscription growth and the 115% cloud retention rate continue, particularly given the slight year-over-year retention decline.
- Whether operating losses and cash burn improve as revenue grows, and how hiring, stock compensation and other operating expenses develop.
- The timing and terms of any borrowing under the new secured credit facilities, including resulting interest costs and covenant headroom.
- The status of Pegasystems appeals, the separate litigation, and whether any judgment proceeds are ultimately collectible; no award is included in reported results.
- Future AWS hosting costs, foreign-exchange exposure and the effect of inflation on margins and liquidity.