Appian Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited, consolidated financial statements. Unless noted, amounts are USD millions.
Business context
Appian provides a low-code software development platform. Revenue comes primarily from subscriptions, software and support, plus professional services. The company says it intends to grow through new customer acquisition, expansion within existing customers, international investment and strategic partners. It expects professional services to become a smaller share of revenue over time as partners support deployments.
Financial results
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $51.7 | $38.3 | +34.9% |
| Subscriptions, software and support | $27.0 | $21.4 | +25.7% |
| Professional services | $24.7 | $16.9 | +46.5% |
| Gross profit / gross margin | $30.6 / 59.3% | $25.6 / 66.9% | Margin down 7.6 pts |
| Operating loss | $(10.2) | $(3.5) | Loss widened |
| Net loss | $(9.6) | $(3.4) | Loss widened |
| Operating cash flow | $(13.8) | $3.7 | Decreased $17.5 |
| Capital expenditures | $1.0 | $0.1 | — |
Subscription revenue was $25.5 million, up from $18.7 million; subscription revenue retention was 119%, versus 117%. International revenue was $17.2 million, or 33.3% of total revenue, compared with $8.7 million, or 22.7%, a year earlier. Government revenue was 12.3% of total, down from 16.5%.
Subscription and support gross margin remained high at 90.2% versus 90.4%. Professional services gross margin fell to 25.6% from 37.1%, reflecting greater subcontractor use, personnel redirected to customer success, and lower utilization amid hiring. Higher professional-services mix and lower services margin reduced overall gross margin.
Sales and marketing expense rose 35.1% to $23.0 million; research and development rose 35.2% to $9.9 million; general and administrative rose 66.2% to $8.1 million. Management attributed spending growth chiefly to personnel, facilities and overhead, with public-company costs also contributing to G&A growth.
Balance sheet, liquidity and debt
At March 31, 2018, cash and cash equivalents were $60.9 million, down from $73.8 million at December 31, 2017. Total assets were $145.8 million and stockholders’ equity was $38.6 million. Current assets were $129.7 million versus current liabilities of $88.9 million. Total deferred revenue was $85.8 million, compared with $89.1 million at year-end.
Appian had no outstanding borrowings under its $20 million revolving credit facility, which matures in November 2022. It was in compliance with facility covenants, including a minimum adjusted quick ratio and minimum adjusted EBITDA requirements. Borrowings are secured by substantially all assets. Management believes cash, operating cash flows and available credit will support working capital and capital expenditures for at least the next 12 months.
Operating cash use included the net loss and working-capital outflows, notably lower deferred revenue, payment of year-end compensation, and timing of payables. Cash declined by $12.9 million overall during the quarter; option exercises provided $1.0 million of financing cash.
Outlook, risks and unusual items
- The filing provides no quantified revenue, earnings or cash-flow guidance. Management expects continued investment in sales and marketing, R&D, international growth and platform development; it also expects cost of revenue and operating expenses to rise in absolute dollars.
- Appian announced an Intelligent Contact Center Platform, with availability expected in June 2018.
- A new Tysons, Virginia headquarters lease was signed April 17, 2018, after quarter-end. It covers approximately 176,000 square feet, with additional “must-take” space; aggregate base rent is approximately $81.9 million over the lease term, before the company’s share of taxes and operating expenses. The initial term is 150 months and is expected to commence no later than May 1, 2019.
- Appian was still evaluating adoption of ASC 606, which it planned to adopt January 1, 2019 using the full retrospective method. It expected a significant timing effect for term-license subscription revenue and changes to contract-acquisition-cost capitalization and amortization; the effects were still being quantified.
- The company had not completed its accounting for the Tax Cuts and Jobs Act; final effects could differ, possibly materially, from provisional estimates.
- Foreign-exchange exposure arises from international revenue and expenses. Appian had no currency hedges and said an immediate 10% currency move was not expected to materially affect operating results. No material legal proceedings or material changes to previously disclosed risk factors were reported.
- Class B shares carry ten votes per share, compared with one vote per Class A share. The filing also reports substantial unrecognized stock-based compensation costs: $9.6 million for options and $18.3 million for restricted stock units.
Important facts for investors to verify
- Whether subscription growth and 119% retention continue, and whether the higher professional-services mix reverses as partner delivery expands.
- Whether professional-services margins recover from 25.6%, given subcontractor costs, utilization and customer-success staffing.
- Whether operating cash use persists and how deferred revenue and customer-billing timing develop.
- The eventual ASC 606 impact on reported revenue, deferred commissions and comparative periods, plus completion of the TCJA tax accounting.
- The long-term cash and operating-cost implications of the new headquarters lease and the credit facility’s financial covenants.
- The impact of international expansion, foreign exchange, and dual-class voting control on risk and governance.