Appian Corporation — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Financial statements are unaudited. Appian provides a low-code software development platform, with revenue from subscriptions, software and support, and professional services.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $44.6 million | $30.7 million | $126.2 million | $99.2 million |
| Subscriptions, software and support revenue | $22.7 million | $17.7 million | $66.1 million | $50.6 million |
| Professional services revenue | $22.0 million | $13.1 million | $60.1 million | $48.6 million |
| Gross profit / margin | $28.0 million / 62.8% | $19.5 million / 63.6% | $80.2 million / 63.6% | $59.7 million / 60.1% |
| Operating loss | $6.5 million | $6.2 million | $24.9 million | $9.5 million |
| Net loss | $6.3 million | $4.7 million | $24.1 million | $8.3 million |
| Net loss per share, diluted | $0.10 | $0.14 | $0.53 | $0.26 |
Q3 revenue increased 45.2% year over year: subscriptions, software and support rose 28.3%, while professional services rose 68.1%. Nine-month revenue increased 27.2%. Subscription revenue retention was 122% at September 30, versus 118% a year earlier.
Q3 gross margin decreased 0.8 percentage points, reflecting the higher share of lower-margin professional services revenue. Nine-month gross margin improved 3.5 points, with improved margins in both revenue categories. Operating expenses increased to $34.6 million in Q3 from $25.7 million, and to $105.1 million for the nine months from $69.2 million, driven principally by hiring and growth investments. Nine-month net loss included $10.9 million of stock-based compensation.
Cash, debt and liquidity
- Cash and cash equivalents were $72.3 million at September 30, 2017, compared with $31.1 million at December 31, 2016. Current assets were $127.7 million and current liabilities were $76.2 million.
- For the first nine months, operating cash use was $10.1 million, investing cash use was $0.3 million, and financing provided $50.5 million. Financing included $80.2 million of IPO proceeds net of underwriting discounts, offset in part by $40.0 million of debt repayments, a $7.6 million preferred-stock dividend, and $2.4 million of deferred IPO costs.
- No debt was outstanding at September 30. In November 2017, Appian entered a new $20 million secured revolving credit facility, maturing in November 2022, with financial covenants; no amounts had been drawn as of the filing.
- Management stated that existing cash and expected positive operating cash flows should fund working capital and capital expenditures for at least 12 months. This is an expectation, not a guarantee.
Material changes, outlook and risks
- The May 2017 IPO generated $77.8 million in net proceeds. Preferred shares converted into Class B common stock before the IPO; the company also repaid its term debt. Appian reported an accumulated deficit of $89.3 million.
- Management plans continued investment in sales and marketing, research and development, international expansion, and customer support. It expects operating expenses to increase in absolute dollars and anticipates professional services will decline as a percentage of revenue over time as subscription revenue and partner-delivered services grow. The filing provides no specific financial guidance.
- Appian warned that adoption of the new revenue recognition standard, which it planned to adopt in 2019 using the extended transition period, could significantly change the timing of term-license subscription and professional services revenue recognition, as well as the accounting for contract acquisition costs.
- Key risks include continued losses and cash burn, uncertain growth and profitability, competition, long and variable sales cycles, reliance on a single platform and on AWS for cloud hosting, customer and government exposure, cybersecurity and service availability, and the ability to scale operations. Foreign currency movements also affect results; the company had not hedged these exposures.
- Appian reported no legal proceeding expected to have a material adverse effect. Management said disclosure controls were effective as of September 30, 2017; it also described a previously remediated material weakness and a significant deficiency identified in the 2016 audit.
- The dual-class structure gives Class B shares ten votes per share versus one vote for Class A. Class B holders collectively held approximately 99% of voting power, and the CEO and affiliates approximately 54%, concentrating control.
Investor verification points
- Check whether subscription growth and retention persist, and whether revenue growth becomes less dependent on professional services.
- Track operating losses, operating cash use, stock-based compensation, hiring-related expense growth, and the pace at which the IPO cash balance is used.
- Review the November credit facility’s covenant requirements, collateral, and any future borrowings.
- Assess the eventual revenue-recognition transition effects and whether management’s stated liquidity outlook remains supported by cash generation.
- Consider customer and government concentration, cloud-provider dependence, and the voting-control implications of the dual-class shares.