Appian Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Appian provides a low-code automation platform and earns revenue from subscriptions and professional services. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise stated.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $66.8 | $65.3 | $145.6 | $125.6 |
| Subscription revenue | $41.4 | $36.9 | $91.9 | $71.4 |
| Professional services revenue | $25.4 | $28.4 | $53.8 | $54.2 |
| Gross margin | 68.3% | 64.7% | 68.9% | 62.5% |
| Operating loss | $(12.1) | $(9.8) | $(20.7) | $(25.1) |
| Net loss | $(11.8) | $(10.1) | $(23.5) | $(25.3) |
| Diluted loss per share | $(0.17) | $(0.16) | $(0.35) | $(0.39) |
- Q2 total revenue increased 2.3% year over year; subscriptions grew 12.4%, while professional services fell 10.8%. Cloud subscription revenue rose to $29.6 million from $22.8 million. Management attributed subscription growth primarily to cloud sales, partly offset by lower on-premise revenue.
- For the first half, total revenue increased 16.0%; subscriptions rose 28.6% and professional services declined 0.7%. Cloud subscriptions were $58.0 million, up from $44.1 million. Subscription revenue represented 63.1% of first-half revenue, versus 56.9% a year earlier.
- Gross margin improved in both comparisons, reflecting a higher subscription mix and lower professional-services subcontractor, travel, and other costs. Subscription gross margin edged down to 88.6% in Q2 and 89.0% for the half, primarily due to higher cloud hosting costs.
- Operating expenses rose 11.0% in Q2, driven by research and development and general and administrative spending; sales and marketing expense declined modestly. Q2 operating loss and net loss widened year over year. First-half operating and net losses narrowed despite higher operating expenses, aided by gross-profit growth.
- Cash and cash equivalents were $256.1 million at June 30, compared with $159.8 million at year-end. Current assets were $369.4 million and current liabilities $119.7 million. Stockholders’ equity was $298.8 million; accumulated deficit was $158.9 million.
- First-half operating cash flow was negative $7.0 million, compared with positive $12.0 million in 2019. Investing cash use was $6.8 million, including the Novayre acquisition; financing provided $109.8 million, principally from the June equity offering. The resulting net cash increase was $96.4 million.
- Appian raised net proceeds of $107.9 million in a June offering, issuing 1,931,206 shares; existing stockholders sold an additional 568,794 shares and received those proceeds. The offering increased liquidity but diluted existing shareholders.
- No borrowings were outstanding on the $20 million revolving credit facility; $11.1 million of letters of credit secured leased office space. Lease liabilities totaled $49.6 million for operating leases and $3.1 million for finance leases.
Changes, outlook, and risks
- Appian acquired Novayre Solutions SL, a robotic process automation platform developer, in January for approximately $6.9 million, funded with cash. The acquired business’s revenue and expenses through June 30 were immaterial; purchase-price allocation remained preliminary.
- Management said COVID-19 had not meaningfully adversely affected financial position, results, or liquidity through June 30. However, it warned that later effects could include reduced demand, longer sales cycles, and collection delays; the ultimate impact was not estimable.
- Management expects subscription revenue to become a larger share of total revenue over time as customers expand deployments and strategic partners perform more implementation work. It expects continued investment in product development and sales and marketing; near-term hiring was expected to be lower due to COVID-related cost controls. No specific numerical financial guidance is stated in the supplied filing text.
- Management believes existing cash, potential operating cash flows, and available credit can support working capital and capital expenditures for at least 12 months. Future funding needs depend on growth, investment, headquarters costs, and economic conditions; additional equity financing could dilute shareholders.
- Other relevant risks include foreign-exchange volatility, macroeconomic uncertainty, customer spending reductions, and leadership transitions in departments responsible for substantial revenue. First-half foreign-exchange losses contributed to $2.4 million of other expense, compared with $0.4 million of other income in the prior-year period.
- Appian reported no legal proceedings expected to have a material adverse financial impact and stated that disclosure controls were effective at the reasonable-assurance level.
Most important facts for investors to verify
- Whether cloud subscription growth and the 113% cloud subscription revenue retention rate as of June 30 can be sustained; the comparable 2019 retention rate was 122%.
- Whether subscription growth can offset weaker professional-services revenue and the continuing operating losses and operating cash burn.
- Whether the improved gross margin persists as hosting costs, customer-support investment, and revenue mix change.
- How COVID-19 affects customer budgets, sales cycles, renewals, collections, and future results; management said these effects were uncertain and not estimable.
- The effects of the June offering and future equity compensation or financing on share count and shareholder dilution.
- The final purchase-price allocation and realized business contribution from Novayre, as well as the financial impact of headquarters expansion and lease commitments.