Appian Corporation — Q1 2020 Form 10-Q
Business context and period: Appian provides a low-code automation platform and related professional services. This unaudited report covers the three months ended March 31, 2020; comparisons are with Q1 2019. Prior-period revenue was recast under ASC 606.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $78.9 million | $60.3 million | Up 30.8% |
| Subscriptions revenue | $50.4 million | $34.6 million | Up 46.0% |
| Professional services revenue | $28.4 million | $25.7 million | Up 10.4% |
| Gross profit / margin | $54.7 million / 69.4% | $36.2 million / 60.1% | Margin up 9.3 percentage points |
| Operating loss | $8.6 million | $15.3 million | Improved |
| Net loss | $11.7 million | $15.2 million | Improved |
| Net loss per share, diluted | $0.17 | $0.24 | Loss per share narrowed |
| Cash used in operations | $3.9 million | $4.1 million | Use decreased |
Subscriptions were 64.0% of revenue, compared with 57.3% a year earlier. Cloud subscription revenue was $28.4 million, up from $21.3 million. Cloud subscription revenue retention was 115%, down from 126%.
Cash and cash equivalents were $149.2 million at March 31, 2020, versus $159.8 million at year-end 2019. The company had $149.2 million in current assets and $108.9 million in current liabilities. Cash decreased $10.6 million during the quarter. Investing cash use was $6.3 million, primarily for the Novayre acquisition; financing provided $0.3 million.
Appian had no borrowings under its $20 million revolving credit facility and was in compliance with its covenants. It had $11.1 million in letters of credit secured under the facility. Lease liabilities totaled $52.0 million, including $48.5 million operating and $3.5 million finance lease liabilities. Management said existing cash, operating cash flows and available borrowing capacity should fund operations and capital needs for at least 12 months.
Material changes and notable items
- Revenue growth reflected higher subscriptions revenue, including expansion within existing customers and sales to new customers. Management attributed $9.5 million of the revenue increase to existing customers and $6.3 million to new customers; a three-year on-premise contract contributed $2.8 million of the latter.
- Gross margin improved mainly because professional services gross margin rose to 34.1% from 20.5%, reflecting lower subcontractor use and lower prior-year stock compensation related to co-founder RSUs. Subscription gross margin edged down to 89.3% from 89.6%, partly due to higher hosting costs.
- Operating expenses rose to $63.4 million from $51.6 million. General and administrative expense increased 45.8%, partly due to higher personnel, professional fees and stock-based compensation.
- Foreign-exchange losses drove $3.1 million of other expense, versus $0.3 million of other income in Q1 2019. Appian cited currency movements involving the British pound, euro and other currencies.
- In January, Appian acquired Novayre Solutions SL, a robotic process automation platform developer, for approximately $6.9 million in cash. The purchase-price allocation was preliminary; Novayre’s post-acquisition results were immaterial for the quarter.
Outlook, risks and contingencies
Appian reported no meaningful adverse financial impact from COVID-19 through March 31, 2020, but said effects on later periods were uncertain. It warned that reduced demand, longer sales cycles, slower customer spending, delayed collections and broader economic disruption could affect results. The company moved employees largely to remote work and made its annual user conference virtual. Hiring in the near term was expected to be lower due to cost controls. The filing provides no specific numerical financial guidance.
Management expects subscriptions to become a greater share of revenue over time as customer deployments expand and partners take on more services delivery. It expects continued investment in sales and marketing, research and development, and customer support; gross margins may fluctuate in the short term. Risks include competition, customer spending and renewal trends, foreign-currency movements, and the uncertain economic effects of COVID-19. The company does not hedge foreign-currency exposure.
Appian expanded its McLean headquarters lease by approximately 34,158 square feet; occupancy was expected to begin upon completion of improvements or by October 14, 2020. Future base rent for the added space was set at $87,388 per month for the first 27 months, subject to increases thereafter. The filing said no legal matters were expected to materially affect the financial statements. The CARES Act was not expected to have a material financial-statement impact, though evaluation continued.
After quarter-end, the Senior Vice President of Worldwide Sales announced his departure effective May 31, 2020, and Appian appointed a Chief Revenue Officer effective May 11, 2020. The filing also identifies leadership-transition risk in revenue-related departments.
Key facts for investors to verify
- Whether subscription growth, customer expansion and the 115% cloud retention rate persist, particularly given the lower retention rate year over year.
- How COVID-19 affects sales cycles, renewals, collections and customer budgets in subsequent quarters; Q1 results do not establish the extent of future effects.
- Whether improved gross margin is sustainable as hosting costs, services delivery mix and partner utilization change.
- The final Novayre purchase-price allocation and the acquisition’s contribution to results.
- The impact of foreign-exchange volatility, continuing operating losses and headquarters lease commitments on cash needs and liquidity.
- Whether the sales leadership transition affects execution, customer retention or growth.