Appian Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Appian provides a low-code software development platform, with revenue from subscriptions, software and support, and professional services. Financial amounts below are in millions of dollars unless noted.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $54.9 | $44.6 | $166.5 | $126.2 |
| Subscriptions, software and support revenue | $30.9 | $22.7 | $90.9 | $66.1 |
| Professional services revenue | $24.0 | $22.0 | $75.6 | $60.1 |
| Gross profit / margin | $34.9 / 63.4% | $28.0 / 62.8% | $103.8 / 62.3% | $80.2 / 63.6% |
| Operating loss | $(14.9) | $(6.5) | $(33.4) | $(24.9) |
| Net loss | $(15.0) | $(6.3) | $(35.5) | $(24.1) |
| Basic and diluted loss per share | $(0.24) | $(0.10) | $(0.58) | $(0.53) |
Q3 revenue grew 23.1% year over year; subscription, software and support revenue grew 36.4%, while professional services grew 9.3%. Nine-month revenue increased 32.0%. Subscription revenue retention was 117% as of September 30, down from 122% a year earlier.
For the nine months, operating cash flow was $(24.0), compared with $(10.1) in 2017; investing cash flow was $(2.2), and financing cash flow was $60.5. Cash and cash equivalents were $107.3 at September 30, up from $73.8 at December 31, 2017. The August equity offering generated $57.8 of net proceeds to Appian. The company reported no outstanding borrowings and had a $20.0 revolving credit facility; it was in compliance with its covenants.
At September 30, total assets were $206.9, current assets $188.1, and current liabilities $110.7. Deferred revenue totaled $96.8, including current and long-term balances.
Material changes and management commentary
- Operating expenses rose 44.0% in Q3 to $49.7, faster than revenue. Sales and marketing increased 29.1%, research and development 36.5%, and general and administrative 101.0%. Management attributed spending growth to hiring and continued investment in sales, product development, and public-company support.
- Q3 general and administrative expense included a $4.5 stock-based compensation charge from vesting of the CEO’s 1,828,080-share option after a market-based milestone was achieved. Total stock-based compensation was $6.8 for Q3 and $11.2 for the first nine months.
- Nine-month gross margin declined to 62.3% from 63.6%, principally as professional services margin fell to 28.6% from 35.0%. Management cited greater subcontractor use, staff reassignment to customer-success roles, and lower utilization. Q3 total gross margin was 63.4%, versus 62.8%.
- Growth included expansion within existing customers and new customer sales. A $4.4 perpetual software license sold to a federal agency contributed to nine-month subscription, software and support revenue and margin.
Outlook, risks and unusual items
- The filing gives no specific revenue, earnings, or cash-flow guidance. Management said existing cash, expected operating cash flows, and available credit should fund working capital and capital expenditures for at least the next 12 months; future needs depend on growth and investment requirements.
- Management expects to continue investing in sales and marketing, research and development, and international operations. It expects professional services to decline as a share of revenue over time as customer deployments mature and strategic partners take on more services work.
- A new Tysons, Virginia headquarters lease began October 1, 2018, with a 150-month initial term and approximately $87.2 of committed payments, including added space. A $9.4 letter of credit supports the lease security deposit. The commitment is material relative to the company’s cash use and warrants monitoring.
- Appian cited foreign-exchange exposure, particularly to the British pound, euro, Australian dollar and Swiss franc, and had not hedged currency transactions. Government agencies generated 14.1% of Q3 revenue; international customers generated 29.1%.
- Appian was still evaluating the effects of adopting Topic 606, planned for January 1, 2019 using the modified retrospective method. It expected a significant timing effect for on-premises term-license revenue and changes to capitalization and amortization of contract acquisition costs.
- Management reported no material change to previously disclosed risk factors and no legal proceedings expected to have a material adverse effect. Disclosure controls were judged effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether subscription growth and customer expansion sustain momentum, particularly given the retention-rate decline to 117%.
- Whether operating expenses and cash burn moderate as revenue scales, and the contribution of the CEO option vesting to reported expenses.
- Whether professional services margin recovers and the shift toward subscription revenue proceeds as management expects.
- The cash-flow and operating impact of the new headquarters lease, including the required letter of credit and other lease costs.
- The eventual accounting impact of Topic 606, especially on term-license revenue timing and deferred commissions.
- The implications of Appian’s dual-class structure: Class B shares carry ten votes per share, versus one vote per Class A share.