Appian Corporation (NASDAQ: APPN) — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Appian sells a low-code platform for business-process automation, with subscription and professional-services revenue. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial results and liquidity
| Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 |
|---|---|---|---|---|
| Revenue | $127.7 (+16.0%) | $110.1 | $263.0 (+17.2%) | $224.3 |
| Subscription revenue | $93.8 (+22.3%) | $76.7 | $192.8 (+20.2%) | $160.4 |
| Cloud subscription revenue | $74.4 (+30.4%) | $57.1 | $144.1 (+30.5%) | $110.5 |
| Professional-services revenue | $33.9 (+1.6%) | $33.4 | $70.2 (+9.8%) | $63.9 |
| Gross margin | 71.2% | 69.8% | 72.3% | 71.3% |
| Operating loss | $(40.7) | $(42.7) | $(75.9) | $(66.6) |
| Net loss | $(42.4) | $(49.4) | $(79.2) | $(72.5) |
| Adjusted EBITDA (non-GAAP) | $(24.7) | $(25.0) | $(40.5) | $(28.3) |
Q2 GAAP diluted loss per share was $0.58, versus $0.68 a year earlier; H1 was $1.09 versus $1.00. H1 operating cash outflow was $37.2, improved from $50.3 in 2022, while capital expenditures were $7.8. Cash, cash equivalents and restricted cash totaled $173.8 at quarter-end, with $65.4 of short-term investments. Working capital was $109.1, down from $150.0 at year-end 2022.
Debt, net of issuance costs, was $208.3 at June 30, comprising $62.0 drawn on a $75.0 revolving facility and a term loan. The filing separately reports outstanding principal of $209.7 for interest-rate sensitivity. Interest expense rose to $4.8 in Q2 and $7.9 in H1, largely reflecting the credit facilities. The company reported compliance with credit covenants.
Material changes and operating trends
- Subscription growth—particularly cloud—drove revenue gains. In Q2, management attributed $7.3 of subscription growth to new customers and $9.8 to expansion at existing customers. H1 cloud subscription revenue grew 30.5%; cloud revenue retention was 115%, compared with 116% in 2022.
- Subscriptions increased to 73.4% of Q2 revenue from 69.7%; H1 share rose to 73.3% from 71.5%. Professional services grew more slowly in Q2.
- Q2 gross margin improved, though subscriptions gross margin edged down to 88.5% from 88.9%, primarily due to hosting costs. Professional-services gross margin fell to 23.2% from 25.8% in Q2, but improved to 26.3% for H1 from 25.6%.
- Operating expenses remain substantial: H1 sales and marketing rose 23.0% and R&D rose 27.6%. G&A declined 2.9%, mainly because of lower legal fees. H1 included $6.3 of severance costs and $22.2 of stock-based compensation.
- H1 net loss widened despite lower operating cash use. Adjusted EBITDA also deteriorated versus H1 2022; this non-GAAP measure excludes specified items, including stock compensation, litigation and severance.
Outlook, risks and contingencies
- No numeric revenue or earnings guidance is provided in the supplied filing text. Management expects operating expenses to rise in absolute dollars, but at a more measured pace than in prior years; it expects G&A to decrease for 2023, mainly from anticipated lower legal costs. It expects 2023 professional-services gross margin to be consistent with 2022, while margins may fluctuate.
- Management believes cash, investments, operating cash flows and available borrowing capacity will cover working capital and capital spending for at least 12 months. This outlook depends in part on growth, spending plans and market acceptance.
- The AWS hosting agreement carries $131.0 of minimum commitments over five years, including $25.0 in year two and $28.0 in each of years three through five. Appian expects to meet the remaining minimum commitments; actual payments may be higher with usage.
- The $2.036 billion Pegasystems trade-secrets judgment, plus $23.6 of attorney fees and post-judgment interest, remains subject to appeal. Pegasystems need not pay until appeals are exhausted; Appian has not recorded the award and says collection is not assured.
- Risks highlighted include competition and adoption of the platform, execution of growth investments, rising personnel and hosting costs, inflation, foreign-exchange exposure, and interest-rate exposure. Appian estimates a one-percentage-point rate increase would add about $2.1 annually to interest expense. It also identifies financial-institution volatility as a concern and says it drew $62.0 on its revolver in March 2023 as a precaution.
- Revenue concentration disclosures: government agencies represented 20.1% of Q2 revenue; international customers represented 38.4%. No single end customer exceeded 10% of revenue.
Important facts for investors to verify
- Whether cloud growth and 115% retention continue, and how much growth comes from new customers versus existing-customer expansion.
- Whether operating expense growth moderates and losses and operating cash outflows improve, including the effects of stock compensation and severance.
- Debt principal, variable-rate terms, covenant headroom, remaining revolver availability, and the effect of interest costs on liquidity.
- Progress and possible outcomes of the Pegasystems appeal; the judgment is not recognized as an asset or revenue in these statements.
- Cloud hosting commitments, margin trends, and management’s stated expectation that existing liquidity will cover at least the next 12 months.