Appian Corporation (Nasdaq: APPN) — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Appian sells a low-code process automation platform through cloud and term-license subscriptions, with related professional services. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $137.1 (+16.3%) | $117.9 | $400.0 (+16.9%) | $342.2 |
| Subscription revenue | $103.8 (+20.0%) | $86.5 | $296.6 (+20.1%) | $246.9 |
| Cloud subscription revenue | $77.2 (+27.4%) | $60.6 | $221.4 (+29.4%) | $171.1 |
| Professional services revenue | $33.3 (+6.2%) | $31.4 | $103.5 (+8.6%) | $95.3 |
| Gross margin | 73.7% | 71.4% | 72.8% | 71.3% |
| Operating loss | $(15.2) | $(37.8) | $(91.1) | $(104.4) |
| Net loss | $(22.3) | $(44.0) | $(101.4) | $(116.5) |
| Adjusted EBITDA, non-GAAP | $(5.3) | $(22.9) | $(45.9) | $(51.2) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(102.2) | $(94.0) |
- Q3 subscriptions were 75.7% of revenue, up from 73.4%; nine-month subscriptions were 74.1%, up from 72.2%. Cloud subscription revenue retention was 117%, versus 115% a year earlier.
- Q3 gross margin improvement reflected higher professional-services margin (25.5% versus 22.0%); subscription margin was broadly flat at 89.1% versus 89.2%. Nine-month total margin rose despite subscription margin easing to 89.0% from 89.4%.
- Operating losses narrowed as revenue growth outpaced cost growth and Q3 general and administrative expense fell, including lower Pegasystems-related legal fees. Nine-month expenses included $6.3 million in severance costs incurred in the first half.
- Q3 net loss per share was $0.30, compared with $0.61; nine-month loss per share was $1.39, compared with $1.61. Adjusted EBITDA is a company-defined non-GAAP measure and excludes specified items, including stock compensation, litigation expenses, JPI amortization and severance.
Cash, liquidity and debt
- At September 30, cash and cash equivalents were $130.8 million and short-term investments and marketable securities were $38.7 million, totaling $169.5 million. Cash and cash equivalents were $148.1 million at December 31, 2022.
- Working capital was $62.1 million, down from $150.0 million at year-end. Current liabilities increased to $323.3 million from $270.3 million, including $65.4 million of current debt.
- Total debt, net of issuance costs, was $207.4 million ($65.4 million current and $142.0 million long-term), versus $118.1 million at year-end. The balance included $62.0 million drawn on a $75.0 million revolver and a $146.75 million term-loan principal balance. Outstanding letters of credit were $11.9 million.
- Nine-month operating cash use was $102.2 million, versus $94.0 million. Investing activities provided $0.9 million and financing activities provided $82.4 million, including $92.0 million of borrowings. The company paid $57.3 million for judgment preservation insurance, a major factor in operating cash use.
- Management said available cash, investments, expected operating cash flows and borrowing capacity should fund working capital and capital expenditures for at least the next 12 months. The company reported compliance with credit-facility covenants at quarter-end and expected to remain compliant based on current forecasts.
Changes, outlook and risks
- Revenue growth was led by cloud subscriptions. Management attributed nine-month subscription growth to $17.1 million from new customers and $32.6 million from expansion, renewal pricing and additional subscriptions to existing customers.
- Management expects professional services to become a smaller share of revenue over time as strategic partners deliver more implementation work. It expected 2023 professional-services gross margin to be consistent with 2022, while noting margins can fluctuate.
- Management expects operating expenses to continue increasing in absolute dollars, but at a more measured pace than in prior years. It expected sales and marketing investment to continue and G&A expense to decrease in 2023, largely due to lower anticipated legal costs, partly offset by JPI amortization. No specific forward revenue or earnings guidance is provided in the filing text.
- Appian’s $2.036 billion Pegasystems judgment, plus attorney fees and post-judgment interest, remained under appeal. Pegasystems was not required to pay while appeals remained pending; Appian said the outcome and collection were uncertain and did not recognize the award in its financial statements.
- The JPI policy, entered into September 1, cost $57.3 million and provides up to $500 million of coverage related to the judgment. Appian capitalized the cost and estimated an approximately three-year appeals period for amortization purposes.
- Appian has a non-cancellable AWS hosting agreement with $131.0 million of minimum purchase commitments over five years, including $28.0 million minimum spending in each of years three through five. Management expected to meet remaining commitments.
- Risks discussed include competition and market adoption, customer spending and expansion, inflation and cost pressures, foreign-exchange exposure, interest-rate exposure on variable-rate debt, and litigation uncertainty. The filing reported no material changes to the risk factors in the 2022 Form 10-K.
Important facts for investors to verify
- Whether cloud growth and the 117% retention rate persist, and how much growth continues to come from existing-customer expansion versus new customers.
- Cash burn, working-capital decline, debt service and covenant headroom; the filing reports $62.0 million drawn on the revolver and $11.9 million of letters of credit.
- Future gross margins and the pace of operating-loss improvement, including the effects of hosting costs, hiring, stock-based compensation and partner-delivered services.
- The timing, appellate outcome and collectability of the Pegasystems judgment, and the JPI policy’s coverage and economic effect.
- Execution against AWS minimum commitments and management’s stated liquidity outlook.