Appian Corporation (NASDAQ: APPN) — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Appian provides a low-code software development platform; revenue comes from subscriptions, software and support, and professional services. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $66.9 million | $59.9 million | $126.5 million | $111.6 million |
| Subscriptions, software and support revenue | $39.3 million | $33.0 million | $74.2 million | $60.0 million |
| Professional services revenue | $27.7 million | $26.8 million | $52.3 million | $51.6 million |
| Gross profit / margin | $43.9 million / about 65.5% | $38.3 million / 64.0% | $79.4 million / 62.8% | $69.0 million / 61.8% |
| Operating loss | $(9.3) million | $(8.3) million | $(26.7) million | $(18.5) million |
| Net loss | $(9.4) million | $(11.0) million | $(26.9) million | $(20.5) million |
| Net loss per share, diluted | $(0.15) | $(0.18) | $(0.42) | $(0.34) |
| Operating cash flow | Not presented quarterly | $11.9 million | $(23.6) million |
At June 30, 2019, cash and cash equivalents were $81.1 million, down from $94.9 million at year-end 2018. Current assets were $176.7 million and current liabilities $133.4 million. The company had no borrowings on its $20 million revolving credit facility and was in compliance with its covenants. Capital lease obligations were $3.7 million.
Changes versus comparable periods
- Q2 revenue increased 11.7% year over year; subscription, software and support revenue rose 18.8%, while professional services revenue grew 3.0%. For the first half, revenue increased 13.4%, led by 23.6% growth in subscription, software and support.
- Subscription revenue, a separately disclosed operating metric, was $38.0 million in Q2 versus $27.0 million. Subscription revenue retention was 117%, compared with 119% a year earlier.
- Q2 net loss narrowed, but the six-month net loss widened. Operating expenses grew 14.1% in Q2 and 21.3% for the first half, reflecting investment in sales and marketing, research and development, and personnel.
- Gross margin improved year over year in both periods, partly reflecting a greater subscription revenue mix. First-half professional services gross margin fell to 24.5% from 27.9%, including the impact of co-founder restricted stock unit vesting and increased customer-success resources.
- Cash from operations improved to positive $11.9 million from negative $23.6 million. The 2019 result included working-capital benefits, notably tenant-improvement reimbursements and lower receivables; it should not be read as operating profit.
Outlook, commentary and risks
- No specific revenue or earnings guidance is provided. Management expects to continue investing in sales and marketing, research and development, international expansion, customer support and the platform; it expects these expense categories to continue increasing in absolute dollars.
- Management believes cash, operating cash flows and available credit will fund working capital and capital requirements for at least the next 12 months. It expected about $20 million of 2019 headquarters build-out spending above the landlord allowance and approximately $5 million of remaining build-out expenditures as of the filing. The office move was completed in July 2019.
- The new Tysons headquarters carries substantial long-term commitments: the lease has $87.2 million of total committed payments, and aggregate future operating lease payments disclosed were $91.3 million. The company also had $3.7 million of furniture and fixtures under capital leases.
- Appian expected ASC 606 adoption to change the timing of revenue recognition for on-premises term-license contracts, including recognizing some revenue upon software delivery, and to increase capitalized contract acquisition costs. The impact was still being quantified.
- Foreign currency movements can affect results; the company had not hedged foreign currency transactions. Government agencies represented 17.3% of Q2 revenue, and foreign customers 30.8%. No individual customer exceeded 10% of revenue.
- Management reported no material changes to previously disclosed risk factors, no material adverse legal matters, and effective disclosure controls as of June 30, 2019.
Investor verification points
- Assess the durability of subscription growth and the decline in retention from 119% to 117%.
- Separate recurring operating performance from working-capital cash benefits, particularly headquarters tenant-improvement reimbursements.
- Track operating expense growth, losses, stock-based compensation, and professional services utilization and margins.
- Review ASC 606 adoption effects on term-license revenue timing and commission capitalization, as well as the future lease and headquarters cash commitments.
- Monitor foreign-exchange exposure, government and international revenue mix, and covenant compliance.