Appian Corporation (Nasdaq: APPN) — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone Q4 report; fourth-quarter figures below are unaudited. The company provides a low-code software development platform and related professional services.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Total revenue | $226.7 million | $176.7 million | +28.3% |
| Subscriptions, software and support revenue | $126.0 million | $91.5 million | +37.7% |
| Professional services revenue | $100.7 million | $85.2 million | +18.2% |
| Gross profit / gross margin | $141.8 million / 62.5% | $112.1 million / 63.5% | Margin down 1.0 percentage point |
| Operating loss | $(46.7) million | $(31.8) million | Loss widened |
| Net loss | $(49.5) million | $(31.0) million | Loss widened |
| Cash used in operating activities | $(31.3) million | $(9.1) million | Outflow increased |
FY 2018 subscription revenue, as separately defined by management, was $115.7 million, up from $82.8 million in 2017. Subscription revenue retention was 117%, versus 122% in 2017; the three-year average subscription renewal rate was 97%. GAAP diluted loss per share was $0.80, compared with $0.63 in 2017. Non-GAAP net loss was $33.4 million, or $0.54 per share; these measures exclude specified items, chiefly stock-based compensation, and should be considered alongside GAAP results.
Q4 2018: Revenue was $60.2 million, versus $50.6 million in Q4 2017 (about 19.1% growth). Subscriptions, software and support contributed $35.1 million and professional services $25.1 million. Gross profit was $38.0 million (about 63.1% margin); operating loss was $13.3 million and net loss was $13.9 million. Q4 2017 net loss was $6.9 million.
Balance sheet at December 31, 2018: Cash and cash equivalents were $94.9 million; working capital was $81.2 million; total assets were $233.2 million. Total debt was zero. The company had a $20 million revolving credit facility, no borrowings under it, and $10.5 million of outstanding letters of credit. Deferred revenue totaled $111.7 million.
Material changes and operating developments
- Revenue growth came from existing-customer expansion and new customers. Management attributed $28.2 million of the increase in subscriptions, software and support to expanded deployments, including a $4.4 million perpetual license sold to a federal agency; new-customer subscriptions contributed $6.3 million.
- Subscription, software and support gross margin improved to 90.5% from 89.8%, partly due to the federal perpetual license. Professional services gross margin declined to 27.6% from 35.2%, reflecting greater subcontractor use, staff shifted to customer-success roles, and lower utilization. Overall gross margin consequently fell.
- Operating expenses rose across sales and marketing, research and development, and general and administrative functions. Total operating expenses increased to $188.5 million from $144.0 million as Appian expanded its workforce and invested in growth. G&A also included higher stock-based compensation, including expense associated with the CEO’s previously granted stock option.
- Operating cash use increased substantially. Higher receivables and deferred commissions partly offset the cash benefit of a $23.0 million increase in deferred revenue. Investing cash use was $7.0 million, largely for the new headquarters build-out.
- Appian raised $57.8 million net from an August 2018 public offering. It reported 436 customers at year-end, up from 356; customers with more than $1 million of annual recurring revenue increased from 24 to 38.
Outlook, risks and notable items
- Outlook: The filing provides no numerical revenue or earnings guidance. Management expects continued investment in sales and marketing, R&D, international expansion, and platform development, and expects these expenses to increase in absolute dollars. It anticipates subscription revenue growing relative to professional services over time, but gives no assurance this mix shift will occur.
- Backlog: Approximately $230 million at year-end, compared with $214 million a year earlier; about 49% was not expected to be filled in 2019. Management cautions that backlog fluctuates and is not a reliable indicator of future revenue.
- Liquidity and commitments: Management said cash, expected operating cash flows and available credit were sufficient for at least the next 12 months. The company expected to spend about $20 million above the landlord’s tenant-improvement allowance on its new headquarters in the first half of 2019. Contractual obligations totaled $132.2 million, including operating leases and headquarters-related commitments.
- Accounting transition: Appian planned to adopt ASC 606 in 2019 using the modified retrospective method. Management expected a significant timing effect for on-premises term-license revenue, including recognition of a portion upon software delivery, and changes to capitalization and amortization of contract acquisition costs. The impact was still being quantified.
- Key risks: Continued losses and rising operating cash use; competition and uncertainty in the developing low-code market; customer concentration, including U.S. federal government revenue of 15.7%; reliance on renewals, customer expansion and long sales cycles; cloud availability and AWS dependence; cybersecurity, privacy and regulatory compliance; international and foreign-exchange exposure; and the ability to scale while maintaining service quality and margins.
- Contingencies and controls: The company reported no legal proceedings expected to have a material adverse effect and no material off-balance-sheet arrangements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to ICFR effectiveness, consistent with the company’s emerging-growth-company exemption.
Most important facts for investors to verify
- Whether subscription growth, retention and customer expansion persist, and whether the revenue mix shifts toward higher-margin subscriptions.
- Whether professional services margins recover and overall gross margin stabilizes as hiring and subcontractor use evolve.
- How quickly operating losses and cash use improve, and whether the $94.9 million cash balance remains adequate given headquarters and other commitments.
- The actual revenue-recognition and contract-cost effects of ASC 606, particularly for on-premises term licenses.
- Exposure to federal-government customers, cloud-provider dependence, security incidents, and the concentration of voting power under Appian’s dual-class share structure.