Appian (NASDAQ: APPN), a software-as-a-service business focused on low-code software, reported its first-quarter results on Thursday. Management had previously warned investors that top-line growth would decelerate to the mid-teens, which is exactly what happened during the quarter.
That sounds like bad news, but the slowdown is almost completely attributable to no growth in low-margin professional services revenue. Subscription revenue, which is both high margin and recurring, grew 32% during the quarter, and it indicates much more about the current health of the business.
Appian's first-quarter results: The raw numbers
Non-GAAP operating loss
Non-GAAP net loss
Data source: Appian. GAAP = generally accepted accounting principles. Non-GAAP = adjusted. EPS = earnings per share.
What happened with Appian this quarter?
- Subscription revenue grew 32%, to $33.6 million. This number was at the top of management's guidance range.
- Professional services revenue was flat, at $24.7 million. This is partially attributable to the company's decision to expand its relationships with its consulting partners.
- Total revenue of $59.6 million landed at the low end of guidance.
- The all-important subscription revenue-retention rate came in at 116%.
- International sales comprised 30% of total revenue.
- Non-GAAP gross margin grew 300 basis points, to 63%. This is mostly a result of subscription revenue comprising a higher portion of total sales.
- Appian's cash balance at quarter-end was $75.4 million.
Image source: Getty Images.
What management had to say
On the conference call with Wall Street, CEO Matt Calkins stated that the company's strong subscription growth is directly attributable to its expanding partner ecosystem and the recent launch of the Appian Guarantee:
Partners increased their contribution by bringing us 75% more new logos this quarter than they did in the first quarter of 2018. And the Appian guarantee won us deals that we believe we would not have captured otherwise. Our large wins this quarter show that even the most mature Appian customers continue to buy more licenses for years after their first purchase.
Management projected that subscription revenue would continue to grow at a brisk pace in the upcoming quarter. However, professional-services revenue is expected to continue to act as a substantial drag on overall revenue growth and profitability:
|Metric||Q2 2019 Guidance Range||Implied Change|
|Subscription revenue||$36.5 million to $36.7 million||35% to 36%|
|Total revenue||$63.3 million to $63.8 million||6% to 7%|
|Non-GAAP operating loss||($11.5 million) to ($11 million)||N/A|
|Non-GAAP EPS||($0.18) to ($0.17)||N/A|
DATA SOURCE: APPIAN.
Management also took the opportunity to adjust its guidance for the full year:
|Metric||Old Guidance Range ||Updated Guidance Range|
|Subscription revenue||$148 million to $150 million||$150.5 million to $152 million|
|Total revenue||$258.5 million to $262.5 million||$255 million and $258 million|
|Non-GAAP operating loss||($29.5 million) to ($27.5 million)||($35.5 million) and ($32.5 million)|
|Non-GAAP EPS||($0.46) to ($0.42)||($0.55) to ($0.50)|
DATA SOURCE: APPIAN.
Wall Street wasn't pleased with the company's results and updated guidance, so Appian's stock dropped by double digits in response to the news.
The good news for investors is that the company continues to prioritize the growth of subscription revenue above all else, which makes sense, given that it's high margin and will drive higher profitability in the long run. The bad news is that the hyperfocus on subscription-revenue growth is acting as a near-term drag on both total revenue and profits.
That trade-off might not be pleasing traders today, but it's an arrangement that long-term investors should applaud.
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