Appian (NASDAQ:APPN) investors may be feeling disoriented these days.
Since the beginning of November, the stock price has more than tripled, helped by a strong third-quarter earnings report, a possible short squeeze, and a broader rally in growth stocks. However, as investors started rotating out of growth stocks in February, Appian share prices have pulled back sharply, giving back nearly all of those gains.
Investors are struggling to definitively value the cloud-based maker of low-code software, and the stock sold off last week following its first-quarter earnings report. Total revenue rose 12.7% to $88.9 million, well ahead of the analyst consensus at $82.7 million, and cloud subscription revenue, the company’s biggest priority, rose 38% to $39.1 million. Its adjusted loss per share narrowed from $0.12 to $0.06, which beat the consensus at a loss of $0.14 a share. Still, the stock sold off on revenue guidance for the second quarter. The company forecast $77 million to $78 million, or 15% to 17% growth, which was below estimates at $84.1 million, and it projected a wider bottom-line loss than expected.
What you should understand about the second quarter
It’s normal for a high-priced stock to sell off in response to weak guidance, but that revenue forecast deserves a deeper explanation.
Appian expects revenue to decline from the first quarter to the second quarter, even as growth in its cloud subscription business is accelerating. In fact, the company called for 39% to 40% cloud subscription revenue growth — the first time it’s called for 40% revenue growth. However, there are two factors that help explain the sequential decline. First, the company’s professional services business — providing services like consulting after it’s deployed its software — is shifting to its “partners,” or large business services companies like Deloitte that recommend Appian to their clients and help sell it. In the first quarter, partners delivered 70% of new customer additions.
When partners make those sales, they handle the services business, and that shift has been accelerating, meaning services revenue should continue to decline, making up a smaller percentage of overall revenue. When Appian IPOed in 2017, half of its revenue came from services. Now it’s only about 25%.
Over the long term, that shift is good for Appian as subscription gross margins are high, at 91%, meaning nearly all of that revenue can go to expanding its business through research and development, marketing, and new hires. However, in the near term, it may be a headwind on growth. Additionally, the company still has a substantial business from on-premise subscriptions, and sales in that category are seasonally weakest in the second quarter. As management said on the earnings call, it also tends to be conservative with its guidance.
Taking those factors into consideration, especially with the strong growth in cloud subscription revenue, the second-quarter guidance seems less concerning.
Appian remains the low-code leader
Appian was the first low-code company to go public and is the biggest pure-play stock in the industry. By most conventional definitions, the company is the pioneer and leader in low code. Gartner ranked it as the leader overall as well as the leader for North America, for finance companies, and for companies with more than $1 billion in annual revenue. Buyers also rank Appian as their No. 1 vendor in low-code.
The industry accelerated significantly during the pandemic as companies and organizations needed to quickly deploy apps to adapt to the needs of the pandemic. It was an excellent use case for low-code software, which allows companies to easily and quickly create applications with no or little code.
In an interview with CEO Matt Calkins, he explained how the pandemic was driving momentum in low-code, saying, “The pandemic just showed that the organizations that benefited from [the ability to use low code] are going to double down on it. The ones who were punished are going to have to provide it just to keep it. The customers are going to expect it now because they saw it happen. We’re starting a new era of constant change.”
Appian is targeting long-term cloud subscription revenue growth of 30%, and cloud subscriptions will make up an increasing percentage of its overall revenue as services becomes diminished and on-premise subscribers shift to the cloud, meaning growth should accelerate from current levels.
The stock will continue to be volatile as this transition plays out, but with the broader digital transformation accelerating the need for low-code technology, Appian’s business looks to be right where it wants to be.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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