Software development tools that are easy to use even for those that aren’t technologically inclined are the way of the future.
Coding can be intimidating and difficult. This can often lead to companies outsourcing software development work. But not anymore with Appian Corp. (APPN, Financial). Even people completely new to coding can use the software, which purports to make every person a software developer by making it less reliant on code. Companies can now develop programs with ease.
Appian looks like a company committed to long-term growth. Revenue increased by more than 30% in recent months and the leadership team (many of them founders) seems poised to continue this growth.
Revenue moves up and up
Appian’s best story is its solid financial performance over the last several years. Revenue is increasing and growth looks poised to continue. Costs are staying relative steady, although Appian would do well to try to curtail unnecessary expenses wherever possible moving forward.
Revenue growth has been a highlight, increasing by more than 30% last quarter on the heels of a revenue retention rate reportedly well over 100%.
Revenue increased 33% year over year from 2016 to 2017, growing from $133 million to $177 million. That is a jump from the two years before, where revenue growth was 20% and 25% respectively. Cost of revenue has kept pace, which is to be expected, and gross profit has therefore matched revenue fairly closely.
Earnings surprise to the upside, but still negative
Further, earnings surprise results have been generally positive. The last three consecutive quarters have seen surprises surpassing 20% (24%, 39% and 41% respectively).
Earnings have remained negative, though not troubling. With software companies of Appian’s type, it is not at all uncommon to see a growing company not generating profits. The hope is Appian’s growth exceeds costs by enough that profits will eventually begin to generate (more on that later).
Value in the product
We see tremendous value in Appian’s product, which is innovative and unique. They allow companies with very little technological acumen to create products and programs with relative ease. This then allows them to compete better than ever in their marketplaces.
Returning customers are a highlight of Appian’s story’s salability. Customers clearly like their products and the goal for the future will be to continue to sell existing customers new and better products while also steadily building a base of new customers.
The company remains steered by its founders, who have a clear strategic vision for Appian: to revolutionize the way companies make programs and to bring technology access to all companies regardless of size or scope. Appian looks like it is on to something special, and therefore we advise investment in the company.
Some concerns to note
Appian’s story is strong, but there are some concerning holes.
Let’s look at net income. This is an area of concern, though not of an overly dire nature.
Appian’s costs of revenue, research and development spending and sales and marketing expenses are all increasing. This means Appian is spending money in order to make money. That is fine in the short term. However, if Appian is unable to contain its costs and prove that it can produce high enough revenue growth to make a profit, the company will be at serious risk.
For 2017, research and development expenses hit $35 million, more than double the previous year (versus only 33% revenue growth). Similarly, sales and administrative costs increased to $109 million, up 53% from 2016. Both of these costs are outpacing revenue growth, which is resulting in net income actually dropping despite a 33% jump in revenue. Earnings dropped to -$31 million in 2017 from -$13 million in 2016.
Now, we understand these costs may be short-term expenses with long-term benefits and that Appian may see exponential growth as a result. It is just important to highlight these facts for our readers as a caution to this investment advice.
Further, we believe Appian must continue to make best-in-class products in anticipation of larger companies like Alphabet's Google (GOOG) and Oracle (ORCL) potentially gobbling up some of their business.
Verdict
The market clearly likes this stock, and with (mostly) good reason from a growth stock perspective. It has strong growth prospects for the future, solid management and a marketable, attractive product offering. The stock has more than doubled in the last 18 months. We expect that upward trajectory to continue.
This is obviously more of a growth play until earnings stabilize, however. Value-oriented investors might still steer clear given the risks inherent in any company at this stage of the development cycle.
Disclosure: I/We own no stocks discussed in this article.
(This article was co-authored by Clyde William Engle Jr., an analyst for Almington Capital – Merchant Bankers.)
