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Appian Investors Need to Look Past the Headline Numbers

Appian's (NASDAQ: APPN) top-line revenue number for its most recent quarter doesn't look all that appetizing for growth investors. But there's more going on behind the curtain with this software-as-a-service low-code specialist. On a Fool Live episode recorded on June 30, Fool contributors Brian Feroldi, Brian Stoffel, and Brian Withers discuss the company's recent results and talk about what metrics investors should be watching.

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Brian Feroldi: Let's move on to Appian. Appian is ticker symbol APPN. This is a low-code software development platform that essentially turns non-programmers into programmers. If you can draw a flow chart, you can program on Appian's platform. This company has been growing rapidly for a long time, it's been a massive winner since coming public. The most recent quarterly results were pretty good.

Appian gets revenue in two ways. The first, subscription revenue, that is high-margin recurring software. We like that as investors. The second is through professional services revenue. That's consulting revenue, much lower margin, much lumpier from quarter to quarter. Boo as investors. In the most recent quarter, total revenue growth for this company was only 13%. That is not that impressive. But if you drill down subscription software, the good one, that grew 26%. Professional services revenue, the bad one, dropped 11%. That's actually a good thing because this company is taking that business and moving it over to its consulting partners. That not only gets it off its books, that helps it get in with those consulting partners business and helps them grow revenue.

The total revenue is not the metric to watch here. The metric I think you should watch is gross profit. Gross margin here is rising as more business shifts to the subscription and gross profit grew 19% to $65 million. The company is still losing money and lost four million dollars on an adjusted basis, but they have $255 million in cash. They've taken advantage of their ballooning stock price to raise that up.

Now, if you looked at the stock price, it's been all over the map. It basically went bananas when Slack got acquired by Microsoft, it shot up to over $200 per share or 53 times sales. More recently, it's about 29 times sales, which is still expensive. But if you look at the business, it's really executing well.

Brian Withers: Slack got acquired by Microsoft? That's a new one on me.

Feroldi: Salesforce.

Withers: Salesforce. [laughs] No, I get it. We got so many stocks that we cover. I'd like that you bring up the partner thing, and how that revenue is declining, and that's the direction that we want to go. I recently saw an announcement for Appian's Partner Awards and it's literally a who's who are partners? I think Wipro, Accenture, Infosys, KPMG. They're partnering, I think, with the right folks. How can investors tell whether these consulting partners are really doing well by Appian, and enabling this [platform] to sell and reach more customers? How can investors keep tabs on this progress?

Feroldi: Few ways. One, look at software revenue, is that moving in the right direction rapidly? It was in the most recent quarter, that is a sign that consulting partners are paying off. Two, look at the net revenue retention rates, which is same-customer spending, that is also trending in the right direction. That tells you that customers are getting on board and then they're being upsold well. Three, look at gross profit. Gross margin should expand over time as professional services makes up less and less of the total. This is just a company when you see the headline numbers, you just have to train yourself to look past them because there's more to the story.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Brian Feroldi owns shares of Accenture, Appian, and Microsoft. Brian Withers has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Accenture, Appian, Microsoft, Salesforce.com, and Slack Technologies. The Motley Fool has a disclosure policy.


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