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Appian's Loss Just Doubled. Is It Time To Sell the Stock?

Motley Fool - Sat Nov 5, 2022

Appian (NASDAQ: APPN) shares were hit hard Friday after the low-code software company reported a wider-than-expected loss in the third quarter and called for slower growth in the fourth quarter.

Cloud subscription revenue, the company's top priority, grew 30% to $60.6 million, and overall revenue was up 28% to $117.9 million, edging out estimates at $116.1 million.

However, on the bottom line, the company's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss came in significantly below its guidance range, and its adjusted loss per share nearly doubled from $0.22 to $0.43, missing the consensus at $0.23. The wider-than-expected loss was primarily due to accelerated hiring in the period.

Appian also guided for revenue growth of just 16%-18% in the fourth quarter. However, management said that forecast reflected stronger foreign-currency headwinds, its usual conservatism, and uncertainty around the timing of on-premise subscription deals rather than any underlying slowdown in the business. Analysts had expected revenue to grow 21.3% in the current quarter.

While the slowing growth and widening losses make the business appear to be struggling, CEO Matt Calkins had a good explanation for the disparity.

Digital images of blue clouds with binary code streaming from them like raindrops.

Image source: Getty Images.

Investing in the future

Headcount increased much faster than expected in the third quarter, management said on the earnings call. During the quarter, the company opened a development center in Chennai, India, earlier than expected. Calkins expects the Chennai base to be the fastest-growing part of the company on a percentage basis.

Additionally, the company's employee attrition was lower than expected as it lost just 3.2% of its workforce and increased outside hiring, ramping up to intended levels for 2023. In total, it added 221 employees, compared to 203 in the three previous quarters combined, and Calkins said he expects headcount growth to cool off from here.

Because of the jump in headcount, the company's adjusted EBITDA loss expanded from $12 million to $22.9 million, missing the company's guidance. To better control costs, Appian said it plans to cut its adjusted EBITDA losses to 10% of revenue by the second half of next year.

Ready for a recession

Though management wasn't seeing clear signs that the macroeconomic climate was impacting the business, the company is taking steps to prepare for one. For example, it closed on a $150 million credit facility to give it financial flexibility in the event of an economic downturn.

Additionally, the company acquired process mining company Lana Labs last year to strengthen its product and use efficiency as a selling point, which is especially valuable during a downturn. It also creates a more comprehensive customer solution, combining two products that have historically required separate vendors. Calkins has been anticipating a recession for several months now and aims to grow through it, continuing to hire and emerging a stronger company.

Can the stock recover?

While management believes it's executing effectively on its growth plan, the market took a different view, bidding the stock down 19% by Friday's close. Investors were clearly unhappy with the lower Q4 guidance and the bottom-line miss in Q3.

Appian continues to invest in what it sees as a large growth opportunity in low-code software, and its customer retention rate has historically hovered at 99%, showing the project's success.

However, Appian has not been profitable on a generally accepted accounting principles (GAAP) basis since its 2017 initial public offering (IPO), and its losses have widened in recent quarters.

With the stock hitting another low following the earnings report, investors seem to be saying that it's come time for Appian to deliver improvements on the bottom line in addition to customer growth. Management's target to trim EBITDA losses to 10% of revenue by next year offers some reassurance to investors, but the company still has to deliver on that.

Though it seems Appian will be in a stronger position a year from now and has considerable potential over the longer term -- as well as a pending $2 billion judgment in a case against rival Pegasystems -- the near term will likely be challenging. The software stock will need an improvement in market sentiment or its bottom line to recover, and neither seems likely to materialize in a recession.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Appian. The Motley Fool recommends Pegasystems. The Motley Fool has a disclosure policy.

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