Appian Corporation

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Appian Corporation is a software company that automates business processes using a low-code platform, allowing organizations to build and deploy applications with greater speed and flexibility.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Appian’s core business revolves around its low-code platform, a development environment that enables organizations to create, deploy, and manage software applications with minimal traditional coding.

Business Overview

Appian operates in the low-code software development market, a space that aims to democratize software creation by reducing the amount of technical coding required to develop applications. The platform serves a broad spectrum of industries, including financial services, healthcare, insurance, manufacturing, energy, and the public sector.

Revenue Distribution: Appian generates revenue from two primary sources: subscriptions and professional services.

Subscriptions: This stream contributes the bulk of the company’s revenue. It involves recurring fees paid by customers for access to the Appian platform, including maintenance, support, and cloud hosting, typically structured as one to three-year agreements.
Professional Services: This segment involves fees for consulting, implementation, deployment, and training services related to the platform. Professional services are typically project-based and sold as stand-alone engagements or part of larger deals. The sales strategy has been refined over the years to sell platform first with a much larger long-term focus.

Appian’s subscription revenue is recurring in nature, providing a more stable income stream than one-time professional services revenue.

Industry Trends:

Digital Transformation: The accelerating pace of digital transformation across industries is a significant driver for low-code adoption. Companies increasingly need to rapidly develop applications to meet evolving business needs, which favors low-code solutions for quicker development cycles and lower coding overhead.
Citizen Developers: As technical talent becomes harder to find and retain, low-code platforms appeal to the demand for citizen developers, or business experts who can build apps without needing a computer science background. The increase in these people and their desire for digital tools has helped low-code adoption.
Cloud Adoption: Cloud-based platforms are becoming increasingly favored by organizations due to scalability, flexibility, and ease of access, which further increases the demand for low-code solutions. This is a tailwind for Appian because their cloud offerings are core to the business.
Artificial Intelligence: Integration of AI and ML technology into low code will increase adoption even further. Appian has been working to integrate the AI into their software.

Competitive Landscape:

The low-code market is becoming crowded, with competition from a variety of players.

Major Platform Providers: Large technology companies such as Microsoft (Power Apps), Salesforce (Lightning), and ServiceNow (Now Platform) offer low-code solutions as part of larger ecosystems.
Emerging Players: A number of new players have entered the low-code space, offering specialized solutions for a variety of markets. Some are public and others remain privately owned. Some of these new players might cause a short-term disruption.
Custom Software Developers: While these businesses provide different services, software development companies often do offer an alternative approach to app development, and might compete directly with Appian’s core business. This makes things highly fragmented.

What Makes Appian Different:

Appian positions itself as a leader in low-code automation for complex business processes, focusing on its unique strengths.

Platform Breadth and Integration: Appian aims to offer a comprehensive, integrated platform, and can connect data across different software systems. It is not just for app creation.
Emphasis on Complex Automation: Appian focuses on providing solutions for more complex and strategic business processes, which often require integration with different data sources and systems. This also allows for scalability.
Government Clients: Appian’s security and certifications allows it to compete for large government and publicly funded projects.
AI Integration: Appian has been working to increase their capabilities in AI and make them accessible to their users.

Financials

Appian’s financials, while showing consistent revenue growth, also reveal some challenges.

Revenue Trends: Appian’s revenue has been steadily growing, with subscription revenue being a significant factor.

Subscription Revenue Growth: This has generally been a very strong driver of their revenue, indicating a consistent increase in the amount of recurring subscriptions on their platform.
Professional Services Revenue Growth: Although the professional services revenue does fluctuate, it generally trends upward.
Revenue Growth: Over the past three years (2020-2022), total revenue has grown from $305.9 million in 2020 to $467.2 million in 2022.
Revenue Growth: The three and nine months ended September 30, 2023 saw revenues of $146.8 million and $400.2 million, respectively, which is an increase from the same time last year.

Profitability and Margins: Profitability is one of the key areas the company needs to improve on.

Gross Profit: Although gross profit is increasing, so are costs; hence the margins have been fairly steady over time.
Operating Income: While they have grown in revenue, the operating profit has remained negative for Appian. The operating loss was $15.1 million for the three months ended September 30, 2023 and $71.9 million for the nine months ending September 30, 2023.
Net Income: Net income has also consistently been negative for Appian. The net loss for the three and nine months ended September 30, 2023, were $18.8 million and $104.1 million, respectively.

Balance Sheet Health: Appian’s balance sheet indicates a fairly good financial position.

Cash and Cash Equivalents: The company maintains a solid base of cash and marketable securities. They had $120.8 million in cash, restricted cash, and cash equivalents at the end of September 30, 2023 and $188.9 million in current investments, including marketable securities.
Debt: Appian’s long-term debt is relatively modest, mostly a term loan taken out in 2022 to help finance the acquisition of Lana Labs.

Key Metrics (as of September 30, 2023): * Net Cash from Operations: -$72 million for nine months ended Sept 30, 2023 * Total Assets: $869 million * Total Liabilities: $388.6 million * Total Equity: $480.5 million

Recent Concerns / Controversies / Problems

Profitability: The main concern is the company’s consistent lack of profitability despite significant revenue growth. The company has yet to show profits from its operations.
Competition: Intense competition in the low-code market might put pressure on Appian’s pricing power and hinder revenue growth.
Economic Slowdown: With increasing economic uncertainty, companies are looking to cut costs. This may cause Appian’s sales cycles to lengthen or result in more clients choosing smaller solutions that compete with Appian’s core platform.

Management has also acknowledged that the macroeconomic environment has had a negative impact on their sales cycles and client’s decision.

Moat Analysis

Moat Rating: 2 / 5 Appian possesses a narrow moat, primarily driven by switching costs and intangible assets but has yet to achieve a wide-moat rating.

Switching Costs (Moderate): Once an organization embeds its processes on Appian’s platform, the cost of switching to another platform can be quite high due to re-training, rewriting code, and integration with existing systems.
Intangible Assets (Moderate): Appian’s brand recognition within the low-code sector, their patent portfolio, and their customer relationships add a layer of defensibility. These advantages are important, but may not be sufficient to withstand attacks from well-established larger players.
Network Effects (Weak): Appian does not exhibit a strong network effect compared with platform software that allows more interaction between different users.
Scale (Weak): While Appian is a well-established player in the low-code field, it is much smaller than competitors and larger technological firms.

Legitimate Risks to the Moat

Technological Disruption: New software tech that can replace their coding and development framework could make the platform obsolete.
Increased Competition: Existing players or new entrants into the low-code market could start to offer better solutions, or more competitive pricing, that lure customers away from Appian.
Market Saturation: While the low-code market is still growing, it will eventually reach a point where there may be limited room for additional companies.
Financial Strain: Appian’s poor financials could impair its ability to fund new developments or withstand an economic downturn.
Mismanagement: Poor resource allocations or strategic business decisions could hurt business performance and thus threaten the long term value proposition.

Business Resilience:

Appian has shown considerable resilience in that it was able to continue to grow its revenue and operations, while still generating net losses for the time being. Appian’s core platform is complex, requiring a significant investment, and the company has developed the expertise needed to sell it. Because their revenues come mainly from recurring subscriptions, they might be able to maintain this revenue stream despite a market downturn. Their ability to offer professional services as well allows them to remain valuable to clients.

Understandability and Balance Sheet Rating

Understandability Rating: 3 / 5 Appian’s low code technology and platform are complex, but ultimately, its business model is relatively easy to understand: they are offering a platform that allows for quick creation of applications.

Balance Sheet Health Rating: 4 / 5 Appian has a relatively healthy balance sheet with good levels of cash and marketable securities. The biggest issue is their lack of profitability and net loss over the years. They also use a significant amount of equity financing which does dilute shareholders.

In short, Appian’s moat is weak, but present. Appian’s major selling point is its emphasis on complex solutions, and integration with existing systems. The company can improve its positioning and increase its value through focusing on long-term revenue streams with higher ROIC, and improve its own cost structure by further increasing efficiency across the company. Management should also focus on how it presents itself to investors, as the stock tends to have large share price fluctuations.