Appian Corporation: Large Insider Buying At Multi-Year Lows (NASDAQ:APPN)

If you can imagine something, at least imagine it with legs so that it has a chance to go somewhere.” – Craig D. Lounsbrough

Today, we take our first look at Appian Corporation (NASDAQ:APPN). The stock of this software concern is near multi-year lows. This seems to have triggered large insider buying by a beneficial owner. A sign the shares may bottom soon? The stock is trading at long-term support levels. An analysis follows below.

Company Overview:

Appian Corporation is headquartered just outside of Washington, D.C. The company provides a low-code platform that allows companies to automate enterprise-wide workflows with a unified suite of native automation technologies. The company also offers professional and customer support services. The stock currently trades at just over $35.00 a share and sports an approximate market capitalization of just south of $2.6 billion. The company’s revenue is made up of both subscription revenue (primarily cloud subscriptions) and fees for professional services.

Third Quarter Results:

On November 3rd, Appian posted third quarter numbers. The company had a non-GAAP loss of 43 cents a share, missing expectations by 20 cents a share. Revenues did grow nearly 28% on a year-over-year basis to $117.9 million, which was slightly under the consensus. Total subscriptions revenue increased 29% to $86.5 million from the same period a year ago. Cloud subscription sales made up $60.6 million of that total and were up 30% from 3Q2021. Professional Services revenue rose 25% to $31.4 million.

Leadership lowered full-year guidance by approximately $5 million to a range of $461 million to $466 million. This would represent 25% to 26% sales growth over FY2021. Management then revised its estimate of its loss in FY2022 to between $1.30 and $1.36 a share on a non-GAAP basis. This is far below previous guidance calling for a loss of between 86 cents to 91 cents a share for the fiscal year. Adjusted EBITDA losses also worsen to $22.9 million from just $12 million in the year-ago period.

The higher loss provisions are due largely to a strong dollar which is hurting the company results on a constant currency based. Leadership plans to slow hiring and cap discretionary expenses. They expect to bring down the company’s losses to 10% of overall revenues by the second half of this year.

Not surprisingly given the disappointing results, the stock has lost approximately a quarter of its value in the market since third quarter earnings came out.

Analyst Commentary & Balance Sheet:

Since third quarter results posted, four analyst firms have reissued Buy/Outperform ratings on APPN including Goldman Sachs and William Blair. Price targets proffered range from $50 to $55 a share. Four analyst firms including Morgan Stanley and Citigroup reiterated or downgraded Appian to a Hold/Sell rating. Their price targets range from $23 to $46 a share

Approximately 10% of the outstanding float of the stock is currently held short. A beneficial owner (Colin Moran of Abdiel Capital Management) has purchased nearly $9 million worth of shares here in 2023. He also added more than $20 million to his holdings in the fourth quarter of 2022.

The company ended the third quarter with just over $90 million of cash and marketable securities on its balance sheet against no long-term debt. The company posted a non-GAAP net loss of $30.9 million for the quarter. Early in November, the company closed on a new credit facility that provided it with nearly $100 million in funding with another $50 million available from a revolving credit source if needed.

Verdict:

The current analyst firm consensus has the company losing $1.36 a share in FY2022 even as revenues rise just over 25% to $465 million. Losses are projected to drop slightly in FY2023 as sales growth slows to the mid-teens.

The company has done a nice job making recurring subscription revenues a bigger portion of its overall sales mix since going public. This is important given subscriptions have massively higher margins than professional services. It is also encouraging to see heavy buying from the beneficial owner of the stock at these levels.

The wildcard in trying to value Appian has to do with litigation. In May, the company won a legal case involving trade secrets between it and Pegasystems (PEGA). The circuit court involved in the case awarded Appian just over $2 billion as a result. The damages award is by far the largest in Virginia’s history. The court entered its final judgement in September which called for six percent interest on the award as well as reimbursement for Appian’s $23.6 million in legal fees. It should be noted that Pegasystems is appealing the judgement and it may be many years before some sort of award is actually paid out, if ever, depending on the outcome of the appeal process.

However, those appear to be some of the few positives around the investment case for Appian right now. Losses are increasing and revenue growth should slow markedly in FY2023. The company’s balance sheet also appears quite leveraged. Add in tepid analyst support and the likelihood of a recession at some point in 2023, the shares are not compelling at these levels despite the recent and significant pullback in the equity.

The strongest backs bear the heaviest burdens” – Will Bly, Consolation of the Rose