APPN - Appian: Efficiency Is A Concern

2023-06-07 11:48:29 ET

Summary

• Appian's operating profitability has deteriorated over time, despite modest growth, calling into the company's competitive position.
• LLMs are likely to cause a proliferation of low-code/no-code and developer productivity tools, increasing competition.
• Appian's valuation is not justified by the company's growth, efficiency, end market or competitive positioning.

Appian (APPN) is a leading provider of software for low-code application development and process automation. Competition is increasing though, particularly from platforms that are introducing low-code functionality as part of a larger strategy. LLMs also have the potential to shift competitive dynamics in the market, and it is not clear that Appian has any particular AI expertise.

Market

Technology spending remains soft and presents an ongoing headwind to Appian's business. While there are some indicators that the market may have stabilized, it is too early to say for sure and there is no indication of a rebound.

Appian has stated that deals are being delayed, as they are facing additional scrutiny. This situation hasn't deteriorated significantly in recent months, but there is an ongoing progression towards greater caution by customers. Most software companies are in the same boat, although Appian may be somewhat better off than most due to the importance of its government business and reliance on larger customers in more mature industries.

Appian

Appian offers a low-code development and business process automation platform with functionality expanding into adjacent use cases. Recent innovations include process mining, RPA, increased AI capabilities and portals. The company is currently trying to reposition itself from low-code to end-to-end automation, and increase the strategic importance of the platform. This move comes in the face of companies like Microsoft ( MSFT ) and ServiceNow ( NOW ) threatening to turn process automation into a feature rather than a stand-alone product.

AI

Like every company at the moment, Appian is now an AI company and is trying to embed AI wherever possible. This includes adding low-code AI features that helps users create applications. Appian is also working on expanding AI training capabilities and making it easier for customers to introduce AI into their applications. Appian's slant is that it is focused on "private AI", which refers to helping customers keep data and models private.

From a process mining and RPA perspective, AI is an important part of Appian's business, although it is not clear where the company's capabilities stand relative to competitors, given that these activities are core for companies like UiPath ( PATH ).

Appian recently introduced an OpenAI plug-in for ChatGPT which supports a number of different use cases. This was reportedly Appian's most quickly adopted app market add-on ever, even surpassing Microsoft Excel. While this could be considered indicative of the importance of LLMs, I believe it demonstrates how large the AI hype bubble is becoming.

Data Fabric

Data Fabric is a virtual database that acts like a semantic layer for Appian's platform. It allows data from across the entire enterprise to be accessed as if it were in the one location, even though it remains separated. This allows customers to utilize their data without having to move it. Appian believes that this is a significant advantage for its platform as data is the hardest part of building and running processes. Data Fabric also provides Appian with an edge in process mining, as this essentially involves going through system data logs.

Process HQ

Process HQ is Appian's recently launched process mining solution. Appian wants to generate actionable insights from process mining faster by leveraging its Data Fabric product. Process HQ also allows customers to see before and after performance statistics, so they can understand how performance changed and where bottlenecks may still exist. Appian's management has stated that process mining is providing the business with upsell opportunities and it is likely to make the platform as a whole stickier.

Appian Solutions

Appian Solutions offer "out of the box" capabilities but retain flexibility so that they can be customized to meet the needs of an individual business.

Go-to-Market

Appian generally targets organizations with more than 2,000 employees and 2 billion USD in annual revenue. This is probably because Appian's software is more likely to appeal to larger organizations with complex business processes and greater security needs. The sales process, and software implementation, also appear to be relatively involved, requiring larger customers to justify the effort.

While Appian is increasing its focus on profitability, it remains a growth company and as such, continues to invest in sales and marketing. Current marketing priorities include:

• Doubling quality pipeline
• Differentiating the company's message
• Increasing market awareness

The company recently held its annual conference, with more than twice as many prospects attending compared to 2022.

Partners are central to Appian's plan to increase its pipeline, with project implementation increasingly expected to be handed off in the future.

Appian also offers a free community edition of its software, which encourages bottom-up adoption. There are currently over 200,000 users in the community, providing a large source of highly qualified leads.

High priority verticals include:

• Financial services
• Public sector
• Insurance
• Life Sciences

Appian also has a large government business, with government agencies contributing 20.5% of total revenue in the first quarter of 2023. The US public sector also contributed half of Appian's Q1 new logo ACV. Appian Cloud recently became StateRAMP certified and the company continues to introduce government focused solutions.

Competition

Appian faces competition from a number of process automation companies, with Pega ( PEGA ) being the primary competition. There are also a number of software platforms introducing low code functionality that competes with Appian. This includes ServiceNow, Salesforce ( CRM ) and Microsoft.

Microsoft in particular is a large threat. Power Apps enables Microsoft customers to build and share low-code apps. Power Apps is part of Microsoft's Power Platform, a family of business intelligence, app development, and app connectivity solutions. Adoption of Power Apps appears to be increasing rapidly, likely driven in large part by Microsoft's enormous distribution capabilities and customer mindshare.

Appian has stated that its win rates are pretty good against all competitors once the company has been shortlisted. Given this statement, and the fact that Appian's marketing efforts are focused on messaging and brand awareness, it appears that management believe that the product isn't doing as well as it should be.

Appian believes its strengths include data management, scalability and security. Appian targets high-end, mission critical applications, and doesn't believe other solutions on the market are competitive in this area.

Financial Analysis

Appian's growth has moderated over the past 12 months, but this has not been as extreme as many software companies, which has likely helped to support the stock. Growth is quite low given the company's size though.

First quarter results were boosted by services revenue from new large projects with existing customers and recognition of revenue that was on hold from Q4 2022.

Cloud subscription revenue growth is expected to be 26-30% in the second quarter. Total revenue growth is expected to be 12-14% in the same period. Cloud subscription revenue growth for the full-year is expected to be 25-26%, with total revenue growth of 14-15%.

Appian continues to expand its customer base, with particular strength amongst customers generating more than 1 million USD ARR. This growth is coming from an increasingly large investment in sales and marketing though, calling into question Appian's efficiency.

The number of job openings mentioning Appian in the job requirements has been fairly flat over the past 2 years. This compares quite negatively with hiring data for Power Apps. Although, this data is far more positive than similar data for Pega and Automation Anywhere.

Search data also seems to indicate that demand for Appian's has been fairly flat in recent years.

Appian's gross profit margins have been improving over time, primarily as a result of services contributing less to total revenue. Appian expects partners to drive the majority of implementations in the future, which will support gross profit margins, although they are unlikely to move significantly higher from current levels.

While Appian continues to record large losses, the company's high gross renewal rates can be used to justify this. Appian's platform appears to be extremely sticky, which should lead to profits in time.

Appian has so far shown no ability to improve operating profit margins with scale, as sales and marketing expenses remain high and the company has been investing in R&D to expand the capabilities of the platform. General and administrative costs are high though, and the company's growth is only modest, calling into question efficiency.

Appian appears to be trying to address this, recently laying off some employees. The company is also pursuing a flatter hierarchy and trying to optimize some support functions. This should help to control operating costs, but given the company's growth rate, breakeven is a long way off.

Valuation

Appian's valuation is quite high given the growth rate and efficiency of the organization. This may be due to the fact that Appian has demonstrated less growth deceleration than many software companies in recent quarters, creating a perception of less downside risk.

While the company likely has a solid competitive position amongst its target market, competition could severely limit the company's ultimate growth. Microsoft in particular appears to be having a lot of success with its Power Platform.

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