AppianAPPN

Appian reported second-quarter results that show its transition to a higher-profit business is on track. Cloud subscription revenue, which is the core of our view on the company, grew 23 percent to about 131.7 million dollars. This is a vital number because these subscriptions carry higher profit margins and are more predictable than the professional services work the company is intentionally doing less of.

The company also reported earnings of 13 cents per share, which was significantly higher than the roughly break-even result analysts were expecting. Total revenue reached 200 million dollars for the quarter. While the stock fell about 5 percent today, the underlying business is meeting the key goals of maintaining double-digit growth while moving toward consistent profitability.

See the full quarter, and how our tracked metrics did

Source: 8-K filing

Appian is scheduled to report its second-quarter results today. The company has a history of performing well against expectations, having topped analyst estimates in six of the last eight quarters.

For a long-term owner, the most important numbers to watch are the cloud subscription growth and the company's progress toward consistent profits. We are looking to see if cloud revenue is growing fast enough to replace its older consulting services, and if the company is managing to grow without significantly increasing its spending on sales and marketing.

See the full quarter, and how our tracked metrics did

Key highlights

• Cloud growth remains steady: Cloud subscription revenue grew 23% to $131.7 million, outperforming the company's total sales growth of 19%. This matters because these recurring software sales are the most profitable part of the business and provide a predictable stream of income for years to come.
• Profitability showing real progress: Non-GAAP operating income, which measures the profit from running core operations, reached $13.6 million compared to just $5.6 million last year. The company is becoming more efficient as it grows, even while it continues to report a GAAP operating loss of $5.4 million.
• Client spending holding firm: The cloud net expansion rate was 115% as of June, indicating that existing customers are increasing their spending on the platform over time. This rate is right on the line of our long-term target and shows that the software remains essential to the large enterprises and governments that use it.
• Services mix shifting down: Professional services revenue grew to $45.6 million but now represents about 22% of total sales, which is an improvement from 28% in the previous quarter. Investors want to see this percentage drop because services require expensive human labor, while software sales can be expanded at almost no extra cost.
• Full year outlook raised: Management expects full year revenue to be between $845.0 million and $853.0 million, with cloud subscription growth between 20% and 21%. Providing this range shows confidence that the current momentum in software sales will continue through the end of the year.

Our take: This was a strong quarter that showed Appian is successfully moving toward better profitability. While the business still reports losses under standard accounting rules, the sharp rise in adjusted income and the shift toward higher-margin software sales are very encouraging. These results strengthen the case for the company as its core cloud business continues to grow at a healthy pace.