Following its latest surge, Appian’s (APPN) – Get Report stock is up 159% on the year, a gain that’s outpaced by only a handful of other U.S.-traded software firms.
Appian, founded back in 1999, is a leading provider of low-code software development tools. Its subscription-based platform, which can be deployed in both cloud and on-premise environments, lets developers use a graphical interface to create software that can do things such as automate tasks, execute business processes and integrate data from a number of sources.
In recent years, Appian’s platform has been extended to let software created with it leverage cloud-based AI/machine learning services from the likes of Google (GOOGL) – Get Report, Microsoft (MSFT) – Get Report and Amazon.com (AMZN) – Get Report.
Shares are up 32% since a strong Q3 report was posted on Nov. 5. Appian’s revenue rose 17% annually to $50.8 million, with a 6% drop in low-margin professional services revenue more than offset by a 40% increase in subscription revenue.
I had a couple of conversations recently with Matt Calkins, Appian’s founder and CEO. Here’s what he had to share about business trends, Appian’s competitive strengths relative to rivals such as Salesforce.com (CRM) – Get Report, Microsoft and Pegasystems (PEGA) – Get Report, and his company’s Q3 performance and long-term goals, slightly edited for clarity.
The customer demand trends that Appian has been seeing in recent months
Calkins: “The macro trend across the economy this year is the importance of agility. How important it is for organizations to be able to change their own processes — even their most important processes — in the face of change coming from outside their walls… For years, we’ve been talking about things like digital transformation [and] agility. And this year, we all had to live up to that. And so it’s been a year of reckoning.”
“You know what COVID did to the economy… I’m so glad it happened after we had video conferencing. I’m so glad it happened after we had a few core pieces of technology. One core piece of technology that we also wish we’d all had — low-code would be one word for it — would be a platform that allows you to adapt quickly to change. To change your processes in the face of change in the world… We all have Zoom (ZM) – Get Report, but we didn’t all have a way to change our processes. As a result, you saw a lot of businesses clock out without the ability to protect their relationships with their customers as their employees as circumstances changed.”
“Businesses are now very aware that they need to have a technology that allows them to pivot. And so, I believe that this will be a turning point in the low-code industry, certainly, and perhaps in other industries as well, that serve to help businesses to adapt and be agile in the face of change.”
“We’ve been working on low-code for a long time… We were the first low-code IPO in 2017, and we’ve been working out for a lot longer than that… And I think we’re the largest low-code pure play by revenue… We’ve been in this for a long time. And I feel like businesses surge, they have moments when they become mainstream. And this has been that moment for low-code.”
How usage of Appian’s software has changed lately
Calkins: “We’ve been a platform for a long time … so we enable businesses to create their own applications easily — like drawing a picture or drawing a flip chart. And that’s great: It starts with a blank page and you fill it. This year, some of the things that our clients wanted out of our software were so similar from one client to another.”
“And we decided to just write the application and give it [to them]. We could sell the application built on the platform, instead of selling the platform itself. And by finishing the application in advance, we would get the client to their destination a lot faster, even though we assumed they would want to make some modifications.”
“[These] applications are the most successful we ever launched. Workforce Safety in particular, which is built on an initial COVID safety application has been adopted very broadly…[is] responsible for the biggest uptick in clients we’ve ever had. Biggest launch we’ve ever had, biggest pipeline we’ve ever had, just everything all at once based on this application. [It] allows organizations to implement a digital health strategy, which I think is very important right now.”
Expectations for best-of-breed software to become more popular in 2021
Calkins: “[COVID] has created a moment where it’s great to be a leader, [and] bad to be a follower. It’s great to be what you’re trying to be, and bad to be in the process of becoming it. It’s really given great power to the companies that already had the connections, already had the reputation. If you’re already the trusted conduit for a customer, and you’re in wonderful shape right now, and free to some degree from competition. But I think it’s going to lead to a backlash.”
“I believe that this concentration of power in the top few tech companies is going to come to the disadvantage of a lot of customers. They are going to realize that they have very little negotiating leverage. They’re going to realize that their assets are caught in frameworks, in formats, and in the clouds of these tech giants.”
“And I believe that the pendulum is going to swing back in 2020 and 2021, away from giant tech stacks, and back towards best-of-breed and freedom and preserving the clients’ leverage… And we’re trying to position actually for that — to be the enabler of best-of-breed [solutions], the enabler of free choice in technology. A company that can be big enough and reliable enough to facilitate the uniting of the best technology across the enterprise, and let the enterprise be what it is.”
“Instead of asking them to move their data, reformat their data … we’ll take the enterprise the way it is and we’ll make it better. Instead of trying to retool it and put our imprint on it the way a tech giant would. I think that there needs to be a little bit more freedom and respect for the customer in technology, and I believe that might be the theme of next year.”
Which competitors Appian sees most often, and how it’s positioning its low-code platform
Calkins: “We see a lot of Pega, and a lot of Salesforce. We are in a great convergence right now around automation. Appium considers itself a low-code automation company. And what we mean by automation is using a workflow to bring together in collaboration all the different types of workers — not just people anymore — but also AI and bots, like robotic process automation. All of them working together, collaborating with each other, asserting their strengths, delegated to cover up their weaknesses together in a workflow. This is enormously valuable, because none of these workers by themselves are as effective even close as all together. So this is a clear win for customers.
“And it’s also a bit of a challenge. You need a few things to make it happen. And we’re trying … we all know that there’s more convergence to come. You need a great workflow, and you need to be open to all the technologies that already exist in the enterprise, in order to make value out of the combination of them. That’s what it’s going to take to do automation properly, nobody’s really got it. And furthermore, the [software] stack vendors are a little bit of a disadvantage, because it’s too late to tell the customer what RPA tool they need to buy, or to switch their AI or something like that.”
“So this isn’t a natural monopolistic market. It’s a diverse market, and whoever succeeds in this market is going to have to respect diversity. So this is an emerging concept, and it’s going to lead to a lot of consolidation, convergence and competition amongst companies that are only peripherally in competition today. We are peripherally in competition with a number of firms, and I see it all kind of consolidating and [there] will be interesting partnerships and combinations along the way. Automation is like a star. It’s going to pull in a lot of a lot of matter from all around it, [and] create a bright market in the process.”
How Appian sees its low-code tools differing from Microsoft’s PowerApps platform
Calkins: “We really don’t compete against Microsoft very much. And it’s because we’re addressing different ends of the market. Of all the low-code tools on Earth, Appian is the one most focused on mission-critical, industrial-strength applications. Which is to say that you use the Appian platform to build a low-code process to do something really fundamental and important in your business, you don’t use it for a little thing on the edge of the business.”
“You use it for something that’s very hard to measure, and that’s very different from the approach that other low-code vendors have taken, Microsoft included. [Their] technology is not nearly as strong. It’s not robust, it doesn’t have the track record, it doesn’t have the scalability, it doesn’t have the features. And clients right away see that and they know that they’re either in the market where they should be looking at Microsoft, or the market where they really should be looking at Appian.”
“Microsoft is going to make a lot of money in this market. There’s nothing wrong with their product. It’s just targeted at a different segment than [what] we’re targeted at.”
What Appian sees as its competitive strengths relative to Salesforce’s Lightning platform
Calkins: “We compete more with Salesforce … than we compete with Microsoft by a lot. Maybe it’s just [that] Salesforce is brilliant at marketing — and they’re the best at it — but they find their way into all sorts of opportunities that should be ours, because their product is not scalable. It’s rudimentary, they acquired it, it’s old.”
“However, it’s Salesforce, and Salesforce is such a good company. And people are so excited about it. And they have friends in every boardroom. And so they play really big. And you got to give them credit for that. I think they’ve been visionary about carving out their space. Their CRM [software] is extraordinarily dominant. And they just wanted to radiate in all directions from that. So one of the ways they’ve done this is to create this Lightning [platform].”
“Now, I find a lot of these tools to be essentially programmer tools. So, you could build something powerful and it really kind of just … coding. And that’s not the objective with Appian. I want someone to be able to draw an application. Which is to say I want them to write it with their mouse. You’re going to draw lines and boxes, and create different kinds of decision nodes. And I want you to do integration with a mouse. That’s what I mean by low-code, you should be able to draw your application, it should be a lot faster. And that application still should be very powerful.”
“In Salesforce’s case, you can make a simple thing, easily. But if you want a complicated thing, it’s not easy anymore … And Pegasystems is always coding. We’re very different in that we have this confluence. We both make it easy to create an application, and the application is itself highly robust.”
Which kinds of acquisitions Appian, which had $251 million in cash and no debt at the end of Q3, would be interested in making
Calkins: “Well, I’ll tell you what kind of acquisition interests me the most. I like … emerging technology, whether or not it’s been validated in the market. We’re technologists, and we’re happy to appraise the quality of code and functionality on our own. We don’t need to look at how broad the adoption is, or check the revenue to see whether it’s good. I think finding new technologies — hidden gems — that’s very interesting to me.”
“And so, yeah, we do have a war chest. It could be used for things like that, but we don’t need to. And we typically write our functionality internally. [We keep M&A] as an option though”
Appian’s biggest R&D priorities going forward
Calkins: “The top one would have to be the realization of that automation concept that I mentioned a few minutes ago. Automation being: The use of a workflow to bring together different work types. That’s a big idea, and it’s going to be a big market. When companies get a handle on just how important it is to coordinate work amongst all the entities that now do work, it’s going to take off. And so, we need to realize that vision faster than anybody else.
“I believe right now that we are in the lead, but not at the finish line. And so, what I’m telling our engineering team is, above all, realize this value proposition.”
Which industry verticals Appian saw particularly strong demand within in Q3
Calkins: “Let me just start with what our key verticals are, and we’re fortunate to some degree in where we depend the most … We’re traditionally very strong in financial services, and quite strong as well in life sciences and government. All of those industries have kept growing through this year — kept buying and they’ve all relied even more on agility and transformation than they had in the past. So, our logos have come primarily from those areas.”
“And our route to getting logos has been partners…our global systems integrators partnerships have never been better. We’ve been working on this for a long time…companies like PwC [and] Deloitte are teaming with us closely. And we’ve reached a scale now as a company where we can be a primary go-to partner for a global systems integrator. And that’s a big turning point in a business like ours. We are, after all, an enabler for creating new applications.”
“And that’s what these businesses do. They create new applications. They have developers and consultants who use a tool like ours in order to make a specific application that the customer needs. So if we can get big enough, and partner well enough, to be the go to platform that opens a major new route of growth.”
“We’ve created new solutions this year, largely in response to chaos in the world. And those solutions have been sold to a lot of firms, giving us new logos … Things like our Workforce Safety solution, which is basically a digital health strategy. Even though we didn’t sell that solution, it still opens the door for us. It still gave us credibility. It still demonstrated that Appian is an enabler of agility and transformation, which is exactly what most users are looking for right now.”
Whether Appian’s cloud subscription net revenue retention (NRR) rate, which was at 115% in Q3, could go back above 120%
Calkins: “I’m always trying to increase it. I would like to get above [120%], we always say we’re aiming for [110% to 120%], that’s what our CFO says … [but] I attempt to make it go above the top end of bound, and we will work on that.”
“But it’s going to be challenging, particularly because there’s going to be such different demand in ‘21 than … in ‘20. People who approached us, people who bought our software in ‘20 may not be as committed to the whole purpose of Appian. Solutions buyers — companies or maybe even a university who bought our health package — are they going to buy more, or maybe that’s all they need us for? It’s going to be hard to upsell those customers … and NRR is all about upsell.”
“If we’re going to get to [120%] NRR, it’s because everybody who spent a buck on Appian in 2020 is actually going to spend $1.20 in 2021. And that’s hard to do, unless you get all your customers [to buy into] the main mission of the software. So we’ve got our work cut out for us, but I will be trying to raise it.”
Whether Appian, which saw fairly restrained spending growth in Q3, could dial up its sales/marketing and R&D spend in 2021 in order to drive more growth
Calkins: “We do want to grow in both of these areas, and the priority is going to be all of the above. I want to grow account executives, of course, to increase sales. I also want to grow the rest of the sales department. I want to hire mid-level engineers, but also entry-level engineers.”
“I want more marketing. We need more recruiters, because we’re planning to do a big push next year. The truth is, we will hire in every department and every office. And so it’s an advance on all fronts.”
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