For much of its history, Appian (APPN -3.46%) defined itself as a low-code platform. Its software helped companies create and deploy applications without the need for coding, using just a flow chart instead.
However, in recent years that business model has evolved. Appian acquired a process mining company in 2022, effectively going upstream for its customers' needs as process mining helps companies discover ways they can improve their workflow to become more efficient and effective.
With the advent of generative artificial intelligence (AI), Appian is reinventing itself, de-emphasizing its low-code roots and pitching itself as a business process automation provider, using AI to automate apps to handle functions like procurement, insurance underwriting, and claims processing.
Appian now sees its future as closely tied to AI and CEO Matt Calkins said in the second quarter that usage of the new Appian AI platform doubled on a quarter-over-quarter basis, including both free trial and paid offerings. The company is also betting on "private AI," and Calkins expects Appian to create value for customers by running its generative AI programs by using only the small sliver of customer data it needs to work, rather than taking all of it. He explained in an interview with the Motley Fool, "Our private approach to AI allows you to get personal responses without offering up your private information except only in the tiniest fragment as is pertinent to answer a specific question."
The company also scored a big win in its federal government procurement vertical, saying that bookings more than doubled in the first half of the year from 2023.
That helped drive Appian's cloud subscription revenue up 19% to $88.4 billion and overall revenue up 15% to $146.5 million in the second quarter, which beat estimates. However, Appian is reinventing more than just its technology. It's also restructuring the business to improve margins and focus on its highest-return opportunities.
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Appian is heading for breakeven
In June, the company laid off approximately 150 employees as part of a plan to realign its sales and marketing teams with its new go-to-market strategy and improve profitability.
As a result of those moves, the company pulled forward its target of reaching break-even adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and it now sees full-year adjusted EBITDA between -$3 million and $3 million and between breakeven and $3 million for the third quarter.
While that was clearly a step in the right direction, the stock still fell on the report as revenue guidance was below estimates. For the third quarter, it sees revenue growth slowing to between 9% and 12%, reaching between $149 million and $153 million, below the consensus at $155.6 million.
Is Appian a buy?
Appian's move to reduce its workforce and focus on its highest-value deals makes sense, but it also seems born of necessity as the company is still losing money and revenue growth has slowed while the stock has floundered.
Still, it's an important step in the right direction for Appian and the stock sell-off on the news seems surprising. The bigger challenge for Appian may be figuring out how to expand its customer base as its customers seem to love its product, based on its gross renewal rate of 99%, and it also enjoys a high subscription gross margin of near 90%, meaning those customers are highly profitable once they've bought the product.
The restructuring and the company's slowing growth despite high customer satisfaction may indicate a need to expand its product-market fit as the company reinvents itself with automation and AI at the center. With its slimmed-down workforce and a new product portfolio, Appian deserves some time to get it right, but investors seem to be losing their patience.
If Appian can make significant strides on the bottom line or reaccelerate revenue growth, the stock will have a good case for being a turnaround play, but it's hard to call it a buy until it fulfills that promise.
