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Appian and Pegasystems: a tale of two growth paths

Blog: MWD Advisors

 
Appian and Pegasystems, two Process Application Platform leaders and frequent competitors, both released their full-year financial results in the past week. What do they show us?

Appian released its results on February 23rd. Appian’s overall revenue for 2017 grew 33% to $176.7m; net loss widened 148%, from $12.5m a year earlier to $31m.

Appian has led with its cloud-based, subscription platform option for many years, and it shows – in 2017, subscriptions accounted for over 90% of Appian’s product revenue ($82.8m of a total of $91.5m). You can also see this in the company’s growth strategy: like so many SaaS and PaaS providers, it’s spending aggressively on marketing and customer acquisition, happy to trade short-term losses for the potential of future subscription renewals. Indeed, Appian’s total operating expenses grew 53% in 2017, to $144m from $94.2m a year earlier.

Whereas product revenue grew 31% in the year for Appian, professional services revenue outpaced it – growing 35%. In its earnings conference call, executives stressed that they’d like to see professional services revenue grow more slowly in future – with partners picking up more consulting business (and enabling Appian to focus more on higher-margin product license revenue). Looking at the company’s guidance for 2018, it appears that Appian is actually pushing for/expecting a slight revenue reduction across perpetual licenses and professional services: whereas it forecasts subscription revenue to grow $23m-24m in the year, it’s only setting expectations of total revenue growth of around $21m-24m (or 12-14%).

Pegasystems released its results on February 26th. Pega’s overall revenue for 2017 grew 12% to $840.6m; net income grew 22% to $32.9m. Clearly, it’s growing more slowly (in % terms) than Appian – but this is from a much larger base. It’s also consistently profitable.

Pega has also been pushing a cloud-first agenda, but this part of its business is a lot less well-developed than Appian’s – and what’s more, whereas Appian promotes its own cloud to customers, Pegasystems promotes not only its own cloud (where revenue grew 25% to $51.9m for the year), but also cloud hosting options delivered and managed by a set of selected partners (and  this revenue is not recognised as ‘cloud revenue’ by Pega). Looking more broadly, Pega’s revenue is steadily shifting away from perpetual licensing – in 2017, term license revenue was larger than perpetual license revenue for the first time ($146.5m vs. $141.8m for the year).

In line with this more diversified market approach and conservative strategy, Pega’s growth comes at a lower cost – the company’s operating expenses grew just 11% in the year, from $470.5m in 2016 to $522.3m this past year. In the context of 2018 guidance, the company is setting expectations of revenue growth of around 13% – and again, maintaining similar levels of profitability. Still, though, for Pegasystems too, consulting and training revenue growth outpaced the company’s overall revenue growth (expanding around 23%).

What can we take away from these results?

For one thing: clearly, both companies have continued to grow faster than the software industry overall. Both are successfully riding the ‘cloud wave’, though in different ways. Appian is behaving much more like a ‘pure’ SaaS/PaaS provider than Pegasystems is.

Something else: to different degrees, both companies have the (common) challenge of trying to minimise their own (comparatively low-margin) professional services revenues while growing their product revenues. They want to be more like pure product platform companies, but customers keep asking for, and paying for, their premium-priced services.

Last: given Appian’s aggressive growth strategy, it’s surprising to me that it’s only publicly forecasting revenue growth of between 12 and 14% for 2018. I’m keen to dig into that some more…

The post Appian and Pegasystems: a tale of two growth paths appeared first on MWD Advisors.

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