AppFolio, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. AppFolio provides cloud business-management software and related services for the real estate industry. Figures below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $136.1 | $105.3 |
| Operating loss | $(26.5) | $(14.7) |
| Net loss | $(35.1) | $(14.3) |
| Diluted loss per share | $(0.99) | $(0.41) |
| Operating cash flow | $1.6 | $(2.2) |
- Revenue grew 29%. Core solutions revenue increased 21% to $37.2 million; Value Added Services revenue rose 35% to $96.8 million; Other revenue fell 30% to $2.1 million.
- Cost of revenue, excluding depreciation and amortization, was 41.3% of revenue, versus 41.2% a year earlier. Operating loss was 19.5% of revenue, compared with 13.9%; net loss was 25.8%, versus 13.6%.
- Cash, cash equivalents and investment securities totaled $181.7 million at quarter-end. Cash and cash equivalents were $103.9 million; available-for-sale investments were $77.7 million. Net cash increased $33.2 million during the quarter, largely reflecting investment maturities and sales.
- The filing reports no borrowings. Lease liabilities totaled $48.4 million, including $3.1 million classified in other current liabilities. Current assets were $211.9 million and current liabilities $79.8 million.
- Stock-based compensation expense was $13.9 million, compared with $7.4 million in Q1 2022.
Material changes and notable items
- Property-management units under management grew 14% year over year to 7.5 million; property-management customers increased to 18,834 from 17,550.
- Operating expenses increased faster than revenue, particularly research and product development (up 55%) and general and administrative (up 67%). Management cited product-team headcount growth and costs associated with the former CEO’s separation agreement.
- Accrued severance was $16.7 million at March 31, including approximately $14.9 million related to the former CEO’s agreement, expected to be paid in Q2 2023. General and administrative expense also included a $2.4 million gain from a lease modification.
- Income tax expense was $10.0 million despite a pretax loss; the filing attributes the effective-tax-rate difference principally to changes in the valuation allowance on deferred tax assets, nondeductible officers’ compensation and state taxes, partly offset by R&D tax credits.
- Non-cancelable remaining performance obligations were $20 million; approximately 49% was expected to be recognized in the following 12 months.
Outlook, risks and contingencies
- Management said cash, investments and expected operating cash flows should be sufficient for working capital and capital expenditures for at least the next 12 months. The filing provides no specific revenue or earnings guidance.
- For 2023, management expects cost of revenue, sales and marketing, general and administrative, and depreciation and amortization to decline as percentages of revenue; research and product development is expected to increase as a percentage as the company invests in product expansion and larger customers.
- Management identifies competition for talent and the need to invest in product development among business considerations. It cautions that actual results may differ materially from forward-looking statements. The filing reports no material change to the risk factors in the 2022 Form 10-K.
- The company bears a 100% quota share of specified liability-to-landlord insurance policies; estimated claims liabilities were $3.4 million. Management said it was not aware of legal matters expected to have a material adverse effect. Indemnification exposure is not capped at a stated maximum and is described as indeterminable; no related liability was recorded.
- Available-for-sale investments had $1.4 million of gross unrealized losses at quarter-end. Management did not consider the decline other than temporary and reported no credit-loss allowance.
Important facts for investors to verify
- Whether unit and customer growth, particularly Value Added Services usage, continues and supports revenue growth.
- Whether expense growth moderates as management expects, while research and product-development investment rises.
- The ongoing impact of stock-based compensation and the former CEO’s separation costs on reported profitability and cash flows.
- How the unusual tax expense and deferred-tax valuation allowance affect subsequent quarters.
- Changes in cash generation, investment values, lease obligations, and insurance claims exposure.