AppFolio, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless noted. AppFolio provides cloud-based software and services primarily to real estate property managers. The 2020 comparison includes its former legal-software business, MyCase, which was divested in September 2020.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $78.9 million | $72.5 million | Up 9% |
| Operating income (loss) | $(5.7) million | $2.8 million | Down $8.5 million |
| Net income | $0.5 million | $2.0 million | Down $1.5 million |
| Operating margin | (7.2)% | 3.9% | Down 11.1 percentage points |
| Net margin | 0.6% | 2.7% | Down 2.1 percentage points |
| Operating cash flow | $(4.4) million | $3.1 million | Down $7.5 million |
- Revenue mix: Core solutions revenue was $24.2 million, down 3% overall; Value+ services revenue was $51.5 million, up 17%; other revenue was $3.2 million, down 6%. Real-estate-vertical revenue increased 22% to $78.9 million. Management attributed its growth to more customers and units under management, greater Value+ usage, and increased online transactions during the pandemic. Average units under management grew 16%, and average property-management customers grew 10%.
- Margins and costs: Cost of revenue excluding depreciation and amortization was $33.3 million, or 42.2% of revenue, versus 39.9%. Sales and marketing rose 12%, research and product development 28%, and general and administrative 56%. Higher staffing, product investment, Value+ delivery costs, and executive incentive accruals contributed to expense growth. The filing reports total operating expenses of $84.6 million, exceeding revenue.
- Taxes and unusual items: A $5.5 million income-tax benefit contributed to positive net income despite a $5.1 million pretax loss. The effective tax rate reflected, among other factors, stock-compensation benefits and research-and-development credits. Other income included approximately $0.4 million for MyCase transition services. AppFolio paid a $4.25 million FTC settlement during the quarter; it admitted no wrongdoing.
- Cash, investments, and debt: At March 31, cash and cash equivalents were $44.7 million and investment securities were $115.1 million, totaling $159.9 million in cash, equivalents, and investments. Operating cash use was $4.4 million; investing cash use was $87.2 million, primarily reflecting $99.0 million of investment purchases, partly offset by sales and maturities. Financing cash use was $3.9 million, mainly employee tax withholding on vested stock awards. No debt balance is reported at quarter-end; the former credit agreement was terminated following the MyCase sale. Total liabilities were $92.9 million, including $41.4 million of lease liabilities. Management said available liquidity and expected operating cash flows should cover requirements for at least 12 months.
- Balance sheet: Current assets were $181.5 million and current liabilities $43.0 million at March 31, 2021. Total assets were $378.7 million and stockholders’ equity $285.8 million.
Material changes, outlook, and risks
- Property-management customers increased to 16,178 from 14,729 a year earlier; units under management increased to 5.62 million from 4.80 million. Value+ services drove overall revenue growth, while reported core-solutions revenue declined because the comparison includes the former legal business; real-estate core-solutions revenue increased 18%.
- Management expects continued investment in product development, sales and marketing, customer support, infrastructure, and facilities, which may increase costs and make profitability inconsistent. It expects operating margins to improve over the long term, but cautions that investment opportunities may interrupt that trend. The filing provides no numerical revenue or earnings guidance.
- COVID-19 increased uncertainty around customer spending, employee productivity, and operations. Management reported that electronic-payment demand had benefited in part from greater online activity, while warning that pandemic-related disruption could also reduce demand or hinder operations. Employees were expected to transition back gradually during 2021, with remote work available for the remainder of the year.
- Key risks include competition and execution of growth plans; cyberattacks, outages, and third-party service-provider dependence; regulation of payments, insurance, and tenant screening; and customer exposure to real-estate market conditions. The FTC settlement resolved the disclosed investigation into tenant-screening/FCRA compliance, with ongoing compliance obligations.
- After quarter-end, AppFolio entered a 12-year San Diego office lease with a stated total commitment of $14.9 million, net of tenant-improvement allowances. The company also disclosed that Class B holders controlled approximately 89% of combined voting power as of March 31, 2021.
Important facts for investors to verify
- Whether Value+ growth and adoption can continue, and whether its third-party delivery costs allow margins to recover.
- How much the operating loss reflects planned investment and higher compensation costs, and whether management’s long-term margin expectations are progressing.
- The sustainability of earnings excluding the $5.5 million tax benefit and transition-service income, and the cash-flow impact of tax payments and settlement costs.
- Liquidity and investment-security balances, the absence of reported debt, and the effect of the new office lease and other commitments on future cash needs.
- Ongoing FCRA compliance, insurance-claim exposure, and the effects of regulatory, cybersecurity, and third-party-provider risks.