AppFolio, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless noted.
Business context
AppFolio provides cloud-based software and services, primarily for real estate property management; real estate accounts for more than 90% of revenue. Legal-market customers contribute less than 10%. Revenue includes core solutions, Value+ services and other services.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Revenue | $72.5 | $57.1 | Up 27% |
| Core solutions revenue | $24.9 | $20.8 | Up 20% |
| Value+ services revenue | $44.1 | $33.7 | Up 31% |
| Operating income (loss) | $2.8 | $(0.1) | Operating margin 3.9%, versus (0.1)% |
| Net income | $2.0 | $3.7 | Net margin 2.7%, versus 6.5% |
| Diluted EPS | $0.06 | $0.11 | Lower year over year |
| Cash from operating activities | $3.1 | $0.3 | Improved year over year |
Cost of revenue excluding depreciation and amortization was 39.9% of revenue, improving from 42.4%; the corresponding gross margin was approximately 60.1%, versus 57.6%. Net income fell despite the operating improvement, principally because Q1 2019 included a $4.3 million income tax benefit related to deferred tax liabilities acquired with Dynasty; Q1 2020 recorded $0.4 million of tax expense.
At March 31, 2020, cash and cash equivalents were $56.8 million and investment securities were $14.6 million, totaling $71.4 million. Working capital was $54.1 million. The company drew $49.0 million on its $50.0 million revolving facility during the quarter, citing COVID-19 uncertainty; $1.0 million remained available. Term-loan principal was $48.4 million, making total facility borrowings approximately $97.4 million before debt discounts. The term loan and revolver mature December 24, 2023. The company reported compliance with debt covenants.
Cash increased by $41.0 million, including $49.4 million of net revolving-facility proceeds. Investing activities provided $5.7 million, primarily from investment-security sales and maturities; purchases of property and equipment were $8.0 million and capitalized software additions were $6.8 million. Financing cash use included $6.5 million of tax withholding on vested shares, $6.0 million of Dynasty contingent consideration and $4.2 million of share repurchases. The company repurchased 48,002 shares at an average $87.35 per share, excluding commissions.
Material changes and operating trends
- Revenue growth was supported by a 10% year-over-year increase in property-management customers and an 18% increase in property-management units under management, to 14,729 customers and 4.80 million units.
- Value+ services grew faster than core solutions, reflecting increased customer usage and new or expanded services. Management said certain Value+ demand showed variability after COVID-19 restrictions began.
- Operating expenses totaled $69.7 million, up from $57.1 million. Sales and marketing and research and product development increased 29% and 32%, respectively, reflecting investment in growth; general and administrative expense increased 5%.
- Investing cash flow improved substantially from Q1 2019, when the Dynasty acquisition used $54.0 million. There was no acquisition cash payment in Q1 2020.
Outlook, risks and contingencies
- COVID-19: AppFolio reported no significant demand impact during the quarter, but noted variability in some Value+ services and said future cumulative effects could be positive or negative and were difficult to estimate. It shifted employees to remote work, delayed some hiring and reduced or deferred non-essential spending. Management stated existing cash, investments and operating cash flows were expected to cover working-capital and capital-expenditure needs for at least 12 months.
- Management outlook: The filing provides no numerical revenue or earnings guidance. Management intends to continue investing in product development, sales and marketing, customer support and infrastructure; it expects operating margins to improve over the long term, while acknowledging investment timing may interrupt that trend.
- FTC and DOJ matters: On April 30, 2020, FTC staff stated its belief that there was a reasonable basis to assert FCRA-related claims concerning tenant screening, potentially involving monetary penalties and/or injunctive relief. AppFolio disputed the position, said it would defend itself, and could not estimate the outcome or costs, which could be material. The company was also cooperating with a DOJ inquiry concerning the Servicemembers Civil Relief Act and tenant screening; the outcome and potential costs were unclear.
- Other exposures: The company bears 100% of specified legal-liability-to-landlord insurance claims under a reinsurance arrangement; related reported and incurred-but-not-reported claim liabilities were $2.0 million. Risks also include customer financial distress, reduced Value+ usage, reliance on third-party payment and screening providers, variable-rate debt, covenant compliance and cybersecurity or service disruptions.
- The filing reported no identified impairment of goodwill or other long-lived assets in the quarter, no material off-balance-sheet arrangements and no material changes to contractual obligations disclosed in the prior annual report.
Important facts for investors to verify
- How COVID-19 affected subsequent customer retention, units under management, Value+ transaction volumes and collections after March 31.
- Developments, potential penalties, settlement terms or other financial effects from the FTC and DOJ tenant-screening matters.
- Liquidity after the $49.0 million revolver draw, remaining borrowing capacity, interest costs and ongoing compliance with credit-agreement covenants.
- Whether operating cash flow can support planned investment, capital expenditures, debt service and any further share repurchases.
- The sustainability of revenue growth and margin improvement, particularly given the concentration in real estate and the faster growth of usage-based Value+ services.