AppFolio, Inc. — Q1 2018 Form 10-Q
Business and period: Unaudited quarter ended March 31, 2018; comparisons are with Q1 2017. AppFolio sells cloud software and related services, primarily to property managers, with a smaller legal-software business. Property manager customers generated more than 90% of revenue.
Financial results
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $42.34 million | $32.13 million | +32% |
| Operating income / margin | $4.17 million / 9.9% | $0.60 million / 1.9% | Margin +8.0 percentage points |
| Net income / margin | $4.32 million / 10.2% | $0.66 million / 2.1% | — |
| Diluted EPS | $0.12 | $0.02 | — |
| Cash from operating activities | $3.34 million | $3.81 million | Down $0.47 million |
- Revenue mix: Core solutions were $16.21 million (+24%); Value+ services were $24.64 million (+39%); other revenue was $1.50 million (+19%). Growth was mainly attributed to more property manager customers and units under management, and increased use of Value+ services.
- Operating costs: Cost of revenue, excluding depreciation and amortization, was $16.61 million, or 39.2% of revenue versus 40.4%. Sales and marketing was $7.41 million (17.5% versus 22.1%); research and product development was $5.33 million (12.6% versus 11.3%); general and administrative was $5.32 million (12.6% versus 15.0%); depreciation and amortization was $3.50 million (8.3% versus 9.3%).
- Balance sheet and liquidity: At March 31, cash and cash equivalents were $8.55 million and investment securities totaled $59.26 million, for aggregate liquidity of $67.81 million. Working capital was $35.3 million. Total liabilities were $21.53 million and stockholders’ equity was $92.54 million.
- Debt and commitments: No revolver borrowings were outstanding; the available revolving facility was $25 million and matures October 2020. Operating lease obligations were approximately $8.5 million through 2022.
- Investing and financing cash flows: Investing used $10.47 million, including $2.94 million of capitalized software costs and net purchases of investment securities. Financing used $0.43 million, primarily for tax withholding on vested equity awards.
Changes, outlook, and notable items
- Property manager customers rose 15% year over year to 12,030, and units under management increased 20% to 3.40 million. Legal subscribers increased to 9,706 from 8,676.
- Operating cash flow fell despite higher net income, with cash uses including decreases in accrued employee expenses and deferred revenue and increased receivables.
- AppFolio adopted the new revenue standard on January 1, 2018 using the modified retrospective method; 2017 comparisons were not restated. Adoption did not affect revenue, but deferred contract acquisition costs, principally commissions, rather than expensing them immediately. The company reported Q1 2018 net income of $4.32 million; without adoption, it would have been $2.99 million, a $1.33 million difference. The adoption also increased opening retained earnings by $2.96 million.
- Management expects continued investment in product development, customer support, infrastructure, and expansion into adjacent or new verticals. It expects operating margins to improve over the long term as revenue grows, while noting that accelerated investment may interrupt that trend. No specific financial guidance was provided.
- Management said existing liquidity, operating cash generation, and available revolver capacity should meet working-capital and capital-expenditure needs for at least the next 12 months. The company reported no off-balance-sheet arrangements and no litigation it believed would have a material adverse effect.
- Risk considerations include growth and investment execution, customer adoption and retention, seasonality in screening-related Value+ revenue (typically weaker in Q4), and exposure to investment-security fair-value changes. A hypothetical 100-basis-point rate move was estimated to change investment-security fair value by approximately $0.5 million. Adoption of the forthcoming lease standard was expected to materially affect the balance sheet, principally through operating lease assets and liabilities.
Important facts for investors to verify
- How much of revenue growth and profitability reflects durable customer and usage growth versus the accounting change in commission expense recognition.
- Value+ service growth, third-party delivery costs, and any concentration or claims exposure from the landlord-liability insurance offering.
- Whether operating cash flow can strengthen as the business grows, given working-capital movements and ongoing software investment.
- Progress toward long-term margin improvement while funding product development, sales, and potential expansion.
- The balance-sheet impact of lease accounting adoption and any changes in liquidity, commitments, or revolver use.