AppFolio, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; compared with the three months ended March 31, 2016. Unaudited GAAP results. AppFolio provides cloud software and related services to property managers and small legal practices.
Financial results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $32.1 million | $23.2 million |
| Operating income (loss) | $0.6 million | $(3.6) million |
| Net income (loss) | $0.7 million | $(3.6) million |
| Diluted EPS | $0.02 | $(0.11) |
| Cash from operating activities | $3.8 million | $(0.7) million |
- Revenue rose 38% year over year. Core solutions revenue increased 34% to $13.1 million; Value+ services increased 45% to $17.8 million; other revenue was $1.3 million.
- Operating margin was 1.9%, versus negative 15.4%. Cost of revenue excluding depreciation and amortization was 40.4% of revenue, down from 45.4%; the resulting gross contribution margin was approximately 59.6%, versus 54.6%.
- Costs and operating expenses totaled $31.5 million, up from $26.8 million. Depreciation and amortization rose 42% to $3.0 million, primarily reflecting higher amortization of capitalized software. Stock-based compensation was $1.1 million, versus $0.5 million.
- Cash and cash equivalents were $8.0 million at March 31, 2017. Investment securities totaled $44.3 million, for combined cash and investments of $52.3 million. Working capital was $13.3 million.
- Cash decreased $2.7 million during the quarter, to $8.0 million. Investing activities used $5.5 million, including $3.0 million of capitalized software development costs; financing activities used $1.1 million, primarily for tax withholding on vested restricted stock units.
- Total liabilities were $22.4 million, including $20.9 million of current liabilities. No borrowings were outstanding under the $25.0 million revolving credit facility; the company reported covenant compliance.
Business trends and material changes
- Property manager customers increased 19% year over year to 10,468, and units under management rose 23% to 2.83 million. Law firm customers increased to 8,676 from 6,834.
- More than 90% of revenue came from property management. Management attributed growth to customer-base expansion, strong renewals, more units under management, and greater adoption and use of Value+ services, including electronic payments and screening.
- Sales and marketing expense fell 6% in dollars and from 32.5% to 22.1% of revenue. Research and development rose 19%, general and administrative expense rose 35%, and depreciation and amortization rose 42%.
Outlook, risks and notable items
- No numerical revenue or earnings guidance was provided. Management expects to keep investing in growth; it anticipates operating expenses will decline as a percentage of revenue and operating margins will improve over the long term as the business scales. Management cautioned that quarterly results are not necessarily indicative of full-year results.
- Management believes cash, investments, available revolver capacity and operating cash generation will cover working capital and capital expenditure needs for at least the next 12 months. Future capital needs depend on growth, product investment and potential expansion or acquisitions; no present acquisition plans were reported.
- The company assumes a 100% quota share of tenant liability insurance provided through its third-party provider and bears claim risk. Accrued reported and incurred-but-not-reported claims were $0.4 million at quarter-end.
- Operating lease obligations were approximately $10.8 million through 2022. A February 2017 headquarters lease amendment extended the term to December 2021 and added a $3.1 million commitment.
- Management reported no material litigation, off-balance-sheet arrangements, or material changes in internal control. It identified no material impairment of goodwill, intangible assets or the SecureDocs note receivable during the quarter.
- Revenue standard Topic 606 is scheduled for adoption January 1, 2018; management preliminarily expects no material revenue impact but is evaluating the accounting for customer contract acquisition costs. The new lease standard is expected to materially affect the balance sheet through recognition of operating lease assets and liabilities.
Important facts for investors to verify
- Whether Value+ growth, customer additions and unit growth continue, and how much revenue remains concentrated in property management.
- Whether improved operating profitability and operating cash flow persist, considering stock compensation and the substantial capitalization and amortization of software development costs.
- Insurance claim development and the adequacy of reserves, given the company’s assumed insurance risk.
- Future liquidity and lease commitments, including the effects of the new lease accounting standard and any use of the $25.0 million revolver.
- How final Topic 606 adoption affects customer acquisition cost recognition and reported results; management had not selected a transition method.