AppFolio, Inc. — Q3 2017 Form 10-Q
Business and period: AppFolio provides cloud-based software for property managers and small law firms, with subscription products and transaction-based Value+ services. This unaudited filing covers the quarter and nine months ended September 30, 2017; comparisons are with the same 2016 periods unless noted. More than 90% of nine-month revenue came from property management customers.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $37.9M | $28.2M | $105.9M | $77.6M |
| Operating income (loss) | $3.6M | ($1.2M) | $6.9M | ($7.1M) |
| Net income (loss) | $3.7M | ($1.1M) | $7.1M | ($7.0M) |
| Diluted EPS | $0.10 | ($0.03) | $0.20 | ($0.21) |
| Operating cash flow | — | $21.6M | $4.7M |
- Revenue grew 35% in Q3 and 37% for the nine-month period. Q3 Core solutions revenue increased 30% to $14.7M; Value+ services rose 39% to $21.8M.
- Q3 operating margin was 9.5%, versus negative 4.3% a year earlier. Cost of revenue excluding depreciation and amortization was 37.1% of revenue, improving from 41.4%; the corresponding nine-month proportions were 38.5% and 43.0%.
- Nine-month investing cash outflow was $16.4M, including $8.1M of capitalized software development and $1.7M of property and equipment purchases. Financing cash outflow was $1.1M; cash increased $4.1M.
- At September 30, cash and equivalents were $14.8M and investment securities were $48.8M, totaling $63.6M. Working capital was $27.2M, compared with $10.9M at year-end 2016. Total liabilities were $25.1M; there were no borrowings under the $25M revolving credit facility.
- Property-manager customers numbered 11,258 and units under management were 3.08M at September 30, 2017; law-firm customers numbered 9,214.
Changes, outlook and risks
- Profitability improved from losses in 2016 as revenue growth outpaced several expense categories. Management attributed growth principally to a larger property-manager customer base, more units under management, and greater adoption and use of electronic payments and screening services. Property-manager customers increased 17% year over year and units under management increased 22%.
- Management expects to keep investing in product development, sales, customer support and infrastructure. It expects operating margins to improve over the long term as revenue scales, while noting that investments may precede benefits. The filing gives no specific quarterly or annual revenue or earnings guidance.
- Management said existing liquidity, operating cash generation and available credit should cover working capital and capital expenditure needs for at least the next 12 months. A February 2017 headquarters lease amendment extended the lease through December 2021, adding a $3.1M commitment; operating lease obligations totaled approximately $9.6M through 2022.
- Screening-related Value+ revenue is seasonally weaker in the fourth quarter, and management expects this pattern to continue. Business concentration in property management and growth-dependent adoption of Value+ services are relevant risks.
- The company bears 100% of tenant-liability insurance claims under its reinsurance arrangement; accrued reported and incurred-but-not-reported claims were $0.4M. Management reported no litigation believed likely to have a material adverse effect, and no off-balance-sheet arrangements.
- The company plans to adopt the new revenue standard on January 1, 2018 using the modified retrospective method; it did not expect a material revenue impact but anticipated deferring and amortizing certain contract-acquisition costs. It expected the new lease standard to materially affect the balance sheet, principally through recognition of operating lease assets and liabilities.
Investor verification priorities
- Check whether revenue growth, Value+ adoption and units under management continued after Q3, and assess the effect of fourth-quarter seasonality.
- Review the durability of margin gains alongside rising research and development, general and administrative, and depreciation and amortization expenses.
- Reconcile operating cash flow to net income, including working-capital movements, stock-based compensation and capitalized software spending.
- Monitor insurance claims and collateral requirements, lease commitments, and the timing and balance-sheet impact of adopting revenue and lease accounting standards.
- Assess dilution and performance conditions for stock awards; approximately 571,000 performance-based options and units were excluded from Q3 diluted EPS calculations as contingent performance measures had not been met.