AppFolio, Inc. — Q3 2016 Form 10-Q
Business context and period: AppFolio provides cloud-based software for small and medium-sized businesses in property management and legal services, including subscription products and usage-based Value+ services. This unaudited report covers the quarter and nine months ended September 30, 2016; comparisons are with the same 2015 periods.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $28.2 million | $20.3 million | $77.6 million | $54.6 million |
| Operating loss | $1.2 million | $4.3 million | $7.1 million | $11.0 million |
| Net loss | $1.1 million | $4.8 million | $7.0 million | $11.8 million |
| Basic and diluted loss per share | $0.03 | $0.14 | $0.21 | $0.68 |
- Revenue grew 39% in Q3 and 42% for the first nine months. Value+ revenue rose 45% and 52%, respectively, led by electronic payments and screening; core-solutions revenue increased 36% and 37%.
- Property-manager customers totaled 9,612, up 27% year over year; law-firm customers totaled 7,799, up 40%. Property management generated more than 90% of nine-month revenue.
- Cost of revenue, excluding depreciation and amortization, was 41% of revenue in Q3 versus 46% a year earlier, and 43% for nine months versus 45%. Operating margin, calculated from reported figures, improved to approximately negative 4% in Q3 from negative 21%; nine-month operating margin improved to approximately negative 9% from negative 20%.
- Operating cash flow was $4.7 million for the first nine months, versus cash used of $3.8 million in 2015. Investing activities used $9.3 million, including $8.6 million of capitalized software development and $3.6 million in property and equipment. Financing activities provided $0.1 million.
- At September 30, cash and cash equivalents were $7.6 million and investment securities were $41.9 million, or $49.6 million combined. Working capital was $6.5 million, down from $10.6 million at December 31, 2015. The company had no borrowings outstanding under its $25 million revolving credit facility; total liabilities were $19.5 million.
Changes, outlook and risks
- Despite continued losses, operating results improved year over year as revenue growth outpaced several expense categories. Q3 sales and marketing expense was essentially flat; nine-month sales and marketing, research and development, general and administrative, and depreciation and amortization expenses increased.
- Management expects to continue investing in employees, customer support, infrastructure, product development and sales. It expects expense ratios to decline and operating margins to improve over the long term, but provided no specific financial guidance. Management believes available liquidity, borrowing capacity and operating cash flows will meet working-capital and capital needs for at least 12 months.
- Capitalized software development rose to $14.4 million net from $10.0 million at year-end; nine-month additions were $8.8 million. Amortization and capitalization affect the timing of reported expenses.
- Operating lease obligations were approximately $8.9 million through 2022. The company recorded a $0.2 million loss and liability after exiting a prior Texas lease. It also bears a 100% quota share of certain tenant-liability insurance claims; related claim liabilities were $0.7 million.
- Management reported no currently known litigation expected to have a material adverse effect and no impairment of goodwill, intangible assets or the specified note receivable. The company disclosed ordinary-course legal matters and indemnification obligations whose maximum potential payments are indeterminable.
- Key risks include sustained operating losses, execution of growth investments, customer adoption and retention, reliance on property-management revenue, and potential changes in capital needs. A hypothetical 100-basis-point interest-rate movement was reported to change investment-security fair value by approximately $0.5 million; the filing's wording on the direction of the second movement is unclear.
Investor facts to verify
- Whether revenue growth and Value+ usage remain strong, and whether customer retention and adoption support continued growth.
- Whether investment in hiring, software development and infrastructure converts into durable operating leverage and positive earnings.
- Cash generation and liquidity, including software capitalization, lease commitments and the absence of revolver borrowings at quarter-end.
- Insurance claims exposure, the concentration of revenue in property management, and the vesting conditions for performance-based equity awards.
- The eventual effects of new accounting standards, particularly revenue recognition and leases; the company had not determined their effects.