AppFolio, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless stated otherwise. AppFolio provides cloud software and related services to small and medium-sized property management businesses and law firms. More than 90% of Q1 revenue came from property management.
Financial performance
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Revenue | $23.2 million | $15.8 million; up 46% |
| Net loss | $3.6 million | $3.6 million |
| Basic and diluted loss per share | $0.11 | $0.41 |
| Operating loss | $3.6 million; 15% of revenue | $3.5 million; 22% of revenue |
| Cost of revenue, excluding depreciation and amortization | $10.5 million; 45% of revenue | $7.1 million; 45% of revenue |
| Cash used in operating activities | $0.7 million | $1.2 million |
Revenue by category was $9.8 million from core solutions, $12.3 million from Value+ services, and $1.2 million from other services. Value+ revenue grew 59%, primarily from greater use of electronic payments, screening, and tenant liability insurance; core solutions revenue increased 37%, supported by customer growth and renewals. Property manager customers grew 36% to 8,816 and law firm customers grew 61% to 6,834.
Operating expenses totaled $26.8 million, or 115% of revenue, versus $19.4 million, or 122%, a year earlier. Sales and marketing was 33% of revenue (36% prior year), research and product development 13% (13%), general and administrative 15% (21%), and depreciation and amortization 9% (7%). Depreciation and amortization rose 79%, largely reflecting higher capitalized software amortization.
Balance sheet, liquidity, and cash flow
- At March 31, 2016, cash and cash equivalents were $11.3 million and investment securities were $40.9 million, totaling $52.1 million in cash and investments. Working capital was $10.5 million, compared with $10.6 million at year-end 2015.
- Total assets were $89.6 million and total liabilities were $19.6 million. The company had no outstanding balance on its $25 million revolving credit facility; it matures October 2020. The filing reports no material debt balance at quarter-end.
- Cash declined $0.8 million during the quarter. Investing activities used $0.1 million net, including $1.9 million of property and equipment purchases and $2.2 million of capitalized software additions; investment sales and maturities offset much of the outlay. Financing activities provided $0.1 million.
- Management said existing cash, investments, available credit, and expected operating cash generation should cover working capital and capital expenditure needs for at least the next 12 months.
Changes, outlook, and notable items
- Revenue growth outpaced the 46% increase in headcount to 601 employees. Management expects continued investment in personnel, product development, sales and marketing, customer support, and infrastructure; costs may rise in absolute terms.
- Management expects major cost categories to decline as a percentage of revenue over the long term and operating margins to improve with scale. No quantified revenue, earnings, or margin guidance was provided.
- AppFolio launched Premium Leads, a new property-management Value+ service, in February 2016. The April 2015 RentLinx acquisition contributed to other-services revenue and increased acquired-intangible amortization.
- The company moved into a new Richardson, Texas location and exited its prior site; it recorded a $0.1 million lease-abandonment loss and is seeking a subtenant. Operating lease obligations were approximately $10.0 million through 2022.
- The wholly owned insurance subsidiary assumes a 100% quota share of tenant liability insurance through a third-party arrangement. Accrued claims were $0.4 million at quarter-end; related collateral deposits were $0.8 million.
- No material litigation was reported. The filing cites ordinary-course legal matters and indemnification obligations whose maximum potential payments are indeterminable, but no liability was accrued. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Value+ usage and customer additions sustain growth, and how much growth depends on property management versus the smaller legal vertical.
- Whether higher support, third-party service, and infrastructure costs can be managed while the company pursues long-term operating leverage.
- How capitalized software spending and related amortization affect reported expenses and cash needs.
- Insurance claims experience and the potential effect of the 100% quota-share exposure, as well as the outcome of subletting the vacated Texas location.
- The company’s future capital requirements, including any acquisition or investment plans; management noted these could change and that additional financing might be needed.