AppFolio, Inc. — Q3 2015 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2015, compared with the same periods in 2014. AppFolio provides cloud-based software for property managers and small law firms, with subscription products and optional Value+ services. More than 90% of revenue historically came from property management. The company acquired RentLinx in April 2015 and completed its IPO in June 2015.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $20.3 million | $13.0 million | $54.6 million | $34.5 million |
| Operating loss | $4.3 million | $1.3 million | $11.0 million | $4.0 million |
| Net loss | $4.8 million | $1.3 million | $11.8 million | $4.0 million |
| Net loss per share, diluted | $0.14 | $0.14 | $0.68 | $0.46 |
| Operating cash flow | Not separately reported for the quarter | $(3.8) million | $1.3 million |
Q3 revenue grew 56%; nine-month revenue grew 58%. Value+ revenue increased 64% in Q3 and 68% for the nine-month period, primarily from greater use of electronic payments, screening and tenant liability insurance. Core solutions revenue rose 42% and 45%, respectively. The filing attributes growth to customer-base expansion, strong renewals and increased Value+ adoption.
Q3 cost of revenue, excluding depreciation and amortization, was 46% of revenue, versus 46% a year earlier. Revenue less this cost was approximately 54% in both periods; this is not a complete gross margin measure because depreciation and amortization is reported separately. Operating loss margin widened to approximately 21% from 10%; the nine-month operating loss margin widened to approximately 20% from 12%. Expense growth reflected hiring, customer support and service delivery, marketing, product development, public-company costs, and higher depreciation and amortization.
Financial position and liquidity
- At September 30, cash and cash equivalents were $11.8 million and investment securities were $51.9 million, for combined cash and investments of $63.6 million. Working capital was $27.5 million, compared with a $5.7 million deficit at December 31, 2014.
- Total assets were $94.2 million; total liabilities were $17.9 million. Stockholders’ equity was $76.3 million. There was no debt outstanding at quarter-end.
- Nine-month investing cash outflow was $63.1 million, largely reflecting purchases of investment securities, capitalized software, property and equipment, and the RentLinx acquisition. Financing cash inflow was $73.3 million, principally IPO proceeds.
- The IPO and overallotment generated approximately $75.4 million in net proceeds. In October 2015, the company entered into a $25 million revolving facility, with no borrowings outstanding as of the filing date. It includes a minimum liquidity covenant of $12.5 million and, if liquidity falls below $25 million, a maximum senior leverage covenant. Management said available cash, investments and facility capacity should meet requirements for at least 12 months.
Changes, outlook and notable items
- Headcount increased 60% year over year to 556 employees. Management expects absolute operating costs to continue rising as it invests in growth, while anticipating improved operating margins over the long term as revenue scales. No specific financial guidance was provided.
- RentLinx was acquired for approximately $4.1 million in cash; the acquisition added $1.7 million of goodwill and $2.2 million of intangible assets. RentLinx contributed $0.4 million of Q3 revenue; pro forma financial information was omitted as immaterial.
- Q3 interest expense included a write-off of $0.4 million in unamortized debt financing costs after repayment of the $10 million term loan. The company also paid a $2.4 million final MyCase earn-out in May.
- A former MyCase shareholder alleges the company failed to pursue the maximum earn-out, potentially $6.6 million, and has threatened punitive damages. AppFolio disputes the allegations; loss exposure was not reasonably estimable and no reserve was recorded. Separately, AppFolio paid $0.6 million to expedite a transition between service providers.
- The company assumes 100% of certain tenant-liability insurance risk under a reinsurance arrangement; its recorded claims liability was $0.4 million at quarter-end. Operating lease obligations were approximately $6.9 million through 2022, before subsequent lease expansions.
- Management reported material weaknesses in internal control over financial reporting involving staffing and accounting for complex or unusual transactions. Disclosure controls were deemed ineffective at quarter-end; remediation efforts were ongoing and not yet shown to be fully effective.
Important facts for investors to verify
- Whether customer growth and Value+ usage can sustain revenue growth while operating losses and operating cash use remain elevated.
- Investment portfolio composition, maturities, valuation and credit exposure; the $51.9 million portfolio included corporate bonds, agency securities and certificates of deposit.
- Progress in remediating internal-control weaknesses and the company’s ability to meet public-company reporting requirements.
- Developments in the MyCase earn-out dispute and any resulting financial exposure.
- Compliance with the new revolver’s liquidity and leverage covenants, and the effects of expanded lease commitments.