AppFolio, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. AppFolio provides cloud business-management software for the real estate industry. Financial amounts below are in U.S. dollars; “million” is abbreviated as “m.”
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $147.1m | $117.5m | $283.2m | $222.7m |
| Operating loss | $(0.7)m | $(29.9)m | $(27.2)m | $(44.6)m |
| Net loss | $(18.9)m | $(30.0)m | $(54.0)m | $(44.3)m |
| Net loss per share, diluted | $(0.53) | $(0.86) | $(1.52) | $(1.27) |
| Operating cash flow | Not separately provided for Q2 | $(7.7)m | $3.3m |
- Q2 revenue grew 25%; six-month revenue grew 27%. Value Added Services revenue rose 30% in Q2 and 33% year to date, primarily from increased use of payment, tenant-screening, and risk-mitigation services. Core solutions revenue grew 19% and 20%, respectively.
- Property management units under management increased 13% year over year to 7.7m at June 30; customers increased to 19,145 from 17,878.
- Q2 cost of revenue, excluding depreciation and amortization, was 39.3% of revenue, versus 40.4% a year earlier. Operating margin was approximately -0.5%, compared with -25.5% in Q2 2022. Lower prior-year-comparison G&A reflected the nonrecurrence of substantial lease impairment charges.
- Q2 income tax expense was $19.6m despite pretax income of only $0.7m, resulting in a reported effective tax rate of 2,637%. The filing attributes the unusual rate mainly to valuation-allowance changes, nondeductible officers’ compensation, and state taxes. Six-month tax expense was $29.6m.
- Six-month cash used in investing was $26.7m, mainly reflecting purchases of investment securities; financing used $11.8m, primarily from employee tax withholding on vested equity awards. Cash, cash equivalents, and restricted cash declined $46.1m to $24.9m.
Liquidity, assets, and obligations
- Cash and cash equivalents were $24.7m and current investment securities were $139.3m at June 30, for $164.0m in combined cash and investments. Total assets were $351.4m; total liabilities were $125.4m.
- The balance sheet reports no borrowings. Lease liabilities totaled $42.6m, including $3.1m classified in other current liabilities. Management said existing cash, investments, and expected operating cash flows should cover working capital and capital expenditure needs for at least the next 12 months.
- The board had authorized up to $100m of share repurchases; $4.2m had been repurchased to date. No additional repurchases were reported in the supplied filing text.
Material changes, outlook, and risks
- Research and product development expense rose 40% in Q2 and 47% for the first half, reflecting increased personnel costs and investment in product capabilities for larger customers. Management expects this expense to increase as a percentage of 2023 revenue.
- Management expects cost of revenue, sales and marketing, G&A, and depreciation and amortization each to decline as a percentage of 2023 revenue versus 2022, citing revenue mix, efficiencies, and lower software amortization. It expects payment-services revenue to increase during the rest of 2023, including from ending the waiver of eCheck (ACH) transaction fees beginning in Q3. The filing provides no numerical revenue or earnings guidance.
- The former CEO’s $14.9m separation costs were accrued in Q1 and fully paid in Q2. A $19.4m lease-related impairment recorded in Q2 2022 did not recur. Lease amendments generated $4.3m in gains during the first half of 2023; the June amendment also involved a one-time $2.9m payment.
- Reported landlord-insurance claim liabilities were estimated at $3.2m, up from $2.7m at year-end. Management said it knew of no legal matters expected to have a material adverse effect, while noting that legal disputes can entail costs and management distraction. The company reported no material changes to previously disclosed risk factors and said disclosure controls were effective.
- Available-for-sale investments had $1.1m of gross unrealized losses at June 30. Management did not consider the decline other than temporary, stating it was more likely than not the securities would be held to maturity or recovery. A hypothetical 100-basis-point rate move was estimated to change fair value by approximately $0.6m in either direction.
Important facts for investors to verify
- Whether Value Added Services usage growth and the new ACH fee policy translate into sustained revenue growth and margins.
- How the unusually high tax provision and valuation allowance affect future reported earnings and cash taxes.
- Whether operating cash flow returns to positive levels after the CEO separation payment and other working-capital movements.
- How product-development investment, stock-based compensation, lease obligations, and any share repurchases affect future expenses and liquidity.
- Whether insurance claims, investment fair-value movements, or legal matters change materially after the reporting date.