AppFolio, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. AppFolio provides cloud-based business management software for the real estate industry. Unless stated otherwise, financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $125.1 million | $95.8 million | $347.8 million | $263.8 million |
| Operating income (loss) | $(7.8) million | $(0.0) million | $(52.4) million | $(4.5) million |
| Net income (loss) | $(4.2) million | $(0.1) million | $(48.4) million | $2.4 million |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $19.3 million | $26.5 million |
- Revenue grew 31% in Q3 and 32% for the nine-month period. Q3 Core solutions revenue increased 26% to $33.9 million; Value Added Services revenue rose 35% to $88.4 million.
- Cost of revenue, excluding depreciation and amortization, was 40.5% of revenue in Q3 and 40.7% for the nine-month period. Corresponding gross margins were approximately 59.5% and 59.3%, respectively.
- Q3 operating margin was approximately (6.2)%; nine-month operating margin was approximately (15.1)%. Nine-month results included a $19.8 million impairment charge.
- Q3 basic and diluted loss per share were both $0.12; nine-month loss per share was $1.39.
- At September 30, cash and cash equivalents were $67.2 million and available-for-sale investments totaled $117.2 million. Current assets were $176.8 million; current liabilities were $57.8 million.
- The balance sheet lists no borrowings. Operating lease liabilities totaled $57.1 million, including $53.3 million classified as noncurrent. Total liabilities were $113.0 million.
- For the nine months, investing cash outflow was $5.1 million and financing cash outflow was $5.0 million; cash, cash equivalents and restricted cash increased $9.2 million.
Changes, unusual items and outlook
- Property management units under management reached 7.08 million, up 17% year over year; property management customers rose 8% to 18,109.
- Operating expenses rose faster than revenue in several areas. Nine-month research and product development expense increased 72%, sales and marketing 46%, and general and administrative expense 86% year over year. Stock-based compensation was $28.2 million for the nine months, versus $10.1 million.
- After deciding to exit and sublease certain office space, AppFolio recorded a $19.4 million impairment of right-of-use assets and property and equipment, included in general and administrative expense.
- AppFolio sold its WegoWise subsidiary in August for $5.2 million and recorded a $4.2 million pretax gain. The gain contributed to Q3 other income.
- Management stated that available cash, investments and operating cash flow should cover working capital and capital expenditure needs for at least the next 12 months. It expects 2022 cost of revenue to increase as a percentage of revenue, and sales and marketing, research and development, and—excluding the impairment—general and administrative expenses to increase as a percentage of revenue versus 2021, reflecting planned investment and hiring. No specific revenue or earnings guidance was provided in the filing.
- Management cited competition for talent and higher compensation investment. Available-for-sale investments had $2.6 million of unrealized losses at quarter-end; a hypothetical 100-basis-point interest-rate move was estimated to change fair value by about $0.9 million in either direction.
- The company reported no legal proceedings it believed would have a material adverse effect and no material changes to previously disclosed risk factors. The founder and CTO announced he would step down as CTO effective December 31, 2022; the company did not plan to appoint a replacement at that time.
Important facts for investors to verify
- How much of continuing growth and unit expansion is translating into sustainable operating margins, given rising investment and stock-based compensation.
- Whether Value Added Services growth can offset management’s expectation that related third-party costs will rise faster than revenue.
- The assumptions and future sublease prospects underlying the office-space impairment, and any additional exit or lease costs.
- The quality and liquidity of the investment portfolio, including the effect of interest-rate changes and unrealized losses.
- Execution and leadership transition following the CTO’s planned departure from that role, and the status of the authorized $100 million share-repurchase program; $4.2 million had been repurchased to date.