AppFolio, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. AppFolio provides cloud software, services and data analytics primarily to the real estate industry. Comparisons with 2020 are affected by the September 2020 divestiture of legal-software business MyCase.
Financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $95.8 million | $84.1 million | $263.8 million | $237.6 million |
| Operating income (loss) | $(0.01) million | $3.4 million | $(4.5) million | $12.5 million |
| Net income (loss) | $(0.1) million | $137.7 million | $2.4 million | $158.9 million |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $26.5 million | $45.2 million |
- Reported revenue grew 14% in Q3 and 11% year to date. Excluding MyCase revenue included in 2020, real-estate revenue grew 28% in Q3 and 24% year to date.
- Q3 revenue mix: core solutions $26.9 million, Value+ services $65.6 million and other $3.3 million. Real-estate core-solutions revenue grew 23% and Value+ revenue grew 34% year over year in Q3.
- Property manager customers reached 16,844 and units under management 6.04 million, up 10% and 18%, respectively, in average measures for Q3 compared with the prior-year quarter.
- Cost of revenue, excluding depreciation and amortization, was 40.4% of revenue in Q3 versus 39.0% reported in 2020; nine-month figures were 39.7% versus 37.5%. Operating margin was approximately break-even in Q3 (4.0% in 2020) and negative 1.7% year to date (5.3% in 2020).
- 2020 net income included a $187.6 million gain on the MyCase sale; Q3 2020 also included $47.9 million of discrete tax expense related to the transaction. These items make reported earnings comparisons unrepresentative of ongoing operations.
Liquidity, cash flow and balance sheet
- At September 30, 2021, cash and cash equivalents were $84.4 million and investment securities were $85.3 million, totaling $169.8 million in cash, cash equivalents and investments. Current assets were $197.4 million and current liabilities $49.2 million.
- The company reported no outstanding debt; its credit facility was terminated following the MyCase sale. Management said existing liquidity and operating cash generation should cover working capital and capital needs for at least the next 12 months.
- Nine-month operating cash flow was $26.5 million, down from $45.2 million. Investing activities used $73.8 million, primarily reflecting net investment-security purchases and $18.5 million of capitalized software development. Financing activities used $8.5 million, mainly for employee tax withholding on vested equity awards.
- Total liabilities were $115.7 million, including $56.6 million of operating lease liabilities. The filing reports no off-balance-sheet arrangements.
Outlook, risks and unusual items
- No numeric revenue or earnings guidance is provided. Management expects to continue investing in product development, sales and marketing, customer support, infrastructure and facilities; expenses may rise before related benefits are realized. It expects operating margins to improve over the long term, but cautions that investment timing may interrupt that trend.
- Management cited growth in customers, units under management and use of electronic payments, tenant screening and insurance services as revenue drivers. Value+ services growth also brings higher third-party service-provider costs.
- COVID-19 uncertainty remains a risk to customer demand, workforce productivity and operations. The company postponed its return-to-office plans into 2022 and continued to offer remote work.
- Key risks include competition, dependence on customer renewals and Value+ usage, cybersecurity and service outages, third-party payment and screening providers, evolving privacy and financial-services regulation, and the ability to hire and retain skilled employees.
- AppFolio previously settled its FTC tenant-screening investigation, paid $4.3 million, admitted no wrongdoing and remains subject to compliance and reporting requirements. The filing says no pending or threatened legal matter was expected to have a material adverse effect.
- The board-authorized $100 million share-repurchase program remained in place; $4.2 million had been repurchased, with no repurchases after Q1 2020.
Important facts for investors to verify
- Whether real-estate revenue growth and Value+ adoption continue, and how much growth converts to operating profit as service-provider costs rise.
- How ongoing hiring, product investment, stock-based compensation and executive incentive plans affect expenses and margins.
- Whether operating cash flow recovers and whether the $169.8 million liquidity balance is maintained while funding investment and growth.
- Progress on FTC compliance, and any changes in tenant-screening, electronic-payment or insurance regulation and related exposure.
- The filing provides no specific forward revenue or earnings target; assess future results against management’s qualitative long-term margin expectations and stated investment plans.