AppFolio, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context
AppFolio provides cloud-based software and services, primarily for real estate property management. Real estate generated approximately 90% of revenue. On September 30, 2020, the company sold MyCase, its legal-practice software business, exiting the legal vertical. Management reported 15,352 property manager customers and 5.12 million units under management at quarter-end.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $84.1 | $67.9 | $237.6 | $188.7 |
| Operating income | $3.4 | $4.1 | $12.5 | $6.4 |
| Operating margin | 4.0% | 6.1% | 5.3% | 3.4% |
| Net income | $137.7 | $5.0 | $158.9 | $31.9 |
| Net income per diluted share | $3.86 | $0.14 | $4.46 | $0.90 |
- Revenue grew 24% in Q3 and 26% year to date. Q3 core solutions revenue increased 21% and Value+ services increased 28%. Management attributed growth mainly to more property management customers and units, greater Value+ adoption, and increased online transactions.
- Q3 cost of revenue, excluding depreciation and amortization, was 39.0% of revenue, versus 38.2% a year earlier. Operating expenses rose, including research and product development (up 27% in Q3) and general and administrative (up 45%).
- Reported net income includes a $187.6 million pretax gain on the MyCase sale. The sale also contributed a $47.9 million discrete tax expense in Q3. Net income therefore is not representative of earnings from ongoing operations.
Cash, liquidity and debt
- At September 30, cash and cash equivalents were $144.0 million; investment securities were $37.8 million. Management reported combined cash and investments of $181.9 million and working capital of $145.7 million, compared with $14.3 million at December 31, 2019.
- For the first nine months, operating cash flow was $45.2 million, investing cash flow was $152.5 million, and financing cash flow was negative $69.5 million. Investing cash flow included $191.4 million of net proceeds from the MyCase sale.
- The company repaid and terminated its credit facility using sale proceeds. Immediately before repayment, approximately $48.1 million of term loans and $49.1 million of revolving borrowings were outstanding; no term debt remained at quarter-end. Operating lease liabilities were $32.8 million.
- Management believes existing cash, investments and operating cash generation will meet working capital and capital expenditure needs for at least the next 12 months. The company had repurchased $4.2 million of shares under its $100 million authorization and made no repurchases after Q1.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expects to continue investing in product development, sales and marketing, customer support and infrastructure; it expects long-term operating margin improvement, which may be interrupted by investment.
- COVID-19 effects remained uncertain. The company reported variable demand for some Value+ services, while online payment activity increased in the latest quarter; management said it was unclear whether that trend would persist. Employees were expected to work remotely at least through Q1 2021. The filing cautions that future demand, customer finances, workforce productivity and results could be adversely affected.
- The FTC investigation into tenant-screening compliance with the Fair Credit Reporting Act remained subject to settlement negotiations. The company recorded a probable-loss accrual of $4.3 million; a materially higher settlement or judgment could adversely affect results and liquidity. Separately, the DOJ closed its Servicemembers Civil Relief Act investigation with a no-action letter on November 6, 2020.
- The MyCase divestiture generated the large one-time gain and related tax expense; management expected additional income from transition services beginning in Q4. The company stated that it did not expect a material impact on operating income from the divestiture.
Most important facts for investors to verify
- Ongoing revenue growth and operating profitability after MyCase’s removal from reported results, especially growth and margins in real estate and Value+ services.
- The final outcome and payment terms of the FTC matter compared with the $4.3 million accrual.
- Whether pandemic-related demand variability, online payment activity and customer financial health materially change in subsequent periods.
- Cash generation from continuing operations excluding sale proceeds, and the use of the substantial post-sale cash balance.
- Subsequent filings for any changes to the stated liquidity outlook, repurchase activity, or contingent obligations.