AppFolio, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Amounts below are in millions of dollars unless stated otherwise. AppFolio provides cloud software and services primarily to real estate customers (about 90% of revenue), with the remainder primarily from legal-market customers.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $81.0 | $63.6 | $153.5 | $120.7 |
| Operating income | $6.3 | $2.3 | $9.2 | $2.2 |
| Operating margin | 7.8% | 3.6% | 6.0% | 1.9% |
| Net income | $19.3 | $23.2 | $21.2 | $26.9 |
| Diluted EPS | $0.54 | $0.65 | $0.60 | $0.76 |
| Operating cash flow | Not stated separately for Q2 | $27.4 | $11.8 |
- Q2 revenue grew 27%; six-month revenue also grew 27%. Q2 core-solutions revenue rose 21% and Value+ services revenue rose 32% year over year.
- Q2 cost of revenue, excluding depreciation and amortization, was 33.8% of revenue versus 39.5% a year earlier. Operating margin improved, though general and administrative expense included a $4.3 million FTC-related accrual.
- Net income declined despite higher operating income, principally because the income-tax benefit was smaller than in 2019. The 2019 benefit included release of a valuation allowance on deferred tax assets; tax benefits in 2020 also reflected stock-based compensation and R&D credits.
- Six-month operating cash flow increased to $27.4 million. Investing activities used $18.7 million, including $14.3 million for property, equipment and intangible assets and $12.7 million of software development additions, partly offset by investment-security sales and maturities. Financing activities provided $28.8 million, principally from revolver borrowings.
Balance sheet and liquidity
- At June 30, cash and cash equivalents were $53.3 million and investment securities were $26.9 million; management reported combined cash and investments of $80.2 million. Working capital was $55.4 million, compared with $14.3 million at December 31, 2019.
- Debt included approximately $48.1 million principal on the term loan and $49.0 million drawn on the $50.0 million revolving facility. About $1.0 million remained available. The facilities mature December 24, 2023, bear variable rates, and the company reported compliance with financial covenants.
- Management said existing cash, investments and operating cash generation should cover working-capital and capital-expenditure needs for at least the next 12 months.
Changes, outlook and key risks
- Property-management customers increased to 15,011 from 13,737 year over year, and units under management rose to 4.94 million from 4.23 million. Management attributed revenue growth to customer and unit growth, greater Value+ usage, new services and a legal-product price increase.
- COVID-19 had produced variable demand in some Value+ services; online payment activity increased during the quarter, but management said the durability of that trend was unclear. Employees were working remotely, expected to continue remotely at least through year-end, and the company had delayed some hiring and reduced or deferred nonessential spending. Management said the pandemic’s cumulative effect on demand could be positive or negative and future results might be more affected than the reported period.
- No numerical revenue or earnings guidance is provided in the supplied filing text. Management expects continued investment in product development, customer support and growth; it anticipates long-term operating-margin improvement but cautions that investment timing may interrupt it.
- The FTC staff said it believed there was a reasonable basis for claims alleging FCRA violations in tenant screening. AppFolio disputes the position and was negotiating a settlement; it accrued a probable loss of $4.3 million, while warning a settlement or judgment materially above that estimate could harm results and liquidity. A separate DOJ inquiry concerning the Servicemembers Civil Relief Act remained unresolved, with potential costs not estimable. A related FCRA class action was settled in 2019.
- Other material risks include uncertain COVID-19 effects on customers, demand and remote-work productivity; dependence on third-party payment, screening and infrastructure providers; cybersecurity and service outages; regulatory and privacy obligations; and variable-rate debt and covenant requirements.
Investor verification points
- Track Value+ usage and revenue mix, property-management customer and unit growth, and whether increased online payment activity persists.
- Monitor the FTC settlement negotiations, the $4.3 million accrual and the status of the DOJ inquiry.
- Assess the impact of COVID-19 on customer retention, transaction volumes, collections, hiring and operating costs.
- Verify cash generation against capitalized software spending and capital expenditures, and monitor revolver availability, debt service and covenant compliance.
- Separate recurring operating performance from the large, period-sensitive income-tax benefits when comparing net income and EPS.