AppFolio, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. AppFolio provides cloud software primarily to the real estate market; property-management customers generate over 90% of revenue. The financial statements are unaudited.
Financial performance
| Metric | Q3 2018 | Q3 2017 | First nine months 2018 | First nine months 2017 |
|---|---|---|---|---|
| Revenue | $50.1m | $37.9m | $139.7m | $105.9m |
| Operating income | $5.5m | $3.6m | $17.0m | $6.9m |
| Operating margin | 10.9% | 9.5% | 12.1% | 6.6% |
| Net income | $5.5m | $3.7m | $17.3m | $7.1m |
| Diluted EPS | $0.16 | $0.10 | $0.49 | $0.20 |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $24.6m | $21.6m |
Q3 revenue grew 32% year over year. Core solutions revenue rose 22% to $17.9m, while Value+ services rose 42% to $30.8m; other revenue was $1.4m. For the first nine months, core solutions increased 23% and Value+ services 40%. Q3 cost of revenue, excluding depreciation and amortization, was 38.5% of revenue versus 37.1%; management attributed the increase mainly to costs tied to a litigation settlement. Nine-month cost of revenue was 38.4% of revenue, slightly below the prior-year 38.5%.
Financial position and liquidity
- At September 30, 2018, cash and cash equivalents were $13.7m and investment securities were $51.7m; together they totaled $65.4m. Working capital was $41.2m.
- Total assets were $136.2m and total liabilities were $27.8m. The filing reports no outstanding borrowings on the $25.0m revolving credit facility; the facility matures in October 2020 and the company was in covenant compliance.
- Nine-month investing cash outflow was $24.8m, including $14.4m for the WegoWise acquisition and $9.0m of capitalized software development. Financing cash outflow was $2.2m, mainly employee tax withholding on vested shares.
- Management said existing cash, investments, available revolver capacity and operating cash generation should cover working capital and capital expenditure needs for at least the next 12 months.
Material developments, outlook and risks
- WegoWise acquisition: Completed August 31 for $14.4m in cash, including $2.0m held in escrow for 12 months. The preliminary allocation includes $8.8m goodwill and $5.4m acquired intangible assets; valuation was not finalized. Post-acquisition results included $79,000 revenue and a $329,000 net loss through September 30. Contingent consideration was estimated as de minimis but may be remeasured.
- Accounting change: Adoption of the new revenue standard did not affect revenue but changed the timing of commission expense by deferring qualifying contract-acquisition costs over three years. It increased nine-month 2018 net income by $2.8m versus the amount that would have been reported without adoption. Prior-year figures were not restated, limiting comparability.
- Management outlook: AppFolio intends to continue investing in product development, sales and marketing, customer support, infrastructure and possible new markets. Management expects operating margins to improve over the long term, while noting that investment opportunities may interrupt that trend. No numerical financial guidance is provided.
- Seasonality: Tenant screening activity and related Value+ revenue typically decline in the fourth quarter, which has historically led to slower sequential growth or a sequential revenue decline.
- Litigation: The company agreed to settle the Leo Fair Credit Reporting Act class action without admitting liability; court approval remained pending. It recorded $1.1m of expense, net of expected insurance proceeds, in the first nine months.
- Commitments and exposure: Operating lease obligations were approximately $27.8m through 2028. New and amended office leases were entered into during 2018. The company also assumes 100% of the quota share for its legal-liability-to-landlord insurance service; related claims liability was $0.7m at quarter end.
- The company identified real estate customer concentration, continued investment needs, execution of the acquisition, legal proceedings and other risks described in its prior annual report and SEC filings. It reported effective disclosure controls and no material off-balance-sheet arrangements.
Important facts for investors to verify
- How much reported earnings growth reflects underlying operations versus the new commission-deferral accounting treatment.
- Whether the WegoWise purchase-price allocation is finalized and whether contingent payments or integration costs change.
- The final court-approved terms and insurance recovery for the Leo settlement.
- Fourth-quarter seasonality and ongoing Value+ growth, costs and customer usage trends.
- The scale and timing of lease payments, planned investment, and liquidity needs as the business expands.