AppFolio, Inc. — Q2 2018 Form 10-Q
Business context and period. AppFolio provides cloud-based software to property management businesses and small law firms. The report covers the quarter and six months ended June 30, 2018; amounts below are in U.S. dollars. Property management generated more than 90% of revenue.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $47.2 million | $35.9 million | $89.6 million | $68.0 million |
| Operating income | $7.3 million | $2.8 million | $11.5 million | $3.4 million |
| Net income | $7.5 million | $2.8 million | $11.8 million | $3.5 million |
| Diluted EPS | $0.21 | $0.08 | $0.33 | $0.10 |
| Operating margin | 15.5% | 7.7% | 12.8% | 4.9% |
- Q2 revenue grew 32% year over year. Core solutions revenue increased 22% to $17.0 million; Value+ services increased 40% to $28.8 million. Other revenue was $1.5 million.
- Management attributed growth primarily to a larger property-manager customer base and more units under management. Those metrics rose 14% and 21% year over year, respectively, in Q2.
- Q2 cost of revenue, excluding depreciation and amortization, was 37.5% of revenue versus 38.2% a year earlier. Research and product development expense rose 44% to $5.8 million, while sales and marketing expense was 16.1% of revenue versus 20.0%.
- For the six months, operating cash flow was $15.1 million, compared with $11.9 million. Investing activities used $11.3 million and financing activities used $1.8 million. Cash, cash equivalents and restricted cash increased $1.9 million to $18.4 million.
Balance sheet and liquidity
- At June 30, cash and cash equivalents were $18.0 million and investment securities totaled $57.3 million, for $75.3 million in combined cash and investments. Working capital was $42.6 million, up from $29.9 million at December 31, 2017.
- Total assets were $124.0 million and total liabilities were $23.0 million. The company reported no borrowings on its $25.0 million revolving credit facility and was in compliance with its covenants.
- Management said available cash and investments, the credit facility and operating cash generation should cover working capital and capital expenditure needs for at least the next 12 months.
Changes, outlook and material items
- AppFolio adopted the new revenue standard on January 1, 2018 using the modified retrospective method. Revenue was unaffected, but commissions and other incremental contract-acquisition costs are now deferred and amortized over three years rather than expensed as incurred. Reported net income was higher by $0.6 million in Q2 and $1.9 million for the six months than it would have been without adoption; 2017 comparisons were not restated.
- Management plans to continue investing in product development, customer support, infrastructure and growth. It expects operating margins to improve over the long term, while noting that investment opportunities may interrupt that trend. No specific numerical revenue or earnings guidance is provided in the filing.
- Management noted seasonal weakness in tenant-screening activity during the fourth quarter holiday period, which may slow sequential Value+ revenue growth or lead to a sequential decline.
- Subsequent to quarter-end, the company entered a 10-year lease for approximately 86,000 square feet of office space, with rent phased in and annual increases of 3%. It also extended another office lease through April 2023; the stated commitment for that extension is $1.8 million. Existing operating lease obligations were approximately $7.9 million through 2022.
- The company bears 100% of specified legal-liability-to-landlord insurance claims under a reinsurance arrangement; its accrued claims liability rose to $0.8 million from $0.5 million. It reported no litigation expected to have a material adverse effect and no material off-balance-sheet arrangements.
- The company expects the new lease accounting standard to materially affect its financial statements, primarily through recognition of operating lease assets and liabilities. A full valuation allowance remained against deferred tax assets; management said a release may become possible within 12 months, depending on profitability and other factors, but timing and amount were uncertain.
Important facts for investors to verify
- How much of reported profit growth reflects underlying operations versus the commission-cost accounting change.
- Whether Value+ services growth, customer retention and units under management continue at a pace that supports revenue growth and margins.
- The effect of continued research and product investment, software capitalization and amortization on future earnings and cash generation.
- The financial impact of the new office lease and adoption of lease accounting, as well as trends in insurance claims liabilities.
- Seasonal fourth-quarter screening trends, interest-rate sensitivity of the investment portfolio and any future change in the valuation allowance or credit-facility use.