AppFolio, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. AppFolio provides cloud software, services and data analytics, primarily for real estate property managers. The 2020 comparison includes its former legal-software business, MyCase, which was divested on September 30, 2020; real-estate-only growth is therefore more informative than total reported growth.
Key financial results
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $89.0m | $81.0m | $168.0m | $153.5m |
| Operating income (loss) | $1.1m | $6.3m | $(4.5)m | $9.2m |
| Operating margin | 1.3% | 7.8% | (2.7)% | 6.0% |
| Net income | $2.0m | $19.3m | $2.5m | $21.2m |
| Diluted EPS | $0.06 | $0.54 | $0.07 | $0.60 |
| Operating cash flow | Not separately stated | Not separately stated | $10.7m | $27.4m |
Q2 total revenue grew 10% year over year; first-half revenue grew 9%. Real-estate revenue grew 22% in both periods. Property-management units under management increased 17% on average in both comparative periods, while average customer count rose 10%. Value+ services, including electronic payments, tenant screening and insurance, drove much of real-estate growth.
Q2 costs and operating expenses were $87.9m, up from $74.7m. Cost of revenue rose to 36.9% of revenue from 33.8%; sales and marketing to 19.9% from 16.9%; and research and product development to 17.4% from 15.0%. The company cited increased service-provider costs and investment in personnel, product development, sales and marketing. It recorded a $0.3m income tax benefit in Q2 and a $5.9m benefit in the first half; the filing attributes effective-tax-rate differences primarily to stock-compensation benefits and R&D tax credits.
Financial position and cash flows
- At June 30, cash and cash equivalents were $48.6m and investment securities were $114.5m, totaling $163.1m in cash, cash equivalents and investments. Total current assets were $189.9m and current liabilities $48.8m.
- No debt was outstanding. The former credit facility was terminated and obligations were extinguished in connection with the MyCase divestiture.
- First-half investing cash outflow was $94.1m, largely reflecting $148.3m of investment purchases, partly offset by investment sales and maturities; software development capitalization was $11.9m and property/equipment purchases $2.8m.
- First-half financing cash outflow was $8.3m, principally $8.9m of employee tax withholding on net share settlements. Cash, cash equivalents and restricted cash declined $91.7m, largely reflecting investment activity.
- Operating lease liabilities totaled $55.5m. The company said existing liquidity and operating cash generation should cover working capital and capital spending for at least 12 months.
Changes, outlook and risks
- Profitability weakened materially versus 2020 as operating expenses grew faster than revenue. First-half operating results moved from $9.2m income to a $4.5m loss; net income also fell substantially. The 2020 comparison included a larger income-tax benefit.
- Management expects continued investment to increase costs and expenses in absolute terms, while operating margins are expected to improve over the long term; it cautioned that investment timing may interrupt that trend. No specific revenue or earnings guidance was provided in the supplied filing text.
- Q2 general and administrative expense included $1.0m of CFO separation pay. The former CFO resigned effective June 4, 2021; the company was searching for a successor, and the CEO also served as principal financial officer for the quarter.
- First-half other income included $0.7m for MyCase transition services and $0.4m of post-closing sale-price adjustments. A $4.3m FTC settlement expense accrued in Q2 2020 was paid in Q1 2021. The company admitted no wrongdoing and remains subject to FTC compliance and reporting requirements related to tenant screening.
- Principal risks include COVID-19 impacts on customers and workforce, competition and execution of growth investments, cybersecurity and service outages, reliance on third-party payment and screening providers, and legal and regulatory exposure in payment, tenant-screening and insurance services. AppFolio also bears risk under its landlord-liability insurance reinsurance arrangement.
- The board-authorized $100m repurchase program remains available, but no repurchases occurred after Q1 2020; cumulative repurchases were $4.2m. No material changes to contractual commitments were reported, and the company reported no off-balance-sheet arrangements.
Investor verification points
- Reconcile reported revenue growth with real-estate-only growth, considering the MyCase divestiture and the mix of Value+ services.
- Track whether operating-expense growth moderates and margins improve, and assess the returns from sales, marketing and product-development investment.
- Review cash generation excluding investment-security purchases and monitor customer receivables, taxes paid and capitalized software spending.
- Monitor Value+ service economics, including third-party costs, electronic-payment activity and insurance claims/reserves.
- Follow FTC compliance obligations and any material legal or regulatory developments, as well as the CFO succession process.