AppFolio, Inc. — Q2 2017 Form 10-Q
Business and period. AppFolio provides cloud-based software for property management businesses and small law firms, with optional Value+ services. This unaudited report covers the quarter and six months ended June 30, 2017; comparisons are with the same periods in 2016.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $35.9 million | $26.2 million | $68.0 million | $49.4 million |
| Operating income (loss) | $2.8 million | ($2.3 million) | $3.4 million | ($5.9 million) |
| Net income (loss) | $2.8 million | ($2.3 million) | $3.5 million | ($5.9 million) |
| Diluted EPS | $0.08 | ($0.07) | $0.10 | ($0.18) |
| Operating margin | 7.7% | (9.0%) | 4.9% | (12.0%) |
| Net margin | 7.8% | (8.6%) | 5.1% | (11.9%) |
Revenue increased 37% for Q2 and 38% for the six-month period. Q2 core-solutions revenue rose 32% to $13.9 million; Value+ services revenue increased 43% to $20.5 million. Management attributed growth primarily to more property-manager customers and units under management, plus greater use of electronic payments and screening services. Property-manager customers increased 17% year over year and units under management increased 22% in Q2. More than 90% of first-half revenue came from property-management customers.
Q2 cost of revenue, excluding depreciation and amortization, was 38.2% of revenue versus 42.8% a year earlier; for the first half it was 39.3% versus 44.0%. The filing attributes the improvement to revenue growth outpacing personnel costs and improved third-party service-provider pricing. Research and product development, general and administrative, and depreciation and amortization expenses increased in dollars; sales and marketing expense declined.
Financial position and cash flow
- At June 30, 2017, cash and cash equivalents were $7.4 million and investment securities were $50.4 million, for aggregate cash and securities of $57.8 million. Working capital was $17.1 million, up from $10.9 million at December 31, 2016.
- Total liabilities were $24.4 million and stockholders’ equity was $75.2 million. There were no borrowings on the $25 million revolving credit facility; the company reported covenant compliance. The filing describes no material outstanding debt.
- For the six months, operating cash flow was $11.9 million, investing cash flow was a $14.2 million outflow, and financing cash flow was a $1.0 million outflow. Cash decreased $3.3 million to $7.4 million.
- Investing outflows included $15.6 million of investment-security purchases, $5.3 million of capitalized software development, and $0.8 million of property and equipment purchases, partly offset by $7.5 million of investment maturities.
- Operating lease obligations were approximately $10.2 million through 2022. The company extended its Santa Barbara headquarters lease through December 2021, adding a $3.1 million commitment.
Outlook, changes, and risks
Management provided no numerical revenue or earnings guidance. It expects to keep investing in growth, which it said will increase costs and expenses in absolute dollars; it expects expense ratios and operating margins to improve over the long term as revenue grows and operating leverage increases. Management said existing cash, securities, borrowing capacity, and operating cash generation should cover working-capital and capital-expenditure needs for at least the next 12 months.
CEO Brian Donahoo announced his retirement effective August 8, 2017; Jason Randall was appointed CEO and a director effective that date. Donahoo was to remain an employee through December 31, 2017 to assist with transition.
AppFolio bears 100% quota-share risk on its tenant-liability insurance program; accrued reported and incurred-but-not-reported claims were $0.5 million at June 30, up from $0.3 million at year-end. The company reported no material pending litigation and no off-balance-sheet arrangements. It identified interest-rate exposure on its fixed-rate securities: a hypothetical 100-basis-point move was estimated to change their fair value by approximately $0.5 million.
The company planned to adopt the new revenue-recognition standard on January 1, 2018. Preliminary assessment indicated no expected material revenue impact, but the company was still evaluating the treatment of contract-acquisition costs, including sales commissions, which it expected to defer and recognize over time. It anticipated the new lease standard would materially affect its financial statements, particularly by bringing operating leases onto the balance sheet.
Investor facts to verify
- Whether Value+ usage and property-manager unit growth continue to drive revenue, given the property-management concentration and the large contribution of Value+ services.
- Whether improved cost ratios persist while product-development, administrative, and amortization costs rise.
- How CEO succession affects execution, customer growth, and investment priorities.
- The eventual effects of adopting revenue-recognition and lease-accounting standards, including contract-cost capitalization and lease liabilities.
- Changes in insurance claims, investment-security values, and liquidity needs; the reported cash-flow improvement also includes non-cash expenses and working-capital movements.