AppFolio, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods. AppFolio provides cloud-based property-management and legal software for small and medium-sized businesses, with subscription products and optional Value+ services.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $26.2 million | $18.4 million | $49.4 million | $34.3 million |
| Operating loss | $2.3 million | $3.2 million | $5.9 million | $6.7 million |
| Net loss | $2.3 million | $3.4 million | $5.9 million | $7.0 million |
| Net loss per diluted share | $0.07 | $0.36 | $0.18 | $0.77 |
| Operating cash flow | Not separately reported for the quarter | $2.4 million | $(2.8) million |
- Revenue increased 42% in Q2 and 44% year to date. Value+ revenue grew 53% and 56%, respectively; core-solutions revenue grew 37% in both periods.
- Q2 costs of revenue, excluding depreciation and amortization, were 43% of revenue versus 44% a year earlier, implying a 57% gross margin on that basis. Operating margin was negative 9% versus negative 17%. For the six-month periods, the comparable cost ratio was 44% in both years and operating margin improved to negative 12% from negative 20%.
- Revenue growth was attributed mainly to property-management customers, increased usage of electronic payments and screening, customer-base growth, and strong renewals. At June 30, property-manager customers numbered 9,275 (up 32%) and law-firm customers 7,349 (up 50%).
Liquidity, balance sheet, and cash flow
- At June 30, cash and cash equivalents were $11.0 million and investment securities were $40.2 million, totaling approximately $51.2 million in liquid resources. Working capital was $10.2 million, versus $10.6 million at year-end 2015.
- No borrowings were outstanding under the $25 million revolving credit facility at June 30; the facility matures October 2020. The filing reports no material outstanding debt balance.
- Six-month operating cash flow was $2.4 million, including $5.9 million of net loss offset by noncash charges and working-capital movements. Investing used $3.6 million, including $5.2 million of capitalized software development and $3.2 million of property and equipment purchases. Financing provided $0.1 million. Cash declined $1.1 million.
- Total assets were $89.8 million, total liabilities $20.7 million, and stockholders’ equity $69.1 million. Deferred revenue was $6.1 million. Capitalized software, net, rose to $12.8 million from $10.0 million at year-end.
Changes, outlook, and risks
- Management expects continued investment in personnel, customer support, infrastructure, sales and product development, with costs and expenses increasing in absolute dollars. It expects operating leverage and improved operating margins over the long term, but gave no specific revenue or earnings guidance.
- Management believes existing cash, investments, available credit and operating cash generation will fund working-capital and capital-expenditure needs for at least 12 months. Future capital needs depend on growth, service adoption, product investment and possible acquisitions; no present acquisition plans were stated.
- Headcount rose 20% year over year to 634. Stock-based compensation was $1.6 million for the first half, versus $0.3 million, and the company granted performance-based awards tied to future free-cash-flow targets.
- Operating lease obligations totaled approximately $9.4 million through 2022. AppFolio exited a prior Texas location and recorded a $0.1 million lease-abandonment loss while seeking a sublessee.
- The company bears 100% of the quota share of its tenant-liability insurance program; accrued reported and incurred-but-not-reported claims were $0.5 million. Management reported no litigation expected to have a material adverse effect and no material off-balance-sheet arrangements.
- Management cited growth and adoption risks, investment and execution uncertainty, possible need for additional financing, and other risks described in its 2015 Form 10-K. It reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether customer growth, retention and Value+ usage—especially payment and screening services—continue to support revenue growth.
- Whether operating losses narrow as revenue scales, including the effects of rising personnel costs, third-party service costs and depreciation/amortization.
- Cash conversion and investment requirements: operating cash flow benefited from noncash charges and working-capital movements, while software and equipment spending remained substantial.
- Performance conditions, potential dilution and expense recognition for the free-cash-flow-based stock options and restricted stock units.
- Insurance claims exposure, lease-subletting assumptions, and the eventual balance-sheet and disclosure effects of new accounting standards; the filing says impacts of several standards had not yet been determined.