AppFolio, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. AppFolio provides cloud-based software and related services, primarily to the real estate industry, which contributed more than 90% of annual revenue; it also serves the legal market.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change / context |
|---|---|---|---|
| Revenue | $57.1 million | $42.3 million | Up 35% |
| Core solutions revenue | $20.8 million | $16.2 million | Up 28% |
| Value+ services revenue | $33.7 million | $24.6 million | Up 37% |
| Operating income (loss) | $(0.1) million | $4.2 million | Operating margin: (0.1)% vs. 9.9% |
| Net income | $3.7 million | $4.3 million | Net margin: 6.5% vs. 10.2% |
| Operating cash flow | $0.3 million | $3.3 million | Lower year over year |
| Investing cash flow | $(55.7) million | $(10.5) million | Includes $54.0 million cash paid for Dynasty |
| Cash, cash equivalents and restricted cash | $17.2 million | $9.0 million | Down $57.3 million during Q1 2019 |
| Cash and investment securities | $40.8 million | — | At March 31, 2019 |
| Long-term debt, net | $49.5 million | — | Includes current portion; no revolver balance |
| Working capital | $19.4 million | $79.8 million | December 31, 2018 comparison |
Cost of revenue excluding depreciation and amortization rose to 42.4% of revenue from 39.2%. The filing does not present a single gross-margin measure; these cost percentages are the reported figures on that basis. The $4.3 million income tax benefit, primarily associated with deferred tax liabilities acquired with Dynasty, lifted net income despite a pretax loss of $0.6 million. Without this benefit, reported net income would have been materially lower.
Material changes and business developments
- Revenue growth reflected an 11% year-over-year increase in property-manager customers, to 13,409, and a 20% increase in units under management, to 4.08 million. Legal customers grew 8% to 10,485.
- AppFolio acquired Dynasty Marketplace on January 7, 2019, for preliminary purchase consideration of $60.2 million. Dynasty contributed $0.5 million of revenue and a $1.9 million net loss from acquisition through March 31. Purchase accounting remains preliminary; $6.0 million was held back, subject to adjustments and claims.
- Expenses increased faster than revenue: total costs and operating expenses rose 50% to $57.1 million. Sales and marketing, research and product development, and general and administrative expenses grew 52%, 59%, and 54%, respectively, reflecting staffing and other investments.
- AppFolio adopted the new lease standard on January 1, 2019, recording $16.0 million of operating lease right-of-use assets and $23.1 million of lease liabilities at quarter-end. Adoption materially affected the balance sheet, but not reported operations or cash flows.
- In February, the board authorized a $100 million share repurchase program, inclusive of remaining availability under the prior authorization. No shares were repurchased in Q1.
Outlook, risks and other matters
- Management said existing cash and investments, the $50 million undrawn revolving facility, and operating cash generation should be sufficient for working capital and capital spending for at least the next 12 months. No specific revenue or earnings guidance was provided.
- Management intends to continue investing in product development, sales, customer support, infrastructure and expansion. It expects operating margins to improve over the long term, while noting that investment timing may interrupt that trend and results may fluctuate.
- The $50 million term loan matures in December 2023, carries a variable rate, and had an average interest rate of 4.4% during the quarter. AppFolio reported compliance with credit-agreement financial covenants at March 31; covenant requirements and liquidity conditions apply to certain acquisitions and repurchases.
- The FTC is investigating AppFolio’s compliance with the Fair Credit Reporting Act in connection with tenant screening. The company said it is cooperating and cannot predict potential costs or penalties. A related putative class action has a preliminary settlement approval; final court approval remains outstanding.
- AppFolio bears 100% of claims under its legal liability to landlord insurance arrangement through reinsurance; accrued claims were $0.7 million at March 31. The filing also highlights cybersecurity, service availability, third-party provider, regulatory, competitive and acquisition-integration risks.
- The company reported effective disclosure controls and procedures. It made lease-standard-related changes to internal control processes, whose operating effectiveness will be evaluated in its annual assessment.
Important facts for investors to verify
- Whether growth in customers, units under management and Value+ usage continues to outpace the related delivery and operating costs.
- Dynasty’s final purchase-price allocation, integration progress, and whether expected AI-related products and benefits materialize.
- Operating cash generation and liquidity after the acquisition, including any use of the revolver or share repurchase authorization.
- The outcome and potential financial exposure from the FTC inquiry and the FCRA class-action settlement.
- The sustainability of the tax benefit and any change to the valuation allowance; the Q1 tax benefit was acquisition-related and may not recur.
- Variable-rate debt exposure, covenant headroom, and obligations under leases and the credit agreement.