AppFolio, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. AppFolio provides cloud business-management software and related services to the real estate industry. Financial amounts below are in millions unless noted.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $165.4 | $125.1 | $448.6 | $347.8 |
| Operating income (loss) | $(0.1) | $(7.8) | $(27.3) | $(52.4) |
| Net income (loss) | $26.4 | $(4.2) | $(27.6) | $(48.4) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $29.1 | $19.3 |
- Q3 revenue rose 32%; nine-month revenue rose 29%. Value Added Services (VAS) drove most of the increase: up 39% in Q3 and 35% year to date. Core solutions revenue grew 17% and 19%, respectively.
- Q3 cost of revenue, excluding depreciation and amortization, was 37.9% of revenue versus 40.5% a year earlier, implying gross margins of approximately 62.1% and 59.5%. Q3 operating margin was approximately breakeven versus negative 6.2%; nine-month operating margin was negative 6.1% versus negative 15.1%.
- Q3 net income includes a $25.0 million income tax benefit; income before taxes was only $1.5 million. For the first nine months, the company recorded $4.6 million of tax expense despite a pretax loss. The company used the discrete interim tax method, and tax results reflect valuation allowances and tax differences.
- Nine-month operating cash flow increased to $29.1 million. Investing used $22.4 million and financing used $17.6 million; cash, cash equivalents and restricted cash decreased $10.8 million.
- At September 30, cash and cash equivalents were $59.9 million and current investment securities were $131.6 million, totaling approximately $191.5 million in cash and investments. Current assets were $239.9 million versus current liabilities of $74.1 million. The filing reports no borrowings; operating lease liabilities totaled $44.2 million, including current amounts.
- Total assets were $378.6 million and stockholders’ equity was $262.7 million. Stock-based compensation was $15.3 million in Q3 and $39.9 million in the first nine months.
Material changes and notable items
- Property management units under management reached 7.8 million, up 10% year over year; customer count was 19,418 versus 18,109.
- Research and product development expense rose 44% in Q3 and 46% year to date, reflecting personnel investment and growth initiatives. Management expects this expense to increase as a percentage of revenue for full-year 2023.
- The company announced a workforce reduction of 149 employees. Q3 severance and related personnel costs totaled $12.1 million, including $1.8 million of accelerated stock compensation; the remaining accrued severance was expected to be substantially paid by year-end 2023. Separately, $14.9 million of former CEO separation costs was expensed and paid during the first nine months.
- Nine-month 2023 results included $4.3 million of gains from lease modifications. Prior-year results included $19.8 million of lease-related impairment charges, which did not recur.
- The company amended its San Diego lease and sublet Santa Barbara office space through 2031; the sublease commitment totals $6.1 million.
Outlook, risks and contingencies
- Management expects 2023 revenue to increase versus 2022, supported by customer and unit growth and adoption of VAS. It expects cost of revenue, sales and marketing, general and administrative, and depreciation and amortization to decline as percentages of revenue; research and product development is expected to rise as a percentage. No numerical revenue or earnings guidance is provided in the filing.
- Management says existing cash, investments and operating cash generation should fund working capital and capital needs for at least the next 12 months. The board has authorized up to $100 million in share repurchases; $4.2 million had been repurchased to date.
- VAS growth brings higher third-party processing and service-provider costs, and cost of revenue as a share of revenue can vary with product mix. Investment securities are exposed to interest-rate-driven fair-value changes; a 100-basis-point rate move in either direction was estimated to change fair value by about $0.5 million.
- The company reported no legal matters it believes would have a material adverse effect, while noting that proceedings can still cause defense costs and management distraction. It reported no material changes to previously disclosed risk factors and stated that disclosure controls were effective.
Investor facts to verify
- Whether VAS usage growth and unit/customer additions persist, and how much of revenue growth converts to operating profit and cash flow.
- The sustainability of near-breakeven quarterly operations, especially after separating the unusually large tax benefit from Q3 net income.
- Execution and cash costs of the workforce reduction, former CEO separation, and office lease changes.
- Stock-based compensation levels and dilution, alongside the company’s share-repurchase activity.
- Investment-security valuation exposure, lease obligations, and the assumptions underlying management’s 12-month liquidity assessment.