AppFolio, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; comparative periods are 2014. AppFolio provides cloud-based software for property management and legal businesses, with subscription products and add-on Value+ services. The company completed its IPO on June 30, 2015.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue | $18.4m | $11.6m | $34.3m | $21.4m |
| Operating loss | $3.2m | $1.5m | $6.7m | $2.7m |
| Net loss | $3.4m | $1.5m | $7.0m | $2.8m |
| Operating cash flow | Not stated by quarter | Not stated by quarter | $(2.8)m | $0.1m |
- Q2 revenue grew 59% year over year; first-half revenue grew 60%. Value+ revenue rose 67% in Q2 and 71% in the first half, while core solutions revenue rose 44% and 46%, respectively.
- Cost of revenue, excluding depreciation and amortization, was 44% of revenue in both Q2 and the first half, versus 47% in the comparable 2014 periods. This implies gross margin on that basis of approximately 56%, versus 53%; it excludes depreciation and amortization.
- Operating expenses increased faster than revenue overall: total costs and operating expenses were 117% of Q2 revenue and 120% of first-half revenue, versus 113% in each comparable 2014 period. Net losses widened as the company expanded staffing and investment.
- At June 30, cash and cash equivalents were $69.9m; working capital was $56.2m, versus a $5.7m deficit at year-end 2014. First-half investing cash outflow was $8.7m, including $4.0m for RentLinx, $3.2m of capitalized software development, and $1.5m of property and equipment.
- At June 30, reported debt, net of financing costs, was $9.5m, with $0.2m current and $9.3m long-term. Gross facility borrowings were disclosed as $10.2m. On July 16, 2015, the company repaid the term loan and revolving facility; a $0.2m term-loan prepayment premium was potentially payable, subject to the lender’s waiver terms.
Material developments and management outlook
- The June IPO generated $65.1m net proceeds; the underwriters’ full over-allotment on July 8 added $10.4m net proceeds, taking total net IPO proceeds to approximately $75.4m.
- AppFolio acquired RentLinx on April 1 for approximately $4.1m cash, adding rental advertising services. RentLinx contributed $0.3m of Q2 revenue; the filing did not provide pro forma results because the acquisition was considered immaterial.
- Headcount increased 59% year over year to 528 employees. Management expects to continue investing and said expenses will rise in absolute dollars; it expects operating margins to improve over the long term with revenue growth and operating leverage. No specific financial guidance was provided. The company stated it does not expect profitability for the foreseeable future.
- Management believes existing cash will meet working-capital and capital-expenditure needs for at least 12 months. Future capital needs depend on growth, customer adoption, product development, and possible acquisitions.
- Q2 and first-half results include IPO-related professional fees, a $0.6m payment to a service provider to expedite a transition, and RentLinx-related costs. The company also paid a $2.4m final MyCase earn-out; a former MyCase shareholder subsequently alleged the company failed to pursue the maximum earn-out of $6.6m and threatened punitive damages. AppFolio disputed the allegations; loss was not estimable and no reserve was recorded.
- Disclosure controls were deemed ineffective due to material weaknesses in controls over complex and non-routine transactions. Remediation included additional accounting staff and improved review processes; management had not concluded remediation was complete.
Key risks and investor verification points
- Verify the durability and economics of growth, particularly Value+ usage, customer retention, and property-management concentration; over 90% of revenue historically came from property management.
- Review the unresolved MyCase earn-out allegation, the service-provider transition matter, and potential insurance claims. The filing reported no other litigation expected to materially affect the company.
- Assess the material weaknesses and remediation progress, especially given the IPO and other complex transactions.
- Monitor cash use, operating losses, capitalized software spending, and the completed debt repayment. The filing’s June 30 debt balances differ by presentation (net carrying value versus gross borrowings).
- Consider operating risks including competition, security breaches, service outages, payment-processing and regulatory exposure, and the company’s stated lack of a complete disaster-recovery and business-continuity plan.
- Review governance and share-supply risks: Class B shares carried 10 votes per share and approximately 82.9% of combined voting power at June 30; lock-up restrictions were scheduled to expire December 22, 2015.
- Reconcile the MD&A expense table: its first-half 2015 sales-and-marketing amount appears as $15.174m, while the financial statements report $11.948m. The filing text does not explain this discrepancy.