AppFolio, Inc. :APPF-US: Earnings Analysis: Q2, 2016 By the Numbers : August 15, 2016

AppFolio, Inc. reports financial results for the quarter ended June 30, 2016.

We analyze the earnings along side the following peers of AppFolio, Inc. – Qualys, Inc., Q2 Holdings, Inc. and Jive Software, Inc. (QLYS-US, QTWO-US and JIVE-US) that have also reported for this period.

Highlights

  • Summary numbers: Revenues of USD 26.20 million, Net Earnings of USD -2.26 million.
  • Gross margins narrowed from 48.22% to 48.21% compared to the same period last year, operating (EBITDA) margins now 0.04% from -9.68%.
  • Year-on-year change in operating cash flow of 295.05% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Earnings growth from operating margin improvements as well as one-time items.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2015-06-30 2015-09-30 2015-12-31 2016-03-31 2016-06-30
Relevant Numbers (Quarterly)
Revenues (mil) 18.43 20.31 20.4 23.21 26.2
Revenue Growth (%YOY) N/A N/A N/A 46.46 42.21
Earnings (mil) -3.4 -4.76 -3.89 -3.6 -2.26
Earnings Growth (%YOY) N/A N/A N/A 0.41 33.41
Net Margin (%) -18.45 -23.44 -19.07 -15.52 -8.64
EPS -0.36 -0.14 -0.12 -0.11 -0.07
Return on Equity (%) -174.07 -25.94 -20.88 -20.2 -13.02
Return on Assets (%) -20.25 -19.78 -16.85 -16.01 -10.1

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Market Share Versus Profits

Revenues History
Earnings History

APPF-US‘s change in revenue this period compared to the same period last year of 42.21% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that APPF-US is holding onto its market share. Also, for comparison purposes, revenues changed by 12.89% and earnings by 37.16% compared to the immediate last period.

Revenues Growth Versus Earnings Growth

Earnings Growth Analysis

The company’s gross margins showed no year-on-year improvement. In spite of this, the company’s earnings rose, influenced primarily by the improvement in operating margins (EBITDA margins) from -9.68% to 0.04%. For comparison, gross margins were 45.51% and EBITDA margins were -6.30% in the last period.

Gross Margin Versus EBITDA Margin

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

APPF-US‘s decline in gross margins were offset by some improvements on the balance sheet. The management of working capital, for example, shows progress. The company’s working capital days have fallen to 35.95 days from 133.06 days for the same period last year. This leads Capital Cube to conclude that the gross margin decline is not altogether bad.

Gross Margin Versus Working Capital Days

Cash Versus Earnings – Sustainable Performance?

APPF-US‘s change in operating cash flow of 295.05% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Margins

The company’s earnings growth has also been influenced by the following factors: (1) Improvements in operating (EBIT) margins from -17.45% to -8.96% and (2) one-time items. The company’s pretax margins are now -8.59% compared to -18.80% for the same period last year.

EBIT Margin Versus PreTax Margin
EBIT Margin History
PreTax Margin History

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Company Profile

AppFolio, Inc. provides web-based property management software. It offers software solutions for small and medium-sized businesses in the property management and legal industries or verticals. The company products include cloud based property management software, rental syndication and lead tracking software and cloud-based legal practice management software. The company was founded by Brian Donahoo, Klaus Schauser and Jonathan Walker in 2006 and is headquartered in Goleta, CA.

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