APPFOLIO INC Q3 FY2023 earnings

AppFolio's fiscal 2023 third quarter showed a business growing quickly and, on a non-GAAP basis, producing real profit. Revenue reached $165.4 million, up 32% from $125.1 million in the same quarter a year earlier. The GAAP operating loss narrowed to $0.07 million from $7.8 million. Net income was $26.4 million, a swing from a net loss of $4.2 million in the prior-year quarter, and diluted earnings per share were $0.72 against a loss of $0.12 per share a year earlier.

The GAAP profit deserves context. Year to date, AppFolio still reported a net loss of $27.6 million, narrower than the $48.4 million loss in the first nine months of 2022, and diluted EPS was a loss of $0.78 versus a loss of $1.39. Year-to-date revenue was $448.6 million, up 29% from $347.8 million, and the year-to-date operating loss of $27.3 million narrowed from $52.4 million. Operating margin improved to -6.1% from -15.1% on that basis, a gain of 9.0 percentage points.

The non-GAAP picture is what management is selling. Non-GAAP income from operations was $26.7 million, or 16.1% of revenue, compared with $4.7 million, or 3.7% of revenue, in the third quarter of 2022. Free cash flow, a non-GAAP measure built from operating cash flow, was $33.6 million, or 20.3% of revenue, against $11.9 million, or 9.5% of revenue, a year earlier. Operating cash flow for the quarter was $36.8 million, up from $16.0 million, and capital expenditures were $3.8 million versus $0.8 million. Year to date, operating cash flow was $29.1 million, up from $19.3 million, while capital expenditures of $5.9 million were flat with the prior-year period.

Volume metrics moved in step with revenue. Total units on the AppFolio Property Manager platform rose to about 7.8 million from about 7.1 million. Property management customers stood at 19,418, up from 18,109. Deferred revenue, current portion only, was $1.0 million, down 9.1% from $1.1 million, and remaining performance obligations were $30.0 million. Deferred revenue stays small relative to the revenue run rate because the company generally bills monthly.

Guidance covers the full fiscal year 2023, not the coming quarter. Management expects revenue of $608 million to $612 million, a non-GAAP operating margin of 10.5% to 11.0%, and a non-GAAP free cash flow margin of 10.5% to 11.5%. Weighted average shares outstanding are expected to be roughly 36 million for the full year. The company also expects cost of revenue, sales and marketing, general and administrative, and depreciation and amortization to decline as a percentage of revenue for the year, while research and product development rises as a percentage of revenue as investment continues.

Several items complicate the quarter. The results include one-time severance and related personnel costs from a workforce reduction in the third quarter, and stock-based compensation remains a large share of total expense. The year-to-date drop in general and administrative expense leans on lease-related impairment charges booked in 2022 that did not repeat and on gains from lease modifications, so not all of that improvement is repeatable. Tax is another moving part. AppFolio applied a discrete method to its interim income tax provision, and management points to the valuation allowance against deferred tax assets, non-deductible officers' compensation, state income taxes, and the capitalization of research and development costs as drivers of its rate. Revenue also leans on Value Added Services, which grew 39% in the quarter, while core solutions grew 17% and Other revenue fell 9%. Those usage-based services carry third-party delivery costs that scale with adoption, and the MD&A names that mix as the main swing factor for cost of revenue as a percentage of revenue.