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AppFolio, Inc. Announces Third Quarter Financial Results

SANTA BARBARA, Calif., Oct. 27, 2022 (GLOBE NEWSWIRE) -- AppFolio, Inc. (NASDAQ: APPF) ("AppFolio" or the "Company"), a leading provider of cloud business management solutions for the real estate industry, today announced its financial results for the third quarter ended September 30, 2022.

“AppFolio increased the number of units served year-over-year by more than one million units for the second consecutive quarter – a clear testament that our customers rely on AppFolio products to optimize their operations, maximize their revenue and profits, and solve their staffing challenges,” said Jason Randall, President and CEO, AppFolio. “Our strategy for long-term growth is rooted in keeping existing customers happy, acquiring new customers, expanding adoption and usage, and delivering new capabilities and product value – all on a foundation of operational excellence.”

Financial Highlights

  • Revenue: Total revenue was $125.1 million in the third quarter of 2022, a 31% increase from $95.8 million in the third quarter of 2021.
  • Units Served: Total units on the AppFolio Property Manager platform increased to approximately 7.1 million in the third quarter of 2022 from approximately 6.0 million at the end of the third quarter of 2021.
  • Income (Loss) from Operations: GAAP loss from operations in the third quarter of 2022 was $7.8 million, or 6% of revenue, compared to GAAP break-even in the same quarter of 2021. Non-GAAP income from operations in the third quarter of 2022 was $4.7 million, or 4% of revenue, compared to Non-GAAP income from operations of $3.8 million, or 4% of revenue, in the third quarter of 2021.
  • Cash: Cash, cash equivalents, and investment securities were $184.5 million as of September 30, 2022. Non-GAAP free cash flow was $11.9 million, or 10% of revenue, in the third quarter of 2022, compared to $6.8 million, or 7% of revenue, in the same quarter of 2021.

Financial Outlook
Based on information available as of October 27, 2022, AppFolio's outlook for fiscal year 2022 follows:

  • Full year revenue is expected to be in the range of $462 million to $466 million.
  • Full year non-GAAP operating margin as a percentage of revenue is expected to be a loss of 1.5-2.5%.
  • Weighted average shares outstanding are expected to be approximately 35 million for the full year.

Conference Call Information
As previously announced, the Company will host a conference call today, October 27, 2022, at 2:00 p.m. Pacific Time (PT), 5:00 p.m. Eastern Time (ET), to discuss the company’s third quarter 2022 financial results. A live webcast of the call will be available at: https://edge.media-server.com/mmc/p/b7297keo. To access the call by phone, please go to the following link: https://register.vevent.com/register/BIf67920663fb34bef80ab9b99d00c89ec, and you will be provided with dial in details. A replay of the webcast will also be available for a limited time on AppFolio’s Investor Relations website at https://ir.appfolioinc.com/news-events/events.

The Company also provides announcements regarding its financial results and other matters, including SEC filings, investor events, and press releases, on its Investor Relations website at https://ir.appfolioinc.com/, as a means of disclosing material nonpublic information and for complying with AppFolio's disclosure obligations under Regulation FD.

About AppFolio, Inc.
AppFolio is a leading provider of cloud business management solutions for the real estate industry. Our solutions enable our customers to digitally transform their businesses, address critical business operations and deliver a better customer experience. For more information about AppFolio, visit www.appfolioinc.com.

Investor Relations Contact:
Lori Barker
ir@appfolio.com

Use of Non-GAAP Financial Measures
Reconciliations of non-GAAP financial measures to AppFolio’s financial results as determined in accordance with GAAP are included at the end of this press release following the accompanying financial data. For a description of these non-GAAP financial measures, including the reasons management uses each measure, please see the section of the tables titled “Statement Regarding the Use of Non-GAAP Financial Measures.” In this earnings release we are including certain non-GAAP financial measures for prior periods for which such measures were not previously reported to enhance comparability between periods.

Forward-Looking Statements
This press release contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which statements are subject to considerable risks and uncertainties. Forward-looking statements include all statements that are not statements of historical fact contained in this press release, and can be identified by words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts, “projects,” “seeks,” “should,” “will,” “would” or similar expressions and the negatives of those expressions. In particular, forward-looking statements contained in this press release relate to future operating results and financial position, including the Company's fiscal year 2022 financial outlook, anticipated future expenses and investments, the Company's business opportunities, and the impact of the Company's strategic actions and initiatives.

Forward-looking statements represent AppFolio's current beliefs and assumptions based on information currently available. Forward-looking statements involve numerous known and unknown risks, uncertainties and other factors that may cause the Company's actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Some of the risks and uncertainties that may cause the Company's actual results to materially differ from those expressed or implied by these forward-looking statements are described in the section entitled “Risk Factors” in AppFolio's Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on February 28, 2022, as well as in the Company's other filings with the SEC. You should read this press release with the understanding that the Company's actual future results may be materially different from the results expressed or implied by these forward looking statements.

Except as required by applicable law or the rules of the NASDAQ Global Market, AppFolio assumes no obligation to update any forward-looking statements publicly or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

 
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands)
     
  September 30,
2022
 December 31,
2021
Assets    
Current assets    
Cash and cash equivalents $67,232  $57,847 
Investment securities—current  72,018   64,600 
Accounts receivable, net  14,884   12,595 
Prepaid expenses and other current assets  22,660   23,553 
Total current assets  176,794   158,595 
Investment securities—noncurrent  45,200   61,076 
Property and equipment, net  27,633   30,479 
Operating lease right-of-use assets  28,539   41,710 
Capitalized software development costs, net  36,002   41,212 
Goodwill  56,060   56,147 
Intangible assets, net  5,810   11,711 
Other long-term assets  8,844   7,087 
Total assets $384,882  $408,017 
Liabilities and Stockholders’ Equity    
Current liabilities    
Accounts payable $1,508  $1,704 
Accrued employee expenses—current  29,496   30,065 
Accrued expenses  16,161   13,284 
Other current liabilities  10,600   7,589 
Total current liabilities  57,765   52,642 
Operating lease liabilities  53,256   55,733 
Other liabilities  1,989   2,261 
Stockholders’ equity  271,872   297,381 
Total liabilities and stockholders’ equity $384,882  $408,017 
         


 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share amounts)
    
 Three Months Ended
September 30,
 Nine Months Ended
September 30,
 2022 2021 2022 2021
Revenue$125,079  $95,809  $347,825  $263,770 
Costs and operating expenses:       
Cost of revenue (exclusive of depreciation and amortization)(1) 50,707   38,730   141,484   104,847 
Sales and marketing(1) 25,644   19,362   77,558   53,255 
Research and product development(1) 28,959   16,500   79,966   46,389 
General and administrative(1) 19,347   13,404   76,258   40,971 
Depreciation and amortization 8,241   7,826   24,977   22,844 
Total costs and operating expenses 132,898   95,822   400,243   268,306 
Loss from operations (7,819)  (13)  (52,418)  (4,536)
Other income (loss), net 4,221   (353)  4,256   705 
Interest income 374   65   632   173 
Loss before provision for (benefit from) income taxes (3,224)  (301)  (47,530)  (3,658)
Provision for (benefit from) income taxes 938   (160)  889   (6,017)
Net (loss) income$(4,162) $(141) $(48,419) $2,359 
        
Net (loss) income per common share:       
Basic$(0.12) $  $(1.39) $0.07 
Diluted$(0.12) $  $(1.39) $0.07 
Weighted average common shares outstanding:       
Basic 35,043   34,614   34,936   34,525 
Diluted 35,043   34,614   34,936   35,695 

(1) Includes stock-based compensation expense as follows:

 Three Months Ended
September 30,
 Nine Months Ended
September 30,
 2022
 2021
 2022
 2021
Costs and operating expenses:       
Cost of revenue (exclusive of depreciation and amortization)$789  $575  $1,873  $1,509 
Sales and marketing 2,023   738   5,496   1,587 
Research and product development 4,330   1,451   11,160   3,522 
General and administrative 3,688   1,299   9,680   3,435 
Total stock-based compensation expense$10,830  $4,063  $28,209  $10,053 
                


 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
 Three Months Ended
September 30,
 Nine Months Ended
September 30,
 2022 2021 2022 2021
Cash from operating activities       
Net (loss) income$(4,162) $(141) $(48,419) $2,359 
Adjustments to reconcile net (loss) income to net cash used in operating activities:       
Depreciation and amortization 7,658   7,355   23,295   21,545 
Amortization of operating lease right-of-use assets 689   913   2,498   2,312 
Impairment       19,792    
Deferred income taxes 158   (308)  (1,392)  (6,394)
Stock-based compensation, including as amortized 11,413   4,534   29,891   11,352 
Gain on sale of business (4,156)  (21)  (4,156)  (380)
Other (92)  309   (86)  89 
Changes in operating assets and liabilities:       
Accounts receivable 345   2,657   (2,579)  (1,350)
Prepaid expenses and other current assets (507)  (1,387)  (3,159)  (3,558)
Other assets (321)  (199)  (1,629)  (1,181)
Accounts payable 214   83   231   1,384 
Accrued employee expenses—current 2,395   (1,303)  (822)  6,335 
Accrued expenses 809   1,621   3,991   (1,426)
Operating lease liabilities (437)  310   (1,748)  1,995 
Other liabilities 1,997   1,375   3,576   (6,623)
Net cash provided by operating activities 16,003   15,798   19,284   26,459 
Cash from investing activities       
Purchases of available-for-sale investments (25,494)  (18,748)  (70,394)  (167,041)
Proceeds from sales of available-for-sale investments    1,000      43,198 
Proceeds from maturities of available-for-sale investments 33,100   47,004   76,598   73,754 
Purchases of property and equipment (844)  (2,362)  (5,943)  (5,166)
Capitalization of software development costs (3,275)  (6,600)  (10,468)  (18,511)
Proceeds from sale of business, net of cash divested 5,124      5,124    
Net cash provided by (used in) investing activities 8,611   20,294   (5,083)  (73,766)
Cash from financing activities       
Proceeds from stock option exercises 1,976   145   2,579   791 
Tax withholding for net share settlement (1,984)  (403)  (7,581)  (9,303)
Net cash used in financing activities (8)  (258)  (5,002)  (8,512)
Net increase decrease) in cash and cash equivalents and restricted cash 24,606   35,834   9,199   (55,819)
Cash, cash equivalents and restricted cash       
Beginning of period 42,876   49,046   58,283   140,699 
End of period$67,482  $84,880  $67,482  $84,880 
                


 
RECONCILIATION FROM GAAP TO NON-GAAP RESULTS
(UNAUDITED)
(in thousands, except per share data)
      
   Three Months Ended
September 30,
 Nine Months Ended
September 30,
   2022 2021 2022 2021
Costs and operating expenses:
         
 GAAP cost of revenue (exclusive of depreciation and amortization)$50,707  $38,730  $141,484  $104,847 
  Less: Stock-based compensation expense 789   575   1,873   1,509 
 Non-GAAP cost of revenue (exclusive of depreciation and amortization)$49,918  $38,155  $139,611  $103,338 
 GAAP cost of revenue (exclusive of depreciation and amortization) as a percentage of revenue 41%  40%  41%  40%
 Non-GAAP cost of revenue (exclusive of depreciation and amortization) as a percentage of revenue 40%  40%  40%  39%
          
 GAAP sales and marketing$25,644  $19,362  $77,558  $53,255 
  Less: Stock-based compensation expense 2,023   738   5,496   1,587 
 Non-GAAP sales and marketing$23,621  $18,624  $72,062  $51,668 
 GAAP sales and marketing as a percentage of revenue 21%  20%  22%  20%
 Non-GAAP sales and marketing as a percentage of revenue 19%  19%  21%  20%
          
 GAAP research and product development$28,959  $16,500  $79,966  $46,389 
  Less: Stock-based compensation expense 4,330   1,451   11,160   3,522 
 Non-GAAP research and product development$24,629  $15,049  $68,806  $42,867 
 GAAP research and product development as a percentage of revenue 23%  17%  23%  18%
 Non-GAAP research and product development as a percentage of revenue 20%  16%  20%  16%
          
 GAAP general and administrative$19,347  $13,404  $76,258  $40,971 
  Less: Stock-based compensation expense 3,688   1,299   9,680   3,435 
  Less: Impairment       19,792    
  Less: Legal costs and insurance recoveries    (1,900)     (1,900)
 Non-GAAP general and administrative$15,659  $14,005  $46,786  $39,436 
 GAAP general and administrative as a percentage of revenue 15%  14%  22%  16%
 Non-GAAP general and administrative as a percentage of revenue 13%  15%  13%  15%
          
 GAAP depreciation and amortization$8,241  $7,826  $24,977  $22,844 
  Less: Amortization of stock-based compensation capitalized in software development costs 584   471   1,682   1,299 
  Less: Amortization of purchased intangibles 1,093   1,153   3,396   3,494 
 Non-GAAP depreciation and amortization$6,564  $6,202  $19,899  $18,051 
 GAAP depreciation and amortization as a percentage of revenue 7%  8%  7%  9%
 Non-GAAP depreciation and amortization as a percentage of revenue 5%  6%  6%  7%


   Three Months Ended
September 30,
 Nine Months Ended
September 30,
   2022 2021 2022 2021
Loss from operations:       
 GAAP loss from operations$(7,819) $(13) $(52,418) $(4,536)
  Less: Stock-based compensation expense 10,830   4,063   28,209   10,053 
  Less: Amortization of stock-based compensation capitalized in software development costs 584   471   1,682   1,299 
  Less: Amortization of purchased intangibles 1,093   1,153   3,396   3,494 
  Less: Impairment       19,792    
  Less: Legal costs and insurance recoveries    (1,900)     (1,900)
 Non-GAAP income from operations$4,688  $3,774  $661  $8,410 
          
Operating margin:       
 GAAP operating margin(6.3)%  % (15.1)% (1.7)%
  Stock-based compensation expense as a percentage of revenue 8.7   4.2   8.1   3.8 
  Amortization of stock-based compensation capitalized in software development costs as a percentage of revenue 0.5   0.5   0.5   0.5 
  Amortization of purchased intangibles as a percentage of revenue 0.9   1.2   1.0   1.3 
  Impairment as a percentage of revenue       5.7    
  Legal costs and insurance recoveries as a percentage of revenue    (2.0)     (0.7)
 Non-GAAP operating margin 3.7%  3.9%  0.2%  3.2%
          
Net (loss) income:       
 GAAP net (loss) income$(4,162) $(141) $(48,419) $2,359 
  Less: Stock-based compensation expense 10,830   4,063   28,209   10,053 
  Less: Amortization of stock-based compensation capitalized in software development costs 584   471   1,682   1,299 
  Less: Amortization of purchased intangibles 1,093   1,153   3,396   3,494 
  Less: Impairment       19,792    
  Less: Legal costs and insurance recoveries    (1,900)     (1,900)
  Less: Gain on sale of business (4,156)     (4,156)   
  Less: Income tax effect of adjustments 234   1,104   (724)  8,120 
 Non-GAAP net income$3,955  $2,542  $1,228  $7,185 
          
Net (loss) income per share, basic:       
 GAAP net (loss) income per share, basic$(0.12) $  $(1.39) $0.07 
  Non-GAAP adjustments to net income 0.23   0.08   1.42   0.14 
 Non-GAAP net income per share, basic$0.11  $0.08  $0.03  $0.21 
          
Net (loss) income per share, diluted:       
 GAAP net (loss) income per share, diluted$(0.12) $  $(1.39) $0.07 
  Non-GAAP adjustments to net income 0.23   0.08   1.39   0.14 
 Non-GAAP net income per share, diluted$0.11  $0.08  $  $0.21 
          
 Weighted-average shares used in GAAP per share calculation       
  Basic 35,043   34,614   34,936   34,525 
  Diluted 35,043   34,614   34,936   35,695 
          
 Weighted-average shares used in non-GAAP per share calculation       
  Basic 35,043   34,614   34,936   34,525 
  Diluted 35,710   35,653   35,695   35,695 


   Three Months Ended
September 30,
 Nine Months Ended
September 30,
   2022 2021(1) 2022 2021
Free cash flow:
        
 GAAP net cash provided by operating activities$16,003  $15,798  $19,284  $26,459 
  Purchases of property and equipment (844)  (2,362)  (5,943)  (5,166)
  Capitalized software development costs (3,275)  (6,600)  (10,468)  (18,511)
  Non-recurring expenses paid related to the sale of MyCase          7,759 
  Legal costs and insurance recoveries          4,250 
 Non-GAAP free cash flow$11,884  $6,836  $2,873  $14,791 
          
Free cash flow margin:      
 GAAP net cash provided by operating activities as a percentage of revenue 12.8%  16.5%  5.5%  10.0%
  Purchases of property and equipment as a percentage of revenue (0.7)  (2.5)  (1.7)  (2.0)
  Capitalized software development costs as a percentage of revenue (2.6)  (6.9)  (3.0)  (7.0)
  Non-recurring expenses paid related to the sale of MyCase as a percentage of revenue          2.9 
  Legal costs and insurance recoveries as a percentage of revenue %  %  %  1.6%
 Non-GAAP free cash flow margin 9.5%  7.1%  0.8%  5.6%

(1) Amounts have been revised from those previously reported to reflect certain insurance recoveries received in the fourth quarter of fiscal year 2021 that had previously been reported in the third quarter of fiscal year 2021.

   Three Months Ended
   March 31, June 30, September 30, December 31,
   2021 2021 2021 2021
Costs and operating expenses:
         
 GAAP cost of revenue (exclusive of depreciation and amortization)$33,298  $32,819  $38,730  $39,097 
  Less: Stock-based compensation expense 471   463   575   515 
 Non-GAAP cost of revenue (exclusive of depreciation and amortization)$32,827  $32,356  $38,155  $38,582 
 GAAP cost of revenue (exclusive of depreciation and amortization) as a percentage of revenue 42%  37%  40%  41%
 Non-GAAP cost of revenue (exclusive of depreciation and amortization) as a percentage of revenue 42%  36%  40%  40%
          
 GAAP sales and marketing$16,179  $17,714  $19,362  $19,945 
  Less: Stock-based compensation expense 402   447   738   742 
 Non-GAAP sales and marketing$15,777  $17,267  $18,624  $19,203 
 GAAP sales and marketing as a percentage of revenue 21%  20%  20%  21%
 Non-GAAP sales and marketing as a percentage of revenue 20%  19%  19%  20%
          
 GAAP research and product development$14,383  $15,506  $16,500  $19,591 
  Less: Stock-based compensation expense 857   1,214   1,451   1,935 
 Non-GAAP research and product development$13,526  $14,292  $15,049  $17,656 
 GAAP research and product development as a percentage of revenue 18%  17%  17%  20%
 Non-GAAP research and product development as a percentage of revenue 17%  16%  16%  18%
          
 GAAP general and administrative$13,361  $14,206  $13,404  $16,308 
  Less: Stock-based compensation expense 1,046   1,090   1,299   2,096 
  Less: Legal costs and insurance recoveries       (1,900)   
 Non-GAAP general and administrative$12,315  $13,116  $14,005  $14,212 
 GAAP general and administrative as a percentage of revenue 17%  16%  14%  17%
 Non-GAAP general and administrative as a percentage of revenue 16%  15%  15%  15%
          
 GAAP depreciation and amortization$7,369  $7,649  $7,826  $8,001 
  Less: Amortization of stock-based compensation capitalized in software development costs 398   430   471   513 
  Less: Amortization of purchased intangibles 1,187   1,153   1,153   1,153 
 Non-GAAP depreciation and amortization$5,784  $6,066  $6,202  $6,335 
 GAAP depreciation and amortization as a percentage of revenue 9%  9%  8%  8%
 Non-GAAP depreciation and amortization as a percentage of revenue 7%  7%  6%  7%


   Three Months Ended
   March 31, June 30, September 30, December 31,
   2021 2021 2021 2021
Loss from operations:       
 GAAP (loss) income from operations$(5,669) $1,146  $(13) $(7,342)
  Less: Stock-based compensation expense 2,776   3,214   4,063   5,288 
  Less: Amortization of stock-based compensation capitalized in software development costs 398   430   471   513 
  Less: Amortization of purchased intangibles 1,187   1,153   1,153   1,153 
  Less: Legal costs and insurance recoveries       (1,900)   
 Non-GAAP (loss) income from operations$(1,308) $5,943  $3,774  $(388)
          
Operating margin:       
 GAAP operating margin(7.2)%  1.3%  % (7.7)%
  Stock-based compensation expense as a percentage of revenue 3.5   3.6   4.2   5.5 
  Amortization of stock-based compensation capitalized in software development costs as a percentage of revenue 0.5   0.5   0.5   0.5 
  Amortization of purchased intangibles as a percentage of revenue 1.5   1.3   1.2   1.2 
  Legal costs and insurance recoveries as a percentage of revenue       (2.0)   
 Non-GAAP operating margin(1.7)%  6.7%  3.9% (0.4)%
          
Net income (loss):       
 GAAP net income (loss)$479  $2,021  $(141) $(1,331)
  Less: Stock-based compensation expense 2,776   3,214   4,063   5,288 
  Less: Amortization of stock-based compensation capitalized in software development costs 398   430   471   513 
  Less: Amortization of purchased intangibles 1,187   1,153   1,153   1,153 
  Less: Legal costs and insurance recoveries       (1,900)   
  Less: Income tax effect of adjustments 5,206   1,810   1,104   (6,820)
 Non-GAAP net (loss) income$(366) $5,008  $2,542  $12,443 
          
Net income (loss) per share, basic:       
 GAAP net income (loss) per share, basic$0.01  $0.06  $  $(0.04)
  Non-GAAP adjustments to net income (loss) (0.02)  0.09   0.08   0.40 
 Non-GAAP net (loss) income per share, basic$(0.01) $0.15  $0.08  $0.36 
          
Net income (loss) per share, diluted:       
 GAAP net income (loss) per share, diluted$0.01  $0.06  $  $(0.04)
  Non-GAAP adjustments to net income (loss) (0.02)  0.08   0.08   0.39 
 Non-GAAP net (loss) income per share, diluted$(0.01) $0.14  $0.08  $0.35 
          
 Weighted-average shares used in GAAP per share calculation       
  Basic 34,409   34,548   34,614   34,738 
  Diluted 35,712   35,674   34,614   34,738 
          
 Weighted-average shares used in non-GAAP per share calculation       
  Basic 34,409   34,548   34,614   34,738 
  Diluted 34,409   35,674   35,653   35,675 


   Three Months Ended
   March 31, June 30, September 30, December 31,
   2021(1) 2021 2021(1) 2021(1)
Free cash flow:
        
 GAAP net cash (used in) provided by operating activities$(4,437) $15,098  $15,798  $8,932 
  Purchases of property and equipment (938)  (1,866)  (2,362)  (2,937)
  Capitalized software development costs (6,140)  (5,771)  (6,600)  (6,104)
  Non-recurring expenses paid related to the sale of MyCase 5,185   2,574       
  Legal costs and insurance recoveries 4,250         (1,900)
 Non-GAAP free cash flow$(2,080) $10,035  $6,836  $(2,009)
          
Free cash flow margin:       
 GAAP net cash (used in) provided by operating activities as a percentage of revenue(5.6)%  17.0%  16.5%  9.3%
  Purchases of property and equipment as a percentage of revenue (1.2)  (2.1)  (2.5)  (3.1)
  Capitalized software development costs as a percentage of revenue (7.8)  (6.5)  (6.9)  (6.4)
  Non-recurring expenses paid related to the sale of MyCase as a percentage of revenue 6.6   2.9       
  Legal costs and insurance recoveries as a percentage of revenue 5.4         (2.0)
 Non-GAAP free cash flow margin(2.6)%  11.3%  7.1% (2.1)%

(1) Amounts have been revised from those previously reported to reflect (i) certain insurance recoveries received in the fourth quarter of fiscal year 2021 that had previously been reported in the third quarter of fiscal year 2021, (ii) receipt of proceeds from certain post-closing transition services provided by the Company to MyCase in the first quarter of fiscal year 2021, and (iii) payment of certain legal costs in the first quarter of fiscal year 2021.

Statement Regarding the Use of Non-GAAP Financial Measures

We disclose the following non-GAAP financial measures in this press release: non-GAAP income (loss) from operations, non-GAAP operating expenses (cost of revenue (exclusive of depreciation and amortization), sales and marketing, research and product development, general and administrative, and depreciation and amortization), non-GAAP net income (loss), non-GAAP net income (loss) per share, and free cash flow.

  • Non-GAAP presentation of income (loss) from operations, operating expenses, net income (loss), and net income (loss) per share. These measures exclude certain non-cash or non-recurring items, including stock-based compensation expense, amortization of stock-based compensation capitalized in software development costs, amortization of purchased intangibles, impairment, legal costs and insurance recoveries, gain on sale of business, and the related income tax effect of these adjustments, as applicable and described below.

  • Free cash flow. Free cash flow is defined as net cash from operating activities, less purchases of property and equipment, capitalization of software development costs, and insurance recoveries, plus legal costs and non-recurring expenses paid related to the sale of MyCase. We use free cash flow to evaluate our generation of cash from operations that is available for purposes other than capital expenditures and capitalized software development costs. Additionally, we believe that information regarding free cash flow provides investors with a perspective on the cash available to fund ongoing operations, because we review cash flows generated from operations after taking into consideration capital expenditures and the capitalization of software development costs due to the fact that these expenditures are considered to be a necessary component of ongoing operations.

We use each of these non-GAAP financial measures internally to assess and compare operating results across reporting periods, for internal budgeting and forecasting purposes, and to evaluate our financial performance. We believe these adjustments also provide useful supplemental information to investors and facilitate the analysis of our operating results and comparison of operating results across reporting periods.

In particular, we believe these non-GAAP financial measures are useful to investors and others in assessing our operating performance due to the following factors:

  • Stock-based compensation expense and amortization of stock-based compensation capitalized in software development costs. We utilize stock-based compensation to attract and retain employees. It is principally aimed at aligning their interests with those of our stockholders while ensuring long-term retention, rather than to address operational performance for any particular period. As a result, stock-based compensation expenses vary for reasons that are generally unrelated to financial and operational performance in any particular period.

  • Amortization of purchased intangibles. We view amortization of purchased intangible assets as items arising from pre-acquisition activities determined at the time of an acquisition. While these intangible assets are evaluated for impairment regularly, amortization of the cost of purchased intangibles is an expense that is not typically affected by operations during any particular period.

  • Impairment. We believe that impairment charges do not reflect future operating expenses, and are generally unrelated to financial and operational performance in any particular period.

  • Significant legal costs and insurance recoveries. Significant legal litigation costs, settlement expenses or proceeds, other associated expenses, and insurance recoveries of such costs do not relate to the ongoing operation of the business and tend to vary significantly based on the circumstances of each transaction. This is not indicative of our core operating performance and may not be meaningful in comparison to our past operating performance.

  • Gains and non-recurring costs related to the sale of businesses. In August 2022 we completed the sale of AppFolio Utility Management, Inc. and in September 2020 we completed the sale of MyCase, Inc., each a former wholly owned subsidiary. We have excluded any gains and charges related to these sales, as we do not consider such amounts to be part of the ongoing operation of our business.

  • Income tax effects of adjustments. We utilize a fixed long-term projected tax rate in our computation of non-GAAP income tax effects to provide better consistency across interim reporting periods. In projecting this long-term non-GAAP tax rate, we utilize a financial projection that excludes the direct impact of other non-GAAP adjustments. The projected rate considers other factors such as our current operating structure, existing tax positions in various jurisdictions, and key legislation in major jurisdictions where we operate. For the quarter ended September 30, 2022, we have determined the projected non-GAAP tax rate to be 25%. We periodically re-evaluate this tax rate, as necessary, for significant events, based on relevant tax law changes, and material changes in the forecasted geographic earnings mix.

Our non-GAAP financial measures may not provide information that is directly comparable to that provided by other companies in our industry, as other companies may calculate non-GAAP financial results differently. In addition, there are limitations in using non-GAAP financial measures because non-GAAP financial measures are not prepared in accordance with GAAP and can exclude expenses that may have a material impact on our reported financial results. As such, non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. A reconciliation of the historical non-GAAP financial measures to their most directly comparable GAAP measures has been provided in the tables above. We encourage investors to review the reconciliation of these historical non-GAAP financial measures to their most directly comparable GAAP financial measures.


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