AppFolio (APPF), Apptio (APTI), AxoGen (AXGN) and Instructure (INST) Report Q1 Results
AppFolio (APPF) executed better than expected in Q1 with revenue up 31.8% to $42.3 million (beating by $1.3 million) and EPS of $0.12 beating by an impressive $0.07. The quarter was highlighted by strong growth of high value property management customers, price increases and new Value+ products, namely Tenant Screening and Renters Insurance (which is sold directly to tenants). AppFolio’s property management customers increased by 15% (to 12,000) and units under management were up by 20% (to 3.4 million). Customers in the Legal vertical increased by 12% to 9,700.
With an efficient business model AppFolio was able to gain leverage in the quarter as profit growth exceeded expense growth. The company didn’t change guidance for the year, but it’s reasonable to expect consensus estimates will inch up a little after the quarter.
I’ve talked about how I believe the market is wondering what’s next for AppFolio. Mainly, whether it will expand into another vertical besides Property Management and Legal, or keep investing in more Value+ services to drive growth. Management didn’t speak on this topic, but with incremental investments in Value+ services seemingly paying off quarter after quarter, it’s hard to find fault in what appears to be a measured and successful growth strategy. I suspect the groundwork is being laid for expansion into the next vertical(s), but there’s little benefit to telegraphing this to the market until expansion is imminent.
I could be wrong, but the quarter’s results and the stock’s reaction (down early but came back strong) suggest to me that higher prices are ahead. I expect analysts will bump up their price targets by a few bucks. We need to get through 52.25 for a breakout to all-time highs. Keeping at Buy. BUY.
Apptio (APTI) also reported Q1 results Monday night that were well ahead of expectations. Revenue grew by 23% to $54.1 million (beating by $2.4 million) and EPS of $0.00 beat by $0.06. Management attributed the strength to seasonally strong large strategic deals, strong enterprise deal flow, renewals and upsells, and initial contribution from the Digital Fuel acquisition (closed in February). In other words, pretty much everything was good!
Management talked about accelerating demand for IT spend management tools as all organizations under the sun ramp up cloud transformation initiatives. It said spending on public cloud is a particularly positive driver of demand for Apptio’s solutions, which offer far more value, convenience and flexibility then spreadsheet-based IT spend management strategies. At the small end of the customer spend curve, demand for lower-cost solutions (including IT Financial Management Foundation) continues to ramp up. This is providing Apptio with ample upsell opportunities as customers see the value in adding more modules after their initial purchase.
Regarding the FedRAMP certification, management said it feels fortunate to be one of just 10 companies that received the certification and believes it will capture its fair share of government spending, especially since the federal government needs to report using the TBM taxonomy by 2019. But at this early stage it didn’t get into specifics or speculate about how much of this market it could capture. We’ll just have to see how things track throughout the year.
The bottom line is the quarter was better than expected and analysts were pleasantly surprised. Management also provided upsized guidance for 2018, calling for revenue in a range of $225 million to $230 million (consensus was for $223 million) and positive non-GAAP EPS. Shares are behaving well after the report and I’m keeping Apptio at Buy. BUY.
Instructure (INST) handed in another beat on the top and bottom line in Q1. Revenue was up 39.2% to $48 million (beating by $870K) and EPS of -$0.21 beat by $0.02.
Notable domestic education customer wins in the quarter included Mississippi State University (18,000 students), San Diego Community College District (45,000 students) and Chesterfield County Public Schools in Virginia (60,000 K-12 students). On the international front (which now accounts for 18% of revenue) Instructure landed the University of Oxford (24,000 students) and four additional universities in Sweden’s University Computer Network (now up to 100,000 students). It’s notable that Instructure appears to be in a strong position to keep taking market shares as it enters the peak academic buying season.
Bridge, the newish corporate learning solution, is also still selling well and management said the product is on target to generate 15% to 20% of company bookings in 2018. In Q1 Instructure landed Ancestry.com (genealogy company), Superion (public sector software), Optiv (cyber security solution provider), Guardian Life (mutual life insurance) and FranklinCovey (management consulting). A few months back Instructure announced a partnership with Paychex and integration work is still taking place. Expect this to show up in the numbers closer to 2019.
Profit margins continue to increase as salespeople sell more solutions into the installed base. But while Instructure is cutting its loss materially, investors shouldn’t expect full-year profits until 2020. With revenue growth comfortably above 30% and shares trading at a discount to other high growth peers (Instructure’s EV/forward sales multiple is only around 5) I expect to see analysts raise price targets. That doesn’t always translate into higher prices, and Instructure has now dipped below the level of its February breakout. But without anything really to complain about here we should see demand for shares pick up soon. Keeping at Buy. BUY.
AxoGen (AXGN) delivered Q1 2018 results that were essentially in-line with expectations, which is probably why the stock traded down a little yesterday (it came back later in the day). First quarter revenue growth was 41% to $17.3 million (beating by $180K) and EPS of -$0.11 was in-line. Revenue growth was driven by sales of the company’s four nerve repair products into its core markets of trauma, oral and maxillofacial surgery and carpal and cubital tunnel revision. Active accounts were up 30% to 604 (from 465 a year ago).
AxoGen added 15 direct sales reps in the quarter, so now has 68 total. Ten of these are specialty reps focused on selling products for the expanded applications of oral and maxillofacial and breast reconstruction neurotization. The company burned just under $6 million in the quarter so its cash position is now $30.6 million (it has $25 million in debt). Management said it believes it has the cash to achieve profitability and keep investing in its growth initiatives, and said cash burn should slow down a little moving forward. Forward guidance remains at least 40% revenue growth in 2018, but sales reps are now expected to grow to 80 (versus 75) by year-end.
There was a lot of talk about the sales team on the conference call. Management said building out the sales team infrastructure – including adding sales managers to keep the rep-to-manger ratio down (which should keep per rep productivity up) – took some of the focus out of selling in January and February, but that March was a record month as the teams got going.
This portends good things for the balance of the year since the incremental sales force investments should theoretically yield better results moving forward. Management said it typically limits each rep when his or her sales get up to around $2 million. And as analysts on the call were right to assume, this implies that with a target of around 80 reps there is considerable upside to consensus estimates, which are calling for about $85 million in sales in 2018 and $118 million in 2019.
Do the math, and 80 reps selling $2 million each equals sales capacity of around $160 million! On the other hand, AxoGen also works with distributors so as the number of sales reps increases , the company will probably cut some distributors (it cut one in Q1, so now has 19 distributors).
But management repeatedly said it is conservatively guiding for at least 40% revenue growth this year. And with expansion into surgical management of pain with the AxoGuard Nerve Cap (approved by FDA in November), as well as breast reconstruction neurotization, there is ample room for revenue growth to accelerate. Obviously doing so will come down to execution. But suffice to say the potential for revenue growth to hold up near 40%, or more, with profitability in 2019, in what appears to be a relatively untapped market, is a very compelling pitch.
Finally, AxoGen has been training surgeons on its ReSensation technique for breast reconstruction neurotization and ultimately will partner with 20 to 25 breast neurotization centers by the end of the year. Management said it has trained two-thirds of these centers, which are just beginning to offer the procedure to patients. Breast reconstruction did add a little revenue in the quarter, but it was minimal, and management expects it will ramp up throughout the year as surgeons get up to speed.
The bottom line here is that the long-term growth story for AxoGen appears to be intact. With the stock up handsomely over the past couple of years it’s entirely possible there could be some profit taking. But we’ll handle that as it comes. For now, I’m keeping the stock at Buy. BUY.