• AppFolio, Inc. Announces Second Quarter Financial Results

    Source: Nasdaq GlobeNewswire / 28 Jul 2022 15:05:01   America/Chicago

    Revenue grows 32%
    Launch of AppFolio Stack™ Marketplace to Modernize Property Management Software Integrations

    SANTA BARBARA, Calif., July 28, 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 second quarter ended June 30, 2022.

    “AppFolio’s revenue growth, coupled with a year-over-year increase of more than one million units served, reflects our continued focus on delivering powerful property management solutions and exceptional experiences to our growing base of real estate industry customers,” said Jason Randall, President and CEO, AppFolio. “In the second quarter, as part of our strategy to serve larger customers, we were pleased to announce AppFolio Stack, our new integration marketplace. This integration marketplace is one of many examples of our multi-year investment strategy focused on growing our customer base and expanding our Value Added Services.”

    Financial Highlights

    • Revenue: Total revenue was $117.4 million in the second quarter of 2022, a 32% increase from $89.0 million in the second quarter of 2021.
    • Units Served: Total units on the AppFolio Property Manager platform increased to approximately 6.8 million in the second quarter of 2022 from approximately 5.8 million at the end of the second quarter of 2021.
    • Income (Loss) from Operations: GAAP loss from operations in the second quarter of 2022 was $29.9 million, or 25% of revenue, compared to GAAP income from operations of $1.1 million, or 1% of revenue, in the same quarter of 2021. Non-GAAP income from operations in the second quarter of 2022 was $1.2 million, or 1% of revenue, compared to Non-GAAP income from operations of $5.9 million, or 7% of revenue, in the second quarter of 2021.
    • Cash: Cash, cash equivalents and investment securities were $168.0 million as of June 30, 2022. Non-GAAP free cash flow was $(1.5) million, or (1)% of revenue, in the second quarter of 2022, compared to $10.0 million, or 11% of revenue, in the same quarter of 2021.

    Financial Outlook
    Based on information available as of July 28, 2022, AppFolio's outlook for fiscal year 2022 follows:

    • Full year revenue is expected to be in the range of $455 million to $461 million.
    • Full year non-GAAP operating margin as a percentage of revenue is expected to be in line with prior guidance and lower than in 2021.
    • 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, July 28, 2022, at 2:00 p.m. Pacific Time (PT), 5:00 p.m. Eastern Time (ET), to discuss the company’s second quarter 2022 financial results. A live webcast of the call will be available at: https://edge.media-server.com/mmc/p/zj46j6vo. To access the call by phone, please go to the following link: https://register.vevent.com/register/BI5ea7ed5f458047dfbc8b649e60b55a96, and you will be provided with dial in details. To avoid delays, we encourage participants to dial into the conference call fifteen minutes ahead of the scheduled start time. A replay of the webcast will also be available for a limited time at https://ir.appfolioinc.com/news-events/events.

    About AppFolio, Inc.
    AppFolio, Inc. (NASDAQ: APPF) 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. Today, our solutions are AppFolio Property Manager and AppFolio Investment Management, which are supplemented with Value Added Services that enhance, automate and streamline business-critical processes and workflows. 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 the Company's business opportunities, the impact of the Company's strategic actions and initiatives, and the timing of providing updated financial guidance.

    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)
     
      June 30,
    2022
     December 31,
    2021
    Assets    
    Current assets    
    Cash and cash equivalents $42,626 $57,847
    Investment securities—current  75,425  64,600
    Accounts receivable, net  16,175  12,595
    Prepaid expenses and other current assets  22,157  23,553
    Total current assets  156,383  158,595
    Investment securities—noncurrent  49,909  61,076
    Property and equipment, net  28,270  30,479
    Operating lease right-of-use assets  29,228  41,710
    Capitalized software development costs, net  37,496  41,212
    Goodwill  56,147  56,147
    Intangible assets, net  9,408  11,711
    Other long-term assets  8,587  7,087
    Total assets $375,428 $408,017
    Liabilities and Stockholders’ Equity    
    Current liabilities    
    Accounts payable $1,338 $1,704
    Accrued employee expenses—current  26,757  30,065
    Accrued expenses  15,807  13,284
    Deferred revenue  3,075  2,512
    Other current liabilities  7,742  5,077
    Total current liabilities  54,719  52,642
    Operating lease liabilities  54,044  55,733
    Other liabilities  1,674  2,261
    Stockholders’ equity  264,991  297,381
    Total liabilities and stockholders’ equity $375,428 $408,017
           


    CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
    (UNAUDITED)
    (in thousands, except per share amounts)
     
     Three Months Ended
    June 30,
     Six Months Ended
    June 30,
      2022   2021   2022   2021 
    Revenue$117,450  $89,040  $222,746  $167,961 
    Costs and operating expenses:       
    Cost of revenue (exclusive of depreciation and amortization)(1) 47,430   32,819   90,777   66,117 
    Sales and marketing(1) 26,995   17,714   51,914   33,893 
    Research and product development(1) 26,687   15,506   51,007   29,889 
    General and administrative(1) 37,947   14,206   56,911   27,567 
    Depreciation and amortization 8,321   7,649   16,736   15,018 
    Total costs and operating expenses 147,380   87,894   267,345   172,484 
    (Loss) income from operations (29,930)  1,146   (44,599)  (4,523)
    Other income, net 45   496   35   1,058 
    Interest income 151   55   258   108 
    (Loss) income before provision for (benefit from) income taxes (29,734)  1,697   (44,306)  (3,357)
    Provision for (benefit from) income taxes 236   (324)  (49)  (5,857)
    Net (loss) income$(29,970) $2,021  $(44,257) $2,500 
            
    Net (loss) income per common share:       
    Basic$(0.86) $0.06  $(1.27) $0.07 
    Diluted$(0.86) $0.06  $(1.27) $0.07 
    Weighted average common shares outstanding:       
    Basic 34,927   34,548   34,881   34,479 
    Diluted 34,927   35,674   34,881   35,697 

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

     Three Months Ended
    June 30,
     Six Months Ended
    June 30,
      2022  2021  2022  2021
    Costs and operating expenses:       
    Cost of revenue (exclusive of depreciation and amortization)$726 $463 $1,084 $934
    Sales and marketing 2,013  447  3,473  849
    Research and product development 4,024  1,214  6,830  2,071
    General and administrative 3,198  1,090  5,992  2,136
    Total stock-based compensation expense$9,961 $3,214 $17,379 $5,990
                

     

     
    CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
    (UNAUDITED)
    (in thousands)
     
     Three Months Ended
    June 30,
     Six Months Ended
    June 30,
      2022   2021   2022   2021 
    Cash from operating activities       
    Net (loss) income$(29,970) $2,021  $(44,257) $2,500 
    Adjustments to reconcile net (loss) income to net cash used in operating activities:       
    Depreciation and amortization 7,759   7,219   15,637   14,190 
    Amortization of operating lease right-of-use assets 922   737   1,809   1,399 
    Impairment 19,433      19,792    
    Deferred income taxes (1,208)  (363)  (1,550)  (6,086)
    Stock-based compensation, including as amortized 10,523   3,644   18,478   6,818 
    Other (62)  (422)  6   (579)
    Changes in operating assets and liabilities:       
    Accounts receivable 507   (2,111)  (2,924)  (4,007)
    Prepaid expenses and other current assets (710)  (2,218)  (2,652)  (2,171)
    Other assets (735)  (579)  (1,308)  (982)
    Accounts payable (2,970)  431   17   1,301 
    Accrued employee expenses—current 1,799   6,910   (3,217)  7,638 
    Accrued expenses 1,460   757   3,182   (3,047)
    Deferred revenue (1,146)  (266)  (94)  33 
    Operating lease liabilities (680)  2,357   (1,311)  1,685 
    Other liabilities 603   (3,019)  1,673   (8,031)
    Net cash provided by operating activities 5,525   15,098   3,281   10,661 
    Cash from investing activities       
    Purchases of available-for-sale investments (21,591)  (49,282)  (44,900)  (148,293)
    Proceeds from sales of available-for-sale investments    24,299      42,198 
    Proceeds from maturities of available-for-sale investments 20,155   25,750   43,498   26,750 
    Purchases of property and equipment (3,269)  (1,866)  (5,099)  (2,804)
    Capitalization of software development costs (3,709)  (5,771)  (7,193)  (11,911)
    Net cash used in investing activities (8,414)  (6,870)  (13,694)  (94,060)
    Cash from financing activities       
    Proceeds from stock option exercises 503   546   603   646 
    Tax withholding for net share settlement (4,524)  (4,908)  (5,597)  (8,900)
    Net cash used in financing activities (4,021)  (4,362)  (4,994)  (8,254)
    Net (decrease) increase in cash and cash equivalents and restricted cash (6,910)  3,866   (15,407)  (91,653)
    Cash, cash equivalents and restricted cash       
    Beginning of period 49,786   45,180   58,283   140,699 
    End of period$42,876  $49,046  $42,876  $49,046 
                    


      RECONCILIATION FROM GAAP TO NON-GAAP RESULTS
      (UNAUDITED)
      (in thousands, except per share data)
       
       Three Months Ended
    June 30,
     Six Months Ended
    June 30,
        2022   2021   2022   2021 
    Costs and operating expenses:     
     GAAP cost of revenue (exclusive of depreciation and amortization)$47,430  $32,819  $90,777  $66,117 
      Less: Stock-based compensation expense 726   463   1,084   934 
     Non-GAAP cost of revenue (exclusive of depreciation and amortization)$46,704  $32,356  $89,693  $65,183 
     GAAP cost of revenue (exclusive of depreciation and amortization) as a percentage of revenue 40%  37%  41%  39%
     Non-GAAP cost of revenue (exclusive of depreciation and amortization) as a percentage of revenue 40%  36%  40%  39%
              
     GAAP sales and marketing$26,995  $17,714  $51,914  $33,893 
      Less: Stock-based compensation expense 2,013   447   3,473   849 
     Non-GAAP sales and marketing$24,982  $17,267  $48,441  $33,044 
     GAAP sales and marketing as a percentage of revenue 23%  20%  23%  20%
     Non-GAAP sales and marketing as a percentage of revenue 21%  19%  22%  20%
              
     GAAP research and product development$26,687  $15,506  $51,007  $29,889 
      Less: Stock-based compensation expense 4,024   1,214   6,830   2,071 
     Non-GAAP research and product development$22,663  $14,292  $44,177  $27,818 
     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 19%  16%  20%  17%
              
     GAAP general and administrative$37,947  $14,206  $56,911  $27,567 
      Less: Stock-based compensation expense 3,198   1,090   5,992   2,136 
      Less: Impairment 19,433      19,792    
     Non-GAAP general and administrative$15,316  $13,116  $31,127  $25,431 
     GAAP general and administrative as a percentage of revenue 32%  16%  26%  16%
     Non-GAAP general and administrative as a percentage of revenue 13%  15%  14%  15%
              
     GAAP depreciation and amortization$8,321  $7,649  $16,736  $15,018 
      Less: Amortization of stock-based compensation capitalized in software development costs 561   430   1,098   828 
      Less: Amortization of purchased intangibles 1,151   1,153   2,303   2,340 
     Non-GAAP depreciation and amortization$6,609  $6,066  $13,335  $11,850 
     GAAP depreciation and amortization as a percentage of revenue 7%  9%  8%  9%
     Non-GAAP depreciation and amortization as a percentage of revenue 6%  7%  6%  7%
                     


       
       Three Months Ended
    June 30,
     Six Months Ended
    June 30,
        2022   2021   2022   2021 
    (Loss) income from operations:       
     GAAP (loss) income from operations$(29,930) $1,146  $(44,599) $(4,523)
      Less: Stock-based compensation expense 9,961   3,214   17,379   5,990 
      Less: Amortization of stock-based compensation capitalized in software development costs 561   430   1,098   828 
      Less: Amortization of purchased intangibles 1,151   1,153   2,303   2,340 
      Less: Impairment 19,433      19,792    
     Non-GAAP income (loss) from operations$1,176  $5,943  $(4,027) $4,635 
              
    Operating margin:       
     GAAP operating margin (25.5)% 
      1.3%  (20.0)%  (2.7)%
      Stock-based compensation expense as a percentage of revenue 8.5   3.6   7.8   3.6 
      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 1.0   1.3   1.0   1.4 
      Lease impairment 16.5      8.9    
     Non-GAAP operating margin 1.0%  6.7%  (1.8)%    2.8%
              
    Net (loss) income:       
     GAAP net (loss) income$(29,970) $2,021  $(44,257) $2,500 
      Less: Stock-based compensation expense 9,961   3,214   17,379   5,990 
      Less: Amortization of stock-based compensation capitalized in software development costs 561   430   1,098   828 
      Less: Amortization of purchased intangibles 1,151   1,153   2,303   2,340 
      Less: Impairment 19,433      19,792    
      Less: Income tax effect of adjustments 58   1,810   (958)  7,016 
     Non-GAAP net income (loss)$1,078  $5,008  $(2,727) $4,642 
              
    Net (loss) income per share, basic:       
     GAAP net (loss) income per share, basic$(0.86) $0.06  $(1.27) $0.07 
      Non-GAAP adjustments to net (loss) income 0.89   0.09   1.19   0.06 
     Non-GAAP net income (loss) per share, basic$0.03  $0.15  $(0.08) $0.13 
              
    Net (loss) income per share, diluted:       
     GAAP net (loss) income per share, diluted$(0.84) $0.06  $(1.27) $0.07 
      Non-GAAP adjustments to net (loss) income 0.87   0.08   1.19   0.06 
     Non-GAAP net income (loss) per share, diluted$0.03  $0.14  $(0.08) $0.13 
              
     Weighted-average shares used in GAAP per share calculation       
      Basic 34,927   34,548   34,881   34,479 
      Diluted 34,927   35,674   34,881   35,697 
              
     Weighted-average shares used in non-GAAP per share calculation       
      Basic 34,927   34,548   34,881   34,479 
      Diluted 35,668   35,674   34,881   35,697 
                      

     

       Three Months Ended
    June 30,
     Six Months Ended
    June 30,
        2022   2021   2022   2021 
    Free cash flow:    
     GAAP net cash provided by operating activities$5,525  $15,098  $3,281  $10,661 
      Purchases of property and equipment (3,269)  (1,866)  (5,099)  (2,804)
      Capitalized software development costs (3,709)  (5,771)  (7,193)  (11,911)
      Non-recurring taxes paid related to MyCase divestiture    2,574      9,259 
     Non-GAAP free cash flow$(1,453) $10,035  $(9,011) $5,205 
              
    Free cash flow margin:      
     GAAP net cash provided by operating activities as a percentage of revenue 4.7%  17.0%  1.5%  6.3%
      Purchases of property and equipment as a percentage of revenue (2.8)  (2.1)  (2.3)  (1.7)
      Capitalized software development costs as a percentage of revenue (3.2)  (6.5)  (3.2)  (7.1)
      Non-recurring taxes paid related to MyCase divestiture as a percentage of revenue    2.9      5.5 
     Non-GAAP free cash flow margin(1.2)%  11.3% (4.0)%  3.1%
                 

     

        
       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: Insurance recovery       (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) income from operations:       
     GAAP (loss) income from operations$(5,669) $1,146  $(13) $(7,342)
      Less: Stock-based compensation expense 2,776   3,214   4,063   5,288 
      Less: Amortization of stock-based compensation capitalized in software development costs 398   430   471   513 
      Less: Amortization of purchased intangibles 1,187   1,153   1,153   1,153 
      Less: Insurance recovery       (1,900)   
     Non-GAAP (loss) income from operations$(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 
      Insurance recovery       (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) $(1,331)
      Less: Stock-based compensation expense 2,776   3,214   4,063   5,288 
      Less: Amortization of stock-based compensation capitalized in software development costs 398   430   471   513 
      Less: Amortization of purchased intangibles 1,187   1,153   1,153   1,153 
      Less: Insurance recovery       (1,900)   
      Less: Income tax effect of adjustments 5,206   1,810   1,104   (6,820)
     Non-GAAP net (loss) income$(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   2021   2021   2021 
    Free cash flow:    
     GAAP net cash (used in) provided by operating activities$(4,437) $15,098  $15,798  $8,932 
      Purchases of property and equipment (938)  (1,866)  (2,362)  (2,937)
      Capitalized software development costs (6,140)  (5,771)  (6,600)  (6,104)
      Non-recurring taxes paid related to MyCase divestiture 6,685   2,574       
      Insurance recovery       (1,900)   
     Non-GAAP free cash flow$(4,830) $10,035  $4,936  $(109)
              
    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 taxes paid related to MyCase divestiture as a percentage of revenue 8.5   2.9       
      Insurance recovery as a percentage of revenue       (2.0)   
     Non-GAAP free cash flow margin(6.1)%  11.3%  5.2% (0.1)%
                 

    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, insurance recoveries, 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 non-recurring income taxes paid related to the divestiture 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.
    • 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 June 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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