AppFolio, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual report, not a standalone fourth-quarter filing; Q4 figures below are the three months ended December 31, 2018. Amounts are U.S. dollars.
Business context
AppFolio sells cloud-based software and related services primarily to real estate property managers, with a smaller legal-practice software business. Real estate customers generated more than 90% of annual revenue. At year-end, it reported 13,046 property manager customers managing 3.91 million units, and 10,279 law-firm customers.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $190.1 million | $143.8 million |
| Operating income and margin | $19.7 million; 10.3% | $9.3 million; 6.5% |
| Net income and diluted EPS | $20.0 million; $0.56 | $9.7 million; $0.28 |
| Cash from operating activities | $36.3 million | $29.4 million |
| Cash, cash equivalents and investments | $102.0 million | $68.3 million |
| Working capital | $79.8 million | $29.9 million |
| Debt, net | $49.8 million | None reported |
Revenue increased 32%. Value+ services grew 40% to $113.1 million, core solutions grew 23% to $70.5 million, and other revenue was $6.5 million. Operating margin improved year over year; cost of revenue excluding depreciation and amortization was 38.7% of revenue versus 38.4%.
In Q4, revenue was $50.4 million, up from $37.9 million a year earlier. Net income was $2.6 million versus $2.6 million; operating income was $2.7 million versus $2.4 million. Q4 operating margin was 5.4%, compared with 6.3% a year earlier. Leasing-related services are typically seasonally weaker in Q4.
Year-end cash and cash equivalents were $74.1 million, with $27.9 million of investment securities. The company had a $50 million term loan, with $48.6 million net long-term debt and $1.2 million current portion; its $50 million revolving facility was undrawn. Operating cash flow rose to $36.3 million. Investing activities used $4.6 million and financing activities provided $26.3 million, including $50 million of term-loan proceeds and $21.6 million of share repurchases.
Material changes, outlook and unusual items
- Growth reflected customer and unit expansion: property manager customers rose 11% year over year and units under management rose 20%; management also cited stronger use of Value+ services.
- Adoption of the new revenue standard did not affect reported revenue, but deferred customer-acquisition commissions over three years. It increased FY2018 operating income and net income by $4.2 million versus the prior accounting method; sales commissions had previously been expensed as incurred.
- AppFolio acquired WegoWise in August 2018 for $14.4 million. Its post-acquisition contribution through year-end was $0.4 million revenue and a $1.4 million net loss. In January 2019, it acquired Dynasty for $60.2 million, subject to adjustments; purchase-price allocation was still pending.
- The company recorded $1.1 million of net expense for a proposed settlement of FCRA class-action litigation, subject to final court approval. It also received an FTC Civil Investigative Demand concerning tenant-screening compliance; the filing says the investigation’s outcome and potential costs or penalties could not be predicted.
- Management intends to prioritize long-term growth and continue investing in product development, customer support, sales and infrastructure. It expects operating margins to improve over the long term, while warning that investment periods may interrupt that trend. No quantified revenue or earnings guidance is provided.
- In February 2019, the board authorized a $100 million repurchase program, inclusive of the remaining $8.4 million under the prior authorization. The program is discretionary and may be changed or suspended.
Key risks and items for investors to verify
- Track the FTC inquiry and final court approval, settlement terms and insurance proceeds for the FCRA class action.
- Assess whether Value+ growth, customer retention and unit growth can sustain revenue expansion without eroding margins as third-party service costs and operating expenses rise.
- Review Dynasty integration, the final acquisition accounting and funding impact; the filing notes that most consideration was expected to be allocated to technology and goodwill.
- Monitor term-loan repayment, variable interest exposure, revolving-facility covenants and liquidity alongside planned acquisitions and share repurchases.
- Consider concentration in real estate customers, seasonality in leasing services, cybersecurity and service-continuity exposure, and evolving payment, screening, privacy and insurance regulation.
- Account for the dual-class structure: Class B shares carry ten votes per share, and their holders controlled approximately 92% of combined voting power at year-end.
- Confirm the effects of the new lease-accounting standard, adopted January 1, 2019; management expected material lease assets and liabilities to be recognized. The independent auditor reported effective internal control over financial reporting, excluding WegoWise from the assessment because of its recent acquisition.