AppFolio, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing is an annual report, not a standalone Q4 filing; quarterly figures are unaudited. AppFolio sells cloud software and related services primarily to property managers, with a smaller legal-practice business.
Business context and operating scale
- More than 90% of revenue came from real estate customers. At year-end, AppFolio had 11,708 property-manager customers managing 3.25 million units, and 9,349 legal customers.
- Property-manager customers increased 17% year over year and units under management increased 21%. No customer generated 10% or more of annual revenue.
- Value+ services include payments, tenant screening, insurance, contact center, premium leads, and other optional offerings. The company reports one operating segment.
Financial results
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $143.8 million | $105.6 million |
| Core solutions revenue | $57.1 million | $43.8 million |
| Value+ services revenue | $80.8 million | $57.0 million |
| Operating income (loss) | $9.3 million; 6.5% margin | ($8.4 million); (8.0%) margin |
| Net income (loss) | $9.7 million; $0.28 diluted EPS | ($8.3 million); ($0.25) diluted EPS |
| Operating cash flow | $29.4 million | $11.5 million |
| Cash, cash equivalents and investments | $68.3 million | $52.9 million |
| Working capital | $29.9 million | $10.9 million |
- Revenue grew 36%. Value+ revenue grew 42%, mainly from greater payments and screening usage; core solutions revenue grew 31%.
- Cost of revenue, excluding depreciation and amortization, rose 24% but declined to 38.4% of revenue from 42.3%. Total operating expenses were 93.5% of revenue, versus 108.0% in 2016.
- Investing activities used $22.8 million, including $10.5 million of capitalized software development and $2.2 million of property and equipment purchases. Financing activities used $1.1 million. Cash and cash equivalents increased $5.4 million during the year.
- At year-end, the company had no borrowings outstanding and had a $25.0 million revolving facility available. It reported compliance with credit-agreement covenants and said existing liquidity, available borrowing capacity, and operating cash flow should meet needs for at least 12 months.
Q4 and changes versus prior periods
- Q4 2017 revenue was $37.9 million, approximately 35% above Q4 2016’s $28.0 million. Sequential revenue was essentially flat versus Q3 2017’s $37.9 million, consistent with the company’s stated seasonal slowdown in tenant screening during the holiday quarter.
- Q4 2017 operating income was $2.4 million and net income was $2.6 million, compared with operating and net losses of $1.3 million and $1.3 million, respectively, in Q4 2016.
- AppFolio returned to annual profitability after losses in 2016 and 2015. Revenue growth and improved cost ratios contributed, while sales and marketing expense remained roughly flat year over year.
- Research and product development expense increased 31% to $16.6 million. General and administrative expense increased 18% to $21.2 million, partly due to incentive compensation related to a stock-option modification following the former CEO’s announced retirement.
Outlook, risks and unusual items
- Management gave no specific financial guidance. It expects to continue investing in product development, customer service, sales and marketing, infrastructure, and expansion into adjacent markets or new verticals. It expects operating leverage and margins to improve over the long term, but cautions that investment timing may interrupt that trend and profitability may fluctuate.
- Key risks include dependence on property management revenue; customer renewals and adoption of Value+ services; competition and pricing pressure; cybersecurity, data privacy, service availability and third-party infrastructure; payment-processing and insurance regulation and losses; and the challenge of managing growth and recruiting personnel.
- The company retained insurance risk under a reinsurance arrangement for its legal-liability-to-landlord program. Recorded reported and incurred-but-not-reported claims were $0.5 million at year-end, versus $0.3 million in 2016. Management cautioned that claims could exceed reserves.
- The Tax Cuts and Jobs Act lowered the federal corporate rate to 21% beginning in 2018. Re-measurement reduced deferred tax assets before valuation allowance by $7.2 million; the full valuation allowance largely offset the impact in 2017.
- AppFolio expected adoption of the new revenue standard in 2018 to produce an approximately $3.0 million reduction to opening accumulated deficit, primarily from deferring contract-acquisition commissions over an estimated three-year benefit period. Adoption of the new lease standard in 2019 was expected to materially affect balance-sheet presentation.
- There were no material legal proceedings disclosed. Operating lease commitments totaled $9.1 million; unrecognized tax benefits were $2.1 million, with uncertain timing of any related cash outflows.
- Subsequent to year-end, the board adopted a long-term executive cash incentive plan and granted awards to the CEO and CFO. Potential payouts depend on future economic-value-per-share performance and were not reasonably estimable in the filing.
Important facts for investors to verify
- Whether customer and unit growth, renewals, and Value+ usage remain strong, particularly in the highly concentrated property-management business.
- Whether margin and cash-flow improvements persist as the company continues investing, and how much reported profit reflects stock-based compensation and capitalized software development.
- Whether payment, screening, and insurance partner costs, regulatory obligations, or insurance claims change materially.
- The effects of revenue-standard adoption, including commission capitalization, and lease-standard adoption on reported results and balance-sheet metrics.
- Potential dilution and governance implications: Class B shares carried 10 votes per share and represented approximately 93% of combined voting power at year-end.
- Whether the long-term executive cash awards lead to material future expense or cash payments; the filing does not provide a reliable estimate of potential payouts.