AppFolio, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed March 2, 2020. This is an annual report, not a standalone fourth-quarter filing. AppFolio provides cloud-based software and services primarily to property managers, with a smaller legal-software business. More than 90% of revenue came from real estate. At year-end, it had 14,385 property-management customers and 4.64 million units under management, up 10% and 19%, respectively, year over year.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $256.0 million | $190.1 million |
| Operating income | $6.5 million; 2.5% margin | $19.7 million; 10.3% margin |
| Pre-tax income | $4.8 million | $20.4 million |
| Net income | $36.3 million | $20.0 million |
| Operating cash flow | $38.9 million | $36.3 million |
| Cash and investment securities | $50.8 million | $102.0 million |
| Working capital | $14.3 million | $79.8 million |
| Debt, net | $48.6 million | $49.8 million |
- Revenue grew 35%. Core-solutions revenue rose 26% to $88.6 million; Value+ services revenue rose 36% to $154.0 million; other revenue rose 108% to $13.4 million.
- Cost of revenue excluding depreciation and amortization increased to 39.7% of revenue from 38.7%. Operating expenses grew faster than revenue in several areas: sales and marketing rose 55%, research and product development 64%, and depreciation and amortization 54%.
- Reported net income included a $31.5 million non-cash income-tax benefit, primarily from reversing the valuation allowance on deferred tax assets. Before that tax benefit, pre-tax income was $4.8 million; the rise in reported net income therefore does not reflect a comparable increase in operating profit.
- Cash and investments declined by $51.2 million year over year. Investing activities used $89.9 million, including $54.0 million of cash for the Dynasty acquisition, $21.0 million of capitalized software development, and $8.1 million of capital expenditures. Operating cash flow remained positive at $38.9 million.
- At year-end, the company had $48.6 million of term debt and no revolver borrowings, with $50.0 million available under its revolving facility. The term loan and revolver mature December 24, 2023; borrowings carry variable interest rates. Management said existing liquidity, operating cash generation, and available borrowing capacity should meet needs for at least the next 12 months.
Material changes and fourth-quarter performance
- FY 2019 revenue increased $65.9 million from FY 2018, driven mainly by more property-management customers and units, greater Value+ usage, and new service offerings.
- Operating income fell from $19.7 million to $6.5 million as expenses rose with hiring, growth investments, acquired intangible amortization, and sales-commission accounting. Interest shifted from $0.8 million of net income in 2018 to $1.7 million of net expense in 2019, reflecting debt and lower investment balances.
- Q4 revenue was $67.4 million, up 34% from $50.4 million in Q4 2018 but slightly below Q3 2019 revenue of $67.9 million. Q4 2019 operating income was $0.1 million, compared with $2.7 million in Q4 2018. Q4 net income was $4.4 million, including a $4.6 million income-tax benefit.
- AppFolio acquired Dynasty, an AI provider for real estate, in January 2019 for stated purchase consideration of $60.2 million; $6.0 million was held back and released in January 2020, subject to unresolved claims. Dynasty contributed $2.8 million of revenue and a $9.2 million net loss after acquisition through year-end. AppFolio also launched Utility Management and its AI Leasing Assistant, Lisa, and introduced Investment Management.
- The company adopted new lease accounting in 2019, recognizing operating lease assets and liabilities. The adoption materially affected the balance sheet but did not affect the income statement or cash flows.
Outlook, risks, contingencies, and unusual items
- No specific financial guidance for 2020 is provided in the filing. Management expects to continue investing in product development, customer support, infrastructure, sales and marketing, and expansion into adjacent markets or verticals. It expects operating margins to improve over the long term, while warning that accelerated investments may interrupt that trend.
- Management identifies limited seasonality in leasing-related Value+ services: activity typically declines in the fourth quarter, which can slow sequential revenue growth or cause a sequential decline.
- Key business risks include dependence on real estate customers, intense competition, customer retention and Value+ adoption, execution of growth and acquisitions, cybersecurity and service availability, and evolving privacy, payment, tenant-screening, insurance, and other regulations.
- AppFolio completed a class-action settlement in 2019 related to alleged Fair Credit Reporting Act violations. The FTC had issued a Civil Investigative Demand concerning tenant-screening compliance, and the Department of Justice had requested information concerning Servicemembers Civil Relief Act compliance. The company said it was cooperating and could not predict the outcome or potential costs.
- Other notable exposures include insurance claims reserves of $1.8 million at year-end, unrecognized tax benefits of $4.4 million, and variable-rate debt. Management reported compliance with credit-agreement financial covenants. It also said no pending legal matter was then expected to have a material adverse effect, while noting outcomes could not be predicted with certainty.
- Class B shares carried 10 votes per share versus one vote for Class A; Class B holders collectively held approximately 91% of voting power at year-end. The authorized $100 million share-repurchase program did not obligate the company to repurchase shares, and no shares were repurchased under that program in 2019.
Important facts for investors to verify
- Whether revenue growth and rising units under management are translating into sustained operating-margin improvement, given the sharp FY 2019 margin decline.
- How much reported earnings depend on the one-time valuation-allowance release and whether future tax expense better reflects ongoing operations.
- Cash use, acquisition integration, and the returns expected from Dynasty and other growth investments; also verify the final disposition of the Dynasty holdback and any claims.
- Developments, potential costs, or penalties related to the FTC and DOJ inquiries and the completed FCRA class-action settlement.
- Growth in Value+ services alongside third-party delivery costs, insurance loss reserves, payment risks, and customer adoption and retention.
- Debt repayment, variable-rate exposure, lease commitments, liquidity, and compliance with credit-facility covenants.
- Governance implications of the dual-class voting structure and any future use of the authorized share-repurchase program.