AppFolio, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing is an annual report; selected fourth-quarter results are also summarized below. AppFolio provides cloud-based software and related services to property managers and small law firms.
Financial performance
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $105.6 million | $75.0 million |
| Net loss | $8.3 million | $15.7 million |
| Operating loss | $8.4 million | $15.0 million |
| Cash provided by operating activities | $11.5 million | Cash used: $6.8 million |
| Cash, cash equivalents and investment securities | $52.9 million | $56.7 million |
| Working capital | $10.9 million | $10.6 million |
| Outstanding debt under revolving facility | None | $12,000 |
Revenue grew 41% year over year. Value+ services revenue rose 50% to $57.0 million, while core solutions revenue increased 36% to $43.8 million. Value+ growth was principally attributed to electronic payments, screening, insurance, contact-center and website services. Property-management customers generated more than 90% of revenue.
Cost of revenue, excluding depreciation and amortization, was 42.3% of revenue, compared with 45.2% in 2015. Operating loss was 8.0% of revenue, versus 20.0% in 2015; net loss was 7.8% of revenue, versus 20.9%. The filing does not present a single gross-margin measure including depreciation and amortization.
Investing activities used $13.1 million, including $11.2 million of capitalized software development and $4.2 million of property and equipment purchases, partly offset by investment-security transactions. Cash and investments totaled $52.9 million at year-end. The company reported $25.0 million available under its revolving facility and stated that liquidity and operating cash flow should meet working-capital and capital-expenditure needs for at least 12 months.
Fourth-quarter and year-over-year changes
Fourth-quarter 2016 revenue was $28.0 million, up from $20.4 million in fourth-quarter 2015, but slightly below third-quarter 2016 revenue of $28.2 million. Fourth-quarter net loss was $1.3 million, compared with $3.9 million a year earlier. Management noted that fourth-quarter screening and new-tenant application activity is seasonally lower.
Customer growth supported results: property-manager customers increased 22% to 10,038, property units under management rose 25% to 2.68 million, and law-firm customers increased 32% to 8,135. Operating cash flow improved to $11.5 million from cash use of $6.8 million in 2015. Expenses continued to rise in absolute dollars; depreciation and amortization increased 63% to $9.9 million, and research and product development expense increased 32% to $12.6 million.
Outlook, risks and notable items
- Management plans continued investment in product development, customer support, sales and marketing, infrastructure, and potential adjacent markets or new verticals. It expects operating leverage and margins to improve over the long term, but does not expect consistent profitability in the foreseeable future.
- Key risks include dependence on property-management revenue, competition, customer retention and adoption of Value+ services, cybersecurity and service availability, third-party infrastructure and payment partners, and evolving payment, privacy and insurance regulation. The filing also notes that disaster-recovery and business-continuity arrangements were not complete.
- The company retains insurance-claim exposure through its tenant-liability insurance business; reported and incurred-but-not-reported claim liabilities were $0.3 million at year-end. Routine legal proceedings were not expected by management to have a material adverse effect.
- Cash and investment balances declined by $3.9 million. Operating cash generation was outweighed by investing cash uses; the company continued substantial software development and facilities investment.
- A February 2017 headquarters lease amendment extended the term through December 2021 and added a $3.1 million commitment. Total operating-lease obligations at December 31, 2016 were $8.3 million, before that extension.
- Class B shares carried 10 votes per share; their holders controlled approximately 95% of combined voting power at year-end. No cash dividends were planned.
- The auditor issued an unqualified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting; the auditor’s internal-control attestation was not included under the emerging-growth-company exemption.
Investor verification priorities
- Confirm that Value+ growth, especially payment and screening activity, is sustainable and profitable after related third-party costs.
- Track property-management customer retention, units under management, law-firm growth, and the revenue mix given the concentration in property management.
- Assess whether operating cash flow can support capitalized software development, capital spending and ongoing investment while the company remains loss-making.
- Review security, service-continuity and payment-partner safeguards, along with regulatory and insurance-claim exposures.
- Monitor stock-based compensation and dilution, including performance-based awards tied to free-cash-flow targets, and the effect of concentrated voting control.