Business context and reporting period
AppFolio, Inc. filed this Form 10-K for the fiscal year ended December 31, 2020. It provides cloud-based software, services and data analytics, primarily for real estate property managers. Revenue includes subscriptions to core products and usage- or subscription-based Value+ services. AppFolio completed the sale of its legal-software subsidiary, MyCase, on September 30, 2020.
Financial performance and liquidity
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Revenue | $310.1 million | $256.0 million |
| Operating income | $9.8 million | $6.5 million |
| Operating margin | 3.2% | 2.5% |
| Net income | $158.4 million | $36.3 million |
| Cash from operating activities | $48.3 million | $38.9 million |
- Revenue increased 21% year over year. Core solutions revenue rose 14% to $100.9 million; Value+ services revenue increased 27% to $195.1 million.
- Cost of revenue, excluding depreciation and amortization, was 38.4% of revenue, versus 39.7% in 2019 (implied gross margins of 61.6% and 60.3%, respectively).
- FY 2020 net income included a $187.7 million pretax gain on the MyCase sale. Excluding that unusual gain, reported net income substantially overstates earnings from ongoing operations.
- Q4 2020 revenue was $72.4 million, up from $67.4 million in Q4 2019. Q4 operating loss was $2.8 million, compared with operating income of $0.1 million; net loss was $0.5 million, compared with net income of $4.4 million.
- At year-end, cash and cash equivalents were $140.3 million and investment securities were $35.0 million, totaling $175.3 million. Working capital was $149.5 million, compared with $14.3 million a year earlier.
- Year-end debt was zero. AppFolio repaid and extinguished its term loan and revolving-facility obligations using proceeds from the MyCase transaction. Operating lease liabilities were $42.0 million.
- Investing activities provided $146.5 million, largely reflecting $191.4 million in net proceeds from the MyCase sale; financing activities used $70.4 million. The company reported no off-balance-sheet arrangements.
Changes, outlook, risks and unusual items
- Real estate revenue grew 23% to $284.7 million. Average property-management units under management increased 17%, and average customer count rose 10%. At year-end, AppFolio reported 15,724 property-management customers and 5.36 million units under management.
- Management attributed increased online payment activity in part to COVID-19, but said the durability and overall effect of pandemic-related demand changes were uncertain. Demand for some Value+ services varied during the year.
- The company expects to keep investing in product development, customer support, sales and marketing, and infrastructure. Management anticipates long-term margin improvement but cautioned that investment timing may interrupt that trend. No specific revenue or earnings guidance was provided.
- The FTC tenant-screening investigation was resolved through a settlement order filed January 12, 2021. AppFolio admitted no wrongdoing; the $4.3 million settlement was accrued in 2020 and paid in January 2021. The DOJ separately closed its investigation with no action.
- The MyCase sale generated $192.2 million in cash proceeds before transaction-related adjustments and $187.7 million in pretax gain. The sale drove a substantial portion of 2020 earnings and liquidity; related tax expense was $51.3 million.
- Key risks include COVID-19’s effects on customers and employees, customer retention and adoption of Value+ services, competition, cybersecurity and service availability, third-party payment and screening providers, evolving regulation, and the ability to attract and retain personnel.
- Class B shares carry ten votes per share; Class B holders controlled approximately 90% of combined voting power at December 31, 2020. The company reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions.
Important facts for investors to verify
- Assess ongoing revenue growth and profitability separately from the one-time MyCase gain, including the impact of the associated tax expense.
- Track customer and unit growth, Value+ adoption and usage, and whether elevated electronic-payment activity persists after pandemic-related changes.
- Review the settlement order’s requirements and any continuing compliance costs relating to tenant screening and the FCRA.
- Monitor cash generation, reinvestment needs, operating lease commitments, and any future borrowing or share repurchases.
- Consider the effects of concentrated voting control, potential dilution from equity awards, and risks from cybersecurity, regulation, and third-party service providers.