AppFolio, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; filed February 29, 2016. Amounts are in U.S. dollars. The filing also reports fourth-quarter results.
Business context and reporting period
AppFolio sells cloud-based property-management and legal-practice software to small and medium-sized businesses. Revenue comes from core subscriptions, optional “Value+” services (including payments, screening, insurance and websites), and other services. At year-end, the company reported 8,218 property-manager customers and 6,145 law-firm customers. More than 90% of FY2015 revenue came from property management. AppFolio acquired rental-advertising platform RentLinx in April 2015.
Financial and operating metrics
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $75.0 million | $47.7 million |
| Core solutions revenue | $32.1 million | $22.4 million |
| Value+ services revenue | $38.0 million | $22.5 million |
| Operating loss | $15.0 million | $8.6 million |
| Net loss | $15.7 million | $8.6 million |
| Operating cash flow | $(6.8) million | $0.5 million |
| Cash and cash equivalents | $12.1 million | $5.4 million |
| Investment securities | $44.7 million | None reported |
| Working capital | $10.6 million | $(5.7) million |
Revenue grew 57% year over year. Value+ revenue rose 69%, led by greater use of electronic payments, screening and tenant-liability insurance; core revenue increased 43%. Approximate gross margin, using cost of revenue before depreciation and amortization, was 55%, versus 53% in 2014. Operating margin was approximately negative 20%, compared with negative 18%.
Fourth-quarter revenue was $20.4 million, up from $13.2 million in Q4 2014. Q4 net loss was $3.9 million, compared with $4.6 million a year earlier. Sequential revenue growth is typically slower in Q4 because property managers process fewer tenant applications during the holiday season.
FY2015 investing cash outflow was $59.4 million, substantially reflecting purchases of investment securities, alongside software development, capital expenditures and the RentLinx acquisition. Financing provided $72.9 million, primarily from approximately $75.4 million of net IPO proceeds. Total cash and investment securities were approximately $56.7 million at year-end.
Total liabilities were $17.8 million. Year-end borrowings under the $25 million Wells Fargo revolving facility were immaterial ($12,000); the company had repaid its $10 million term loan during 2015. The revolver matures in 2020 and includes a $12.5 million minimum-liquidity covenant and, under specified conditions, a senior-leverage covenant. The company reported compliance at year-end.
Material changes versus the prior comparable period
- Revenue grew 57%, while net loss widened from $8.6 million to $15.7 million as the company expanded staffing and spending across customer support, sales and marketing, product development, infrastructure and public-company functions.
- Customer counts increased 40% for property management and 68% for law firms. Law-firm growth was faster, but the property-management business remained the dominant revenue source.
- Operating cash flow moved from $0.5 million provided in 2014 to $6.8 million used in 2015.
- The June/July 2015 IPO generated approximately $75.4 million in net proceeds. Convertible preferred stock converted into common stock, and stockholders’ equity rose to $72.7 million from a $51.5 million deficit.
- Cash and investment securities increased substantially, and working capital moved from a deficit to a surplus. The company also acquired RentLinx for approximately $4.1 million in cash.
Outlook, commentary, risks and unusual items
- Management prioritizes long-term growth and expects continued investment and higher expenses; it stated that it did not expect profitability for the foreseeable future. It expects major expense categories to decline as a percentage of revenue over the long term, with operating margins improving, but gave no numerical guidance.
- Management believed cash, investments, available credit and operating cash flows would be sufficient for working capital and capital expenditures for at least 12 months.
- Key risks include continued losses and cash use; dependence on property-management revenue, customer renewals and Value+ adoption; intense competition; security breaches, outages or software defects; and dependence on third-party infrastructure and payment partners. Payment processing, money-transmission regulation and tenant-liability insurance claims and regulation also present risks.
- A former MyCase shareholder alleged the company failed to use commercially reasonable efforts to achieve the maximum $6.6 million earn-out and threatened punitive damages. AppFolio disputed the allegations; it determined a loss was not probable and could not reasonably estimate a possible loss.
- RentLinx-related costs included a $1.1 million employment-conditioned payment to certain sellers, expensed over the service period. The company also incurred $3.1 million of IPO/public-company professional fees and $0.6 million to expedite a transition to a new third-party service provider. Repayment of the term loan resulted in a write-off of $0.4 million of unamortized financing costs.
- The auditor identified material weaknesses in 2014 related to controls and expertise for complex transactions. Management said these were remediated during 2015, but the 2015 10-K did not include management’s internal-control effectiveness report or auditor attestation under the applicable newly public company transition rules.
- The dual-class structure gives Class B shares ten votes per share; Class B holders collectively controlled approximately 95.9% of voting power as of February 19, 2016. The company did not anticipate paying dividends.
Important facts for investors to verify
- Whether customer growth, renewal rates and Value+ usage can sustain revenue growth, especially given the concentration of revenue in property management.
- Whether spending and cash consumption are consistent with management’s long-term margin expectations; review operating cash flow separately from IPO-funded liquidity and investment-security purchases.
- The composition, maturity, liquidity and fair-value sensitivity of the $44.7 million investment portfolio, and the company’s headroom under credit-facility covenants.
- The status and potential exposure of the MyCase earn-out dispute, tenant-liability insurance claims and related reserves, and other contingencies.
- Whether remediated financial controls continue to operate effectively, and how future public-company reporting and audit requirements affect costs.
- Potential dilution from equity awards and the implications of concentrated voting control and the dual-class share structure.