AppFolio (NASDAQ: APPF), a software-as-a-service provider that caters to the real estate and legal markets, reported its fourth-quarter and full-year 2018 results recently.
Revenue growth of 33% allowed the company to exceed the high end of its guidance range. However, the bottom line was held back by elevated expenses primarily related to recent acquisitions. Management expects that spending to lead to a more robust product offering in time, which is exactly what investors should want to see.
AppFolio Q4 results: The raw numbers
GAAP net income
GAAP earnings per share
Data source: AppFolio. YOY = year over year. GAAP = generally accepted accounting principles.
What happened with AppFolio this quarter
- Core solutions, which is the company's subscription-based revenue, grew 26% to $19.4 million. This result was driven by a 20% increase in property management units.
- Value+ services, which is revenue earned from fee-based services such as payments, grew 38% to $28.8 million. On the call with analysts, management credited the gain to growth in electronic payment services, screening services, and insurance services.
- The annual dollar-based net expansion rate, which measures the change in customer spending from one year to the next, was 116% in the company's property management business and 113% in its legal channel. This indicates that retention rates remain very strong and that customer spending continues to increase on AppFolio's platforms.
- Property manager customers grew 11% to 13,050.
- Legal customers grew 10% to 10,300.
- A $1.9 million non-cash charge was recorded during the quarter related to the company's acquisition of WegoWise last August. This was the primary reason profit growth was muted.
- Operating costs grew 34%, which outpaced revenue growth. This was partially driven by acquisition expenses.
- Cash balance at year's end was $102 million while long-term debt was $48.6 million.
- Stock buybacks totaled $21.6 million during the quarter. A $100 million share repurchase program was recently authorized.
Image source: AppFolio.
Turning to the full year, here's a review of the company's numbers from 2018:
- Revenue grew 32% to $190.1 million. This figure exceeded the high end of guidance.
- Net income grew 106% to $20 million, or $0.56 per share.
After the end of the year, the company spent $54 million to acquire Dynasty Marketplace, which is a provider of "artificial intelligence solutions for the real estate market." Management believes that the acquisition will eventually enhance the company's fee-based service offerings.
What management had to say
CEO Jason Randall summarized the year for investors:
In 2018, we continued on our mission to revolutionize vertical industry businesses by providing great software and service to our customers. We did this through our dedication to delivering outstanding customer experiences, supporting a thriving corporate culture and delivering next generation technologies to the verticals we serve today.
CFO Ida Kane expects that AppFolio's strong pace of revenue growth will continue into 2019. The company currently forecasts full-year revenue will land between $250 million and $255 million. The midpoint of this range represents revenue growth of 33%.
CEO Randall ended his prepared remarks on the investor call by stating that the needs of its customers are AppFolio's top priority:"[W]e remain focused on delivering great customer experiences fueled by next-generation technology, innovation and our commitment to providing exceptional service to our customers. We believe our consistency in these areas enables long-term sustainable growth."
This report was mostly filled with great news. Revenue growth remains high and continues to outpace guidance. Customer spending and acquisition remains strong. Churn appears to be low. Management continues to make bolt-on acquisitions and guidance for 2019 calls for greater than 30% top-line growth.
However, there are a few negatives in this report that investors should watch. Spending growth outpaced revenue growth and led to no movement on the bottom line. That's mostly a byproduct of the recent acquisitions, but it's a sharp reversal from the huge profit growth rates that we've seen in the recent past.
The other negative is that AppFolio is no longer debt-free. The company tapped the debt markets to fund its Dynasty Marketplace acquisition and stock buybacks. I'd prefer the company to keep its balance sheet squeaky-clean rather than take on debt, but the leverage is very low in the grand scheme of things.
Overall, I think that the good news from this report overwhelmed the bad. Shareholders have every reason to remain excited about where this company is headed.
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