AppFolio IPO Focuses On Property Managers And Legal Companies

AppFolio APPF, a provider of cloud-based business software solutions, raised $74 million in its IPO on June 26. The company priced 6.2 million shares at a price of $12 per share. AppFolio will list on the NASDAQ under the ticker APPF.

AppFolio provides a cloud-based platform for small and medium-sized businesses in the property management and legal industries. The company was founded in 2006 and is based in Goleta, California. AppFolio offers its AppFolio business system as a platform for its customers by providing functionality in the areas of accounting, document management, real-time interactive search, data analytics and communication options such as messaging.

The main solutions offered are AppFolio Property Manager or APM for property managers and MyCase for law firms. APM helps property managers with activities such as posting and tracking tenant vacancies, handling the entire leasing processing electronically, administering maintenance and repairs with their vendor networks, and managing accounting and reporting to property owners.

MyCase is a solution for self-employed practitioners and small law firms that provide time tracking, billing and payments, client communication, coordination with other lawyers and support staff, legal document management and assembly, and general office administration.

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In addition to AppFolio’s two core products, it also offers its Value+ Services. These consist of website services, electronic payment services, background and credit checks, insurance services, and contact center services.

At the end of the Q1 2015, Appfolio has 6,491 property manager customers and 4,253 law firm customers. No customer represented more than 10 percent of the company’s total revenue from 2012 to 2014.

The company believes that due to the lack of complete, industry-specific, cloud-based software solutions for small businesses in several industries, it presents a dynamic opportunity for the company to capitalize on. According to Parallels, “the cloud market for SMBs was $62 billion in 2013 and will double by 2016, growing to $125 billion. Of which, the SMB cloud market alone represented $24 billion in 2014 and is estimated to grow to $38 billion in 2017.”

Competition

The market for business management software is global, highly competitive and keeps evolving due to changes in technology, operational requirements, laws, and regulations. AppFolio competes against not only other company that serve the SMB segment of the market but also other companies that offer solutions across a broad range of industries.

In the property management industry, AppFolio’s two main competitors are RealPage RP and Yardi. RealPage’s stock has been on a decline since 2011. It raised over $180 million in its August 2010 IPO. Shares rose as high as $16 before closing at $14.52. On December 23, 2010, RealPage hit a high of $32.51 and has been on a decline ever since with a current price of $19.86.

In the legal field, competitors include established players such as Thompson-Reuters, LexisNexis, and new market entrants like Clio.

Financials

Like most cloud-based company that can effectively scale, AppFolio’s year over year growth is almost doubling each year. Revenue comes from the company’s subscription services. From 2012 to 2014, revenue grew from $12.7 million to $47.7 million. Revenue in Q1 2015 was up 61.2 percent to $15.8 million from $9.8 million a year earlier. The increase was due to increased revenue from property manager customers and Value+ services from its electronic payment service.

The company’s biggest expenses come from costs of revenue which includes personnel-related costs for employees focused on customer service and operations, platform infrastructure costs, feeds paid to third-party service providers, payment processing fees, and allocated shared costs.

Although the company has been operating at a loss, net losses have narrowed since 2012. Net losses contracted from $ (12.3) million to $ (8.6) million.

AppFolio has $12.0 million in cash and total assets and liabilities of $36.0 million and $27.7 million.

The main stockholders are Investment Group of Santa Barbara (33.9 percent) and BV Capital (14.5 percent) After the IPO, both firms will still own the same equity amounts.

In May 2015, AppFolio entered into a $12.5 five-year term loan with Wells Fargo Bank.

Conclusion and Pricing Info

AppFolio operates in the SMB segment within the large, fast growing cloud-based solutions market. The company has demonstrated successful growth in the property management and legal field niches, and further plans to expand its offerings other industries. Revenue is growing each year and net losses have narrowed from 2012.

According to its S-1, AppFolio expects to use the proceeds in the following way:

• To expand research and product development, customer service, and sales and marketing which includes hiring new personnel.
• To maintain and expand its technology infrastructure and operational support.
• For general corporate and working capital purposes.
• To repay $10.0 million in debt to Wells Fargo Bank.

Appfolio will sell 6.2 million shares at $12 per share on the NASDAQ under the ticker APPF. The main underwriters on the IPO are Morgan Stanley, Credit Suisse, and Pacific Crest Securities.