AppFolio Scaling via Capital-Efficient Acquisitions

According to Gartner, the worldwide public cloud services market is projected to grow 17.5% to $214.3 billion in 2019. AppFolio (NASDAQ: APPF) is a SaaS player operating in niche vertical markets like real estate management and law practice management.  

AppFolio’s Financials

Santa Barbara, California-based AppFolio was founded in 2006 by Klaus Schauser and Jon Walker to focus on efficient property management for small-to-medium businesses. It launched its flagship product AppFolio Property Manager in 2007. It later expanded to the legal practice management vertical with the acquisition of MyCase in 2012.

Today, it offers AppFolio Property Manager, AppFolio Property Manager PLUS and AppFolio Investment Management for the real estate market and legal practice management software MyCase. It also offers Value+ services, such as its Website design, electronic payment services, tenant screening, insurance, contact center, premium leads, and tenant debt collections services.

For the recent second quarter, AppFolio reported revenue of $63.6 million, up 35%, just short of analyst estimates of $63.7 million. GAAP net income was $23.2 million or $0.65 per diluted share, which includes an income tax benefit of $21.3 million, primarily related to the release of its valuation allowance against deferred tax assets. Analysts estimated earnings of $0.11 per share. The company ended the quarter with cash balance of $43 million and total debt of $49.4 million.

Core solutions or subscription-based revenue grew 28% to $20.8 million. Value+ services or fee-based revenue from optional services, grew 36% to $39.1 million. Property manager customers grew 12% to 13,737 while legal customers grew 6% to 10,631.

Full year revenue is expected to be in the range of $253 million to $255 million.

AppFolio’s Recent Acquisitions

In May, AppFolio completed its $54 million acquisition of Dynasty Marketplace, a leading provider of conversational artificial intelligence (AI) solutions for the real estate market. Based on this acquisition, AppFolio recently released Lisa, an AI Leasing Assistant. Lisa is designed to help deal with a high volume of rental inquiries. It helps provide thoughtful, personable responses via text messages and email to prospective renters in real-time. It also tracks leasing performance with accurate data. Founded in 2016, Los Angeles-based Dynasty had an estimated annual revenue of $1 million. It had raised an undisclosed amount from Lowercase Capital in 2016.

AppFolio also launched Utility Management, which is based on its 2018 acquisition of analytics platform WeGoWise for an undisclosed amount. Utility Management is a Value+ service designed to increase efficiency by automating utility bill processing and resident billing. Founded in 2010, Boston-based WeGoWise had raised $4.9 million in funding from Boston Community Capital and had an estimated revenue of $1.4 million.

With both these acquisitions and products, AppFolio is upselling to target large portfolio property managers and owners. I like the way AppFolio is scaling via capital-efficient acquisitions.

AppFolio went public in 2015 at a list price of $12 and raised $74 million in the IPO. Before going public, it had raised $30 million in five funding rounds from Kevin Milden, e.ventures, Investment Group of Santa Barbara, Cisco, Ospre Point Capital, and Dragoneer Investment Group.

Its stock is currently trading around $95.06 with a market cap of $3.24 billion. Its 52-week range is $51.15 to $109.89