Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read together with our Consolidated Financial Statements and the related notes included elsewhere in this Annual Report. This discussion and analysis contains forward-looking statements that are based on our current expectations and reflect our plans, estimates and anticipated future financial performance. These statements involve numerous risks and uncertainties, including those related to the anticipated impact on our business from, and our response to, the COVID-19 pandemic. Our actual results may differ materially from those expressed or implied by these forward-looking statements as a result of many factors, including those set forth in the section of this Annual Report entitled "Risk Factors". See the section of this Annual Report entitled “Cautionary Note Regarding Forward-Looking Statements” for additional information.
The following discussion and analysis of our financial condition and results of operations discusses 2020 and 2019 items and year-over-year comparisons between 2020 and 2019. For discussion of 2018 items and year-over-year comparisons between 2019 and 2018, refer to Part II. Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2019.
Overview
We provide innovative software, services and data analytics to customers in the real estate industry. Our industry-specific, cloud-based solutions are used primarily by property managers, and also by numerous other constituencies in the property management business ecosystem. These other constituencies include property owners, rental prospects, tenants and service providers, whom we refer to collectively as "users". Although specific functionality varies by product, our core solutions are designed to enable our customers to digitally transform their businesses, address critical business operations and enable exceptional customer service. In addition to our core solutions, we offer an array of optional, but often business-critical, Value+ services that are designed to enhance, automate and streamline processes and workflows that are essential to our customers' businesses. Our Value+ services are generally available on an as-needed basis and enable our customers to adapt our offerings to their specific operational requirements.
Our property management solutions and services provides our customers with a system of record to automate essential business processes, a system of engagement to enhance business interactions between our customers and a variety of users and a system of intelligence designed to leverage data to predict and optimize business workflows to increase efficiency across our customers' businesses. Our mobile-optimized software solutions are designed for use across multiple devices and operating systems. Our software solutions are offered as a service, are hosted using a modern cloud-based architecture, and in part, use artificial intelligence technologies. This architecture leads to rich data sets that have a consistent schema across our customer and user base and enables us to deploy data-powered products and services for our customers and users.
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In 2008, we introduced APM, a property management solution designed to address the unique operational and business requirements of property management companies and their business ecosystems. Recognizing that our customers and their business ecosystems would benefit from additional business critical services, we launched a series of Value+ services beginning in 2009. Our Value+ services are tailored to the specific workflows of property management businesses and generally fall into the categories of marketing and leasing, electronic payment services, business optimization and risk mitigation. In 2018, we introduced APM PLUS, a tier of APM designed for larger businesses with more complex needs. APM PLUS builds upon the functionality of APM and additionally offers data analytics, configurable workflows, and revenue management and optimization functionality for our customers. In April 2019, we launched AppFolio Investment Management, which is designed to enable real estate investment managers to better manage their investor relationships by increasing transparency and streamlining certain business processes. We do not separately break out customer information at this time.
APM and APM PLUS serve our property management customers, including third-party property managers and owner operators, who typically manage single- and multi-family residential, and others who manage community association, and commercial properties. Our solutions and services also serve other constituencies in the property management market, including property owners, rental prospects, tenants and service providers. Revenue generated from each customer varies based on the type of property, the number of units under management, and the level of adoption and utilization of Value+ services by the customer and users. Revenue per unit generated from each customer typically varies based on the type of property and the level of adoption and utilization of Value+ services by the customer and users. For example, revenue generated per community association unit, which represent a growing percentage of our overall units, is lower than revenue generated per residential unit given the unique and complex needs of the residential rental lifecycle and resulting impact on the adoption and utilization of V+ services.
Property management customer count and property management units under management are presented in the table below. We define property management customers as those paying for a subscription to our core solutions.
Quarter Ended
December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31,
2020 2019
Property management customers 15,724 15,352 15,011 14,729 14,385 14,034 13,737 13,409
Property management units under management (in millions) 5.36 5.12 4.94 4.8 4.64 4.41 4.23 4.08
To date, we have experienced rapid revenue growth due to strong relationships with our customers, our investments in research and product development, sales and marketing, customer service and support, and infrastructure. We have invested, and intend to continue to invest, in our business to capitalize on our market opportunity by working closely with our customers, prospects, partners and other industry participants to inform our product strategy. Over the long-term, these investments are expected to continue to increase our costs and operating expenses on an absolute basis. Many of these investments will occur in advance of our realization of revenue or any other benefit, which will make it difficult to determine if we are allocating our resources effectively and efficiently. We expect our operating margins will improve over the long-term, but this trend may be interrupted from time to time as a result of accelerated investment opportunities occurring in advance of realization of revenue.
We rely heavily on our talented team of employees to execute our growth plans and achieve our long-term strategic objectives. We believe our people are at the heart of our success and our customers' success, and we have worked hard not only to attract and retain talented individuals, but also to provide a challenging and rewarding environment to motivate and develop our valuable human capital. Beginning in March 2020, in an effort to protect our employees and comply with applicable government orders, we transitioned our employees to a remote work environment and restricted non-essential employee travel. We currently expect the majority of our employees will continue working remotely at least through the second quarter of 2021. Our workforce has continued to effectively develop and support our software and services offerings notwithstanding the current environment. We take the health and welfare of our people very seriously, and have encouraged safe practices designed to stem the infection and spread of COVID-19 within our workforce and beyond and to maintain the mental health and well-being of our employees. However, if the COVID-19 pandemic requires remote working conditions for a prolonged period of time, it could have an adverse impact on the productivity of our employees, which would harm our business and impede our ability to achieve our strategic objectives. For example, certain employees with younger children have been required to respond to ongoing school closures and adapt to a distance learning environment, and may be required to continue to do so for the foreseeable future. Furthermore, we have a limited history of remote work and the long-term impact on, and the resulting types of continuing investments necessary for, our employee base is uncertain.
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Moreover, the COVID-19 pandemic may have long-term effects on the nature of the office environment and remote working. This may present operational and workplace culture challenges that may adversely affect our business. However, we are committed to our employees returning to the workplace in the long-term, and have recently constructed a new office space in Santa Barbara, California, extended the lease for our office in Richardson, Texas and are seeking new office space to lease in San Diego, California to accommodate our employees' return to the workplace in the future.
We began fiscal year 2020 with healthy demand for our core solutions and Value+ services, many of which are designed to enable our customers to manage their businesses virtually. During the twelve months ended December 31, 2020, we experienced some variability in demand for certain Value+ services after lock-down measures were implemented. We expect demand variability could continue as a result of the COVID-19 pandemic, although it is presently unclear whether the cumulative impacts will be positive or negative.
During certain periods covered by this Annual Report, we also provided software solutions and services to the legal vertical. As previously disclosed, we completed our divestiture of MyCase, Inc. on September 30, 2020. In connection with the MyCase Transaction, our Credit Agreement was terminated and all obligations outstanding under the Term Loan and Revolving Facility, including all guarantees and security interests granted with respect to such obligations, were satisfied in full with proceeds from the sale and extinguished. For additional details, see Note 1, Nature of Business and Note 3, Divestitures and Business Combinations of our Consolidated Financial Statements in this Annual Report.
Key Components of Results of Operations
Revenue
Our core solutions and certain of our Value+ services are offered on a subscription basis. Our core solutions subscription fees vary by property type and are designed to scale to the size of our customers’ businesses. We recognize revenue for subscription-based services over time on a straight-line basis over the contract term beginning on the date that our service is made available. We generally invoice monthly or annually in advance of the subscription period.
We also offer Value+ services that are not covered by subscription fees on per use basis. Usage-based fees are charged on a flat fee per transaction basis with no minimum usage commitments. We recognize revenue for usage-based services in the period the service is rendered. We generally invoice our usage-based services on a monthly basis or collect the fee at the time of service. A significant majority of our Value+ services revenue comes directly and indirectly from the use of our electronic payment services, tenant screening services, and insurance services. Usage-based fees are paid both by customers and users in our customers' business ecosystems.
We charge our customers for on-boarding assistance to our core solutions and certain other non-reoccurring services. We generally invoice for these other services in advance of the services being completed and recognize revenue upon completion of the related service. We generate revenue from RentLinx, WegoWise, and Dynasty standalone customers by providing services outside of our property management core solution platform. Revenue derived from these services is recorded in Other revenue.
Costs and Operating Expenses
Cost of Revenue . Many of our Value+ services are facilitated by third-party service providers. Cost of revenue includes the fees paid to these third-party service providers (including legal fees and costs associated with the delivery and provision of those services, as well as loss reserves and other costs associated with our legal liability to landlord insurance services), which vary both in cost and as a percent of revenue for each Value+ service offering, personnel-related costs (including salaries, performance-based compensation, benefits, and stock-based compensation) for our employees focused on customer service and the support of our operations, platform infrastructure costs (such as data center operations and hosting-related costs), payment processing fees and allocated shared costs. Cost of revenue excludes depreciation of property and equipment, and amortization of capitalized software development costs and intangible assets.
Sales and Marketing . Sales and marketing expense consists of personnel-related costs (including salaries, sales commissions, performance-based compensation, benefits, and stock-based compensation) for our employees focused on sales and marketing, costs associated with sales and marketing activities, and allocated shared and other costs. Marketing activities include advertising, online lead generation, lead nurturing, customer and industry events, and the creation of industry-related content and collateral. Sales commissions and other incremental costs to acquire customers and grow adoption and utilization of our Value+ services by our new and existing customers are deferred and then amortized on a straight-line basis over a period of benefit, which we have determined to be three years. We focus our sales and marketing efforts on generating awareness of our software solutions, creating sales leads, establishing and promoting our brands, and cultivating an educated community of successful and vocal customers.
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Research and Product Development. Research and product development expense consists of personnel-related costs (including salaries, performance-based compensation, benefits, and stock-based compensation) for our employees focused on research and product development, fees for third-party development resources, and allocated shared and other costs. Our research and product development efforts are focused on enhancing functionality and the ease of use of our existing software solutions by adding new core functionality, Value+ services and other improvements, as well as developing new products and services for new and existing markets. We capitalize our software development costs which meet the criteria for capitalization. Amortization of capitalized software development costs is included in depreciation and amortization expense.
General and Administrative. General and administrative expense consists of personnel-related costs (including salaries, a majority of total performance-based compensation, benefits, and stock-based compensation) for employees in our executive, finance, information technology, human resources, legal, compliance, corporate development and administrative organizations. In addition, general and administrative expense includes fees for third-party professional services (including audit, legal, compliance, tax, and consulting services), transaction costs related to business combinations and divestitures, regulatory fines and penalties, other corporate expenses, and allocated shared costs.
Depreciation and Amortization. Depreciation and amortization expense includes depreciation of property and equipment, amortization of capitalized software development costs, and amortization of intangible assets. We depreciate or amortize property and equipment, software development costs, and intangible assets over their expected useful lives on a straight-line basis, which approximates the pattern in which the economic benefits of the assets are consumed.
Other Income (Expense), Net. Other income (expense), net includes gains and losses associated with the sale of businesses, property and equipment and investment securities and income from certain post-closing transition services to be provided by us to MyCase in connection with the MyCase Transaction.
Interest Expense, Net . Interest expense includes interest paid on any outstanding borrowings. Interest income includes interest earned on investment securities, amortization and accretion of the premium and discounts paid from the purchase of investment securities, and interest earned on notes receivable and on cash deposited in our bank accounts.
Provision for (Benefit from) Income Taxes. Provision for (benefit from) income taxes consists of federal and state income taxes in the United States.
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Results of Operations for the Years Ended December 31, 2020 and 2019
The following table presents our results of operations for the periods presented in dollars (in thousands) and as a percentage of revenue:
Year Ended December 31,
2020 2019
Amount % Amount %
Consolidated Statements of Operations Data:
Revenue $ 310,056 100.0 % $ 256,012 100.0 %
Costs and operating expenses:
Cost of revenue (exclusive of depreciation and amortization) (1)
119,029 38.4 101,642 39.7
Sales and marketing (1)
58,445 18.8 51,528 20.1
Research and product development (1)
48,529 15.7 39,508 15.4
General and administrative (1)
47,480 15.3 34,478 13.5
Depreciation and amortization 26,790 8.6 22,395 8.7
Total costs and operating expenses 300,273 96.8 249,551 97.5
Income from operations 9,783 3.2 6,461 2.5
Other income, net 188,897 60.9 16 —
Interest expense, net (1,849) (0.6) (1,654) (0.6)
Income before provision for (benefit from) income taxes 196,831 63.5 4,823 1.9
Provision for (benefit from) income taxes 38,428 12.4 (31,459) (12.3)
Net income $ 158,403 51.1 % $ 36,282 14.2 %
(1) The following table presents stock-based compensation expense included in each respective expense category:
Year Ended December 31,
2020 2019
Stock-based compensation expense included in costs and operating expenses:
Cost of revenue (exclusive of depreciation and amortization) $ 1,506 $ 1,466
Sales and marketing 1,415 1,271
Research and product development 1,818 1,411
General and administrative 4,286 3,161
Total stock-based compensation expense $ 9,025 $ 7,309
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Revenue
Year Ended December 31, Change
2020 2019 Amount %
(dollars in thousands)
Core solutions $ 100,938 $ 88,581 $ 12,357 14 %
Value+ services 195,146 153,994 41,152 27 %
Other 13,972 13,437 535 4 %
Total revenue $ 310,056 $ 256,012 $ 54,044 21 %
Revenue derived from our software and solutions offered to the real estate vertical for the years ended December 31, 2020 and 2019 was $284.7 million and $231.1 million, respectively, an increase of $53.6 million, or 23%. This increase was primarily attributable to the growth in the number of property management customers and units under management utilizing our software and services. The remaining revenue was attributed to our legacy legal vertical.
Core solutions revenue derived from our real estate vertical for the years ended December 31, 2020 and 2019 was $86.5 million and $72.6 million, respectively, an increase of $13.9 million or 19%. Value+ services revenue derived from our real estate vertical for the years ended December 31, 2020 and 2019 was $184.2 million and $145.2 million, respectively, an increase of $39.1 million or 27%. The increase in core solutions and Value+ services revenue was mainly attributable to growth in our base of property management customers and growth in users of our subscription and usage-based services. During this period we experienced growth of 17% in the average number of property management units under management resulting from 10% growth in the average number of property management customers during the period.
Our electronic payment services experienced increased demand during the current year as residents, property managers, owners and customers transacted more business online, which we attribute in part to the response to the COVID-19 pandemic. It is unclear whether the trend will continue over the long-term. During the comparative period, we also introduced new Value+ services and expanded the functionality of others, which resulted in incremental revenue. A significant majority of our Value+ services revenue comes directly and indirectly from the use of our electronic payment services, tenant screening services, and the insurance services we make available to customers.
Cost of Revenue (Exclusive of Depreciation and Amortization)
Year Ended December 31, Change
2020 2019 Amount %
(dollars in thousands)
Cost of revenue (exclusive of depreciation and amortization) $ 119,029 $ 101,642 $ 17,387 17 %
Percentage of revenue 38.4 % 39.7 %
Stock-based compensation, included above $ 1,506 $ 1,466 $ 40 3 %
Cost of revenue related to our software and solutions offered to the real estate vertical for the years ended December 31, 2020 and 2019 was $109.7 million and $93.0 million, respectively, an increase of $16.7 million, or 18%. This increase was primarily attributable to increased costs associated with servicing the incremental $53.6 million in revenue over the same period, partially offset by third-party service provider incentives earned of $2.0 million. The remaining cost of revenue was attributed to our legacy legal vertical.
Expenditures to third-party service providers related to the delivery of our Value+ services to the real estate vertical increased $6.9 million, which was directly associated with the increased adoption and utilization of our Value+ services, as evidenced by the $39.1 million increase in Value+ services revenue to the real estate vertical. Partially offsetting this increase was $2.0 million of annual maximum incentives earned during the period from third-party service providers related to programs intended to increase adoption and utilization of online payments. Personnel-related costs, including performance-based compensation, necessary to support growth and key investments, increased $7.8 million. Allocated shared costs increased by $2.1 million primarily driven by an increase in platform infrastructure costs, partially offset by a reduction of allocated expenses attributed to a decrease in workplace-related and other expenditures in response to the impact of the COVID-19 pandemic.
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As a percentage of revenue, cost of revenue (exclusive of depreciation and amortization) fluctuates primarily based on the mix of Value+ services revenue in the period, given the varying percentage of revenue we pay to third-party service providers, and investments made in advance of expected revenue generation. Excluding the third-party service provider incentives earned during the period, cost of revenue (exclusive of depreciation and amortization), as a percentage of revenue decreased to 39.2% from 40.2%. This decrease in cost as a percentage of revenue was primarily driven by the mix of Value+ services revenue with varying underlying costs.
Sales and Marketing
Year Ended December 31, Change
2020 2019 Amount %
(dollars in thousands)
Sales and marketing $ 58,445 $ 51,528 $ 6,917 13 %
Percentage of revenue 18.8 % 20.1 %
Stock-based compensation, included above $ 1,415 $ 1,271 $ 144 11 %
Sales and marketing expense related to our software and solutions offered to the real estate vertical for the years ended December 31, 2020 and 2019 was $52.5 million and $44.5 million, respectively, an increase of $8.0 million, or 18%. This increase was primarily due to a $6.7 million increase in personnel-related costs, including performance-based compensation, necessary to support growth and key investments in the business. Advertising and promotion costs increased by $2.4 million due to increased online advertising and virtual marketing events aimed at increasing revenue and supporting growth in the business. In addition, there was a decrease in allocated and other costs of $1.1 million related to the elimination of event-related travel from cancelled or postponed events and the reduction of workplace-related and other non-essential expenditures in response to the impact of the COVID-19 pandemic.
As a percentage of revenue, sales and marketing expense decreased to 18.4% from 19.2% for fiscal 2020 compared to fiscal 2019. This leverage in cost as a percentage of revenue was primarily driven by the reduction of event related travel and other non-essential expenditures as a result of the COVID-19 pandemic. Notwithstanding the leverage in cost as a percentage of revenue, we intend to continue to invest in sales and marketing to increase our customer base and increase the adoption and utilization of Value+ services over time.
Research and Product Development
Year Ended December 31, Change
2020 2019 Amount %
(dollars in thousands)
Research and product development $ 48,529 $ 39,508 $ 9,021 23 %
Percentage of revenue 15.7 % 15.4 %
Stock-based compensation, included above $ 1,818 $ 1,411 $ 407 29 %
Research and product development expense related to our software and solutions offered to the real estate vertical for the years ended December 31, 2020 and 2019 was $43.8 million and $34.0 million, respectively, an increase of $9.8 million, or 29%. This increase was the result of an increase in personnel-related costs, net of capitalized software development costs, of $11.3 million due to investments in headcount growth within our research and product development organization. This increase was partially offset by a decrease in allocated and other costs of $1.4 million primarily related to the reduction of workplace-related and other non-essential expenditures in response to the impact of the COVID-19 pandemic.
General and Administrative
Year Ended December 31, Change
2020 2019 Amount %
(dollars in thousands)
General and administrative $ 47,480 $ 34,478 $ 13,002 38 %
Percentage of revenue 15.3 % 13.5 %
Stock-based compensation, included above $ 4,286 $ 3,161 $ 1,125 36 %
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General and administrative expense related to our software and solutions offered to the real estate vertical and general corporate overhead expenses for the years ended December 31, 2020 and 2019 was $46.1 million and $33.4 million, respectively, an increase of $12.7 million, or 38%. The increase in general and administrative expense was primarily due to a $7.4 million increase in personnel-related costs, including performance-based compensation, due to investments in headcount growth within our general and administrative organizations. In addition, there was a $4.3 million legal settlement expense recorded during the current period related to our compliance with certain regulations in our tenant screening business. For additional information regarding this legal settlement, refer to Note 11, Commitments and Contingencies , of our Consolidated Financial Statements. There was also an increase in professional services fees and other costs of $2.3 million related to the MyCase Transaction. Allocated and other costs decreased $1.4 million primarily due to the reduction of workplace-related and other non-essential expenditures in response to the impact of the COVID-19 pandemic.
We expect stock-based compensation expense will continue to decrease for certain executives in light of our adoption of the Long-Term Cash Bonus Plan in 2018. No accrual has yet been made under this plan as a result of the high degree of uncertainty regarding potential future payments under the plan.
Depreciation and Amortization
Year Ended December 31, Change
2020 2019 Amount %
(dollars in thousands)
Depreciation and amortization $ 26,790 $ 22,395 $ 4,395 20 %
Percentage of revenue 8.6 % 8.7 %
Depreciation and amortization expense related to our software and solutions offered to the real estate vertical for the years ended December 31, 2020 and 2019 was $25.0 million and $20.0 million, respectively, an increase of $5.0 million, or 25%. This increase in depreciation and amortization expense was primarily due to increased amortization expense associated with higher accumulated capitalized software development balances.
Other Income, net
Year Ended December 31, Change
2020 2019 Amount %
(dollars in thousands)
Other income, net $ 188,897 $ 16 $ 188,881 *
Percentage of revenue 60.9 % — %
*Percentage not meaningful
The increase in other income, net was primarily due to the gain of $187.7 million associated with the MyCase Transaction. Additionally, there was $1.1 million in other income recorded during the fourth quarter of fiscal 2020 related to certain post-closing transition services provided to MyCase.
Provision for (Benefit from) Income Taxes
Year Ended December 31, Change
2020 2019 Amount %
(dollars in thousands)
Provision for (benefit from) income taxes $ 38,428 $ (31,459) $ 69,887 *
Percentage of revenue 12.4 % (12.3) %
*Percentage not meaningful
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For the year ended December 31, 2020, we recorded income tax expense of $38.4 million. The tax provision for the year ended December 31, 2020 includes tax expense of $51.3 million relating to the MyCase Transaction which includes $52.3 million of current tax expense on the gain on the sale of MyCase, less a $1.0 million benefit on the reversal of deferred tax liabilities relating to MyCase. For tax purposes, we plan to file an election to treat the transaction as a sale of assets. As such, the tax impact takes into consideration the tax basis of the assets on the date of sale and the availability of net operating losses and research and development tax credits. The effective tax rate as compared to the U.S. federal statutory rate of 21% differs primarily due to state income taxes and the benefits associated with stock-based compensation expense and research and development tax credits.
For the year ended December 31, 2019, we recorded an income tax benefit of $31.5 million. During the second quarter of 2019, we evaluated all available positive and negative evidence, including our sustained profitability in 2018 and 2019, and the impact of recent acquisitions and future projections of profitability. As a result, we determined that all of our deferred tax assets were more likely than not to be realized and reversed the valuation allowance against those deferred tax assets accordingly.
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Quarterly Results of Operations
The following table presents selected unaudited quarterly consolidated statements of operations data for each of the eight quarters during the years ended December 31, 2020 and December 31, 2019. We have prepared the unaudited quarterly consolidated statements of operations data on a basis consistent with the audited annual Consolidated Financial Statements included elsewhere in this Annual Report. In management's opinion, the financial information in this table reflects all normal and recurring adjustments necessary for the fair statement of this data. This information should be read in conjunction with the Consolidated Financial Statements and related notes included elsewhere in this Annual Report. The results of historical periods are not necessarily indicative of the results for any future periods.
Quarter Ended
December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31,
2020 2019
(in thousands, except per share data)
Consolidated Statements of Operations Data:
Revenue $ 72,432 $ 84,086 $ 81,043 $ 72,495 $ 67,362 $ 67,935 $ 63,624 $ 57,091
Costs and operating expenses:
Cost of revenue (exclusive of depreciation and amortization) (1) 29,905 32,752 27,411 28,961 26,403 25,930 25,128 24,181
Sales and marketing (1) 15,328 14,894 13,717 14,506 14,441 12,636 13,232 11,219
Research and product development (1) 11,735 13,454 12,128 11,212 11,086 10,602 9,339 8,481
General and administrative (1) 11,177 12,946 14,785 8,572 9,117 8,955 8,214 8,192
Depreciation and amortization 7,039 6,680 6,657 6,414 6,226 5,678 5,415 5,076
Total costs and operating expenses 75,184 80,726 74,698 69,665 67,273 63,801 61,328 57,149
(Loss) income from operations (2,752) 3,360 6,345 2,830 89 4,134 2,296 (58)
Other income (expense), net 1,138 187,747 (10) 22 84 (11) (56) (1)
Interest income (expense), net 60 (853) (562) (494) (330) (400) (427) (497)
(Loss) income before (benefit from) provision for income taxes (1,554) 190,254 5,773 2,358 (157) 3,723 1,813 (556)
(Benefit from) provision for income taxes (1,041) 52,578 (13,484) 375 (4,585) (1,255) (21,338) (4,281)
Net (loss) income $ (513) $ 137,676 $ 19,257 $ 1,983 $ 4,428 $ 4,978 $ 23,151 $ 3,725
Net (loss) income per common share:
Basic $ (0.01) $ 4.01 $ 0.56 $ 0.06 $ 0.13 $ 0.15 $ 0.68 $ 0.11
Diluted $ (0.01) $ 3.86 $ 0.54 $ 0.06 $ 0.12 $ 0.14 $ 0.65 $ 0.11
(1) The following table presents stock-based compensation expense included in each respective expense category:
Quarter Ended
December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31,
2020 2019
(in thousands)
Stock-based compensation expense included in costs and operating expenses:
Cost of revenue (exclusive of depreciation and amortization) $ 408 $ 452 $ 520 $ 126 $ 393 $ 334 $ 415 $ 324
Sales and marketing 346 367 477 225 367 354 302 248
Research and product development 470 474 580 294 387 353 363 308
General and administrative 993 1,803 1,176 314 731 1,151 607 672
Total stock-based compensation expense $ 2,217 $ 3,096 $ 2,753 $ 959 $ 1,878 $ 2,192 $ 1,687 $ 1,552
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The following table presents selected consolidated statements of operations data for the specified periods as a percentage of our revenue for those periods:
Quarter Ended
December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31,
2020 2019
Consolidated Statements of Operations Data:
Revenue 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Costs and operating expenses:
Cost of revenue (exclusive of depreciation and amortization) 41.3 39.0 33.8 39.9 39.2 38.2 39.5 42.4
Sales and marketing 21.2 17.7 16.9 20.0 21.4 18.6 20.8 19.7
Research and product development 16.2 16.0 15.0 15.5 16.5 15.6 14.7 14.9
General and administrative 15.4 15.4 18.2 11.8 13.5 13.2 12.9 14.3
Depreciation and amortization 9.7 7.9 8.2 8.8 9.2 8.4 8.5 8.9
Total costs and operating expenses 103.8 96.0 92.2 96.1 99.9 93.9 96.4 100.1
(Loss) income from operations (3.8) 4.0 7.8 3.9 0.1 6.1 3.6 (0.1)
Other income (expense), net 1.6 223.3 — — 0.1 — (0.1) —
Interest income (expense), net 0.1 (1.0) (0.7) (0.7) (0.5) (0.6) (0.7) (0.9)
(Loss) income before (benefit from) provision for income taxes (2.1) 226.3 7.1 3.3 (0.2) 5.5 2.8 (1.0)
(Benefit from) provision for income taxes (1.4) 62.5 (16.6) 0.5 (6.8) (1.8) (33.5) (7.5)
Net (loss) income (0.7) % 163.7 % 23.8 % 2.7 % 6.6 % 7.3 % 36.3 % 6.5 %
Seasonality
We experience limited seasonality in our Value+ services revenue, primarily with respect to certain leasing-related services we provide to our property management customers, including our tenant screening services for rental prospects which also impact electronic payment services revenue. Our property management customers historically have processed fewer applications for rental prospects during the fourth quarter. As a result of this seasonal decline in activity, we have typically experienced overall slower sequential revenue growth or a sequential decline in revenue in the fourth quarter of each of our most recent fiscal years. We expect this seasonality to continue in the foreseeable future.
Liquidity and Capital Resources
Cash and Cash Equivalents
Our principal sources of liquidity continue to be comprised of our cash, cash equivalents, and investment securities, as well as cash flows generated from our operations. At December 31, 2020, our cash and cash equivalents and investment securities had an aggregate balance of $175.3 million. During the year ended December 31, 2020, our cash and cash equivalents increased primarily as a result of the proceeds from the MyCase Transaction.
Working Capital
At December 31, 2020, we had working capital of $149.5 million, compared to working capital of $14.3 million at December 31, 2019. The increase in our working capital was primarily due to an increase in cash and cash equivalents as a result of the net proceeds from the MyCase Transaction, a decrease in other current liabilities due to the payment of contingent consideration related to the Dynasty acquisition, an increase in investment securities-current, an increase in accounts receivable primarily driven by increased usage of our Value+ services, and a decrease in deferred revenue. The increase in our working capital was partially offset by an increase in income taxes payable related to the MyCase Transaction, and increases in accrued expenses, and accrued employee expenses.
Liquidity Requirements
We have financed our operations primarily through cash generated from operations. We believe that our existing cash and cash equivalents, investment securities, and cash generated from operating activities will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months.
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Capital Requirements
Our future capital requirements will depend on many factors, including continued market acceptance of our software solutions, changes in the number of our customers, adoption and utilization of our Value+ services by new and existing customers, the timing and extent of the introduction of new core functionality, products and Value+ services, the timing and extent of our expansion into adjacent or new markets, the timing and extent of our investments across our organization, and the impact of the COVID-19 pandemic on the customers we serve and on our business. In addition, we have in the past entered into, and may in the future enter into, arrangements to acquire or invest in new technologies or markets adjacent to those we serve today or entirely new verticals. Furthermore, our Board of Directors has authorized the repurchase of up to $100.0 million of shares of our Class A common stock from time to time, as directed by a committee consisting of three directors. To date, we have repurchased $4.2 million of our Class A common stock under the Share Repurchase Program. For additional information regarding our share repurchase program, refer to Note 12, Stockholders' Equity .
Cash Flows
The following table presents our cash flows for the periods indicated (in thousands):
Year Ended December 31,
2020 2019
Net cash provided by operating activities $ 48,299 $ 38,887
Net cash provided by (used in) investing activities 146,511 (89,874)
Net cash used in financing activities (70,358) (7,272)
Net increase (decrease) in cash and cash equivalents $ 124,452 $ (58,259)
Cash Provided by Operating Activities
Our primary source of operating cash inflows is cash collected from our customers in connection with their use of our core solutions and Value+ services. Our primary uses of cash from operating activities are for personnel-related expenditures and third-party costs incurred to support the delivery of our software solutions.
For the year ended December 31, 2020, cash provided by operating activities was $48.3 million resulting from our net income of $158.4 million, adjusted by the gain related to the MyCase Transaction of $187.7 million, non-cash charges of $68.6 million and a net increase in our operating assets and liabilities of $8.9 million. The non-cash charges primarily consist of a decrease in deferred taxes of $29.0 million, depreciation and amortization costs of $26.8 million, stock-based compensation expense of $9.0 million, and amortization of operating lease right-of-use assets of $3.7 million. The net increase in our operating assets and liabilities was mostly attributable to a $9.4 million increase in other liabilities primarily driven by income taxes payable due to the MyCase Transaction, a $6.9 million increase in accrued expenses which includes a $4.3 million accrual related to legal loss reserves, a $2.8 million increase in accrued employee expenses related to an overall increase in personnel-related costs, and a $0.5 million increase in deferred revenue. These increases were partially offset by a $2.8 million increase in accounts receivable primarily driven by growth of our Value+ services, an increase in prepaid expenses and other current assets of $5.9 million primarily driven by an increase in prepaid expenses to support the growth in our business, an increase in deposits held with a third party related to requirements to maintain collateral for our insurance services, and an increase in deferred costs, and a $0.9 million decrease in accounts payable due to timing of payments.
For the year ended December 31, 2019, cash provided by operating activities was $38.9 million resulting from our net income of $36.3 million, adjusted by non-cash charges of $2.4 million and a net increase in our operating assets and liabilities of $0.2 million. The non-cash charges primarily consist of a one-time benefit of $31.5 million related to the release of the valuation allowance for our deferred tax assets, offset by $22.4 million of depreciation and amortization of our property and equipment, intangible assets, and capitalized software development costs, $7.3 million of stock-based compensation and $4.1 million of amortization of operating lease right-of-use ("ROU") assets. The net increase in our operating assets and liabilities was primarily attributable to an increase of $4.5 million in accrued employee expenses related to an overall increase in personnel-related costs, a $1.4 million decrease in other assets, a $1.2 million increase in other liabilities and a $1.2 million increase in deferred revenue. The increase in our operating assets and liabilities was partially offset by a $4.0 million increase in prepaid expenses and other current assets, a $2.7 million decrease in operating lease liabilities, and a $2.0 million increase in accounts receivable primarily driven by the growth in sales of our Value+ services.
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Cash Provided by (Used in) Investing Activities
Cash provided by (used in) investing activities is generally comprised of proceeds from divestitures, purchases, maturities and sales of investment securities, purchases of property and equipment, additions to capitalized software development, and cash paid for business acquisitions.
For the year ended December 31, 2020, investing activities provided $146.5 million in cash primarily due to net proceeds from the MyCase Transaction of $191.4 million and the proceeds from maturities and sales of investment securities of $27.3 million and $16.7 million, respectively. These sources of cash were partially offset by purchases of investment securities of $43.9 million, capitalized software development costs of $26.0 million, and capital expenditures of $19.0 million to purchase property and equipment primarily related to the growth and expansion of our headquarters in Santa Barbara, CA, a portion of which was reimbursed through tenant improvement allowances.
For the year ended December 31, 2019, investing activities used $89.9 million in cash primarily due to $54.0 million used to acquire Dynasty, as well as purchases of investment securities of $25.2 million, capitalized software development costs of $21.0 million for the continued investment in our software development, and capital expenditures of $8.1 million to purchase property, equipment and intangible assets for the continued growth and expansion of our business. These uses were partially offset by sales and maturities of investment securities of $2.8 million and $15.7 million, respectively.
Cash Used in Financing Activities
Cash used in financing activities is generally comprised of proceeds from the exercise of stock options, net share settlements for employee tax withholdings associated with the vesting of RSUs, the payment of contingent consideration under acquisition arrangements, activities associated with our former Credit Facility, and activities related to the repurchase of our Class A common stock.
For the year ended December 31, 2020, financing activities used $70.4 million in cash primarily as a result of the payment of all outstanding amounts due under the Credit Facility of $99.6 million, net share settlements for employee tax withholdings associated with the vesting of RSUs of $12.2 million, payment of contingent consideration related to the Dynasty acquisition of $6.0 million, and the repurchase of outstanding shares of Class A common stock in the amount of $4.2 million. These uses of cash were partially offset by net proceeds from the Revolving Facility of $50.8 million.
For the year ended December 31, 2019, financing activities used $7.3 million in cash primarily as a result of net share settlements for employee tax withholdings associated with the vesting of RSUs of $6.2 million, as well as principal payments on debt of $3.4 million, and payments of debt issuance costs of $0.4 million, partially offset by proceeds from issuance of debt of $2.2 million and proceeds from stock option exercises of $0.6 million.
Off-Balance Sheet Arrangements
At December 31, 2020, we did not have any off-balance sheet arrangements.
Contractual Obligations and Other Commitments
The following table presents our contractual obligations and other commitments at December 31, 2020:
Payments Due by Period
Total Less than 1 year (1)
1 to 3 years 3 to 5 years More than 5 years
(in thousands)
Operating lease obligations 52,692 (1,275) 9,327 10,172 34,468
(1) Operating lease obligations for the year ending December 31, 2021 are presented net of tenant improvement allowances of $5.2 million.
At December 31, 2020, liabilities for unrecognized tax benefits of $6.1 million were not included in our contractual obligations in the table above because, due to their nature, there is a high degree of uncertainty regarding the timing of future cash outflows and other events that would extinguish these liabilities.
For additional information regarding our contractual obligations, commitments and indemnification arrangements, refer to Note 9, Leases and Note 11, Commitments and Contingencies of our Consolidated Financial Statements included elsewhere in this Annual Report.
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Critical Accounting Policies and Estimates
Our Consolidated Financial Statements and the related notes included elsewhere in this Annual Report are prepared in accordance with generally accepted accounting principles in the United States. The preparation of our Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates.
We believe that the following critical accounting policies involve a greater degree of judgment or complexity than our other accounting policies. Accordingly, these are the policies we believe are the most critical to a full understanding and evaluation of our Consolidated Financial Statements. For additional information, refer to Note 2, Summary of Significant Accounting Policies of our Consolidated Financial Statements included elsewhere in this Annual Report.
Revenue Recognition
We generate revenue from our customers primarily through subscriptions to access our core solutions and Value+ services for our cloud-based software solutions. Revenue is recognized upon transfer of control of promised services in an amount that reflects the consideration we expect to receive in exchange for those services. We enter into contracts that can include various combinations of services, which are generally capable of being distinct, distinct within the context of the contract, and accounted for as separate performance obligations. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities.
Contracts with Multiple Performance Obligations
Many of our contracts with customers contain multiple performance obligations. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require judgment. We account for individual performance obligations separately if they are distinct. The performance obligations for these contracts include access and use of our core solutions, implementation services, and customer support. Access and use of our core solutions and implementation services are considered distinct.
The transaction price is allocated to each performance obligation on a relative standalone selling price basis. Judgment is required to determine the standalone selling price for each distinct performance obligation. We typically have more than one standalone selling price for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, we determine the standalone selling price based on our overall pricing objectives, taking into consideration customer demographics and other factors. Fees are fixed based on rates specified in the subscription agreements, which do not provide for any refunds or adjustments.
Capitalized Software Development Costs
Software development cost consist of certain payroll and stock compensation costs incurred to develop functionality of our internal-use software solutions. We capitalize certain software development costs for new offerings as well as significant upgrades and enhancements to our existing software solutions. Capitalized software development costs are amortized using the straight-line method over an estimated useful life of three years. We do not transfer ownership of our software, or lease our software, to third parties. We believe there are two key estimates within the capitalized software balance, which are the determination of the useful life of the software and the determination of the amounts to be capitalized.
We determined that a three year life is appropriate for our internal-use software based on our best estimate of the useful life of the internally developed software after considering factors such as continuous developments in the technology, obsolescence and anticipated life of the service offering before significant upgrades. Based on our prior experience, internally generated software will generally remain in use for a minimum of three years before being significantly replaced or modified to keep up with evolving customer and company needs. While we do not anticipate any significant changes to this three year estimate, a change in this estimate could produce a material impact on our financial statements.
We determine the amount of internal software costs to be capitalized based on the amount of time spent by our software engineers on projects. Costs associated with building or significantly enhancing our software solutions and new internally built software solutions are capitalized, while costs associated with planning new developments and maintaining our software solutions are expensed as incurred. There is judgment involved in estimating the stage of development as well as estimating time allocated to a particular project. A significant change in the time spent on each project could have a material impact on the amount capitalized and related amortization expense in subsequent periods.
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Business Combinations
The results of a business acquired in a business combination are included in our Consolidated Financial Statements from the date of acquisition. We allocate the purchase price, including the fair value of contingent consideration, to the identifiable assets and liabilities of the acquired business at their acquisition date fair values. The excess of the purchase price over the amount allocated to the identifiable assets and liabilities, if any, is recorded as goodwill.
Determining the fair value of assets acquired and liabilities assumed requires management to make significant judgments and estimates, including the selection of valuation methodologies, estimates of future revenue and cash flows, discount rates and selection of comparable companies. We engage the assistance of valuation specialists in concluding on fair value measurements in connection with determining fair values of assets acquired and liabilities assumed in a business combination.
Acquisition-related transaction costs are not included as a component of consideration transferred, but are accounted for as an operating expense in the period in which the costs are incurred.
Income Taxes
We recognize deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the Consolidated Statements of Operations in the period that includes the enactment date. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized. In evaluating the need for a valuation allowance, management considers the weighting of all available positive and negative evidence, which includes, among other things, the nature, frequency and severity of current and cumulative taxable income or losses, future projections of profitability, and the duration of statutory carryforward periods.
Judgment is required to measure the amount of tax benefits that can be recognized associated with uncertain tax positions. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in our Consolidated Financial Statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized. We recognize interest and penalties accrued with respect to uncertain tax positions, if any, in our provision for income taxes in the Consolidated Statements of Operations.
Leases
We determine if an arrangement is a lease at inception. Operating leases are included in prepaid expenses and other current assets , operating lease right of use ("ROU") assets , other current liabilities , and operating lease liabilities on our Consolidated Balance Sheets. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As none of our leases provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU assets also include any lease payments made to the lessor before or at the lease commencement date and excludes lease incentives received and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, refer to Note 2, Summary of Significant Accounting Policies of our Consolidated Financial Statements included elsewhere in this Annual Report.
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