By Jorge Mercado Friday, August 25th, 2023

Santa Barbara-based AppFolio has seen its shares rise as much as 12.6% in the days since the company announced it would be laying off 9% of its workforce on Aug. 17.

Shane Trigg, the company’s CEO recently hired in March, wrote in a letter sent out to employees on Aug.17 that it would be cutting 149 jobs, effectively immediately. The letter was published on the company’s website the same night.

AppFolio did not specify what positions were cut or how many, if any, employees from its Santa Barbara office were laid off.

The letter, also filed with the U.S. Securities and Exchanges Commission, said the company’s lack of profitability hurt “our ability to achieve our potential.”

“To continue to deliver industry-leading innovation that enables our customers to thrive, we must generate enough profit to fuel long-term growth and reinvest in our products, technology, and people,” Trigg wrote in the letter.

He added that AppFolio’s costs have “increased considerably in this environment, and we have not scaled the business efficiently. This has forced us to make these changes in service of our customers and the long-term health of AppFolio.”

However, the company’s emphasis on addressing its profitability concerns has impressed some analysts.

Stephens analyst John Campbell upgraded his rating for AppFolio stock from a hold to a buy, according to Investing.com, on Aug. 21.

He also gave the company’s shares a new target Price of $212, representing about a 13% upside from where shares were trading on Aug. 21.

Similarly, investors such as Pier Capital LLC and Barclays PLC boosted their holdings in AppFolio’s shares in the days after the company’s announcement, increasing their holdings by 70.1% and 87.1%, respectively.

As such, shares of AppFolio, which closed at $166.99 on Aug. 17, were trading as high as $188.17 on Aug. 21.

Shares of AppFolio stock closed at $183.73, a gain of 10% since the layoffs were announced. AppFolio shares are up 71.4%.

Peter Heckmann, a senior research analyst a DA Davidson who covers AppFolio, kept the company’s stock rating at neutral with a target price of $155.

Still, in a note to investors, he said he was “encouraged” by management’s increased focus on delivering a more balanced model of attractive revenue growth and margin expansion.

He noted that, in addition to layoffs, over the last year, AppFolio has reduced costs by divesting a small business unit, reducing the company’s office real estate footprint, and re-evaluating hiring needs.

Additionally, the company announced a new fee to be charged to tenants of the company’s property management customers that he estimates could generate $45 million to $50 million a year in incremental revenue for AppFolio with little incremental cost.

He added that, while never officially acknowledged by management, the enhanced focus on profitability likely was aided by long-time shareholder, Maurice Duca.

The company’s largest shareholder, owning about 19% of total shares and about 39% of the voting power, filed an updated 13D in November of 2022 and, in that filing, communicated his perspective to AppFolio’s Board of Directors that the company should immediately revise its management incentive arrangements to align with, and emphasize, clear profitability growth objectives, Heckmann’s note to investors said.

Duca was the founder and a managing partner at the Investment Group of Santa Barbara, a pre-IPO venture capital investor in AppFolio.

“We agreed with Mr. Duca’s position as we have been making the same point on AppFolio for several years,” Heckmann’s note said.

This is Santa Barbara-based AppFolio’s — a software company for the real estate industry — second round of layoffs this year.

In May, the company laid off 62 people or roughly 3% of the company. The company did not cite a reason for the layoffs when asked by the Business Times, although it had noted its advancements in its artificial intelligence platforms before the firings.

In the letter to employees, Trigg said the company had taken “many steps to lower costs this year,” but ultimately a reduction in workforce was necessary to reach profitability.

“While we’ve made real progress, these measures are not enough to get us where we want to be,” he said.

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