Appfolio Inc (APPF) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the AppFolio, Inc. Second Quarter 2015 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this call maybe recorded.

I would now like to introduce your host for today's conference, Ida Kane, CFO of AppFolio. Ms. Kane, please go ahead.

Thank you, Brian.

Good afternoon, ladies and gentlemen. Thank you for joining us today as we report AppFolio's second quarter 2015 financial results. I am Ida Kane, CFO of AppFolio. I am joined by Brian Donahoo, CEO of AppFolio, to discuss our results today. The call is being simultaneously webcast on the investor relations section of our website at www.appfolioinc.com.

Before we get started, I would like to call everyone's attention to our Safe Harbor policy. Please note that certain statements made on this call will be forward-looking statements which are subject to considerable risks and uncertainties. These forward-looking statements may relate to our future or assumes financial condition, result of operation, business forecast and plans, strategic plans and objectives, and product development plan.

Forward-looking statements represent our management's belief and assumptions based on information currently available. Forward-looking statements involve numerous risks and uncertainties that may cause our actual results or performance to be materially different from any results or performance expressed or implied by the forward-looking statement.

We discuss these risks and uncertainties in greater detail in the risk factor section of the Form 10-Q that we filed today with the SEC as well as in our other filings with the SEC. We assume no obligation to update any forward-looking statements after today even if new information becomes available in the future.

Finally, during the course of the call today, we will be discussing both GAAP and non-GAAP financial measure. A reconciliation of the GAAP financial measures to the non-GAAP financial measures is included in the press release we issued today as well as on our Investor Relations website.

Now, I will turn the call to Brian. Please go ahead, Brian.

Thanks for joining us on the call. I'm excited to be here today for our first quarter reporting as a public company. And I'm pleased to report that we're experiencing strong demand for our software solutions, and our revenue for the second quarter grew to $18.4 million, up 59% year over year.

Before we get in to the strategic and financial highlights of a quarter, I thought it'd be useful to provide a review of AppFolio's business for those investors and analysts on the call who might be less familiar with our business.

We launched AppFolio with the belief that cloud-based solutions would evolve from horizontal software that works for all types of businesses the targeted solutions that are built to solve the needs of specific industries. The power of cloud-based solutions means that we put exceptional technology, that was once reserved for only the largest companies with ample resources, into the hands of small and medium size businesses.

For small business owners, this is truly revolutionary. With our solutions, they now spend more time growing their businesses instead of simply running them.

Our customers are often responding to demand from their own clients to modernize and digitize all aspects of their businesses. For example, our property management customers have renters and owners who expect to transact and communicate online. And our little customers have clients who expect to receive online updates about their case status. And online doesn't just mean on their laptop, it means anytime, anywhere on any device.

Our software is enabling our customer's digital transformation which is quickly becoming a requirement in today's economy. Today, our easy-to-use cloud-based solutions are helping thousands of small and medium size businesses in the property management and legal industries more effectively grow and compete.

Our software is designed to be both a system of record and a system of engagement. This means we offer complete solutions that power both the back office infrastructure, things like accounting, reporting and record-keeping, as well as enhance the business interactions between our customers and their clients and vendors.

Today, we're focused on two large and growing verticals -- property management and legal. And combined, we have over 10,000 customers who rely on our software to power their business. Both software solutions also include mission-critical value plus services that our customers can adopt to enhance our core solutions as their businesses grow and evolve.

Our property management customers manage residential and commercial buildings, and our legal customers are still low practitioners in small law firms. Both property managers and lawyers are mobile and client-focused with complex workflows and significant compliance requirements. They are the perfect fit for vertical cloud-based software.

As our clients increase their use of our solutions, their businesses become even more efficient and successful. The great example of this in action comes from a recent case study featuring Hanes Properties, a Southern California based property management company. With AppFolio Property Manager, Hanes has been able to cut their workload during the week of rent collection by 50% due to automating many of the previously time-consuming and cumbersome tasks. As they increase efficiency, they're now able to take on 27% more rental units under management without increasing staff.

And we see similar experiences in our law firm customers, just like property management SMBs, reducing overhead expenses, and the time spent on mundane task is critical to their business' success. We recently conducted a study with the Royal law firm and her quote is really telling. And she said, "MyCase acts as my entire firm's staff and secretarial support."

These are just a few of the many customer examples who are modernizing and automating their workflows which allow them to become more productive and competitive.

[I'd be pleased] to talk about how we think about growth. We manage our business towards the achievement of long term and sustainable growth, and we begin by focusing on keeping our existing customers happy as well as acquiring new customers.

Happy customers are really the key to a successful business and this is especially true in vertical markets. We know that our technology and customer service is a tremendous competitive differentiator. And the impact of word-of-mouth marketing as happy customers stay with us and share their experience with AppFolio is powerful to our growth.

Next, we help our customers expand their usage and investment in AppFolio value plus services. We devote marketing, sales, and loyalty resources to help customers make the most of their software, and this is an excellent way to have multiple levers in our business. We can fuel our growth with new value plus offers as well as drive increased usage of existing products.

There are also large adjacent market opportunities in both of our current verticals that present growth options for us in the future. For example, our property management software today serves property management companies with single and multi-family residences, student housing, commercial properties. But we could tailor the message and features set for affordable housing, vacation rentals, and senior housing in the future.

And of course, we consider expanding into new verticals. We're very thoughtful about this type of expansion because we recognize the great opportunities we have in front of us currently with both property management and legal. For now, maximizing our current opportunities is more attractive than investing in new verticals.

We see the lack of comprehensive industry specifics cloud solutions for the SMB as a great opportunity for our business. We'd really only scratch the surface with our current target vertical's, well, occupancy rates and rents, and the rent prices in the US have reached historic highs. And according to a recent US census report, home ownership rates in the US have reached an all-time low since 1967. The number of recent law graduates opening solo practices has nearly doubled in the past decade, and these trends speak to the growth and health of our target market.

And now I'll focus on our strategic progress and business growth in the second quarter of 2015. So far of this year, we've continued our fast case of product innovation. Both AppFolio Property Manager and MyCase leverage the common platform, and our suite of applications spans many of our customers' most critical business needs.

Functioning is really the heart of their business. These products are designed to be extremely easy to use, work beautifully on any device, be compatible with multiple operating systems, and accessible anytime from anywhere. For our property management customers, we have expanded our set of features for commercial property management including enhanced reporting, vacancy advertising, and the ability to schedule rent increases.

We also launched the ability to text residents for free right from within the application. So property managers can easily send rent reminders or schedule maintenance. This feature has been rapidly accepted by our customers and illustrates the growing demands for systems of engagement that enhance business communication.

We've also continued with our successful land and expand strategy. We released the AppFolio Maintenance Contact Center which allows customers to outsource maintenance requests to our property management answering service. And we completed the acquisition of RentLinx, a software platform that allows customers to easily advertise rentals online. We are working to offer RentLinx as a value plus service that'll provide our customers with the ability to better spend, track, and optimize their marketing investments.

For our legal customers, we continue to enhance the MyCase feature set with new updates to invoicing, as well as the powerful filtering feature that makes it even easier to catalogue and manage important legal documents. These updates are great examples of our continued focus on increasing usability for our customers and rolling out mission-critical solutions.

Our growth comes not only from our commitment to product innovation, but also our strong focus on connecting with our customers. From hosting real time reviews on our product websites to hosting over 40 local events so far this year, we recognize that our customers are the most powerful and believable advocates for our software solutions. And we're gearing that for our third annual customer conference in late September. We're expecting to double attendance from last year, and we'll offer more than 20 educational sessions.

As we look ahead, we'll remain focused on our highest priorities -- product innovation, customer satisfaction, and customer and product expansion. We believe that innovative, easy-to-use software, and outstanding service leads to ongoing success for our customers which will continue to drive strong results for our business.

Our strong performance this quarter is a great testament to the value we deliver to our customers' businesses every day and the strength of our team. As we cross into our new state as a public company, I'd like to take a moment to thank our community of employees, customers, investors and partners. We wouldn't be here without you. The second quarter was a great start to our life as a public company, and we're more excited than ever about our future.

And now I'd like to turn it over to Ida to review our financials as well as our outlook for the remainder of 2015.

Thanks, Brian, and thanks to all of you joining us today as we report our second quarter results.

Total revenue for the quarter was $18.4 million, up from $11.6 million one year ago, a 59% increase. We are pleased with our revenue performance in the quarter which was a result of growth in all areas of our business with our land and expand revenue strategy as a key contributor to this growth. As a reminder, we break out revenue into three distinct categories -- core solutions, value plus, and other services.

Core solution revenue represents the subscription revenue for our cloud-based business management software solution, which serve as the system of record and system of engagement for our property management and legal industry customers. Value plus services includes solutions such as website hosting, resident screening, or electronic payment processing, and are offered to our customers on a subscription or flat fee per use basis. We also offer other services such as onboarding and website design that are included in other services revenue.

In April 2015, we acquired RentLinx which primarily generates revenue by providing online services that allow customers to advertise rental properties. Revenue related to RentLinx is currently being recorded under other services. Once the technology is integrated into our platform, we expect to offer these services as value plus services to our customer base, at which time we will classify this revenue as value plus.

For the second quarter, core solution revenue was $7.7 million, up from [$5.3] (corrected by Company after the call) million one year ago, a 44% increase. The growth was mainly driven by the increase in number of customers and by strong customer retention. We ended the quarter with over 7,000 Property Manager customers, an increase of 43% from a year ago, and almost 4,900 law firm customers, an increase of 81% over one year ago. At June 30, 2015 our small and medium size Property Manager customers were managing 1.9 million units in their portfolios, up from 1.4 million one year ago, a 34% increase.

Value plus services revenue was $9.4 million, up from $5.6 million one year ago, a 67% increase. The growth was mainly driven by the increased usage of our electronic payment platform, an increased usage of our screening services by a larger customer base.

Other services revenue was $1.3 million, up from $600,000 one year ago, a 108% increase. The growth was driven by the increase in onboarding new customers to our platform and providing website design services, and approximately $300,000 related to RentLinx.

We continue to invest in driving growth over the long term in a disciplined manner across our organization. As a result, our headcount and associated personnel cost increased significantly an absolute dollars to support increased revenue. At June 30, 2015, we are proud to have 528 AppFolians serving our customers and shareholders, up from 332 employees a year ago, an increase of 59%.

As a reminder, cost of revenue, excluding depreciation and amortization, includes personnel cost associated with our customer service and support organization, our platform infrastructure cost, and fees paid to third party service providers, including payment processing fees related to our value plus services. Cost of revenue as a percentage of revenue was 44% during the second quarter of 2015, compared to 47% in the year ago period.

We also continue to invest on top of the success in sales and marketing. In absolute dollars, our sales and marketing expense increased to $6.2 million, up from $3.7 million one year ago, a 68% increase. Sales and marketing expense as a percentage of revenue was 34% during the second quarter of 2015, compared to 32% in the year ago period.

For general and administrative expenses for the second quarter included increase in expenses incurred in connection with our IPO, and approximately $500,000 we agreed to pay certain individuals of RentLinx subject to their continued employment with us. We will have an additional $500,000 expense in general and administrative expenses during the upcoming third quarter for the balance of this payment.

Our weighted average common shares outstanding used to calculate net loss per share is 9.3 million for the second quarter. At June 30, 2015, our total common shares outstanding was 32.6 million which includes the conversion of our convertible preferred stock and the 6.2 million shares of common stock issued in connection with our IPO at the end of June.

The aggregate net proceeds from our IPO were 69.1 million after underwriting discounts and commissions. These proceeds in our second quarter financials excludes the exercise in full by our underwriters of their options to purchase 930,000 additional shares of common stock which occurred on July 8, 2015. Additional proceeds, net of underwriting discounts and commissions received in July from this exercise was 10.4 million.

Moving to the balance sheet, we ended the quarter with almost $70 million in cash and cash equivalents. With the acquisition of RentLinx which we completed in April, we added $4 million of intangible assets including 1.7 million of goodwill to the balance sheet during the quarter.

Given our continued focus on delivering great software to our customers, our growing group of developers has been working on these features and services, as Brian mentioned earlier on the call. As a result of this, during the second quarter, we added 1.9 million to capitalized software. At June 30, 2015, we had 10.2 million outstanding under a credit facility including accrued interest.

During the month of July, we made a pre-payment in full of the outstanding debt. And in connection with the pre-payment, we expect to have a $600,000 onetime charge flow through general and administrative expenses in the third quarter.

In the second quarter of 2015, we used approximately $1.6 million of cash related to operating activities and $6.8 million in investing activities, including the $4 million acquisition of RentLinx, the $1.9 million addition of capitalized software related to new products and features, and $800,000 increase in property and equipment mainly related to the expansion of our facilities and increase in head count.

Before I turn over the call for questions, I would like to provide some guidance for the full year 2015. We expect full year 2015 revenue in a range of $73.3 million to $74.3 million. At the midpoint of the range, which is $73.8 million, this would represent year-over-year growth of 55%.

I want to remind you of historical seasonality that impacts our business, which is visible in our numbers included in the prospectus we filed in connection with our IPO. We experienced some seasonality in the fourth quarter related to our screening services for our Property Manager customers. Fewer people moved during the fourth quarter holiday seasons, therefore revenue associated with applications and resident screening services typically declined in the fourth quarter of the year.

As a result of this seasonal decline in revenue, we have historically experienced sequential revenue growth in the fourth quarter at a rate lower than we experienced in other quarter. Weighted average common shares outstanding is expected to be approximately 33.5 million during the second half of the year, which would equate to approximately 20.9 million outstanding for the full year 2015.

We remain confident in our strategy and business plan to deliver long term shareholder value. We will continue to manage our business towards the achievement of long term growth that we believe will positively impact long term shareholder value.

With that, I will turn over the call to the operator for questions.

Thank you. (Operator Instructions).

Our first question comes from the line of Brian Essex with Morgan Stanley. Your line is now open.

Hi. Good afternoon and congratulations on your entry to the public market.

Thanks.

I was wondering if you could talk a little bit about RentLinx and maybe the rationale for the acquisition, a little bit about how many customers were asking for this and what likely adoption looks like for that product out of the gates.

Sure. I'll take that one.

Brian, there are two things that we were really interested about RentLinx. One, they had a very interesting syndication technology, which essentially takes rental vacancies and syndicate those to a number of Internet listing services in a unique and intelligent way. The second thing that they do is help their customers spend their marketing dollars across this network of Internet listing services from a single point, as opposed to having a number of individual relationships. And that was interesting to us because we -- our customers struggle today with great ways to spend their marketing dollars.

The third part that really interested us was the idea of understanding how these marketing investments translate into pay off. It's very difficult today to understand where the customers' marketing dollars are spent and how effective that spend is. Today, we have integrated RentLinx's listing on technology into our product, AppFolio Property Manager. And in the future, we will integrate that media buying technology into the platform as a value added service.

Got it. And did they have customers on their platform that you need to now integrate into your core offerings as a -- on the perspective of your customers as a first level of penetration, have a system of record, and then kind of from there go towards expanding their value added services?

None of that is included in the numbers that Ida talked about today. So what I'll say is certainly there are some RentLinx customers today that were seeing great value from AppFolio Property Manager and we're looking at ways to cross-sell to them. But it's not a requirement today that a RentLinx customer buy AppFolio Property Manager.

Is that going to be a disconnect from the way you run the business now, in terms of basically needing AppFolio Property Manager and then adding on the value plus services?

Your question was is it a mismatch?

I'm just saying is it a disconnect in terms of historically --

(Inaudible). Yes --

My understanding of the platform is you lead with the core platform, your system of record, and then you add the value plus services on top of that. I'm just wondering what is it going to take of making sure the amount of efforts to align that customer base with the install base that you currently have.

Yes. Okay, I understand your question. Thanks, Brian.

Look, let me reaffirm that AppFolio's strategy is to first be the system of record and on the back office. We acquired RentLinx as a relatively small company with a really small number of customers as well. Our hope is that many of those will see the value of AppFolio Property Manager. And we'll continue to ask ourselves a question how long will we run it as a standalone business.

Again, I'd stress that this was a small business when we acquired it, small number of employees, and small number of customers. So I don't see it as a disconnect to our core strategy at all.

Got it, very helpful. And I'll squeeze one more in. On incremental gross margin, seems like they were relatively consistent with the first quarter, like 61%, so you have a little bit of margin extension there. What might we expect going forward to move those margins up or down one way or the other?

Sure, Brian. I'll take that.

As you know, our cost of revenue as a percentage of revenue can fluctuate from period to period based on the mix of revenue, and that's obviously speaking to kind of core solution, value added, and other. And then within value added -- our value plus services, obviously, there's a variety of different service offerings that we have for our customers. And so that mix also impacts our cost of revenue as a percent of revenue.

For example, in my prepared remarks, I spoke to the historical seasonality that we'd have in Q4 with our mix of revenue with screening and applications being lower because we have fewer tenants typically moving in Q4. And historically, we've seen that in Q4, cost revenue as a percent of revenue has experienced sequential percentage increases as a percent of revenue.

But looking forward, I would say there's levers that we pull as they continue to gain operating leverage in our business and our revenue growth. We have the opportunity to experience upside on the margin and/or our cost of revenue as a percentage of revenue would decline. And as you know, we also focus on the cost that we incur with our third party service providers as well as internally in supporting our value added services and continue to look for opportunities to optimize those.

Great, very helpful. Thank you and congrats again.

Thanks, Brian.

Thank you. Our next question comes from the line of Michael Nemeroff with Credit Suisse. Your line is now open, please go ahead.

Hi. This is Kyle Chen, sitting in for Michael Nemeroff. Thanks for taking the question and congratulations on the solid quarter.

Thanks, Kyle.

Sure. So on the customer growth, this was a little better than expected or at least better than what we had in our model. Just wondering what's driving the strength in new customer additions, is this more attributed to marketing, better execution, share gains, or against the competition? Any color there would be appreciated.

Yes. Kyle, this is Brian. I think that you're saying strong execution. We didn't get distracted by an IPO. We kept our eye on the right things and we just executed well.

Okay. And then if you can help dimensionalize or quantify that demand within your customer base for an increased functionality that allow you to cross-sell, up-sell incremental value plus services. And also if you can perhaps provide some color on how ASPs or attach rates of value plus services trended in the quarter and where you expect them to go over the next one to two years?

Yes. Kyle, I can speak for demand.

Look, our strategy with value plus services is to help customers buy what they're already buying. And we believe that we can do that more effectively because we deeply integrate these value plus services into more solutions, into the workflow. And that manifests itself in something easy like rent collection. And we don't just allow our customers to collect rent online.

But behind the scenes, we also then do the accounts receivable for them and calculate [whose rate or rent to do]. All of these deeply embedded processes sit along with these core solutions. So what we're really doing is kind of taking something that's already doing it and making it a whole lot better. We also price and package in a way that makes it easy to say yes to these value plus services.

And I think the final thing is although we do market and sell these value plus services, there's a lot of [in-app] marketing that happens that just encourages use and encourages adoption of these services through the basic use of our products today. Our strategy with value plus services is to look at all of the areas where our customers are outstanding today, and then capturing those ones that makes sense, and that we can do a better job by deeply integrating kind of those processes into the system of record.

Okay. That's helpful. Any color on how ASPs or attach rates of the value plus services trended this quarter?

What I would say is they continue to be really strong, mainly driven by the fact that these value plus services are deeply integrated into our products. As I mentioned on the call, we launched the Maintenance Contact Center and we had tremendous demand for that product. And we definitely see that we are fitting on a customer paying point with that.

It's early on the offering. We began aggressively marketing that to our customers in April, and we've seen great attachment on that. Other value plus services remain strong and growing

Great. And just lastly, you had mentioned in your prepared remarks about APM being configured more specifically for [commercial] portfolios or a more [made-to-use] portfolios. Any comments in terms of, I guess, the timing of that release, and if you can comment in terms of what your current property unit mix looks like relative to sort of some verticals within APM.

Sure. First I'll start by saying that the small or medium size property managers tend to be working with mixed portfolios. So that means that they are usually working with single family, multifamily, and commercial, and other derivatives like student housing.

And in our world when -- in the SMB world, when we talk about commercial, this might be like office suites or a small strip mall, it's not necessarily like a commercial high rags or something like that. Our SMB property managers manage commercial properties that many times operate a lot like a residential property would. And that's been the case forever.

Our target market has always managed the mixed portfolio. And we continue to improve the product to better suit the needs of specific types of properties. In Q2, we made a lot of improvements too and a lot of innovation in the way that we managed commercial properties and this has been lauded by our customers throughout the quarter. And we'll be probably louder in our marketing messages going forward about those capabilities.

Okay. Thanks very much. Congratulations again.

Thank you.

Thanks, Kyle.

Thank you. Our final question comes from the line of Bhavan Suri with William Blair. Your line is now open, please go ahead.

Hey, guys. Can you hear me okay? And congrats on the quarter.

Thanks, Bhavan. We hear you fine.

Great. It's great. So just a few questions from me.

First, on the legal side, that tends to be or feels like it's a little more competitive market. As you look at your functionality vis-a-vis some of the competitors, obviously in growth rate, you are better. But other pieces you feel like you need to add or build on there to have a more fully functional solution, especially sort of in the value plus side or the value services side, would you feel you got the piece components and not the question or sort of demonstrating value at the price point you have to the market?

Yes. Great question, Bhavan.

Look, on the legal side, this is a newer business for us. We've really made strong investments in the engineering side of that business. We feel very strongly about the feature and functionality of what I'm going to call the system of record.

We're very early in the expansion of the value plus services in that world.

Sure.

And we're really working hard at all of our opportunities there in investing a lot in expanding there.

From a competitive perspective on the core solution or the system of record, I would say we're very strong in that world. And we're really focusing on the value plus additions that we can make in the future.

Okay, helpful. And then on the property management side, we have discussed with you sort of the ability given this fully featured function nature of the offering, sort of potentially moving up customer (technical difficulty) you're critically focused on SMB. And I don't want to drag you there, but it would be great to sort of -- just any color on whether you're seeing larger property managers even outside of that 3,000 managing level look at the solution. And sort of is that something to look at in the future sort of trending up the market, or I mean is it a sort of just the current strategy is stick to the [knitting] for right now in the property management side?

Great question. So what I would say is that we're big believers that the small and medium size property management market is larger than 3,000 units. I think it can go maybe up to even 10,000 units and still be working. Today, we do focus the majority of our efforts, certainly are marketing and sales alignment efforts, to focusing on property managers with portfolios up to 3,000 units. And we see strong demand in that area.

We do close deals that our larger than that. We are aware of opportunities to improve the products to attract larger customers. And then we're constantly evaluating kind of do we -- when and how do we move higher demand. And even today, even though we have more than 7,000 property managers in our space of up to 3,000 units, I still believe we're just scratching the surface of the market opportunity in the segments that we're more focused on today.

Got it, got it. And let's face that certainly that the customer due diligence is always like, yes, great functionality and materially more cost effective than the competitors. But clearly, already is now trying to figure out how to come back at you guys given some of that. So are you seeing a little more -- now, I guess they've released an SMB offering, [Genesis Two] or whatever it's called, are you seeing that a little more competitively or is it still just kind of not something you're running into that much?

From a competitive perspective in our segment, we're working with customers that are usually replacing a number of point solutions and looking for their first professional software purchase. So more often than not, we're just placing a number of point solutions and we are helping our customers digitize their business. We're not saying we're usually not head-to-head competition with any of kind of the established players from a competitive perspective.

Got it, got it. And last one from me. You obviously said you invested on the legal side from an engineering perspective. I mean, a lot of common stuff you had on the property management side that your leveraging obviously for some of the core system record stuff on the legal side. Are you finding that some of the stuff, your customer, to drive you to -- on the legal side is then applicable from a cross-sell or feature functionality up-sell back to the property management side, sort of a leverage of the development of one side to the other side, so to speak?

Yes. Great question. And we have seen that very specifically.

An example that I'll give you is that legal professionals tend to be much more mobile than property management professionals. As you might imagine, lawyers who are in courts and offsite often run a lot -- the big parts of their business from an iPad or from their phone, probably more predominantly than half within property management today.

Our legal engineering team did a tremendous amount of work in mobile and mobile experience management, and shared those learnings and those platform elements back across with our property management division to help us improve the property management mobile user experience.

Cool. Well, that's it for me guys. Thanks again for answering my questions and nice job.

Thanks.

Thank you.

Ladies gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everybody have a wonderful day.