Appfolio Inc (APPF) 2015 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the AppFolio Incorporated third-quarter 2015 financial results conference call.

(Operator Instructions)

As a reminder this conference is being recorded. I would now like to introduce your host for today's conference, Ms. Ida Kane, CFO. Ma'am you may begin.

Thank you. Good afternoon ladies and gentlemen. Thank you for joining us today as we report AppFolio's third-quarter 2015 financial results. I am Ida Kane, CFO of AppFolio. I'm joined today by Brian Donahoo, CEO of AppFolio to discuss our results. This call is being simultaneously webcast on the investor relation 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, results 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 statements. We discussed these risks and uncertainties in greater detail in the risk factor section of our 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 our call today we will be discussing both GAAP and non-GAAP financial measures. A reconciliation of the GAAP financial measures to the non-GAAP financial measures is included in the press release we issued today. With that I'll turn the call over to Brian.

Hello and thanks for joining us as we report our third-quarter financial results and our first full quarter as a public company. I'm happy to be here today and I am quite pleased with our financial results this quarter.

Revenue increased 56% in the quarter to $20.3 million as we continue to experience strong demand for our core solutions as well as increased interest in our Value+ services from both our property management and legal customers. In addition to our financial success this quarter we remain focused on our top strategic priorities: keeping our customers happy and successful, acquiring new customers, expanding our product offerings and total addressable market and driving the adoption of the Value+ services.

Let me show some highlights from the quarter. At the end of September we held our third annual customer conference in Santa Barbara for our property management customers. This year we had more than 700 customers attend. This is up from 420 one year ago. They all came with a similar goal, to maximize their investment in AppFolio. During the three-day conference we announced two new Value+ services and hosted almost 40 educational sessions. Customers also enjoyed networking events, hands on product demonstrations and individual help sessions provided by AppFolio experts. The conference was a huge success and validates that focusing on customers is the key to building an outstanding business.

Customer feedback during and after the conference was overwhelmingly positive. One customer told us they had 400 units under management when they started with AppFolio three years ago. This customer was able to streamline and automate many of the routine tasks allowing them to spend more time growing their business rather than simply running it. Today they have expanded to over 700 units under management nearly doubling their portfolio.

Another customer shared how they decreased to their workload by 35% reducing their workweek up from 70 to 40 hours. And finally, one of my favorite quotes came another customer who said AppFolio has changed the face of our business.

As customers stay and grow with AppFolio word-of-mouth marketing from happy customers like these is a powerful tool and tremendous competitive differentiator that fuels our growth. That same enthusiasm is echoed by our legal customers.

We recently conducted a survey of MyCase customers and learned that we save them one or more hours per day in administrative time. This time savings translates to decreased staffing costs and increased billable hours. It's clear we are bringing real value to these legal customers.

New customer acquisition metrics were also impressive in the third quarter. In our property management vertical customer accounts increased 42% year-over-year in a healthy and growing market. Today 35% of all households in the US are renters. That's over 45 million households and we're at record-breaking occupancy rates of 96%.

Customer accounts in the legal vertical also increased to 74% year-over-year. Which is very solid growth in a market that's also rapidly expanding and has substantial runway ahead.

Turning our focus on innovation in the third quarter we continue to concentrate on building the best software available and increasing our Value+ solutions. We announced the upcoming launch of new Value+ service offerings notably Owner/Vendor E-Checks which customers at your conference or very excited to learn about. This new Value+ service allows property managers to quickly and securely pay owner and vendor bills right from AppFolio property manager. With this service, customers will no longer need to write the paper checks saving them time and eliminating these manual processes.

AppFolio Premium Leads, another announcement made at the customer conference is expected to formally launch early next year. Premium Leads will allow property managers to easily post vacancies to dozens of popular pay-to-list websites allowing them to capture high-quality rental leads and fill vacancies faster. Because this service is built right into AppFolio property manager, customers can track and manage marketing investments and will be able to more efficiently spend and maximize their marketing dollars.

In the third quarter we also completed the launch of Common Area Maintenance features within AppFolio Property Manager fortifying our market expansion into commercial property management. This feature takes a new and unique approach to common area income and expense tracking and reconciliation and is another example of AppFolio's innovative approach to solving complex problems. With this feature our customers gained efficiency while we continue to expand our market opportunity in the commercial space.

In the third quarter we welcomed Amy Meyer as our Chief People Officer. This hirer really speaks to how important people are to our business. We know that happy employees deliver the best express for our customers so we work hard to attract the best and brightest and keep them engaged. We welcome Amy to AppFolio and we look forward to her help in expanding our team and supporting our growth.

In summary, we're proud of our progress in the third quarter. As we look ahead, we're confident in our ability to continue to execute on our strategy. We know the recipe for success: keep customers happy and successful, win new customers, continue to expand adoption in markets and remain focused on product innovation. As we push forward on our path to revolutionize the way S&Ps grow and compete by enabling the digital transformation. The past quarter was another important step in our journey. We remain focused on long-term growth in shareholder value and we are excited about our future.

And now I'd like to turn it over to Ida to review the details of Q3 and update you on our outlook for the remainder of 2015.

Thanks, Brian.

Total revenue for the quarter was $20.3 million up 56% from $13 million reported one year ago. We are pleased with our continued strong 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.

Breaking down revenues further for the quarter, core solution revenue was $8.3 million up from $5.8 million one year ago, a 42% increase. The growth in mid subscription revenue for our software solutions which serve as our system of record and system of engagement for customers was mainly driven by the increase in number of customers and by strong customer retention resulting from incremental investments in sales and marketing efforts.

We closed the third quarter with approximately 7,600 property management customers, an increase of 42% from a year ago and almost 5,600 law firms, an increase of 74%. At the end of the third quarter, our small and medium sized property manager customers were managing 2 million units in their portfolios, up from 1.5 million units one year ago. Value+ services revenue for the third quarter was $10.8 million up from $6.6 million one year ago, a 64% increase.

Value+ 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. The growth in Value+ services revenue in the third quarter was mainly driven by the increased usage of our electronic payments platform, screening services and tenant liability insurance program by a larger customer base compared to the year ago period.

Other services revenue was $1.2 million, up from $600,000 one year ago. A 102% increase. The growth was driven by incremental revenue from the acquisition of RentLinx which contributed $400,000 during the period and an increase in revenues from website design services related to the increase in new customers.

Turning to our expense model, we continue to invest in key areas of the business to drive growth over the long term in a disciplined manner across our organization. As result, our headcount and associated personnel costs increased significantly in absolute dollars to support increased revenue.

At September 30th, 2015, we are proud to have 556 AppFolems serving our customers and shareholders up from 347 employees a year ago, an increase of 60%. Cost of revenue, excluding depreciation and amortization, increased to $9.3 million in absolute terms and was flat on a percentage of revenue basis for the same period one year ago at 46% of revenue.

In sales and marketing expenses increased to $7 million up from $4.3 million one year ago, a 63% increase. Sales and marketing expense were 35% of revenue during the quarter as compared to 33% in the year ago period.

Research and development expenses were $2.8 million up from $1.8 million a year ago, a 52% increase. R&D was 14% of revenue during the third quarter, unchanged from the year ago period.

Our general and administrative expenses were $3.9 million for the third quarter and included a nonrecurring charge which I mentioned last quarter of $500,000 related to the acquisition of RentLinx. Our weighted average common shares outstanding used to calculate loss per share was $33.3 million at the end of the third quarter. During the third quarter we issued an additional 930,000 shares in connection with the over allotment of the IPO.

Moving to the balance sheet, we closed the quarter with $63.6 million in cash, cash equivalents and investments. On a cash flow basis during the third quarter we used approximately $1 million in cash flow operations. We raised an additional $10.4 million in net proceeds from the over allotment of the IPO, paid $3.2 million associated with the IPO related expenses, and paid in full the $10 million in debt outstanding under a credit facility.

Before I turn the call over for questions, we would like to update our outlook for the remainder of the year. We now expect full-year 2015 revenue in the range of $74.6 million to $75.1 million. At the midpoint of the range, which is $74.85 million, this would represent year-over-year growth of 57%.

Given our performance to date this means fourth-quarter revenue is expected to be in the range of $20 million to $20.5 million. At the midpoint of the range which is $20.25 million, this would represent year-over-year growth of 53% in our historically slower growth quarter. Weighted average common shares outstanding are expected to be approximately 33.5 million for the fourth quarter and 21.5 million for the full-year 2015.

In summary, we're pleased with our performance in the third quarter and 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 shareholder value.

With that I would like to turn the over to the operator for questions.

Brian Essex, Morgan Stanley.

Hi. Good afternoon and thank you for taking the question. Congratulations on a good quarter, and I wanted to start by diving into the property management side of the Business. It looks like, from a customer perspective, relatively in line with what we thought would be on revenue. And I was wondering as you rollout these Value+ services, how long do they take to contribute to the topline? And what is the pipeline for incremental services look like on your platform?

Brian, thanks for the question. Value+ services are adopted by customers at different times. Traditionally a new customer will go live or very close to going live with the screening and with parts of the payment platform. Over the course of the first six to eight months they will their usage of the payments products. And after about six months of use they will expand into other Value+ services like insurance, websites, and maintenance contact center. New Value+ services are always coming to market, I talked about on the call, new payment offerings that will be coming out early next year along with AppFolio Premium Leads, which is also coming out early next year. We will see both of these contributing to increased Value+ revenue next year.

All right. And then maybe on the legal side we've seen a lot coming out on the property management side. How do you anticipate balancing incremental development on the legal platform as opposed to property management as you work forward given that most of it -- most of the incremental development particularly on the Value+ side seems to have been on the property management side of the house?

We are aggressively investing in R&D and development of the legal side. We're big believers in our land and expand strategy that begins with being the system of record and having great software that really changes our customers business.

In the legal world we really have been focusing on that system of record portion for the last few years and we'll continue to invest in it, building a great group of legal customers that will expand with Value+ services. We are doing a lot of work on the payments platform in the legal vertical now which will begin to translate into increased Value+ revenue as we go into next year and we have an aggressive development schedule for our new Value+ services in the legal world next year.

Great. Thanks a lot. Very helpful and congratulations again on the quarter.

Thank you.

Thanks, Brian.

Michael Nemeroff, Credit Suisse

Hello. Thanks for taking my questions. Just a couple from me. Just wanted to know, what are the products that have the highest attach rate for new customers coming in? And maybe if you could just -- I know you don't give a lot of details about this but just maybe tell us what the attach rate, maybe the increase it looks like today versus, let's say, a year ago when you didn't have as many Value+ services to offer?

Sure. Thanks for the question, Michael.

On the Value+ services side for the property management world the services with the highest attach rates are payments and also resident screening. Remember when I say payments, that's actually many different revenue lines for different types of payments. And our tax rates there are very high. These are mission-critical applications for most customers. Those you could expect to be very high and they honestly haven't fluctuated. Those attach rates haven't fluctuated over the years. Must customers do adopt those.

Other services have lower attach rates. Website hosting is one that is lower than payments and than resident screening, but it is relatively high and a large number of our S&B clients rely on us to host and manager their websites. Other value added services are more future-oriented. Things like tenant liability insurance are newer to the market. Our larger and more sophisticated customers are big adopters of those, and our smaller customers are emerging and beginning to be larger adopters of those.

This year we also launched maintenance contact center, a service that allows our customers to offset their maintenance calls to our contact center staff to log and dispatch on our customer's behalf. This has been a service that has been very very popular with our larger customers and is beginning to trickle down to our smaller customers over the year. And we see that being a significant revenue contributor into next year.

Okay. That's very helpful. And maybe one on the units or the customer ads, excuse me.

When I look at the number of customers as well as the units for the last 5 or 6 quarters, it's been decelerating slowly. As it relates to the land and expand, should we expect the number of customers, the number of units added in Q4, is there seasonality to those numbers that we should expect a little bit of an increase in the rate at which you're adding both customers and units or should we focus a little bit more on the ARPU lift that you expect on the expand side of that equation?

Michael, I think the amount of customers that we've been adding on a quarter-over-quarter basis has been pretty consistent the last few quarters and we expect to continue to add customers going forward. One thing that I would say is ARPU, obviously, given the additional value added services is something that has the ability to expand at a greater rate as the existing customer base, as well as new customers continue to expand the services that they purchase from us. But what we have seen over the last few customers -- quarters, excuse me, is consistent growth in the number of customers that we've acquired and we've provided some topline guidance for Q4, as well, looking to the next quarter.

That's great. Thanks, Ida. Thank you. Appreciate it.

Thank you.

Bhavan Suri, William Blair.

Hello. Thanks for taking my call and my question, and nice job on the quarter there. Just to start off with, any updates on the competitive environment, and sort of how win rates are trending against guys like Buildium and a Propertyware?

Hey, Bhavan, thanks for the question. From a competitive perspective things have not changed much in our world but we -- our primary competitor is Excel and a number of point solutions. In most cases we are our customers first professional software purchase, and that really hasn't changed. We continue to see a really healthy and strong market and customers very interested in improving their workflow with an all-in-one solution like AppFolio.

Great. Great. And then, when you look at the growth of the business, which has been incredibly healthy on the property management side, when you look at your core existing subscriber base, as they grow, is it because they are adding new properties and acquiring them, or is there sort of a net green field? And when you do those, is that a competitive decision typically, or is it, as you said, just a replacement of Excel moving off of Excel onto the AppFolio platform for the existing base?

So, I would say look there's still a great green field opportunity out there with property managers who are replacing pen and paper and Excel and a number of point solutions for a solution like AppFolio. Then the other thing that we see happening is this is a really great and growing market. There are more and more rental properties coming on the market and more and more landlords are looking for property managers to manage those properties and so our existing customers are growing their portfolios.

One of the things we consistently hear from our customers is that AppFolio helps them eliminate a lot of mundane and repetitive tasks which gives them time to go out and market to property owners and grow their portfolios. And so, we see both of those types of growth, from the green field from new customers who don't have the solutions and from our existing customers who are growing their portfolios.

That's really helpful, actually. Thanks. And then one last one from me.

You obviously did a nice job on sort of the EPF line, and were ahead of our expectations on the bottom line. Any change to your view on when you might achieve profitability or breakeven? I know you sort of laid out a long-term plan, but obviously, you've done a nice job there despite, or in spite of the growth almost. But any update on that, Ida, or do you think that that's still a little ways out?

Yes, Bhavan, what I would say there is we're continuing to invest in the business behind the success that we've had thus far, and are very focused on continuing to accumulate some market opportunity that's ahead of us. We haven't provided any information or update on a break even, or a bottom line performance and are not expecting to do so right now either.

All right. Thanks. Hey, nice job again. Thanks.

Thanks Bhavan.

Brendan Barnacle, Pacific Crest Securities.

Thanks.

I was just looking back at last quarter and the units under management versus this quarter and the customer account. And just trying to on the back of the envelope look at what's going on with our -- the number of units per new customer? Are we seeing a ramp in that in the size of those new customer additions?

Brendan, I think that's actually pretty consistent. I think the average portfolio size is relatively consistent quarter over quarter. It can move quarter over quarter. We do see larger -- more larger deals, more larger portfolio size deals closing in Q4, but in general it's pretty consistent.

And as you think about your move upmarket should we -- as we think about next year start to model in, maybe we get an uptick in that size of those initial portfolios?

Here's what I would say. We continue to see really strong demand from the S&B space, and we consider it to be a real green field. Again, our product is getting more and more sophisticated over time and we'll attract larger and larger portfolios. But that's offset by the fact that a large share of the market is actually in the less than 500 unit space. So there will be a balancing act of a capturing that available market, as well as the product expanding and being able to accommodate larger portfolios.

And Ida, last quarter you had given us just full year guidance, this quarter because all we have left is one quarter we're quarterly guidance. Are you thinking of giving quarterly guidance next year?

You know I'm expecting that I'll be giving annual guidance next year, early next year for the full year. You're right on the math that this time around backing into what we have left, which was the fourth quarter. But yes, I expect to continue to give annual guidance going forward on the revenue.

So there will be no quarterly guidance going forward?

I mean at this point I can say what I expect to do, which is annual guidance.

Okay. Great. Just wanted clarity on that. Thanks.

Thank you.

Ladies and gentlemen thank you for participating in today's conference. This call will be available for replay from November 9, 2015, at 8:00 PM Eastern Standard Time until November 13, 2015, at 11.59 PM Eastern Standard Time. The replay dial-in numbers will be 800-585-8367 and 855-859-2056. This does conclude the program and you may all disconnect. Everyone, have a great day.