Appfolio Inc (APPF) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the AppFolio, Incorporated Q4 and FY15 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. Erica Abrams. Ma'am, you may begin.

Thank you, Chelsea. Good afternoon, ladies and gentlemen. Thank you for joining us today as we report AppFolio's fourth-quarter and FY15 financial results.

I'm joined today by Brian Donahoo, CEO, and Ida Kane, CFO, of AppFolio to discuss our results. This call is being simultaneously web-cast 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, and assumes -- our future financial condition, results of operations, business forecast and plans, strategic plans and objectives and product development plans. Forward-looking statements represent management's belief and assumptions based on information currently available. Forward-looking statements involve numerous risks and uncertainty -- uncertainties that may cause actual results or performance to be materially different from any results or performance expressed or implied by the forward-looking statements.

We discuss these risks and uncertainties in greater detail in the risk factors section of our filings with the SEC. We assume no obligation to update any forward-looking statements today, after today, even if new information becomes available in the future.

And now, I would like to turn the call over to Brian Donahoo, CEO. Brian, please go ahead.

Thanks, Erica. Hello and thanks for joining us today as we report fourth-quarter and FY15 financial results. I am again pleased with our financial progress in the quarter where total revenue grew 54%.

Property management customers increased 40% and legal customer count increased 68% year-over-year. The fourth quarter also wrapped up a strong 2015 for AppFolio. Revenue increased 57% over the prior year.

Our existing customers remain quite happy. We continue to win new customers and execute on our land and expand strategy and we kept a very quick pace of software innovation and development. I am proud of what we achieved in 2015 and in our business to date. We started AppFolio with the idea to create a platform to help small to medium-size businesses grow and compete in specific verticals.

In 2008, we launched into the property management vertical. And with that experience entered into the legal vertical in 2012. The play book is very similar across both industries. Land the customer account with our core functionality and expand the relationship through the addition of Value+ services.

Since then we have made measurable progress against our strategy. As of the end of 2015 our cloud-based solutions are helping more than 14,000 customers automate and digitize their businesses, improve productivity and become even more successful. We have now incorporated thousands of product enhancements into our core offerings, released hundreds of major features and developed five Value+ service platform offerings which contributed 51% of total revenue in 2015.

Turning to more achievements and progress by vertical, in property management 2015 marked our eighth year in business. AppFolio Property Manager provides both a system of record and a system of engagement to our current -- and our current Value+ offerings have helped us to build a very strong customer base and a solid position in a rapidly growing market.

In 2015 we expanded on two important Value+ service offerings, made 400 product enhancements and released 10 major features which helped to drive revenue overall. We added a new feature or enhancement release for our customers nearly every single week of the year.

Early in the year we expanded our contact center solution, enabling customers to completely outsource their property maintenance issues and free up time to focus on managing and growing their businesses. This Value+ service was well received by customers. A property manager customer recently told us our Contract Center service had helped his entire to become more efficient and substantially reduce the number of incoming maintenance calls they received.

We also continued to expand our Payment Platform with online owner contributions. A Value+ service that enables property owners to securely send funds electronically by ACH or credit card to property managers in order to pay for anything from emergency repairs to initial property reserves. This is another major time-saver for our customers.

Similarly, during 2015 we acquired RentLinx, a rental advertising management platform with links to dozens of the most popular rental housing search websites. Since this acquisition, we have integrated this technology in less than one year and are releasing AppFolio Premium Leads in the first quarter of 2016. This new Value+ service is expected to significantly enhance rental lead-generation capabilities for property managers, maximizing marketing dollars and minimizing vacancy times.

The rental economy continues to thrive throughout the US. In 2015 new building starts reached record highs, while rental occupancy rates reached 96%.

We recognized high-growth opportunities in commercial real estate management, which is almost 40% of the total property management market. We are also seeing strong growth in the student housing market where new technologies can easily be applied to improve renter experiences. With the rise of millennial renters, commercial and residential property managers alike are adopting technologies like AppFolio to gain efficiencies and improve customer service across their businesses.

To support these growth trends in 2015, we continued to enhance our features designed for the commercial market, including common area maintenance reconciliation and reporting and unit summary functionality. In student housing we released by-the-bed leasing, student lease improvements, specialized reporting and more. During the year we made important investments in both mobile and texting enhancements to continue to set the standard in providing advanced technologies for property management businesses.

In 2015, we solidified AppFolio's brand, products and customer leadership in the SMB property management market, which we more broadly define as 20- to 3,000-units under management. For 2016, we expect to see more opportunity in the SMB mid-market and are focusing additional product and sales attention to this area. We expect these efforts to grow units under management and achieve operating efficiencies as well as advance our product usability overall.

And now turning to the legal vertical or MyCase, we are experiencing much the same customer enthusiasm and solid progress as we are in property management. 2015 concluded our third year of growth in MyCase, with customer accounts reaching 6,100, up 68% year-over-year.

During 2015 we released product enhancements to MyCase customers nearly every other week. Releases include foldering and document management which allow legal customers to easily and securely organize their documents through one central system. We also continued to expand our Payments Platform for MyCase customers, releasing free ACH payments, enabling our attorney customers to get paid faster via online payments.

The pace of development and commitment to deliver our great service continued to translate to real business value. Our MyCase customers report that we are saving them one or more hours per day thereby decreasing staffing costs and increasing billable hours.

Our development initiatives in 2015 were important precursors to future enhancements. In the future, we will focus more on expansion as a part of our land and expand strategy in the legal vertical. Specifically, we intend to develop Value+ services and extend beyond websites and free electronic payments to further enhance the efficiency of our legal customers.

Across our business in 2015 and since the beginning, our entire company has remained focused on providing outstanding customer experiences. We know that happy customers are the foundation of our success. In 2015, we continued to track net-promoter scores to stay close to customers and use their feedback as an integral part of our product-development strategy.

We are one of the only software providers in our vertical to post uncensored customer feedback right on our website. This level of transparency is highly valued by our customers.

We also hosted 65 in-person customer events and meet-ups across the country during the year. At these events customers were able to talk with one another, learn about industry issues and hear more about how AppFolio can solve their business problems. We think happy customers are a function of happy employees, and satisfied, engaged employees translate to amazing customer service.

To that end, AppFolio recently won two prestigious best-places-to-work awards, including the Glassdoor Employees Choice Award. So thank you to our employees for continuing to make AppFolio a great place to work and thank you to our Investors, Board Members and customers for your continued support of AppFolio.

In closing, 2015 was an important year of advancement and growth for AppFolio from customer satisfaction to product leadership to continued innovation. We achieved many important milestones including our Initial Public Offering which strengthened our balance sheet and positioned us for further expansion.

As we look to 2016 we are excited about growth opportunities ahead. We will remain focused on our key strategic priorities, while also evaluating expansion opportunities and prioritizing long-term sustainable growth. We know the recipe for success and we look forward to talking to you more about our accomplishments throughout 2016.

Now I would like to turn it over to Ida to review the fourth-quarter and fiscal-year and give you more information about our financial outlook for 2016.

Thanks, Brian, and thanks to all of you for joining us today as we report our fourth-quarter and full-year 2015 results. Total revenue for the quarter was $20.4 million, up 54% from $13.2 million reported one year ago. As a reminder, we break out revenue into three distinct categories: core solutions, Value+ services and other services.

Core solutions revenue was $9 million in the fourth quarter, up from $6.4 million in the same quarter of last year, reflecting a 40% increase. Growth in subscription revenue for our products was driven by the increase in new customers as well as strong customer retention.

To this end, we closed 2015 with approximately 8,200 Property Manager customers reflecting an increase of 40% from a year ago, and more than 6,100 law firms, reflecting an increase of 68% year-over-year. At the end of the year our Property Manager customers managed approximately 2.15 million units in their portfolios, up from 1.68 million units one year ago, reflecting a 28% increase year-over-year.

Value+ services revenue was $10.1 million in the fourth quarter, up from $5.9 million one year ago, reflecting a 71% increase. Growth in Value+ services revenue was primarily a function of growth in overall customer count as well as growth in the number of units under management for property management customers. In addition, Value+ revenue captured the increased adoption and usage of these services by our customer base.

Each of our Value+ services separately experienced revenue growth year-over-year although the majority of the growth in absolute dollars came from increases in revenues earned through our Electronics Payment Platform and our Resident Screening Services Platform. Other services revenue was $1.3 million in the fourth quarter, up 44% from $900,000 a year ago.

This growth was driven primarily by incremental revenue related to the acquisition of RentLinx and the increase in on-boarding of new customers to our platform. Annual dollar-based net expansion rate in our Property Manager vertical was 115%, reflecting our single-digit annual churn consistent with prior years.

In our legal vertical, our annual dollar-based net expansion rate was 99%, also consistent with prior years. These rates measure revenue growth for the subset of customers that existed at the beginning of 2014, and their full-year revenue growth in 2015, versus 2014, net of churn. This metric is highly influenced by the timing of Value+ service product launches and adoption cycles of those services in any given year, as compared to those released for the prior-year.

For the remainder of my prepared remarks, unless otherwise noted, I will discuss non-GAAP results, which exclude the impact of stock-based compensation expense. A reconciliation to the corresponding GAAP results can be found at the end of the press release issued today, linked to our investor relations section of our website, appfolioinc.com.

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 a result, during 2015 our headcount and associated personnel costs increased significantly in absolute dollars to support our growing business. We expect to invest in our business in the future as we grow and execute on our long-term strategy. At year end we had 573 AppFolians serving our customers and shareholders, up from 377 a year ago, reflecting a 52% increase.

Cost of revenue, excluding depreciation and amortization, increased in absolute terms to $9.4 million for the fourth quarter, up from $6.4 million a year ago, improving on a percentage of revenue basis to 46% of revenue, from 49% in the fourth quarter a year ago. Sales and marketing expenses increased in absolute terms to $7.1 million for the fourth quarter, from $5.3 million one year ago. On a percentage basis, sales and marketing expense was 35% of revenue in the fourth quarter of 2015, down from 40% a year ago.

We are pleased with these early signs of operating leverage we are seeing in our business model. We also experienced operating leverage in research and development expenses as it increased to $2.6 million from $1.9 million a year ago. R&D expenses were 13% of revenue during the fourth quarter of 2015, improved from 15% a year ago.

Our general and administrative expenses were up slightly to $3.1 million for the fourth quarter. G&A expenses were 15% of revenue as compared to 17% in the fourth quarter a year ago. Stock-based compensation that went through our P&L in the quarter was $384,000.

Non-GAAP EBITDA, adjusted for stock-based compensation, was a loss of $1.7 million during the fourth-quarter of 2015, which compares to a $2.7 million loss in the fourth quarter a year ago. This represents an improvement of 37%.

We are beginning to report and look at non-GAAP adjusted EBITDA as a measure of operating performance. Weighted-average common shares outstanding, used to calculate loss-per-share in the fourth quarter, were 33.4 million. Given the timing of our IPO and issuance of additional shares, our FY15 weighted average common shares were 21.3 million.

Moving to the balance sheet, we closed the year with approximately $57 million in cash, cash equivalents and investments with no debt. We used approximately $3.1 million in cash for operations in the quarter, $1.5 million for capital expenditures and $2.3 million for additions to our capitalized software.

To recap the year, total revenue for 2015 was $75 million, representing 57% growth year-over-year. Adjusted EBITDA margins for the fourth-quarter improved by 37% year-over-year, demonstrating the operating leverage we are starting to experience in the business.

Turning to our first full-view on full-year 2016, we expect revenue to be in the range of $100 million to $104 million, which represents year-over-year growth of 36% at the midpoint of the range. We expect weighted-average shares outstanding for the full-year of approximately 33.7 million shares. Although we expect quarterly results to continue to vary going forward, given our focus on long-term sustainable growth, we anticipate continued improvements in our operating and adjusted EBITDA margins in 2016, and expect to reach positive adjusted EBITDA by early 2017.

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

Thank you.

(Operator Instructions)

Brian Essex, Morgan Stanley

Hi, good afternoon and thank you for taking the question. I was wondering if we could just touch upon some of the unit growth in the model, it looks like it came in a little bit lighter than expected and how the drivers of the model may influence your guide for 2016? Recognizing, of course, that you're also -- it looks like you're going to be a little bit more profitable earlier than we expected.

Brian, thanks. Let me take part of that. Ida can also touch on parts of it around the model.

The property management market -- we're really happy with the growth that we've seen and the market position that we have with smaller property managers. We focus on the SMB segment of this market. This is customers with portfolios between 20 and 3,000-units. We're not focusing at all, remember, on the enterprise market, really the SMB market.

In 2016, one of our big focuses will be the SMB mid-market, which we say are about 500 units and higher. We've really become the de facto standard for smaller property managers and for property managers buying professional software for the first time, and we will focus a lot more specific marketing and product resources on building demand for this SMB mid-market product. And, Ida, if you want to talk a little bit more about the model implication?

Sure. As you know, our business model is predicated on land-and-expand and so we are really happy with the units and customers that we've brought in in 2015, and expect to continue to add to that in 2016 as the business grows, both on the property management side as well as the legal side.

Also, just to add to that, I think in Brian's prepared remarks he talked a little bit about new Value+ services that will continue to layer on additional revenue streams for us with our existing customers as well as our new customers. So we are really excited about that going into 2016 as well.

Great, maybe just a follow up. I noticed the pricing increase on the core service. What, besides incremental value-add services, any pricing increases there? And then how -- what is the strategy for folding those into the install base?

In 2016 we did rollout new pricing, earlier this month. It's for new customers. It's the first time we've increased our price in eight years.

We've continued to hear feedback from our customers that our value exceeds our price and with that we are evaluating the impact of the price increase on customer demand and satisfaction, and we are still determining how we will roll out those price increases to existing customers over time. But again the key for us is to really make the price transparent and simple and easy for our customers over time.

Got it, thank you, very helpful. I will jump back in the queue.

Thanks, Brian.

Michael Nemeroff, Credit Suisse

Hello, guys, thanks for taking my questions. Just a follow-up on one of Brian's questions. I am just curious what the impetus was to focus in on larger customers, and have you seen any competitive change in the landscape at the lower end of the market?

Hello, Michael, thanks for the question. Look, I would say we have really figured out how to scale the low-end of the market. It has become certainly an easy part -- an easier part of our business to build demand in than to close deals in. And as we continue to want to grow and do more, it just makes sense for us to move to the, what we consider the SMB mid-market, and to focus effort and resources there.

From a competitive perspective, we haven't seen great changes in our market. But again, remember, the SMB market that we focus on is between 20 and 3000 units and the competitive landscape hasn't changed at all in Q4 or in 2016.

Thanks, Brian, and as a follow-up for either, related to that, as you start to make efforts and then build out the mid-market effort, specifically, are you going to be spending more on sales marketing? Are you going to be hiring a sales force? Just give us a sense of what different infrastructure you need to attack the mid-market as opposed to going after the low end of the industry?

Yes. Thanks, Michael. So you know we sell into this customer base today, and so I would say that we are going to do more of the same that we have been doing. I might think about it a little bit more from an allocation of resources, of where we would hire additional resources might be, in our mid-market sales group.

But the reality is we do this today and it's built into the margins that we have today and the operating leverage that we have been seeing so I don't expect a significant change there. But we will learn and we'll talk about if there is.

And do you anticipate that the number of units that you add in 2016 will be above the level of 2015? Because of this shift?

That's the goal.

Okay. Thanks very much for taking my questions.

Yes, thank you.

Bhavan Suri, William Blair.

Hi, guys, thanks for taking my question, and it's good to see some of the -- (technical difficulty)

You are cutting out on our side, Bhavan.

Okay, is this better, Ida?

Yes, we can hear you now.

Great, thank you.

Hi, Bhavan. We're losing you --

--in particular Value+ services

Oh, sorry. We just lost you again. (Multiple speakers)

Let me try this again one more time. It's on the Value+ services, are you seeing -- which ones were driving the strength there?

Yes, so all of our Value+ services increase year over year. We've talked previously about seasonality that we have in our screening services, which impact the Q3 to Q4 growth in screening. But from an absolute dollar perspective, the two that add the majority of revenue year over year are the Payments Platform and the Resident Screening Platform.

We obviously have newer value-added services that have been released in the last year that are gaining momentum and adding to revenue but just aren't at that same level of revenue growth as payments and screening.

Got it. Got it. And then just as you head up this mid-portion of the SMB market, the mid-size portion, does it mean less competition from Propertyware and Buildium? And then, do you worry about the RealPages and the Yardis being a little more competitive? Or is it truly no real change in that sort of say 500- to 3,000-unit market?

Hi, Bhavan, I will take that one. In that market, certainly I would say the competitors that you mentioned aren't as competitive as the unit-count grows. Additionally, we don't see strong product competition from Yardi and RealPage in that space either, but we are oftentimes replacing a more legacy system.

At the smaller part of the SMB market we are often replacing paper spreadsheets and we're usually the first professional property management system that the smaller customers might buy. In this SMB mid-market, we are usually replacing an older existing system and that might be a Yardi system.

Got it, that's helpful. And then one quick last one on the legal side, obviously nice growth there, too, but that's obviously a more competitive environment. Just any sense on competitive trends in that space and then, given sort of the macro sort of jitteriness, are you seeing anything from even smaller law firms yet about spending patterns? Like they would rather do paper spreadsheets than technology, or does that still seem pretty open in terms of opportunity?

I would say in general, the small and solo legal professional market still seems like a great and growing opportunity. We see no changes in terms of competition and I think our growth certainly indicates that, last year. And we've seen no change based on macro indicators that you brought up. Lawyers are still looking for ways to operate their businesses more efficiently and by doing so, they are able to gain more billable hours and make more profit. So we haven't seen that jitteriness.

Got it. Great, thanks for taking my questions guys. Appreciate it.

Thanks, Bhavan.

Thank you.

(Operator Instructions)

Brendan Barnicle, Pacific Crest

Thanks so much. Ida, I wanted to follow up on the seasonality comment around the value-added services.

You've mentioned that before, but as it becomes a bigger part of revenue mix, should we be thinking about seasonality with that any differently this year than say last year? Given the size, the mix of services that are offered, any other dynamics that we should be thinking about it as we model it this year?

Sure, good question. So given the portion of revenue right now that comes from the property management side of the business, and then within that the screening-revenue percentage of Value+, I would say that 2016, you should think about that again the same that we did in 2015; which is screening revenue, we expect that screening revenue will sequentially decline between Q3 and to Q4.

Value+ services overall has increased in the past or stayed pretty flat in those consistent periods because of growth of other Value+ services and I would still expect that to be the same, right now. Now, to the extent that there are additional Value+ services that we introduce in the future that have other seasonal components, we would be sure to talk about that as it's warranted.

But there's nothing that's new this year that's going to change -- or that you are anticipating no change seasonality at all for this year?

I am still expecting to have seasonality in the screening services, so that's correct. I am not expecting anything will change there.

Great. And, Brian, you mentioned all the new features and products that you guys introduced over the last year. What are the big things we should be looking for, for this year? What are the things you're most excited about in terms of the product opportunity side?

Yes. In my remarks, I talked about the acquisition of RentLinx, and us turning that into a product that's called AppFolio Premium Leads. The product was just rolled out to all customers this week and it allows them to consolidate their marketing spend across a number of listing sites through AppFolio and pay for qualified leads that are generated.

Our early experience with customers with this product was very favorable and we're watching the rollout across our customer base very actively right now. We are early in the leasing season which begins in spring and summer so the product came to market just in time and we are excited about it.

Great, thanks so much. Appreciate it.

Thanks, Brendan.

Ladies and gentlemen this concludes today's question and answer session. This conference will be available for replay after 8:00 PM Eastern Standard Time today, February 22, 2016, through 11:59 PM Eastern Standard Time on February 26, 2016. You may access the replay system at any time by dialing 800-585-8367 or 855-859-2056 and entering the conference ID number 35780476.

Those numbers again are 800-585-8367 and 855-859-2056. Conference ID number 35780476. Thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.