Appfolio Inc (APPF) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the AppFolio first-quarter 2016 financial conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Miss Erica Abrams. Ma'am, you may begin.

Thank you, Crystal. Good afternoon, ladies and gentlemen. Thank you for joining us today as we report AppFolio's first-quarter 2016 financial results. I'm joined today by Brian Donahoo, CEO; and Ida Kane, CFO of AppFolio to discuss our results for the quarter. This 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 and are subject to considerable risks and uncertainties. These forward-looking statements may relate to our future expectations and future financial conditions. They may vary based on results of operations, business forecast and plans, strategic plans and objectives, and product development plans.

Forward-looking statements represent management's beliefs and assumptions based on information currently available. Forward-looking statements involve numerous risks and 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.

Hello, and thanks for joining us today as we report our first-quarter 2016. I'm happy with our financial performance this quarter as we report revenue growth at 46% year over year to $23.2 million, and a non-GAAP net loss of $0.09 per share. We executed well against our top strategic priorities of keeping customers happy and successful, acquiring new customers and expanding units under management, broadening our product offerings and total addressable markets, and driving the adoption of Value+ services.

We also made solid progress toward realizing operating leverage from the Business, with the goal of reaching positive adjusted EBITDA by early 2017. This is an important milestone, which gives is powerful flexibility for the future.

In addition to financial and strategic progress, each quarter marks another advancement in the development of the AppFolio Business System, or ABS. ABS is our approach to addressing similar fundamental business needs of SMBs across different verticals. It acts as the playbook for our technology platform, product development process, domain expertise, marketing sales, and customer interactions. We continue to make progress with ABS during the first quarter, which will enable operating leverage as we grow in our existing or new verticals over time. And now, let me share more details about our progress by vertical market.

In property management, customer count increased 36% to 8816. This reflects continued strong demand for our software as property managers increasingly move online and digitize their businesses. As you remember from last quarter, we are focused on capturing more opportunities in the SMB midmarket in 2016, and are increasing our marketing sales and product focus in this area.

To better serve this market opportunity, we developed and released support for more complex online lease renewals, bulk invoice approvals, integration with utility submetering, and all of these features are designed to streamline and improve the experience for customers, who are supporting larger unit portfolios and more intricate workflows.

We had an exciting Value+ service release in property management in the first quarter AppFolio Premium Leads. It launched right in time for the leasing season. This is our first foray into providing a software solution, which will capture a piece of the advertising dollars our customers already spend in the leasing process. One year to date after the acquisition of RentLinx we have successfully integrated the technology into our Value+ offerings. This is important not only because the expect the offering to be well received by customers, but because his demonstrates our ability to seamlessly acquire and integrate technology into our platform.

Our Premium Lead offering expands the vacancy advertising options available to property manager customers allowing them to quickly and easily boost their marketing efforts and syndicate selected listings to top pay-to-list rental sites right from within the AppFolio property manager software. Property manager customers benefit from the additional abilities to better spend, track, and optimize their marketing investment, and manage all vacancy postings from one place.

One of our first Premium Lead customers, Brian Haynes of Haynes Properties recently said, we used to pay listing services hundreds of dollars per month per property to drive Web traffic to our vacant units. Many of the leads were unqualified, so it was a waste of time and money. By switching to AppFolio's Premium Leads, we were able to save money and increase lead quality. We are very pleased with the early progress in this offering.

And further on the topic of innovation, we are evolving our entire property management solution to mobile formats, moving well beyond simplified mobile apps to provide the same deep level of functionality on both mobile and desktop environments. We've learned that our customers want to accomplish more and more complex activities on their mobile devices, ranging from accounting, to reporting, to marketing. It is exciting to see how quickly customers are adopting this more sophisticated mobile functionality. In the first quarter alone, we have seen logins via mobile device increase 140 % over the prior quarter, and we think that is only the beginning of what will be a major shift in the digitization of property management. AppFolio is leading the way in mobile and focused on becoming the most mobile-friendly solution in property management.

And now, turning to the legal vertical, MyCase customers increased 61% to 6834 firms in the first quarter, as we leverage our sophisticated marketing and sales engine to win new customers. We released several new innovative features throughout the quarter, with the focus on enabling deep collaboration between law firms, their customers, and other partners. We are enhancing our Value+ payments offering in this vertical in 2016, further extending our land-and-expand strategy. And today, we commemorate Law Day and the 50th anniversary of Miranda rights in partnership with the American Bar Association at NASDAQ's market site.

This year, the president of the ABA is our featured speaker for an evening of networking, fun, and topics of interest for MyCase customers and prospects throughout the New York Metro area. This event underscores our commitment to the legal industry, continuing our investment in educating small practitioners on how to run a more successful and efficient business.

Customer satisfaction remains high in the quarter. We were active in both verticals, conducting meetups and other customer networking and educational events to facilitate our customer feedback loop and ensure customer satisfaction. Maintaining a strong commitment to customer service is a core part of our business, it's critical to our customer success and plays an important role in our consistently high customer retention.

In summary, our momentum continued in the first quarter, and we are off to a strong start to FY16. As we look to the remainder of the year, we remain committed to our strategy of keeping customers happy, acquiring new customers and expanding units under management, broadening our product offerings and driving the adoption of Value+ services. Our success to date is the direct result of the hard work and dedication of our employees, the commitment from our customers and continued support from Board members and investors. Thanks to all of you for your contributions. And with that, I'll turn the call over to Ida for a more detailed financial review of the quarter.

Thanks, Brian. We had a strong start to our 2016 year. Total revenue for the quarter was $23.2 million, up 46% from $15.8 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 $9.8 million in the first quarter, up 37% from the same quarter of last year. Growth in subscription revenue for our product was driven by an increase in new customers, an increase in average size of our new customers, and strong customer retention. To this end, we closed out the first quarter 2016 with approximately 8800 property manager customers, reflecting an increase of 36% from one year ago, and 6800 law firms reflecting an increase of 61% year over year. At the end of the quarter, our property manager customers were managing 2.3 million units in their portfolio, up from 1.81 million units one year ago, reflecting a 27% increase year over year. The increase in units drives additional core solution revenue, as well as incremental Value+ revenue.

Value+ services revenue was $12.3 million in the first quarter, up 59% from one year ago. Growth in Value+ services revenue was primarily driven by increases in customer count, and by the success of our land-and-expand strategy, with increasing units under management for our property manager customers. Each of our Value+ service offerings 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 resident screening services platform.

As Brian discussed, we released AppFolio Premium Leads during the first quarter. Revenue generated from customers using AppFolio Premium Leads to our property manager platform will be included as Value+ services revenue. Our legacy RentLinx revenue continues to be recorded in other services.

Other services revenue was $1.2 million in the first quarter, up 18% from one year ago. This growth was driven primarily by the incremental revenue related to the acquisition of RentLinx that closed in April 2015.

For the remainder of my prepared remarks, unless otherwise noted, I'll discuss non-GAAP results, which exclude the impact of stock-based compensation expense. The reconciliation to the corresponding GAAP results can be found at the end of the press release issued today, linked to our investor relations site at www.appfolioinc.com. As I review operating results today, I will discuss both year-over-year and your sequential quarter results.

As we have discussed, we are focused on our long-term sustainable growth and stockholder value, and we'll continue to invest in our Business for the long-term best interest of the Company. This results in expenses today which may not result in revenue until subsequent periods. Nonetheless, we are starting to experience operating leverage and we anticipate improvements in our operating margins over time. At March 31, we had 601 AppFolians serving customers and shareholders, up 40% from 430 one year ago, and up 5% from 573 in the prior quarter.

Cost of revenue, excluding depreciation and amortization, was $10.5 million or 45% of revenue in the first quarter, as compared to $9.4 million or 46% of revenue in the prior quarter. The same metric one year ago was 44% of revenue. Sales and marketing expenses were $7.5 million or 32% of revenue in the first quarter, as compared to $7.1 million or 35% of revenue in the prior quarter. The same metric one year ago was 36% of revenue. We are pleased with the operating leverage we're gaining in our sales and marketing model.

Research and development expenses were $3 million or 13% of revenue in the first quarter, as compared to $2 million, flat as a percentage of revenue in the prior quarter and year-ago period. We expect to continue to invest in R&D to expand our product offerings in the vertical markets we serve. General and administrative expenses were $3.2 million or 14% of revenue in the first quarter, as compared to $3.1 million or 15% in the prior quarter. The same metric one year ago was 21% of revenue. We again are pleased with the continued leverage we have gained in G&A expenses as a percent of revenue. Stock-based compensation that went through our P&L in the quarter was $463,000.

Non-GAAP adjusted EBITDA was a loss of just under $1 million in the first quarter of 2016, as compared to a loss of $1.7 million in the prior quarter. This represents a sequential quarter improvement of 42%. As we discussed with you last quarter, we are beginning to report and look at non-GAAP adjusted EBITDA as a measure of operating performance, and continue to target positive adjusted EBITDA by early 2017. Weighted average common shares outstanding used to calculate loss per share in the first quarter was $33.5 million.

Moving to the balance sheet, we closed the year with approximately $52 million in cash and cash equivalents in investment securities, and no debt. We used approximately $740,000 in cash for operations in the quarter. $1.9 million for capital expenditures and $2.2 million for addition to our capitalized software.

In summary, we had a strong start to the year, and are encouraged with the operating leverage we have gained. As we look to the remainder of the year, we are maintaining our outlook for revenue in the range of $100 million to $104 million, which represents year-over-year growth of 36% at the midpoint of the range. We are committed to continued improvement in our operating model 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.

Thank you.

(Operator Instructions)

Brian Essex, Morgan Stanley.

Hello, good afternoon. Thank you for taking the questions.

I was wondering if we could start by maybe digging into the Value+ services just a little bit, and the impact that RentLinx may have had on the quarter, and specifically, I am interested in not just the revenue contribution, but also on the margin. I believe that Value+ tends to carry with it a lower gross margin, so how should we think about the addition of this, of RentLinx onto the platform, going forward?

Sure, Brian. Good question. So, for the quarter that we just finished, RentLinx was a very small part of our revenue. Think of it as, significantly less than $100,000, we're just launching the product. So, from a go-forward perspective, we are really excited about the opportunity it brings us expanding into a new area of property manager spend, being the advertising spend.

From a margin perspective, it does come to us at approximately a 50% after direct cost to revenue associated with it margin. But it adds in a very nice way to of our operating leverage over time. There aren't a lot of incremental costs that we will incur in supporting it over the long-term, so think of it as adding significant, potentially significant operating margin dollars to the Business.

Got it. And maybe on operating leverage. Nice leverage in the quarter. G&A costs below where they were last year, from what I can see. Where are you primarily getting that leverage from? And what can we expect -- I understand you're going to plow back into R&D and that, but what can we expect in terms of areas where you are going to gain the most leverage, and how do you think about that drop in G&A, versus where we were last year?

So, I think G&A last year in the first quarter was about $3.3 million this year, and that is including stock-based comp, this year $3.5 million including stock-based comp. Remember this year -- last year we were not a public company. So, I would say that may be accounts for a little bit of the difference in the stock-based comp expense that you are seeing there, but otherwise, I think the last couple quarters we have been relatively stable in G&A.

Got it. So, is that where we should see the most leverage going forward?

We've certainly seen some leverage there over the last couple of quarters, and we will continue to invest as we need to support the growing organization, but obviously, the costs don't directly correlate to an increase in revenue.

Is there -- maybe this is to put a finer point on it, in terms of upside to the quarter that you may have realized, how do you prioritize the spend for that upside and what you might kind of let fall through to the bottom line?

So, in the past we have talked about the understanding that we had some directly correlated costs in cost of revenue, right? So as revenue grows, we'll have some third-party costs that will continue to grow directionally to the growth in revenue. And as we have seen again we continue to invest in R&D, obviously, which is strategic to us short-term and long-term, both addressing the needs of our customers, as well as expanding into different revenue opportunities. So, I think what you have seen come through in the business model the last couple of quarters, which is on the selling and marketing side as well as the G&A side, are additional opportunities for increased leverage in the future.

Got it. Okay. Thank you very much.

Thanks, Brian.

Thank you. Michael Nemeroff, Credit Suisse.

Hi, guys. Can you hear me okay?

Yes, we can.

All right. Thanks for taking my questions. Nice job on the quarter.

Couple questions. Last quarter, I know it is early days, but can you just give us a sense on the progress, last quarter you talked about heading upmarket a little bit, the midmarket. Maybe Brian, if you could tell us about some of the preparation that you have been doing and some of the progress that you have made there?

Sure. Yes. Michael, you know that we focused on the SMB segment of the property management market, and these are customers that have unit portfolios, real estate portfolio between 20 and 3000 units. As a reminder, we're not focusing on the enterprise space, which we would say is probably 10,000 units and higher.

We have become the de facto standard for the first-time buyer in the property management market and the small property manager. And we've really figured out how to scale that side of the business, and over the last quarter, we've really aligned and focused our resources on prioritizing prospects with higher unit counts. I would really characterize it as an alignment of our existing resources, of our marketing and our sales support resources more than anything else.

And early progress is good. We have seen average unit size in the quarter for new customers increase significantly. We are happy with that. We expect to see that trend continue. We will have some variability, but we will see it continue. We are committed to this small and medium-sized business space, and I think we are doing a smarter job of aligning resources on higher-value targets.

That is great. Maybe, Ida if you would, I know you don't like to give out some of the quantitative details, but maybe if you could qualitatively just discuss ARPU and the trends that you saw in the quarter, and whether you were pleased or displeased with the different sides of the business, both in the legal and the APM verticals.

Yes. Sure. So, I guess what I would say there is, we are very pleased with the results that we had in the quarter. If you look at revenue on a sequential-quarter basis, we had talked about Q4 being lower Value+ revenue, specifically in the screening market, and we had anticipated, as we have seen in the past, that that comes back to us in Q1, and it did again this quarter.

So, we feel like we are making steady improvements or increases in ARPU as our customers continue using the Value+ services that they are using and then expand into additional Value+ services that we have offered, the latest one being Premium Leads on the property management side, which we are excited about as well. So, we are pleased with the progress in ARPU. On the legal side, it has been pretty steady as well with the Value+ service that we have there, and so, we continue to work on expanding both the number of customers we bring in, as well as the revenue per customer.

Great. And then just lastly, Ida, you had mentioned adjusted EBITDA positive by early 2017, would you expect that all of 2017 will be full-year adjusted EBITDA profitable, or just to get to that level by early 2017? Thanks.

Sure. Thanks.

I guess what I would say there is that we continue to obviously make decisions to grow the long-term -- to create a long-term sustainable growth engine for our shareholders, and from time to time we are going to make investments that could impact via short-term be it a quarter or two, but we are seeing leverage in our model, and we continue to focus on expanding that leverage in the form of adjusted EBITDA positive by early 2017. So, we are excited about where we are.

Okay. Thanks for taking my questions. Thank you.

Thank you.

Bhavan Suri, William Blair.

Hello, guys. Thanks for taking my question. Nice job there.

I just wanted to touch first on sort of when you look at the Value+ services, you commented that some of it had come back. Growth had tapered down there a little bit, even from the year-ago period of last quarter. So when you look at that, and just some color on what you are seeing in terms of strengths and weaknesses, some of the particular Value+ services, the website, the payments, background check, et cetera.

Just more color on each one of those, how those have been performing due to the expectations. Some did well, but it felt like growth slowed there a little bit.

Yes. I'd say we are really pleased with the results across the board and feel good about the growth and expansion that we have had in Value+ services, across the board. So, I am not sure that -- I think there is certain visibility that you have, but under the covers there is positive growth across the board there.

Okay. Okay. When you look at the pattern, and you guys had talked about this historically, what gets adopted together, what gets adopted first. Any color on sort of has that changed at all, or are those still pretty consistent in terms of what new customers will start adopting from Value+ services and sort of how those expand?

I'll take that one. We have not seen any change to that. We have a large number of Value+ services, most of them really mission-critical to our customers' business. Most of our customers adopt our payments platform, which was really a number of revenue sources, as well as our background screening services, kind of out of the bat. A large number also adopt our website services, but we have not seen any change to those adoption rates. I think the other thing that is important to understand on that is adopting is one thing, but also we need our customers to use those services, and our customers are using those -- continue to use those services at record rates.

I'll also remind you there is some seasonality to the screening business, which is a large part of Value+ services in Q4, as residents are less likely to move during that period of time, so those rates to go down a little and then they bounce back in Q1, and they certainly did bounce back in Q1 this year. Does that help you with the question?

Yes. It does. That is helpful.

And then one quick one on sales and marketing. I think there have been a couple questions on leverage, and certainly a nice job there.

When you look at the sales and marketing model, you've obviously sort of shifted some of the acquisition costs towards targeting some of these -- let's say slightly larger customers. Is the efficiency of cost still driven by the leverage in the inside sales model, or is it a lot of broader strategic thinking about lowering sales and marketing costs, vis a vis getting the property [earlier]? How should we think about how you guys have approached that?

We really just aligned resources to focus more intently with our inside sales model. That is really what we're doing. We are focusing kind of our resources on those larger opportunity customers, but really we're doing it with the same set of tools that we have been using.

I would not say that that is an area that we are intently focusing on as -- in terms of cost reduction or efficiency as we get to profitability, as we're looking at all parts of the business for that. But really, in that area we are doing more with what we have, and we're aligning resources to the higher opportunity targets.

Got it. That is really helpful.

And then a quick update on the competitive environment, largely in legal. How are win rates looking, and that tends to be -- the property management business is becoming de facto, but how is the legal, sort of competitive landscape looking, any change there? And maybe some color on win rates, that'd be really helpful. Thank you.

I'll take that one as well. We added around 689 new firms during the quarter. It was a record for firm growth for us, so I would say there is still a big greenfield opportunity there.

The small and medium-sized solo practitioners are really overlooked in terms of the technology world today, so we have not seen any significant change to the competition in that area -- much like property management. We are not usually selling against an incumbent, we're selling against paper and pencil and a lot of other solutions, and we're usually the first system of record that small and solo practitioners are buying.

Great. Thanks for taking my questions. Brian and Ida, that was helpful.

Thank you.

Brendan Barnicle, Pacific Crest Securities.

Thanks so much. Ida, following up on Brian's question on gross margins. Given the impact from RentLinx, can we assume that gross margins have bottomed in Q1?

Brendan, I guess what I would say there is, we've talked before about how the revenue mix impacts our gross margin, so to the extent on an individual product basis, there are some third-party costs associated with them, so to the extent that the amount of revenue coming from one of those Value+ services fluctuates or gains significant traction vis-a-vis other ones in a particular quarter, there could still be fluctuation. I think we have seen in the past in Q4 an increase in our cost of revenue as a percentage of revenue, based on the decline in screening revenue, for example. My expectation would be that that could continue in the future, as it has in the past.

Now, what I will say is, we continue to gain leverage in some aspects of our, and look at, other aspects of our cost to revenue costs in total to gain additional leverage over time, and so, we are working on offsetting some of those costs as well. But I would not say it is forever going to improve from here on out. There will be fluctuation.

Great. That's helpful. And Brian, you mentioned the increase in number of units and new customers, and we calculated that as well.

Now, we have seen, as a result, not surprisingly, sort of a deceleration in your new customer additions. Where do you think that balances out? When do you think you hit the sweet spot of you are at that optimal size that you're going to go after in the we can start to see maybe that customer count number start to accelerate growth again?

Yes. We had a great quarter there, and we are happy with the balance that we have seen between the number of customers and their average portfolio size, as you've noted. That is going up, and again that is really a result of our aligning resources, sales, and marketing, and other resources aligned against the highest-value prospects. I think we will continue to see that trend over the year.

I don't know how to tell you where it is going to balance out. I think you should just expect to see continued progress towards that throughout the year. I think we are relatively early in making those adjustments and seeing the results of those adjustments.

Great. And then lastly, when do you think you will be at a point where you might start to break out the contribution from legal?

What we have talked about before is to the extent that the revenue becomes 20%-plus of the Business that we would break that out. So, we are still south of 10%, so I would expect to still be a way's out here.

Great. Thanks, guys.

Thank you so much, Brendan.

Thank you. I'm showing no further questions at this time.

Ladies and gentlemen, this conference will be available for replay after 8 PM Eastern Standard Time today, May 9, 2016 through May 13, 2016, at 11:59 PM Eastern Standard Time. You may access the remote replay at any time by dialing 1-855-859-2056, and entering access code 93220882. This does conclude our conference for today. Thank you for your participation in today's conference. You may now disconnect at this time.