Appfolio Inc (APPF) 2016 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the AppFolio, Inc. second-quarter 2016 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 conference call is being recorded.

I would now like to introduce host for today's conference, Miss Erica Abrams. Ma'am, you may begin.

Thank you, operator. Good afternoon ladies and gentlemen. Thank you for joining us today as we report AppFolio's second quarter 2016 financial results.

I'm joined today by Brian Donahoo, CEO and Ida Kane, CFO of AppFolio to discuss results. 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 statements. These forward-looking statements may relate to future plans and financial conditions, results of operations, business forecasts and plans, strategic plans and objectives and product development plans. 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 risks and uncertainties in greater detail in the risk factor section of our filings with the SEC. Forward-looking statements are based on assumptions as of today and 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.

Thank you for joining us today as we report our second quarter results. I'm happy with another quarter of strong financial performance, where revenue increased 42% year over year to $26.2 million, and non-GAAP net loss improved to $0.03 per share.

As a result of our strong year-to-date performance, we're raising our revenue outlook for the year. We remain focused on our top strategic priorities of keeping our customers happy and successful, expanding our customer base, supporting our customers' growth through the adoption of Value+ services and broadening our product offerings and total addressable markets.

We continue to make progress in realizing operating leverage from our business, which is expected to give us flexibility for the future, and, to that end, we realized positive adjusted EBITDA of $1.1 million during the quarter. This is an important milestone for AppFolio, demonstrating the operating leverage in our business.

In our property management vertical, our customer accounts increased by 32% year over year in the second quarter. In addition, our sales and marketing funnels continue to deliver higher average net units per new customer in the first half of 2016 versus 2015, reflecting our early success and serving larger SMB customers.

During the second quarter, we released accounting-specific features designed for property managers with homeowners associations as part of their portfolios. These enhancements better support mixed-use property managers, an increasingly important segment of our customer base. In addition, we developed features that enable our customers to better serve and communicate with their renters, adding to it texting, email enhancements and calendar features that deepen our role as a system of engagement for our customers.

We also expanded existing functionality to enable customers to identify their best-performing marketing channels during the leasing process. Because we're both the system of record and the system of engagement, AppFolio is uniquely positioned to provide powerful data that allows customers to track their lead-to-lease investments, helping to provide the industry's best set of closed loop marking performance information available today.

In addition to product enhancements, we focused on innovating to further drive adoption and revenue with existing customers by our land and expand strategy. As you recall, in Q1 we released Premium Leads, and in Q2 we expanded on our payments platform with owner-vendor e-check, which is a simple to use, hassle-free way for property managers to pay owners and vendors from within our core solutions. Our customers are delighted with these Value+ offerings and we expect them to expand revenue for us over this time as customer adoption grows. One of our customers who adopted owner-vendor e-check recently stated, we've had the product for just four months, we're now paying 95% of our owners by ACH and all my staff is already pleased.

And now turning to the legal vertical, MyCase customers increased 50% year over year in the quarter, further expanding our footprint in the legal SMB market. We enhanced our Value+ payments offering in the second quarter, enabling law firms to now accept credit card payments directly from within their client portal in MyCase. Our early customers are delighted with the expanded Value+ offering, as it enables seamless revenue cycle management for their firm.

We believe that maintaining a strong commitment to customer service and customer-centric decision making pays off with customer loyalty and growth. And I'm proud to share that we recently received several awards for customer service across our businesses, including the Stevie American Business Award for Sales and Customer Service, as well as the annual Customer Sales and Service World Award. In September, we will host our Fourth Annual AppFolio Property Management Customer Conference here in Santa Barbara.

This is a three day conference -- this three day conference is a place where customers come to learn, socialize and maximize their investment in AppFolio. We all look forward to the opportunity to connect in person with our customers, and I especially enjoy seeing our great team of employees shine at this event. This event is always a highlight for our entire company.

Our play book remains the same for the coming quarters -- acquiring new customers, broadening our product offerings, driving the adoption of Value+ services and continuing our high level of customer service. Over time we're positioned to scale our technology platform, business processes and experience to adjacent markets and new verticals. We will continue focus on areas that we believe will result in long-term sustainable growth and shareholder returns.

And now, I'll turn the call over to Ida for a more detailed financial review of the quarter.

Thank you, Brian.

We're happy with our financial performance this quarter, reporting total revenue of $26.2 million, up 42% from $18.4 million reported one year ago. Second quarter GAAP net loss was $2.3 million, or a net loss of $0.07 per share, an improvement over our year ago loss of $3.4 million and $0.36 per share.

Non-GAAP net loss was $1.2 million, or $0.$0.03 per share. Non-GAAP adjusted EBITDA was positive -- $1.1 million during the second quarter 2016, as compared to a $1.6 million loss in the second quarter a year ago, and a loss of $1 million in the most recent quarter.

Breaking down revenue further, core solution revenue was $10.6 million in the second quarter, up 37% from the same quarter of last year. Growth in this core subscription revenue is driven by the increase in new customers and increase in average size of our new customers, as well as strong customer retention.

We ended the quarter with 9,275 property manager customers, an increase of 32% from one year ago and 7,349 law firm customers, reflecting an increase of 50% year-over-year. Our property manager customers were managing 2.41 million units in their portfolios, up from 1.92 million units one year ago, reflecting a 26% increase year over year.

The increase in units drives additional core solution revenue, as well as incremental Value+ revenue over time. The average net new units per customer added of this quarter and year-to-date has increased to the mid-200s as we continue our focus on the larger SMB customers.

Value+ services revenue was $14.4 million in the second quarter, up 53% from one year ago. Growth in Value+ services revenue was primarily driven by new and existing customers continuing to adopt and expand their usage of our Value+ services. Each of our Value+ services offerings experienced revenue growth year over year, although the majority of the growth came from increases in revenues earned through electronics payments and resident screening services platform again this quarter.

My discussion of non-GAAP results today exclude the impact of stock-based compensation expensive that flowed through the P&L in the quarter of $1.1 million, compared to $200,000 in the year ago period. A 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.

At June 30 we have 634 AppFolians serving our customers and stockholders, up 20% from 528 one year ago, and up 5% from 601 in the prior quarter. Cost of revenue, excluding depreciation and amortization was $11.1 million for 42% of revenue in the second quarter, as compared to $10.5 million, or 45% of revenue in the prior quarter.

The same metric one year ago was 44% of revenue. Sales and marketing expenses were $7.4 million, or 28% of revenue in the second quarter, as compared to $7.5 million or 32% of revenue in the prior quarter. The same metric one year ago was 34% of revenue.

We are pleased with the operating leverage we continue to gain in both cost of revenue and sales and marketing expenses as a percent of revenue. Research and development expenses were $2.9 million, or 11% of revenue in the second quarter, as compared to 13% of revenue in the prior quarter and improved from 12% in the year ago period. We expect to continue to invest in R&D to expand our product offerings and market opportunities in the vertical markets we serve.

General and administrative expenses were $3.7 million, or 14% of revenue in the second quarter, as compared to $3.2 million, or 14% of revenue in the prior quarter. The same metric one year ago was 19% of revenue. The sequential quarter dollar increase is mostly due to increased headcount in G&A functions and costs associated with the implementation of a long-term incentive program described in SEC filings earlier this year.

Weighted average common shares outstanding used to calculate loss per share in the second quarter was 33.5 million shares. Moving to the balance sheet, we closed the quarter with approximately $51.2 million in cash, cash equivalents and investment securities and no debt. We generated $3.1 million in cash from operations, used $1.3 million for capital expenditures mainly related to the expansion of our facilities and $3 million for additions to capitalized software.

In summary, we had a strong first half of the year and are encouraged with the operating leverage we continue to gain. As we look to the back half of the year, we are raising our revenue outlook for the year to a range of $103 million to $105 million, which at the midpoint represents year-over-year growth of 39%.

In addition to attaining positive adjusted EBITDA margin in the current quarter, we also reiterate our outlook for sustained positive adjusted EBITDA margin by early 2017 from our current business. We remain confident in our strategy and business plan to deliver long-term stockholder value. We will continue to manage our business towards the achievement of long-term growth that we believe will positively impact long-term stockholder value.

And with that, I like to turn call back over to the operator for questions.

(Operator Instructions)

Bhavan Suri, William Blair

Thank you. Hey Brian, hey Ida, congratulations on a really nice job, obviously on the top line (inaudible)

Thank you.

Before we get into the details of some of the leverage there - if I was to look at the business and say how much of the growth you think in the quarter was due the price increases and maybe exposure, too -- as we think about the (inaudible) increases a quarter (inaudible) really helpful, thank you.

Bhavan, you are cutting in and out -- do you mind repeating the question? Apologies, but we are having a hard time hearing you.

Yes.

(inaudible)

How much the upside increases in the top line sort of (inaudible)

We still can't hear you, Bhavan. I can hear part of your question is -- how much of the revenue increase related to the price increase that we had earlier this year? I couldn't catch any of the other part of your question, so maybe we can come back to that.

But if you look at the performance that we've had year-over-year, I would say that we are minimally impacted by the price increase. It has been a nice improvement, but it is only for our new customers that we've acquired this year. So the vast majority of our customers are still on our legacy pricing. We're happy with the new customer revenue that has come in, but again the majority of the increase year over year relates to our existing base of revenue and customers.

Great. Am I still on?

Now we hear you better.

Thank you. Sorry about that. When you look at the Value+ services, obviously they're such a core part of the stickiness and the growth. Which ones witnessed the most growth in the quarter? Specifically, uptake around liability insurance and maintenance?

Yes. Sure. I'm happy to take that. If you look at it on a year-to-date basis, year-over-year from a dollars perspective, payments revenue from our payments platform and tenant screening platform have contributed the largest increase on a dollars perspective.

But having said, that we're gaining great traction in some of our newer product offerings like contact center, insurance and premium leads. Some of those as a percentage basis year over year are growing at a faster rate than payments and screening, given they are earlier in their lifecycle. But again across the board, increases in revenue that we're really happy with, and focused on continuing to improve the attach rates and adoptions of our Value+ services for our customers.

Yes. And clear that's working. One quick one last one for me -- sales and marketing are pretty big improvement? I think [quarter] bps would be my calculation there.

Is that just because of the move upmarket and the efficiency there? Or is this more of a strategic approach as you think about lowering S&M to get to profitability and drive profitability with fairly solid sustained growth of the business? Thank you.

Thank you, Bhavan. I'll take that. The answer to that one is -- both. We're certainly, constantly looking at how to find the best leverage with our sales and marketing investments, and some of that is doing more with what we have and some of it is bringing the right customers to the table. I think you're seeing improvements because of both of those efforts.

Thank you, Bhavan.

Thank you for taking the questions.

Kyle Chen, Credit Suisse

Hello guys. Thank you so much for taking the question and congratulations on the results. Clearly very nice job on the profitability, very nice surprise here.

It seems like you saw a really nice gross margin expansion in Q2? Can you walk us through what were the big drivers of the leverage here? Was it Value+ mix of premium leads reduction in third parties fees and cogs? And also how sustainable are margins at these levels?

Sure Kyle. I will take that. We're really happy with the performance in the second quarter and the leverage that we gained in the cost of revenue line item specifically. As you know, some of Value+ services have third-party costs associated with them.

So as our business grows, we continue to look to leverage points or areas within that we can gain more leverage in our margin models. Some of that we've been able to do and we've been working on over time. We're seeing the benefits of that -- this quarter and we have in our last couple quarters as well.

But the revenue mix, obviously, it matters a lot with the Value+ gross margin or cost of revenue numbers. So with the screening and payments revenue that we had during the quarter, we had some nice uptick here in the margin and-or a declined in the cost of revenue. From a sustainability over time, I would say the mix of revenue in Value+ matters.

You'll remember that in Q4, we have historically experienced lower seasonality -- or more seasonality, in our screening business as fewer tenants seem to move in the fourth quarter. And have historically seen some compression in the margins and fourth quarter because of that. I would anticipate that would happen again this year. But we're really happy about where we are right now going into the back half of the year.

Got it. That's really helpful. And relative to units under management -- did the number of net additions this quarter meet your internal expectations? Given your focus on the mid-market, do you expect to see a step up in average unit size per customer from now on? Would you be disappointed if you did not see a gross number of net additions increase sequentially every quarter going forward?

Yes. I will take that one. Yes. We are really pleased with the units added for the quarter, but more importantly, we're really pleased with the growing average portfolio size of the customers that we're bringing to the table.

As you know, we've made some shifts in focuses in our marketing and our sales efforts to really put a priority on customers that are going to have the longest -- largest lifetime value with the company. Yes. The trailing indicators are showing great progress in that area. The leading indicators as well are showing great progress in that area. We expect to continue to demonstrate some of that upward trend as we make more progress in bringing larger small and mid-size customers to the table.

That's helpful. Just one more real quick? As the increase in mix of mid-market or larger SMB customers, based on the early data, are you seeing a higher attach rate of Value+ services within this customer base? Maybe they're attaching through to four services versus one to two on the low end? I know it's early but maybe you can wrap some numbers around there?

Yes. What I would say to that, Kyle, is that these customers are running more substantial businesses, and more experienced business professionals and their needs are broader than very early or younger property managers.

I can't comment on the attach rate growth -- its relatively early in that cycle. But what I would say is we're working with more sophisticated customers who come to the table with more sophisticated demands and a lot of those demands surround our suite of Value+ services.

Got it. Thank you very much. Congratulations again.

Thank you, Kyle.

(Operator Instructions)

Brendan Barnicle, Pacific Crest Securities.

Hello, this is Trevor Upton on for Brendan. Thank you for taking my question. On the profitability side, can you talk about what role land and expand played in increasing stability in the quarter?

Sure. I'll take that. Our Value+ service offering is definitely an important part of our strategy, as we acquire customers, we're able to continue to monetize and expand that monetization of those customers with our Value+ sources.

I would say that the improvement in bottom-line results this quarter was driven by operating leverage that we were able to achieve across the business, most notably in the cost of revenue and sales and marketing areas of our business. And so the incremental margin dollars that we get from our Value+ services are definitely a key strategic importance to us as we grow over time.

Can you talk about the operating margin profile of Value+? I know they have a low gross margin, but how does that -- Value+ were strongest in the quarter? How do they look from a sales and marketing perspective?

Yes. Maybe I'll touch on part of this and Brian can talk about what we're doing for new Value+ services down the line. But our Value+ services don't have as much incremental sales and marketing expenses associated with them. The majority of our sales and marketing expenses are incurred upfront in acquiring customers.

We do have some of our Value+ services that have incremental third party costs associated with them. That goes for their cost of revenue but from an incremental sales and marketing, we believe that there's a lot of leverage across-the-board in sales and marketing.

And to add onto that, we've made substantial investments in research and development in allowing our customers to adopt new Value+ services from within the app without the need to interact with a service or sales professional. New Value+ offerings like, owner-vender e-check and premium leads, which I talked about in my remarks -- both of those are in-App enabled, meaning we market to our customers while they're using our app and allow them to actually adopt or sign up for and enable those from within the application without having to interact with a service or sales pro.

Okay. That's very helpful. Last one on the costs if I may? Was there anything specific on the cost of payments that are happening in Q2?

No, there's nothing special that happened during Q2 on the cost of payments side.

Okay. Then if I just one final question? On a higher level, on the data side, maybe talk about what demand you're saying for increased data services from a reporting or analytic perspective?

I think that is one that certainly larger customers are always wanting more access to data and more ways to visually represent it. We're doing a lot of product research in those areas today, and that shows up in terms of things like more and more robust reporting. Although, I would say we have the most robust reporting in the industry.

There's really a huge appetite for that and our larger and larger customers are wanting more and more ways to slice and dice and visually represent the data. It's an area that no one in this industry or any industry has ever really done with, its one that you're always working to kind of meet the needs of the customer.

Great. That's very helpful. Thank you for taking my question.

Thank you, Trevor.

(Operator Instructions)

Thank you for participating in today's conference. This does conclude the program. You may all disconnect and everyone have a great day.