Appfolio Inc (APPF) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the AppFolio third-quarter financial results conference call. (Operator Instructions). As a reminder, this conference is being recorded.

I'd like to introduce your host for today's conference, Ms. Erica Abrams. Ma'am, please begin.

Thank you, Vince. Good afternoon, ladies and gentlemen. Thank you for joining us today as we report AppFolio's third-quarter 2016 financial results. I am 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, which are subject to considerable risks and uncertainties. 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 and performance to be materially different from any results or performance expressed or implied by the forward-looking statements. We discuss our risks and uncertainties in greater detail in the risk factors 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 and is available on our website.

With that, I will turn the call over to Brian. Please go ahead.

Hello and thanks to all of you for joining us today.

We are pleased to report another strong quarter of financial and strategic execution across our business. Revenue for the third quarter increased 39% to $28.2 million. We generated $2.7 million in positive adjusted EBITDA, indicating our potential for continued leverage in the business and consistent with our long-term strategy to reinvest in our business.

We executed well on our key business priorities in the quarter. These include keeping our customers successful and happy, expanding our customer base, enhancing our product offering, and supporting our growth through the adoption and expansion of Value+ services.

I'm also pleased to report that overall demand for our property management solutions remained strong, supported by a robust US rental economy. In our property management vertical, customer accounts increased 27% year over year and units under management increased as well, to $2.5 million. Notably, net units added for new customer grew meaningfully, demonstrating our progress with serving larger SMB customers, which has been a focus in 2016.

Our innovation engine remained active in the third quarter and we announced the plan to launch of two new Value+ offerings, Collections and Revenue Management software integration. Our Collections offering will enable customers to quickly and easily turn over past-due balances to a collections agency. The Revenue Management software integration will offer customers the opportunity to competitively priced vacancies based on recommendations provided directly from Rainmaker revenue optimization software.

We expect both of these new Value+ offerings to be available to customers over the coming months, further extending our land-and-expand strategy.

In addition, we focused on adding features and enhancements to make AppFolio more indispensable as a system of record and system of engagement. Since property managers are highly mobile and do much of their work outside of the office, being the most mobile-friendly solution in the industry continues to be a top priority. And to that end, we greatly improved the customer experience when viewing reports on a mobile device.

In addition, we expanded our texting features so that property managers can now not only send and receive texts, but they can also mass text important announcements. During the third quarter alone, customers sent more than 2 million texts within our solution.

In the end, our products help streamline communications and better track the performance of business while on the go.

Turning to our progress in the legal vertical, MyCase customers increased 40% in the third quarter. This growth remains strong and also reflects our focus on an efficient customer acquisition. With a base of approximately 7,800 legal customers to date, each quarter we continue to be better positioned to add more Value+ services and begin to leverage our land-and-expand strategy.

We demonstrated progress on MyCase payments in the third quarter, releasing several user interface improvements to increase and optimize payments usage. We continue to receive positive feedback from customers about our MyCase payment service. We know that customers can get a lot of leverage from using our payments solution and we're happy to report strong initial success with legal customers adopting MyCase payments.

Across the business, we continued to demonstrate the value and priority we place on staying close and connected to our customers. In September, we held our fourth annual customer conference in Santa Barbara for property management customers. This was another great event, with more than 700 attendees, who joined us with the goal of maximizing their investment in AppFolio property management software. The agenda included more than 30 educational sessions, product workshops, one-on-one help sessions, and networking opportunities.

This was another major success for our Company, our customers, and our employees. It also demonstrated how much we value customer relationships and the vital role AppFolio plays in our customers' digital transformation.

Our property management conference is one of my favorite events. This year, I was reminded of how integral AppFolio software is to our customers' success, and it was clear that the customer engagement and satisfaction remains extremely high. Our customers rely on us for industry education and innovation, and I left the conference excited about the opportunities we have to continue to serve them and to drive even greater adoption of our Value+ services over time.

In closing, we executed well in the third quarter, and I'm proud of the progress we are making towards achieving our strategic priorities and finding sustainable business leverage. From here, AppFolio is well positioned to further extend our product offerings and our technology platform and to expand to adjacent markets and new verticals as the opportunities arise.

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

Thanks, Brian.

We are pleased with our financial performance this quarter, reporting total revenue of $28.2 million, up 39% from $20.3 million reported one year ago. Third-quarter GAAP net loss was $1.1 million or a net loss of $0.03 per share, an improvement over our year-ago loss of $4.8 million and $0.14 per share.

Non-GAAP net income was $164,000 or breakeven per share, compared to our non-GAAP net loss of $4.5 million and $0.13 per share in our year-ago period.

Non-GAAP adjusted EBITDA was a positive $2.7 million for the third quarter, compared to a negative non-GAAP adjusted EBITDA of $2.4 million in the third quarter one year ago.

Breaking down revenues further, core solution revenue was $11.3 million in the third quarter, up 36% from one year ago. Growth in the core subscription revenue is driven by the acquisition of new customers, the increase in average size of our new customers, as well as strong customer retention.

We ended the quarter with approximately 9,600 property manager customers, an increase of 27% from one year ago, and 7,800 law firm customers, reflecting an increase of 40% year over year.

Our property manager customers were managing 2.53 million units in their portfolios, up from 2.01 million units one year ago, a 26% increase year over year. The increase in units under management drives additional core solution revenue, as well as incremental Value+ revenue over time. As Brian mentioned, the average net new units per customer added this quarter increased to the mid-300s. Year to date, net new units per customer is in the high 200s as we continue to focus on the larger SMB customers. We expect our average net new units per customer to rise overall this year, while this metric may vary somewhat quarter to quarter.

Value+ services revenue was $15.7 million in the third quarter, up 45% from one year ago. Growth in Value+ services revenue was primarily driven by the adoption and expansion of new and existing customers using our Value+ services. Each of our Value+ services' offerings experienced revenue growth year over year, although the majority of the growth in dollars came from increases in revenues earned through electronic payments and resident screening services platform, consistent with prior quarters.

The non-GAAP results I will review today exclude the impact of stock-based compensation expense, which was $1.3 million in the third quarter of 2016 compared to $278,000 in the year-ago period. A reconciliation to the corresponding GAAP results can be found at the end of our press release issued today, linked to our investor relations website at www.appfolioinc.com.

At September 30, we had 610 employees serving our customers and stockholders, up 10% from 556 one year ago and down slightly from 634 in the prior quarter, reflecting the net outflow of interns following our summer program. Cost of revenue, excluding depreciation and amortization, was $11.5 million or 41% of revenue, compared to $11.1 million or 42% of revenue in the prior quarter. The same metric one year ago was 45% of revenue.

Sales and marketing expenses were $6.9 million or 24% of revenue, as compared to $7.4 million or 28% of revenue in the prior quarter. The same metric one year ago was 35% 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 percentage of revenue.

Research and development expenses were $3.4 million or 12% of revenue, as compared to $2.9 million or 11% of revenue in the prior quarter. The same metric one year ago was 14%. We continue to invest in R&D to expand our product offerings and market opportunities in the current vertical markets we serve.

General and administrative expenses, excluding stock-based compensation, were $3.7 million or 13% of revenue, compared to $3.7 million or 14% of revenue in the prior quarter. This same metric one year ago was 18% of revenue.

Weighted average common shares outstanding used to calculate per-share amounts in the third quarter was 33.6 million shares.

Moving to the balance sheet, we closed the quarter with $49.6 million in cash, cash equivalents, and investment securities, and no debt. We generated $2.3 million in cash from operations, used $400,000 for capital expenditures and $3.4 million for additions to capitalized software.

In summary, we posted another solid quarter of financial progress and are encouraged with the operating leverage and cash generation in our current business.

As a reminder, we experience seasonality in the property management business during the fourth quarter of the calendar year. In prior years, we have noted that there is a tendency for fewer people to move during the holiday season, resulting in less screening revenue and less payment revenue attributable to the rental applications of new tenants. We expect the seasonality to continue to exist this year as well in our business.

With that reminder, we are updating our revenue outlook for fiscal-year 2016 to a range of $104 million to $105 million, which at the midpoint is revenue of $104.5 million. This represents year-over-year revenue growth of 39%.

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.

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

(Operator Instructions). Brian Essex, Morgan Stanley.

Good afternoon and thank you for taking the question. First of all, nice results, and I guess I wanted to dig into some of the OpEx and margin improvement in the quarter. Sales and marketing in particular on a non-GAAP basis down sequentially and down year on year, and I guess I just wanted to just get my arms around the key drivers of that decline and how you might expect us to view that spend going forward, particularly given this decline and where efficiency might be coming from.

Hi, Brian, thanks for the question. From an overall business perspective, we have reflected the last couple of quarters on efficiencies that we have gained in cost of revenue and sales and marketing, and so as we continue to focus on larger customers in our SMB space, we concurrently look at opportunities where we would have efficiencies on our expense side.

So, I suspect that that percent is going to fluctuate quarter to quarter, just depending on what's going on in our business from a buying season perspective or an efficiency and spend perspective, but we are definitely focused on the leverage that we are able to gain in some of these operating expenses.

Would you have any kind of examples of what the tenor of your spend was last year versus this year and how it is much different, given that you're going up market and focusing on larger customers?

So I guess what I would say there, Brian, is from a customer unit profile perspective, obviously the total revenue potential from smaller customers is different than those of larger customers, given our economics mostly surrounds the number of units a customer has. So as the average unit per customer that we acquire increases, we have the benefit of that operating leverage throughout our business, and I think that's part of what you are seeing on the sales and marketing side.

Is it more channel-focused effort or maybe just more efficiency per direct rep?

Yes, so the marketing channels that we use, as you know, are mostly online marketing, so I wouldn't say we've changed anything from a marketing focus as to the channels through which we acquire customers. Our leads -- our customer -- our salespeople respond to inbound leads and leads generated from our marketing, most of which is online. So, there isn't anything that has shifted significantly there from a business perspective. We are still acquiring prospects and customers the same way.

Got it. Very helpful, thank you.

Kyle Chen, Credit Suisse.

Thanks for taking the question and congratulations on the solid results. Just quickly on the unit acquisition this quarter, it's good to see the step up in average units per customer. I think it's up nearly 50% sequentially. It looks like the upmarket charge is really gaining some traction.

Can you deconstruct the momentum for us a little bit? Was the increase in average portfolio size fairly broad based or concentrated within a few customer wins? And also, were the new customer wins against legacy competitors or were they more greenfield?

Kyle, first, I will start by saying that average isn't concentrated across a couple of large wins. I think that average actually illustrates the real average and the majority of deals that are coming through. And I think it's just -- it's indicative of the priority and focus that we are having and our sales reps are having on customers or potential customers that are going to see the most value from our all-in-one solution and in turn be the most valuable to our business.

The second part of your question is, with these larger deals, are we seeing a bigger mix of displacement and maybe displacing larger customers? And I would say that greenfield versus displacement wins, that percentage really isn't changing radically. We are still operating in primarily a greenfield market where our customers are buying their first professional solution or, in some cases, displacing a very old and outdated one. So we haven't seen much change in that dynamic.

Great, that's helpful. And then with the two new Value+ offerings, the Revenue Management and Collections, what does that -- couple that with Premium Leads last year, I guess, what does that equate to in terms of ARPU potential when you add up all these new services and how close does that get you in terms of the $110 target ARPU that was set out at the time of the IPO?

Yes, I will take that one as well, Kyle. Each one of our Value+ services, you have to think of them as a platform, and when we launch them, there is a beginning of something and they often take some time to get traction and adoption from our base.

I will start with AppFolio Premium Leads, which came from the acquisition of RentLinx. It is part of a larger Value+ platform of marketing services. We have been really pleased with where that service is. I would still say it is in its beginning, and it is also launched in a market where property managers don't have to work that hard to fill a vacancy. There is a strong occupancy metric out there today. But we are really pleased with it, and over time I think it will turn into a very significant Value+ area for us.

Also, as well, on our two new Value+ service offerings, which will come to market next year, I think we will see a slow and steady adoption of those, similar to all of our Value+ services, and they will become more important over time as market conditions change and as customer adoption changes.

That said, obviously, ARPU for us is gaining in momentum quarter over quarter, and rising. We expect that rise to include new Value+ services over time, as well as deeper penetration of the prior Value+ platforms, getting closer to our target. Every quarter, we get more -- we get closer and closer to realizing that long-term target.

Okay, that's very helpful. I appreciate the color.

(Operator Instructions). Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.