AppFolio, Inc. (APPF) Q4 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Fourth Quarter and Fiscal Year 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now like to turn the call over to Erica Abrams. Please go ahead.

Thank you. Good afternoon, ladies and gentlemen. Thank you for joining us today as we report AppFolio’s fourth quarter and fiscal year 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 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 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 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. With that, I’ll turn the call over to Ida. Ida, please go ahead.

Thank you, Erica. Hello. And thank you for all of you joining us today as we discuss our fourth quarter and fiscal year 2016 results. Before I get into more details about our performance, you may have noticed the different format to our press release today. Beginning in 2017, including on this call today, we are evolving the format and forum for our discussion of our results with our stockholders and investment community in an effort to increase access to management insights and availability of information equally across our stockholder base. Today I will only discuss GAAP-based financial results followed by remarks from Brian Donahoo, our CEO. For those who track non-GAAP results, we filed our annual report on Form 10-K today, which includes various financial data points we may make to calculate the non-GAAP results on your own. We have also moved our customer metrics to our Form 10-K filing as well. After Brian’s prepared remarks, we will conclude the call today and encourage your written questions via e-mail to ir@appfolio.com. We intend to respond to questions submitted in writing and make those questions and answers available on our website and via our Form 8-K. Now let me turn back to the results for the quarter and fiscal year. Total revenue for the quarter was $28 million, up 37% from $20.4 million reported one year ago. Fourth quarter GAAP net loss was $1.3 million or net loss of $0.04 per share, an improvement over a year-ago loss of $3.9 million and $0.12 per share. Included in our cost and operating expenses for the fourth quarter is $1.5 million of stock-based compensation. Our core solution revenue was $12.1 million in the fourth quarter, up 35% from one year ago, primarily from the 22% increase in property manager customers, with 25% higher property manager units under management. We ended the quarter with approximately 10,000 property manager customers managing 2.68 million units in their portfolios, up from 8,200 customers with 2.15 million units one year-ago. Our legal customer growth also contributed to the growth in core solutions, although total legal revenue remains under 10% of our overall revenue as we exit 2016. At year end, we had 8,100 law firm customers, up 32% year-over-year. Fourth quarter Value+ services revenue was $14.6 million, up 45% year-over-year. Although, all of our Value+ services continue to grow, the majority of the increase in Value+ revenue came from our electronic payments and resident screening services platforms, due to growth in adoption and usage from new and existing customers, consistent with prior quarters. As we have discussed previously, we do have seasonality in our revenue, primarily with respect to the screening services we provide for our property manager customers. These customers historically have processed fewer applications for new tenants during the fourth quarter holiday season. Therefore, revenue associated with our screening services and new tenant applications typically declines in the fourth quarter of the year. As a result, we have typically experienced lower revenue growth in the fourth quarter of each year and this year we experienced a slight decline in overall revenue due to this seasonality. Turning to expenses, total costs and operating expenses for the fourth quarter increased 20% year-over-year on a GAAP basis, as we continue to invest in key areas of the business to drive growth over the long-term. As a percentage of revenue, throughout 2016 we gained operating leverage in our current business model with the exception of general and administrative expenses and depreciation and amortization. The improved operating leverage was primarily driven by our ability to increase revenue in our two verticals with a more moderate increase in headcount and a decrease in third-party cost of revenue on a percentage basis due to improved pricing with our third-party service providers for our current Value+ solution. As we continue to grow and introduce new or enhanced Value+ solutions, our cost may fluctuate period to period. General and administrative expenses, as a percentage of revenue increased primarily due to increased headcount in various general and administrative functions and personnel-related incentive-based compensation expenses. Depreciation and amortization increased primarily due to increased amortization from ongoing capitalized software development. Moving to the balance sheet, we closed the quarter with $52.9 million in cash, cash equivalents and investment securities and no debt. From our statement of cash flows, you can see we generated $6.8 million in cash from operating activities during the quarter, used $700,000 for capital expenditures and $2.6 million for additions to capitalized software. To recap the full year, total revenues for 2016 was $105.6 million, representing 41% growth year-over-year. Fiscal 2016 GAAP net loss was $8.3 million or net loss of $0.25 per share, an improvements over our year-ago loss of $15.7 million and $0.73 per share. Included in our costs and operating expenses for fiscal 2016 is $4.3 million of non-cash stock-based compensation. Turning to our annual guidance for fiscal 2017, we expect revenue from our property management and legal verticals to be in the range of $136 million to $138 million, which represents year-over-year growth of 30% at the midpoint of the range. We expect weighted average shares outstanding for the full-year of approximately 33.8 million shares. In closing, we remain confident in our strategy and business plans 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 shareholder value. With that, I will turn the call over to Brian.

Thanks Ida. As you just heard some of our financial results, the fourth quarter wrapped up a productive 2016. We continue to build on our long-term strategy at sustainable growth funding leverage and efficiency across our business. We remain focused on our customers’ success products and technology innovation and investing in our talented and committed team. As a reminder, our growth strategy is to provide increasingly valuable cloud-based business management software solutions to SMBs within each vertical we target today and in the future. We've managed and plan to continue to manage our business towards the achievement of long-term growth that we believe will positively impact stockholder value. As you might recall, AppFolio Business System or ABS is our approach to addressing similar fundamental business needs of SMBs across different verticals. It acts as our playbook for our technology platform, product development processes, marketing, sales and customer interactions. And we continue to advance this playbook in 2017. In property management, we increased total customer count and expanded units under management. We focused on better serving, larger SMB customers and as a result, continue to grow net new units per customer throughout 2016. We continue to innovate in the property management vertical and we released several major product enhancements, including the expansion of our feature set designs for HOA and commercial markets, growth in our mobile capabilities, as well as releasing two new Value+ services platforms and the continued enhancements of our payment platform. These new or expanded services enabled customers to better manage their growing portfolio of properties and increase AppFolio Property Managers’ applicability for a wider variety of property types. In addition to product development, our team works with customers every day. This customer feedback loop is a key part of our customer satisfaction equation. I'm always pleased to hear real stories of how our product enhancements directly contribute to our customer success. For example, we have a customer in San Diego who began managing the residential portfolio with AppFolio. As we developed our feature set for commercial properties over the last few years, they were able to expand their portfolio and bring on additional commercial units under management. This example illustrates the impact of expanding to adjacent markets. In the vertical markets we serve, the power of satisfied customers is valuable and delivering an outstanding customer support experience is another area we continue to prioritize. Our support teams for both AppFolio Property Manager and MyCase were honored in Q4 as Gold award winners in the 2016 Best in Biz Awards. We're proud of this award and we believe it's an important acknowledgment of our continued commitment to customer success. And now turning to our legal vertical, in 2016 small and solo attorneys continue to shift to the cloud and look for software solutions like MyCase to create more efficiency in their business. We released enhancements to our payment offering and initiated the early stages of our expand strategy. From here we also released several user interface improvements to increase and optimize MyCase Payments’ usage. Our focus on making the payment process even easier for our attorneys has been well received. A MyCase customer who provides virtual counsel for small businesses in Maryland told this study used to take him all day to invoice clients. And with MyCase, he does it now in less than an hour. He said that cost savings alone makes MyCase worth every penny. And as we move into 2017, we're planning to continue our rapid pace of product development in both property management and legal. In AppFolio Property Manager, we are focused on continuing to expand our feature set that serves mixed property portfolios of residential, HOA and commercial units. We’ll also enhance our system of engagement to help customers improve workloads and make it even easier for them to communicate with their ventures, vendors and owners, with mobile at the center of our development efforts. In MyCase, mobile capabilities will continue to be a key area focus, as well. And we’ll continue to enhance the payments platform and supporting feature sets that drive additional adoption and growth. We recently celebrated our 10-year anniversary as a company. We were formed in 2006 with a vision to revolutionize the way SMBs grow and compete by enabling their digital transformation. And that vision remains the same as we enter into 2017. We'll continue to execute on our long-term objective for sustainable growth and remain intently focused on our customers and our team. And as Ida discussed, we invite you to submit your questions regarding our results to ir@appfolio.com. Thanks for joining us today and this concludes our remarks. And with that, I'll turn the call over to the operator.

Thank you. Ladies and gentlemen, that does conclude our conference for today. If you would like to access the replay for this conference, you may dial 855-859-2056 and enter conference ID: 57609689 and is available until the end of day March 3, 2016. Thank you and have a good day.