AppFolio, Inc. (APPF) Q1 2019 Earnings Report, Transcript and Summary

Good afternoon. My name is Kelly, and I will be your conference operator today. At this time, I'd like to welcome everyone to the AppFolio First Quarter of 2019 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. [Operator Instructions] Thank you. Erica Abrams, you may begin your conference.

Thank you, Kelly. Good afternoon, ladies and gentlemen. Thank you for joining us today as we report AppFolio's first quarter 2019 financial results. I'm joined today by Jason Randall, CEO; and Ida Kane, CFO of AppFolio, to discuss these results. This call is simultaneously being 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 risk and uncertainty 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, and welcome to everyone joining us on the call today for AppFolio's first quarter of fiscal year 2019 financial results. Top line revenue growth accelerated in our first quarter of 2019 with revenue increasing 35% year-over-year to $57.1 million. GAAP net income was $3.7 million or $0.11 per diluted share during the quarter compared to $4.3 million and $0.12 per diluted share in the first quarter of last year, reflecting higher investments in growth initiatives that we believe will positively impact long-term shareholder value. Those investments include: first, the WegoWise acquisition completed in August 2018, which served as a foundation for our AppFolio utility management Value+ service that is now being used by AppFolio Property Manager customers; second, the development and launch of AppFolio Property Manager Plus in September 2018 to serve larger property manager customers; third, the January 2019 acquisition of Dynasty and its advanced artificial intelligence solutions for the real estate vertical; and finally, the development and recent launch of AppFolio investment management to serve real estate investment managers, which Jason will discuss further in a few minutes. Also included in our first quarter results is $1.6 million in non-cash charges related to stock-based compensation. For those of you who track non-GAAP results, our Form 10-Q was filed today and includes more detailed financial data points that you might find helpful in calculating non-GAAP results on your own. We closed the first quarter with 13,409 property manager customers managing 4.08 million units. These metrics reflect our continued efforts and success in acquiring higher unit count customers. As a reminder, we define our real estate property manager customer base as the number of customers subscribing to our core solutions. Customers that are not subscribing to our core solutions are not included in our customer and unit counts. In our legal vertical, customer count increased 8% year-over-year to 10,485. Core solution's revenue was $20.8 million in the first quarter, a 28% increase year-over-year, primarily due to a 20% increase in property manager units under management related to an 11% increase in the number of property manager customers. First quarter Value+ services revenue was $33.7 million, a 37% increase year-over-year. Revenue from each of our Value+ services increased year-over-year with the majority of growth derived from increased usage of electronic payments, screening and insurance services by a larger base of property manager customers and a higher number of units under management. Other revenue increased 72% to $2.6 million reflecting the revenue associated with recent acquisitions stand-alone subscription services revenue. Turning to expenses, total costs and operating expenses for the first quarter increased 50% year-over-year on a GAAP basis compared to an overall 35% increase in total revenue, reflecting our increased investments head of expected revenue generation. Our year-over-year increase in cost is primarily related to our 43% growth in headcount to support new offerings and customers and to drive future growth. Year-over-year, headcount increased to approximately 1,040 employees, which include employees that joined the AppFolio team via acquisitions. Operating expenses also include an increase of $1.3 million related to increased professional service fees for expanded audit, leasing, legal and acquisition-related activities during the quarter. Q1 results include approximately $500,000 of Dynasty-related subscription revenue for stand-alone offerings included in other revenue and $2.4 million of incremental operating expenses. In addition, we recognized a onetime tax benefit related to the acquisition of over $4 million. As a reminder, we have significant deferred tax assets with a full valuation allowance against those assets. We continue to evaluate whether sufficient positive evidence exists with regards to the reversal of our valuation allowance. We believe that there is a possibility that within the next three to 12 months sufficient evidence may become available to allow us to reach the conclusion that the valuation allowance may no longer be needed. Release of the valuation allowance would result in an income tax benefit in the period the release is recorded. Moving to the balance sheet. We closed the quarter with approximately $40.8 million in cash, cash equivalents and investment securities and $49.5 million of debt. With the increased investments during the quarter, we generated $300,000 from operating activities and completed the acquisition of Dynasty for $54 million in cash. We also used $1 million to purchase property and equipment and invested $4.7 million in additional product innovation via capitalized software. Effective January 1, 2019, we also adopted ASC 842 related to lease accounting. You will notice a few changes to our balance sheet with the addition of operating lease right-to-use assets, totaling $16 million at quarter end, and short- and long-term lease liabilities, totaling $23.1 million. In accordance with the accounting standard, we elected not to recast prior comparative balance sheet periods. The adoption of ASC 842 will not have a material impact on our income statement. During the first quarter, our Board of Directors authorized a $100 million share repurchase program. The program allows for repurchases at prices that are below intrinsic value conservatively determined, but does not obligate the company to repurchase any specific dollar amount or number of shares and may be modified or suspended at any time. We have not initiated any repurchases under this program as of today. In summary, Q1 top line growth accelerated to 35% year-over-year with increased investments in growth initiatives. We are pleased with the progress we continue to make towards our long-term goals. For fiscal year 2019, we remain focused on executing full year revenue in the range of $250 million to $255 million, which represents year-over-year revenue growth of 33% at the midpoint of the range. We expect our weighted average diluted shares for the full year to be approximately $36 million. As a reminder, investors are invited to submit questions via the investor Q&A form located on the Investor Overview section of our website. With that, I'll turn the call over to Jason for additional comments.

Thanks, Ida, and thanks, everyone, for joining us today as we report our first quarter 2019 financial results. In the first quarter of 2019, we continued on our mission to revolutionize vertical industry businesses by providing great software and service to our expanding customer base. To that end, we invested in innovation, our technology platforms and product improvements designed to further deliver value to our customers. We remain focused on our customers' experiences and on our talented team and culture, which we believe is a key element of our success. We remain committed to our long-term strategy of sustainable growth. On the topic of innovation, we released AppFolio investment management, which empowers real estate investment managers with a modern solution that streamlines fund and syndication management. We worked on this product in close cooperation with key customers, such as Northwest Commercial Real Estate. Northwest's principal of Morris Coverman wanted to connect his investors to investment and they recently told us, AppFolio investment management offers our investors more transparency and more information on their investments. The AppFolio investor portal provides easy access to statements, appraisals, property information cash flows, K-1s and more, making it a very effective and modern way to communicate with our investors. AppFolio investment management is designed to enable investors to more efficiently manage their business, all within the simplicity of a single solution. We believe this innovation will transform customers' businesses, improve processes and streamline investors' experiences. In the first quarter, we expanded the capabilities of AppFolio Property Manager Plus, a tier of our award-winning software designed for managing larger businesses with more complex needs. This offering released late last year builds upon the functionality of AppFolio Property Manager and includes performance insights, configurable workflows, revenue management and expanded data access. During the quarter, we continued to add automation through the auto assignment of workflow steps to specific user rolls and the addition of auto triggers that initiate and vet workflows. Automating these workflows for our customers leads to increased efficiency, better data integrity and faster time to productivity for new employees. We recently onboarded Zadig Management, a fast-growing real estate asset and property management company based in Florida with more than 7,500 units to APM Plus. They chose Plus for its exceptional service offering, data visualization and overall value. In addition to APM Plus, they are using our recently launched and fully integrated AppFolio utility management Value+ service, which is built upon the WegoWise platform. As a reminder, the WegoWise platform empowers building owners and third-party property managers to better manage operating and capital expenditures relating to utilities. And the new AppFolio utility management Value+ service is a fully integrated offering that provides enhanced functionality to our real estate customers for utility analytics, billing efficiency and management. We also continued our push to help our customers deliver exceptional on-demand experiences for residents. To this end, we added new capabilities to the leasing experience for property managers and perspective renters. Self-schedule showings allows prospective renters via a lockbox to easily tour vacancies on their own schedule without a property manager on site. We intend to leverage our recent acquisition of Dynasty to continue on our path to further automate the leasing experience by unlocking the power of artificial intelligence. Dynasty offers advanced conversational artificial intelligence solutions that automate leasing communications, replace manual tasks and help customers grow their portfolios. We believe that the acquisition of Dynasty strengthens AppFolio's system of intelligence capabilities and better enables us to offer advanced AI products and services to real estate customers and have integrated the AI digital leasing assistant technology into our AppFolio property manager platform. In our legal vertical, we continued to add functionality to help law firms improve business performance from acquiring new clients to collecting payments. Our features now include a leave management capability that allows our customers to measure marketing performance and efficiently manage their prospective client pipeline. During the quarter, we continued to garner industry recognition for a strong company culture, receiving awards from Fortune and Great Place to Work, including best workplaces Dallas, and recognition from Fortune for innovation and leadership. Most recently, AppFolio was recognized for the second year in a row as one of the 25 highest rated public cloud computing companies to work for in a list released by Battery Ventures, a global investment firm, and Glassdoor, one of the world's largest recruiting sites. We believe a great workplace and engaged employees are key to delivering exceptional customer experiences. Looking ahead, we will continue to remain focused on our customers, technology, product innovation and investments that drive long-term growth in the business. Thank you for joining us, and that concludes our prepared remarks. Operator, please continue.

Ladies and gentlemen, that concludes our conference call for today. If you would like to listen to the replay of the call, please dial 855-859-2056, and reference ID number 809-6079. It will be available starting 7:30 Eastern Time. You may now disconnect.