AppFolio, Inc. (APPF) Q2 2019 Earnings Report, Transcript and Summary

Good afternoon. My name is Christine, and I'll be your conference operator today. At this time, I would like to welcome everyone to the AppFolio, Inc. Announces Second Quarter 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, Christine. Good afternoon, ladies and gentlemen. Thank you for joining us today as we report AppFolio's second quarter 2019 financial results. I am joined today by Jason Randall and Ida Kane 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. Actual results or performance may be materially different from any results or performance expressed or implied by the forward-looking statements. 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. Please see our filings with the SEC for greater detail about risks and uncertainties. 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 second quarter 2019 financial results. Total revenue for the quarter increased by 35% over the same period one year ago to $63.6 million. GAAP net income was $23.2 million or $0.65 per diluted share, which includes an income tax benefit of $21.3 million, primarily related to the relief of a valuation allowance against deferred tax assets. Our second quarter performance reflects our continued investment in growth initiative in advance of expected revenue generation. We believe these growth initiatives will positively impact long-term shareholder value and include the following: AppFolio Property Manager Plus, our offering that serves larger, more complex real estate property manager customers; AppFolio Investment Management, which serves real estate investment managers; LISA, AppFolio's AI leasing assistant, which we developed from the technology acquired through the Dynasty acquisition and is now offered as a Value+ service to our real estate customers; and AppFolio utility management, which we developed from technology acquired through the WegoWise acquisition and is now also offered as a Value+ service to our real estate customers. Also included in our second quarter results is $1.7 million in noncash charges related to stock-based compensation. For those of you who track non-GAAP results, our Form 10-Q that was filed today includes more detailed information that you might find helpful in calculating non-GAAP results. Core solutions revenue was $21.6 million in the second quarter, a 27% increase year-over-year, primarily due to a 19% increase in property manager units under management related to a 12% increase in the number property manager customers. We closed the second quarter with 13,737 property manager customers managing 4.23 million units. As a reminder, we define real estate property manager customers as the number of customers subscribing to our core solution. Customers that are not subscribed into our core solutions are not included in our customer and unit count. In our legal vertical, customer count increased 6% year-over-year to 10,631. Second quarter Value+ services revenue was $39.1 million, a 36% increase year-over-year. Revenue from each of our Value+ services increased year-over-year, and new Value+ services were introduced in the quarter. The majority of growth in Value+ services was derived from increased usage of our electronic payments, screening and insurance services by a larger base of property manager customers and a higher number of units under management. Turning to expenses: Total cost and operating expenses for the second quarter increased 54% year-over-year on a GAAP basis compared to an overall 35% increase in total revenue. Our year-over-year increase in cost primarily related to our 49% growth in headcount to support an expanding base of existing customers and our growth initiatives. We released our valuation allowance against our deferred tax assets during the second quarter, which is the primary factor in our income tax benefit of $21.3 million. Our balance sheet at June 30th reflects a $21.7 million deferred tax asset, which we believe we can use to offset future tax expenses. Also on the balance sheet, we closed the quarter with approximately $42.5 million in cash, cash equivalents and investment securities and $49.4 million of debt. We generated $11.5 million from operating activities, used $1.4 million to purchase property and equipment and invested $4.8 million in additional product innovation via capitalized software. We did not initiate any stock repurchases during the second quarter. Given our performance to-date, we now expect full year 2019 revenue in the range of $253 million to $255 million, which represents year-over-year revenue growth of 34% at the midpoint. We continue to 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 some additional comments.

Thanks, Ida, and thanks to everyone for joining us today as we report our second quarter 2019 financial results. During the quarter, we continued on our mission to revolutionize vertical industry businesses by providing great software and services to our expanding customer base. We did this by maintaining our focus on delivering value to our customers through end-to-end customer experiences, product innovation, investments in technology and supporting our team and our thriving culture. In our real estate vertical, we maintained our focus on innovation and advancing our technology platform to provide systems of intelligent solutions that empower businesses to deliver excellent customer and employee experiences. During the second quarter, we released a new Value+ service, LISA, AppFolio's AI leasing assistant, which we built leveraging technology from our recent acquisition of Dynasty. We designed the AppFolio AI leasing assistant to address key challenges faced by property management companies, stemming from a high volume of rental inquiries that make it challenging to follow up on every lead in a timely fashion, which may result in missed revenue, poor customer experience and longer vacancy times. The AppFolio AI leasing assistant works 24/7 as part of a property's leasing team to provide thoughtful, personable responses via text messages and email. LISA communicates to prospective renters in real time and leverages integrated reporting to track leasing performance with accurate data, which can be used by our customers to drive increased occupancy rates and operational efficiency. Property managers utilizing the AppFolio AI leasing assistant stand to benefit from robust, need-to-lease data and insights, ultimately enhancing, optimizing and automating the leasing flow and extending their team's capabilities. Kayla Roeder, Chief Operating Officer of Cambridge Management Group and AppFolio property manager customer, who recently added AppFolio's AI leasing assistant says, “Our team's performance has increased dramatically with no misleads or lag time in response. LISA allows for continued conversations after hours with our prospects, who feel like they're getting great service. Our team is able to focus on higher-level interactions.” Cambridge's use of AppFolio's AI leasing assistant demonstrates the power of AI when it's fully integrated into a property's entire leasing experience as part of AppFolio's Property Management software. Our AI leasing assistant is built for large portfolio property managers and owners and strengthens AppFolio Property Manager and AppFolio Property Manager Plus systems of intelligence capabilities by increasing our customers' overall efficiency, automating repetitive tasks and creating a more streamlined experience for their prospects and tenants at scale. During the quarter, we continued the launch of AppFolio utility management, providing AppFolio Property Manager and AppFolio Property Manager Plus customers a Value+ service to better manage operating and capital expenditures relating to utilities by eliminating late fees with on-time billing and replacing the significant burden of a manual invoicing process with one that minimizes errors and maximizes net operating income. AppFolio utility management provides robust analytics and increased efficiency by automating utility bill processing and resident billing, a critical function for large property managers and owners. Also in the second quarter, we continue to expand the capabilities of AppFolio Investment Management, a new product released earlier this year designed to empower real estate investment managers with a modern solution that streamlines fund and syndication management. We released new capabilities to help transform our customers' businesses, including document signing, to further automate investment operations, improve processes and optimize the investors' experience. Document signing lets investors exchange, sign and track important documents, such as fund-raising materials and subscription agreements, all within the AppFolio investor portal. Argo Property Group, a real estate development investment and property management company based in Philadelphia that uses AppFolio Property Manager, recently added AppFolio Investment Manager into their suite of AppFolio products and services. Argo chose AppFolio Investment Management to modernize and automate investment communications and because it fully integrates with AppFolio Property Manager. Argo's Chief Risk Officer and partner, Jeremy Terr, recently told us, AppFolio Investment Management streamlines the fund-raising process and helps us raise more capital from each individual investor. It helps us communicate clearly and consistently and ultimately gives our investors greater confidence in our business, so they are confidently investing even more with us. AppFolio's new product offerings reflect our ongoing commitment to rapid innovation and to delivering technology solutions and services to solve the top challenges facing our customers. We are excited to announce our seventh AppFolio Property Manager Customer conference to be held October 3rd and 4th here in Santa Barbara. We look forward to this annual event where we connect directly with customers. Staying close to our customers is a critical part of our mission. Recently on boarded AppFolio Property Manager Plus and AppFolio Investment Management customer, 2B Living, Brooks Baskin, CEO, commented, “I'm a big believer in partnership and what it means to be a successful growing business. I truly believe we have found a great partner in AppFolio. I can safely say we have leaned into our AppFolio relationship and we look forward to continuing the successful relationship hopefully for decades to come.” In our legal vertical, we continue to focus on new functionality that help law firms improve business performance. Recently introduced business management dashboards provide case and financial insights to help firms make better decisions. And MyCase lead management now allows electronic intake of prospective clients to automate and simplify the process of collecting data. At AppFolio, we believe that great people make a great company and are the keys to driving our rapid pace of innovation that continues to bring the best in technology and services to our customers. Reinforcing these principles, during the quarter, AppFolio was recognized with two Gold Stevie Awards from the American Business Awards: One acknowledging AppFolio Property Manager Plus as best new products; and the second recognizing our customer-first approach with a Gold Stevie for Best Customer Service, both in real estate, Construction Management Solution category. Looking ahead, we remain focused on our -- executing our long-term strategy of sustainable growth, while delivering exceptional customer experiences, leading technology and unsurpassed customer service. Thank you for joining us and that concludes our call for today. End of Q&A: Please note, a copy of the recording will be available as of Monday, July 29, 2019, at 7:30 PM Eastern. You may access the recording by dialing 1-800-859-2056 and entering 7094869. This concludes today's conference call. You may now disconnect.