AppFolio (NASDAQ:APPF) Q3 2019 Earnings Call

0:01 Thank you for joining us today. Welcome to the AppFolio third quarter 2019 financial results conference call. I would now like to turn the call over to Erica Abrams. Thank you.

0:16 Thank you, Christine. Good afternoon, ladies and gentlemen. Thank you for joining us today as we report AppFolio's third quarter 2019 financial results. I'm 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 performance may be materially different from any results performance expressed were implied by the forward-looking statements.

1:03 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 Thank you, Erica, and welcome to everyone joining us on the call today for Upfolio's third quarter 2019 financial results.

1:34 Total revenue for the quarter increased by 36% over the same period one year ago to $67.9 million. GAAP net income was $5 million, or 14 cents per diluted share, which includes a $1.3 million income tax benefit related to research and development tax credits. 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 including stock-based compensation expense.

2:21 The third quarter of 2019 continues to reflect our investments ahead of potential revenue in several growth areas that we believe will positively impact long-term shareholder value, including a Folio Property Manager Plus or offering that serves larger, more complex real estate property manager customers, a Folio Investment Management, which serves real estate investment managers, Lisa, at Folio's AI Leasing Assistant, which we developed from the technology acquired through the Dynasty acquisition and is now offered as a Value Plus service, and Atfolio Utility Management, which we developed from technology acquired through the WeGalize acquisition and is also now offered as a ValuePlus service.

3:07 Core Solutions revenue in the third quarter was $22.5 million, a 26% increase year-over-year, primarily due to a 19% increase in property manager units under management and an 11% increase in the number of property manager customers. We close the third quarter with 14,034 property manager customers managing 4.41 million units. Growth in net new units under management per customer reflects our ongoing focus and success serving property managers with larger and more complex portfolios. As a reminder, customers that are not subscribing to our core solutions, including, for example, standalone Dynasty and WeGoWise customers, are not included in our customer and unit count.

3:59 In our legal vertical, customer count increased 6% year-over-year to 10,781. Third quarter Value Plus Services revenue was $41.6 million, a 35% increase year-over-year. Revenue from each of our Value Plus Services increased year-over-year. The majority of growth in this area continues to be driven by 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. Other revenue was $3.8 million in the third quarter, primarily related to an increase in revenue generated from customer subscriptions for the standalone WeGoWise platform and Dynasty Technology Services.

4:50 In addition, we experienced an increase in website setup fees associated with our property manager customers upgrading to a new website hosting platform. Turning to expenses, total costs and operating expenses for the third quarter increased 43% year-over-year compared to an overall 36% increase in total revenue. Our year-over-year increase in costs is primarily related to a 41% growth in headcount to support our growth areas and an expanding base of both new and existing customers. Moving to our balance sheet, we closed the third quarter with approximately $45.2 million in cash, cash equivalents, and investment securities, and $49.1 million of debt. We generated $11.6 million from operating activities, used $1.7 million to purchase property and equipment and invested $6.2 million in additional product innovation via capitalized software.

5:56 We did not initiate any stock repurchases during the third quarter. I would like to remind investors that we experienced some seasonality in our property management business during the fourth quarter of the calendar years. In prior years, we have noted that there is a tendency for fewer people to move during the quarter, resulting in less screening and payment services revenue attributable to rental applications for new tenants. We expect the seasonality to continue to exist in 2019. Given our performance in the quarter, we are raising our outlook for the full year 2019. We now expect revenue to be in the range of $254.5 million to $255.5 million.

6:44 which represents year-over-year revenue growth of over 34% at the midpoint. We continue to expect our weighted average diluted share count for the year to be approximately $36 million. That concludes my prepared remarks. As a reminder, investors are invited to submit questions via 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.

7:17 Thanks, Edah, and thanks to everyone for joining us today as we report our third quarter 2019 financial results. In the third quarter, we furthered our mission of revolutionizing vertical industry businesses in both the real estate and legal verticals that we serve today. We remain focused on our long-term strategy of providing innovative software solutions for our customers and their stakeholders, delivering outstanding customer experiences and supporting a thriving corporate culture. We believe that this focus results in sustainable growth over the long term. In our real estate vertical, we continued our investment in innovation, notably in connection with the expansion of our core functionality and the development of new opportunities in our Value Plus service offerings. Our technology platforms form the foundation for systems of record, engagement and intelligence that continue to evolve and deepen our customer relationships.

8:14 We are our customers' trusted partner in innovation and look for opportunities to further strengthen our partnership through connection points. From on-site property visits to attendance at industry events, and most recently our seventh annual Atfolio Property Manager Customer Conference held here in Santa Barbara. At this year's conference, we hosted over 800 attendees from a variety of market segments, including residential, commercial, student housing, Community Association, and Real Estate Investment Management. The conference offered customers a chance to get even more from their investments in Atfolio Property Manager, Atfolio Property Manager Plus, and Atfolio Investment Management through three days of industry and technology workshops, educational sessions, hands-on experiences, one-on-one time with our team, and plenty of networking.

9:06 The sessions included topics such as how we are using our tools and technologies, including artificial intelligence to further automate processes and increase efficiency across our customers' businesses. Turning to our technology, we expanded the capabilities of Folio Property Manager Plus in the third quarter as we added audit functionality with user action logs for better management oversight across the platform. Our configurable workflows functionality grew to include additional levels of configuration and automation for customers that manage complex, repeatable processes across distributed portfolios. Automation, artificial intelligence, and data-driven insights help maximize a property's performance, bringing staff members to deliver high-touch customer experiences.

9:56 We continue to leverage artificial intelligence as a transformational technology for the real estate industry. Today, we're incorporating AI to automate routine tasks and deliver business efficiencies for our customers. At Folio's AI Leasing Assistant, Lisa, which was built on technology acquired in the Dynasty acquisition earlier this year, automates the leasing experience by leveraging conversational AI to schedule appointments, streamline communication, and deliver performance insights. Tony Currie, Director of Bayer Property Management in the Bayer Real Estate Group, an At Folio Property Manager Plus customer who recently started using our AI Leasing Assistant, says, We have doubled the volume of leads that we are getting and have increased applications and showings for our leasing agents. Now, instead of our team performing administrative work at their desk, they are at the point of sales, shaking hands, building relationships, getting signatures, which is where their talent should be used.

10:56 Using AppFolio AI Leasing Assistant in conjunction with AppFolio's property management software enables our customers to provide a streamlined, high-touch, and high-tech leasing experience. We also released in the third quarter AI-powered Smart Bill Entry to automatically process invoices with ease and speed. Smart Bill Entry reads PDF invoices and identifies key information, then automatically enters that information into AppFolio Property Manager's accounts payables workflow. Instead of manually transcribing every field of every bill, users simply review and approve saving our customers' accounts payable teams a significant amount of time processing invoices. Additionally, we extended our features and functionality design for larger community association management portfolios.

11:47 With enhancements to board member tracking and management, we enable community association managers to further streamline their processes and boost efficiencies by providing additional automation and enhanced board communication for our customers. Our recently launched AppFolio Investment Management Software solution expands the reach of our offerings in the real estate vertical, and we continue to add to its capabilities in the third quarter. AppFolio Investment Management is designed to empower real estate investment managers with a modern solution that streamlines fund and syndication management. We've built functionality that allows general partners to share investment performance with their investors in seconds via the AppFolio Investor Portal.

12:32 We also expanded distribution functionality to include waterfall calculations, a task that was previously complex and labor intensive. Turning now to our legal vertical, we continue to deliver new functionality designed to help law firms improve business performance and provide a modern client experience. We recently released eSignature to streamline the client signature collection workflow and automated payment plans to enable law firms to collect more of their outstanding balances. At Atfolio, we know that a strong culture attracts talented team members, which, in turn, allows us to bring the best technology, innovation, and service to our customers. During the quarter, Atfolio was recognized with several awards highlighting our commitment to these principles from both a product and culture standpoint.

13:21 For the second year in a row, we received certification as a Great Place to Work by Great Place to Work, a leading authority on workplace culture. At Folio was also ranked number 14 on the Fortune Best Workplaces for Women list in the small and medium workplace category. And at Folio, Property Manager Plus was recognized as a finalist for 2019 Best SaaS Newcomer. In summary, we remain focused on the long-term strategy to delight our customers, build a happy and engaged team, and deliver innovative technology solutions that drive long-term growth in our business. Thank you all for joining us today. I will now turn the call back to the operator. Please go ahead. Thank you for participating in today's AppFolio third quarter 2019 financial results conference call. This call will be available for replay beginning at 745 Eastern today through 1159 p.m. Eastern on November 2nd, 2019.

14:14 The conference ID number for replay is 805- Again, the conference ID number for replay is 6038. The number to dial for the replay is 585-8367. You can now disconnect.