RealPage Inc
Q1 2019 Earnings Call Transcript

Published: 6 May 2019

[Operator:]

Greetings. And welcome to the RealPage, Inc.’s First Quarter 2019 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would like to turn the conference over to Rhett Butler, Vice President of Investor Relations. Thank you, sir. Please begin.

[Rhett Butler:]

Thank you, Operator. Good afternoon. And welcome to the RealPage financial results conference call for the first quarter ended March 31, 2019. With me on the call today are Steve Winn, our Chairman and Chief Executive Officer; and Tom Ernst, our Chief Financial Officer and Treasurer.

[Steve Winn:]

Thanks, Rhett. Good afternoon, everyone and thank you for joining us. We look forward to reviewing the first quarter with you as we continue our March towards becoming a more strategic platform providing by improving our operational excellence, accelerating innovation and positioning ourselves as a best-in-class partner to our clients. In the first quarter, total revenue grew 16% compared to the prior year and adjusted EBITDA grew over 20%. Financial performance were solid and executing our strategy remains our focus. In last quarter, we highlighted the 2019 is about improving our ability to make client successful faster. We call this Yes-To-Success which begins the moment that our client gives us the verbal green light to the ongoing use of our platform post implementation. We have tangible action plans in motion to drive improvements over the course of this year to address our growing backlog. I’ll briefly touch on a couple of areas. We’ve implemented a global onboarding process and invested in the team responsible for initial client orientation to shepherd the client through each aspect of the implementation process particularly for suite sales.

[Tom Ernst:]

Thanks Steve and good afternoon everyone. First quarter financial performance was solid, reflecting continued execution against our vision of becoming a strategic platform partner to our client.

[Operator:]

Thank you. . Our first question comes from the line of John Campbell with Stephens. Please proceed.

[John Campbell:]

Hey, guys. Good afternoon.

[Steve Winn:]

Hey, with the 2Q 2019 rev guidance, that was a little lower than we had forecasted, but your full year guidance was still solid that just I guess implying a pretty sharper -- a little sharper ramp in the back half. I’m just trying to get a sense for how much of that was just kind of business seasonality that we just king of miss modeled versus how much of a boost you expect in organic growth? And before you touch on that maybe if you could just provide what you're assuming for that organic growth in 2Q 2019?

[Tom Ernst:]

Sure. Absolutely, John. You’re right as we look towards the full year we’re raising the low end of our guidance range, maintaining the high end which is maintaining effectively the same organic growth that we talked about last quarter. As we look at the second quarter growth we’re assuming slightly slower growth on that. I think the things we think as -- think about as we look at the areas we have with several actions in place whether new product or some of the actions Steve talked about in our Yes-to-Success program that we anticipate are going to provide us some momentum lift. And as we look about the full year we anticipate that we will benefit from a portion of those at a minimum. Obviously we plan to benefit from all. But looking towards the second quarter I want to make the conservative assumption that that we really don't get the lift until I see it. So Q2, I’m planning for a little bit milder growth than the overall year plan.

[John Campbell:]

Okay. That make sense. So I guess its fair to say, if you had your implementation time as maybe you have set out for your goal, maybe it’s a 100, 200 bps or so of growth that would have fallen into the first half. Is that the way to think about it?

[Tom Ernst:]

Well, we actually think there’s quite a right opportunity across the whole Yes-To-Success spectrum, so I think that – the impact of – let’s talk about the Winn example that Steve mentioned. Highly successful customer that raves about the implementation. It was still a two-year limitation of the strategic deal. Now if the things we have programmatically in place can make dramatic improvements in that type of a timeframe, which means that the next deployment with Winn will come all that much faster. So, I think there's some dramatic performance gains that can be had over the long-term as we look at the whole cycle of Yes-To-Success.

[John Campbell:]

Okay. And last one from me. On demand units that looks another great quarter of kind of organic unit adds. What product or maybe just kind of broader segment contributing the most of the new units in the mix?

[Steve Winn:]

Yes. The unit growth was 25% year-on-year. Looking at the organic production, our organic growth is about half driven by unit expansion and about half driven by RPU expansion, which is consistent with what you've seen from us in recent quarters. So, looking at the reported level, the ClickPay acquisition certainly brought out a lot of units. So that's the majority or the primary leader for the inorganic acquisition. The organic units really are coming from products across our capabilities and I think reflect the fact the customers are choosing us as a suite vendors, a strategic vendor, specific traction within the suite includes as I mentioned vacation rental, HOA market, within the marketplace, many products with multifamily, so really its broad spread.

[John Campbell:]

Okay, great. Thanks guys.

[Operator:]

Thank you. Our next question comes from the line of Sterling Auty with JPMorgan. Please proceed.

[Unidentified Analyst:]

Great. Thanks guys. This is Jack Nader on for Sterling. Question from our side, so we heard the global onboarding process team is getting kind of spun-up or ramped up on the implementation side. And you mentioned that there are specific plans in place for the second half. Do you mind just giving us a flavor of what those specific plans are and whether you would expect them to be bigger undertakings or smaller undertakings than the projects you’ve already put in place?

[Tom Ernst:]

Unfortunately, this is not one thing that’s going to drive performance. It’s a large number moves that collectively will add up to reducing meantime to implement a suite. I should put this in perspective we are implementing individual products as fast as we always have. Where things have slowed down is in the area of combining multiple products into larger suites that by definition take longer or more complex, customer expects the whole suite to come in versus one product at a time. We’ve been somewhat overwhelmed by the success candidly of suite sales and that's the focus of a lot of these changes. Instead of deploying one product at a time you want to deploy the whole suite. So, when we talk about global consolidation of the implementation teams what we’re doing is bringing together each of the products into a central team so that we can deploy the suite at one time and accelerate meantime to implement the over suite. You’re going to see gradual progress throughout the year.

[Unidentified Analyst:]

Yes. All right understood. Thank a quick follow-up just on the Go Direct product. Within leasing and marketing how big should we think about Go Direct as a mix of that? And maybe how big do we think that it could be?

[Steve Winn:]

Well, leasing and marketing has been organically flat for several years. You should start to see it tickup as LeaseLabs kicks in with the Go Direct product which we are now in the process of deploying. It has showed really dramatic results allowing clients to shift the percentage of the overall lead flow that they get from indirect channels to direct which convert two to three times better. I mean our goal and achievement in many of the clients we’ve deployed is shifting as much as 20% of their overall leads from indirect to direct. And if you think about that that 20% shift with a conversion rate of two x is really dramatic change in the buying opportunity for the customers. I think we gave one example of a customer that saved million dollars. We’ve got many other examples where there is significant improvement in overall marketing spend. More importantly if a client can receive fewer high quality leads they are better able to manage their leasing staff. Today, the leasing staff has to pick through the leads that aren’t likely to convert, but they don't know that. And so to the extent we can deliver to them higher quality leads, its going to make the leasing staff more productive. So we’re quite enthusiastic about the Go Direct, it is the key initiative in our leasing and marketing suite and I think it’s a very large opportunity when you consider the fact that most operators are spending anywhere from $150 to $200 a unit a year on their overall marketing spend.

[Unidentified Analyst:]

Okay. Thank you very much.

[Operator:]

Thank you. Our next question comes from the line of Pat Walravens with JMP Securities. Please proceed.

[Pat Walravens:]

Great. Thank you very much. I guess I have two questions. First of all, I know this is oversimplifying but is there some way you guys can give us an idea in terms of like days or months, for how long it use to take you to get your customers live and where we are now with have so many more suite deals that you have to do?

[Tom Ernst:]

Good question, Pat, and the challenges we have get in and ask an apples-to-apples deal, right? So, when we actually get in and look at as Steve mentioned, the product wise comparison and our data has gotten much at this last couple of months, we’ve been diving in this in quite some detail. The data actually looks pretty good. In most products we’ve created some streamlined processes and we’ve made improvements on a days basis. That actual days implement just focusing on implementation part to your question ranges by product, some are quick and some are a few months before you’re typically live. The challenge that we’re facing as Steve, I think highlighted at least in the big picture is, we’re getting customers that are asking for much more complex bundles. So our organization is aligned around and sold suites that oftentimes have significant sequencing to them. And I think we’ve experienced inefficiencies particularly in handoff between product teams. Hence our efforts in some of the major initiatives that Steve talked about that we put into place here in Q1 and are going into place here in Q2 are around the orchestration of the interworkings of a product teams and capabilities to put those bigger suites in. So there if you take that altogether the time to implement our typical deal is definitely going up. It’s just not an apples-to-apples comparison.

[Pat Walravens:]

Okay. I mean, you know where this coming from Tom, which is with ultimate software they basically use to be six month and they went to seven months, and people got easily sort of wrap their heads around that. But it sounds like you don't they getting an average is the right way to do it?

[Tom Ernst:]

Well, I’m not as deep as into what exactly happened at ultimate. We have a far more comprehensive strategic platform than they had. So I think the difference between a win properties implementation and a standalone individual product of limitation is dramatic. You don't have that same range there. So its not uncommon where customers that have signed up for deals that can take us a year now, year and a half to implement.

[Pat Walravens:]

Okay, great. And then my second question is just on the competitive front is there anything that’s changing? And in particular, I get questions about AppFolio. Do you see them many more than they use to?

[Steve Winn:]

No. They are still in the low end of the multifamily market. There are very strong in the single-family space. I think they compete with the property where in a company called Buildium in that market. It’s a good company. They are trying to come upstream and they candidly just following the value-add services model that we adopted years ago by bundling main things like screening in payments and insurance and that sort of that. I suspect we'll see more of them. But so far we haven't lost enough business to them nor gained candidly enough business for them to move the needle in a most way.

[Tom Ernst:]

I want to add one more comment to your previous question Pat as well, to help you on that. I think we have a significant opportunity post implementation to ramping our customers to full success that we have realized as we've been studying this over the last several weeks. And so in these larger strategic deals what we’re finding is that not enough attention is being placed in the handoff to make sure that some components of the suite that require utilization and usage to ramp the full revenue value for us are being properly orchestrated and coached and the customers getting trained along. So we think we have a significant opportunity post implementation date on these ramped products.

[Pat Walravens:]

Okay, great. Thank you both.

[Operator:]

Thank you. Our next question comes from the line of Brian Essex with Morgan Stanley. Please proceed.

[Brian Essex:]

Hi. Good afternoon and thank you for taking the question. Steve, I was wondering if you can may point on the comments that were made about the consultative shift in the model. How pervasive is that throughout the organization? Are they kind of housed in the sales and marketing? Or is it different arm? And then how is that priced? Is that may be built into the sales and marketing or is it a separate C; I just trying to understand some of the unit economics and how we might anticipate that if it takes off to impact the margins?

[Steve Winn:]

It's -- in sales and marketing there are advisory services. The most interesting service -- we offer many services in that area, but the most interesting is a asset optimization study that we began early last year where we go in and analyze how is a customer utilizing their systems, processes and people in order to drive, improve revenue, reduced expense and mitigate risk. And we found with these in-depth studies which we can typically do literally on a small number of properties where we can really get into the meat, is they're not utilizing the systems as effectively as they should. They are not exploiting all of the product opportunities that we have to drive revenue. So, while we get paid a consulting fee to deliver the service the real value has nothing to do with the consulting fee. That's surrounding error. The real value is in the ability to sell or up sell additional product that will allow them to optimize the overall yield they get from our platform. Is this a significant amount of consulting at this point? It's not significant. Is it going to grow? It'll be the fastest growing area we fund because we're so excited about the results we're seeing from this. So I'm excited about this is going to work. We've proven it works and we're going to do more of it.

[Brian Essex:]

Got it. That’s helpful. And maybe Tom one for you; if we could talk about the backlog a little bit, as you look at kind of the extended backlog timeline how much backlog is fallen out due to deployment issues? And maybe could you talk about how your win rate might have been affected as a result?

[Tom Ernst:]

Yes, absolutely. Good question, Brian. So I think that's actually minimal. I think there are anecdotes here or there, but largely from the customer's perspective they perceive that RealPage is actually getting easier to do business with and they're engaging us more and they're signing up to buy more. So from their perspective they're not experiencing these inefficiencies. I don't think that lets us off the hook. We want to move more product to them faster and get them ramped to usage faster to meet their demand. So it's less a case of not being able to deliver product. It's more a case that they're asking for more complex deployments of larger suites that we need to be able to deliver faster.

[Steve Winn:]

And you do become a victim of your own -- of your clients change management. They don't -- they have 50% turnover at the site. And so deploying new systems can be a challenge. And part of what we're focused on in this whole area of improved Yes-To-Success performance is how do we reduce the amount of change management that the customer has to go through to adopt these larger suites. At the end of the day that is what's going to drive the needle the most right.

[Brian Essex:]

Right. And maybe just kind of one more fine point on that. Are these primarily brand new customers or these conversions of existing platforms within the installed base?

[Tom Ernst:]

No, it’s both. It's customer signing up for complex larger suites.

[Brian Essex:]

Got it. Helpful. Thank you very much.

[Operator:]

Thank you. Our next question comes from line of Matt Hedberg with RBC Capital Markets. Please proceed.

[Dan Bergstrom:]

Hey, it's Dan Bergstrom for Matt Hedberg. Thanks for taking our questions. You talked a little bit about accelerating innovation in the prepared remarks you highlighted the analytics product. I think you're bringing your largest suite of new products to market in 2019. Are there any additional products or innovations you'd like to highlight. Anything we should keep an eye out for at real world or beyond?

[Steve Winn:]

Well, the one I'm most excited about is AI screening. this is a -- it's a new screening model that our data scientists discovered by analyzing tens of millions of transactions and correlating that to a lot of third party data that we brought together. And lo and behold they’ve figured out they could cut the balance that average resonant owes to an owner by almost 50% with a new model. That translates to about a $30 per unit per year gain. We are now pushing that innovation out into the market. We are charging for that as an up sell, but I don't -- the customer would be crazy not to adopt this because of the immense improvement that it delivers in the overall performance of the property. Another advantage of this is it simplifies the screening model where we used to have much more complicated rules incorporated into the statistical models. Now this new model pretty much eliminates the rules which drastically reduces the overall cost of supporting screening. This is one example of how we use our advantage in data to recommend actions that our customers should take and deliver products that allow them to act -- to produce a better performance by either revenue reduced expense or mitigate risk. We're using analytics in many other areas at this point. Our data science team is a large and they really become an asset that I think is going to be difficult for competitors to match and even if they could match the skill of the analytics team they don't have the data footprint that RealPage has. And so I think this -- don't think about as an analytics company, think about us as taking analytics and using that to drive action that improves client performance.

[Dan Bergstrom:]

Interesting. And then it looks like the average renewal rates been trending up here for five quarters now in bottomed in late 2017. Maybe what's driving this? And then if you could remind us what was occurring in 2017 where it was trending a little lower?

[Steve Winn:]

That’s a meaningful enough trend to even comment on?

[Tom Ernst:]

Yes. I don't think so. So think thinking about the renewal rate we've seen it largely consistent. So I think one thing that's been driving some upticking is as we get more distance from our LRO acquisition. We experienced some turnover in the wake of that acquisition due to just customer concern over the direction while it was in limbo while we were under HSR review. So I think as we're putting some distance we're benefiting from a margin less attrition, but I'd say it's largely a consistent trend of attrition and renewal.

[Dan Bergstrom:]

Great. Thanks.

[Operator:]

Thank you. Our next question comes from line of Stephen Sheldon with William Blair. Please proceed.

[Stephen Sheldon:]

Hi. Good evening. So appreciate all the detail on the changes you're making to the implementation process. I Wanted to ask it at a high level how far along are you in correcting I guess these issues? And based on what you can see so far when would you roughly expect to be able to potentially catch up and reduce overall backlog? Should that -- could that happen in the second half of the year?

[Tom Ernst:]

So again thinking about the issue as the whole Yes-To-Success cycle, so this is the whole process of customer says yes, they're ready to contract with us to the full realization of the revenue at the booking. We've been growing that whole Yes-To-Success backlog until this quarter where I think we're about treading even. So this has been something and I think we've recognized as has been a challenge over the last two to three quarters. And as you heard from us last quarter is a challenge that we got laser focused on one that needs full attention and an aggressive approach. So I think some of the things that Steve highlighted in his prepared remarks are things that we anticipate can have tangible and near-term effects. But once again we've been building backlog until this most recent quarter and we're stabilized. I'd like to see performance improvement before I prepare an outlook for you that includes that.

[Stephen Sheldon:]

Makes sense. And then can you talk about the asset optimization business and the bookings trend there along with conversion? It seems like it slowed down quite a bit. Or was that just the implementation challenges that may be impacting that business more than others. And then did you also provide an overall bookings growth number for the quarter? Apology if I miss that.

[Tom Ernst:]

No worries. We said that the bookings growth was consistent with our revenue performance both total and organic. And you're right, the asset optimization business I think there's a couple of main drivers, but the biggest of which is it is common – most commonly getting sold in these strategic bundles and is often slated very late in the implementation. So, people are getting very excited and choosing to be to choose a real page as a platform partner. And unfortunately that means for the AO products that they're often product number three or number four in a larger suite of products rather than being sold one by one. Lesser effect I think we still have some of the after effects in comparison from the -- on the revenue management side from the LRO acquisition. That's just pure math. So those two come together we've seen some nice acceleration in the bookings line across all the product families within the AO suite. But the net effect is in the near-term revenue, revenue growth rates are still -- have still slowed to what we expected them to slow to and we talked about it last quarter.

[Stephen Sheldon:]

All right. Thank you.

[Operator:]

Thank you. Our next question comes from line of Mark Schappel with The Benchmark Company. Please proceed.

[Mark Schappel:]

Hi. Good afternoon. Thank you for taking my question. Steve, starting with you, if I recall correctly from last quarter the company's centralized its product development efforts. And number one, I was wondering if this is part of the Yes-To-Success program. And number two, if you could just talk about maybe some of the early benefits you're seeing from that change?

[Steve Winn:]

This was long overdue. We're so excited about this consolidation coupled with a new system that we've deployed that allows us to much more accurately analyze the amount of resource that we've deployed against each innovation or each development project in the pipeline. What we're now seeing is there is opportunity to improve that asset allocation -- that resource allocation if you will. One of the areas that I'm really delighted about is product development didn't grow that much in Q2 and yet we're innovating more than we have ever innovated in the past. And so I'm anticipating we're going to continue to see improve leverage in product development. Now with no impact on the ability to continue to innovate with this enough resource to deliver products faster. So this has been a very positive change for us. And I just think it's going to get better from here.

[Tom Ernst:]

Mark, I'll add onto that. One of the tangible things we saw right away from the system, Steve has mentioned, previously we had product wise developers and engineers working on our major projects. And one thing that we've gained insight into right away is that those engineers were spending time that we didn't want them spending on in pet projects or in products or in initiatives that weren't adding value from a strategic standpoint. And so, I think we we've got the ability to make sure we really had the focus and prioritization happening. So we were very excited to actually have the data and make real time adjustments.

[Mark Schappel:]

Great. Thank you. And then, Tom, with respect to your implementation project backlog did actually go up in the quarter?

[Tom Ernst:]

It did grow but as a percentage of revenue we’re essentially consistent. And again that's the whole pipeline Yes-To-Success.

[Mark Schappel:]

Okay, great. Thank you.

[Operator:]

Thank you. Our next question comes from line of Peter Heckmann with Davidson. Please proceed.

[Peter Heckmann:]

Hey, good afternoon. Most of my questions have been answered. But just wanted to see if you would give us an update on the outlook for additional M&A. How you see in terms of properties, trading hands, competition for deals and valuations?

[Tom Ernst:]

Yes, absolutely, Peter. I’ll just start and Steve, jump up if you want. So there continues to be a healthy opportunity to pipeline. There are interesting companies out there. I think as we highlighted last quarter 2019 and as we think forward is really about accelerating organic innovation. And I think on the margin you're going to see our growth shift that way. That being said, we're in a great position to be the natural acquirer of focused point companies that made an invention and had something interesting and we see a handful of those and we're well capitalized to be able to continue to bring those into the RealPage mix where they make sense. Valuations; well I mean we're in a healthy market. And I think private company valuations reflect the public company valuations to an extent and we're doing our best to be smart about what is the right way to get real return, right. So we are we're grounding ourselves in the fundamentals of the economic returns top and bottom line and that's obviously deal dependent, depends on the strategy we're looking at. So, we don't follow a public market driven value perspective. We follow what is the return we can generate from hard quantified standpoint. So bringing that all together there is still a healthy opportunity pipeline for us.

[Peter Heckmann:]

All right. And just to provide additional -- little additional color on that. How about on the international side, I mean do you over the next three years in order to continue to drive attractive growth rates. You see international becoming a large component of the growth?

[Tom Ernst:]

Well, first the motivation for M&A is going to be about driving our strategy, right. We are about taking data and driving action out of the data. And we're about making sure that we're the best strategic platform vendor to our customers. So, international is a driver for us as we think long term strategically in many ways because many of our best, our biggest strategic customers want us to be international with them. So we already have gone internationally with customers. And I think I think we're evaluating what are the best ways to and the ways that are going to drive us the greatest return for shareholders and moving internationally. But it's not you know my point is it's not about driving growth. It's about driving the right strategy.

[Peter Heckmann:]

Got it. Thank you.

[Operator:]

Thank you. We've reached the end of our question and answer session. Allow me to turn the floor back over to management for closing remarks.

[Steve Winn:]

Thank you very much. Hope to see you in an Orlando.

[Operator:]

Thank you. This concludes today's conference. You may disconnect your lines at this time and thank you for your participation.