RealPage Inc
Q3 2019 Earnings Call Transcript

Published: 6 Nov 2019

[Operator:]

Greetings, and welcome to the RealPage Third Quarter 2019 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Rhett Butler, Vice President-Investor Relations. Please go ahead, sir.

[Rhett Butler:]

Good afternoon, and welcome to the RealPage financial results conference call for the third quarter ended September 30, 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. Welcome everyone and thank you for joining us. Today, we announced that we have entered into an agreement to acquire Buildium, one of the largest and most successful property management Software as a Service platform selling into the SMB rental housing market. This is the largest acquisition in our history intended to help us accelerate organic revenue growth in the large underpenetrated SMB market. I'll discuss the significance of this acquisition, review third quarter results and provide an update on innovations and initiatives to make RealPage an easier company to do business with in the call. During the third quarter, total revenue was $255 million reflecting growth of 13% compared to the prior year. Adjusted EBITDA grew nearly 22% to $72 million. This was a strong quarter for RealPage and I'm pleased that we exceeded the high end of our revenue guidance coupled with strong cash flow that will support future growth and M&A activity.

[Tom Ernst:]

Thanks, Steve and good afternoon, everyone. As Steve mentioned, we are really excited about the Buildium acquisition due to the significant market opportunity we can attack together, the strength of their platform and customer experience, the complementary nature of our platforms, and our shared customer-focused culture. Let's start by discussing some of the details around Buildium and our SMB plans. The purchase price is expected to be $580 million or roughly 10 times the annual run rate of revenue exiting 2019. For the trailing 12 months ending September 30, 2019, Buildium generated $50 million in revenue, which reflects 28% growth and posted a $1.4 million adjusted EBITDA loss. Revenue growth has been accelerating in 2019. And we expect Buildium to turn EBITDA positive in the fourth quarter. Commensurate with the large growth opportunity in the SMB market, our intentions are to continue to invest. We plan to direct cost and upsell revenue synergy growth to fund product innovation and accelerate go-to-market plans.

[Operator:]

Thank you. At this time, we’ll be conducting a question-and-answer session. Your first question comes from the line of John Campbell with Stephens. Please proceed with your question.

[Unidentified Analyst:]

Hey guys, this is Carter on for John. Thanks for taking my question. On the acquisition, I believe the press release said that Buildium manages two million residential units. Can you provide the mix of those units? How many are single-family, multifamily HOA et cetera?

[Tom Ernst:]

Unfortunately we can't. We will definitely once we close the acquisition and we will do a deeper dive on the business. What we're authorized to say now is that it's approximately two million units.

[Unidentified Analyst:]

Okay, okay. Got you. And one more kind of a bigger picture question around rent controls. I wanted to get your thoughts on that and whether you expect that to hurt potential technology spend? Or is it positive drivers as managers and owner ought to recover the loss yields from that?

[Steve Winn:]

Well, rent control is a concern particularly on the West Coast, New York. I don't think it's going to have a large impact on RealPage. We actually have products now that are designed to enable owners and operators to generate incremental revenue through monetization of the resident in other ways. So I'm not discouraged by rent controls. But rent controls generally are not healthy for economy and certainly not healthy for the markets that implement them.

[Unidentified Analyst:]

Okay, got it. That’s all for me. Thanks guys.

[Steve Winn:]

Thank you.

[Operator:]

Your next question comes from the line of Sterling Auty with JPMorgan. Please proceed with your question.

[Sterling Auty:]

Yeah, thanks. Hi, guys. I wanted to start with the comments that you made about the investment into 2020, if you were, and I know you're not giving guidance for 2020. But if you set the acquisition aside, would we think that the margin patterns that you've displayed over the last couple of years would continue? Or is there additional investment that you're putting into place? In other words potential for margin compression to as you talked about help stabilize and eventually reaccelerate organic growth?

[Tom Ernst:]

Yeah, thanks for the question Sterling. So before Bruin -- before Buildium -- that was our builder code name sorry. I guess that's not a secret anywhere. Before the Buildium acquisition, we would -- yes it does mark a bit of a shift. So we have previously entered prior years targeting 150 basis points plus of margin expansion. We want to drive performance improvement every year. And while we haven't set the target for 2020 yet, we will -- we anticipate that when we talk about targets, we will be talking about a Rule of 40 performance improvement, which is the combination of organic growth, plus EBITDA margin. And as we highlighted in our prepared remarks, we see the organic revenue growth as our first priority. So, we will be -- we are planning right now to try to strive for faster growth rather than margin expansion. So, you should expect to hear a plan from us on an organic basis that is tilted towards revenue growth. That being said, I don't think you should plan for an organic revenue compression -- or excuse me EBITDA margin compression from us.

[Steve Winn:]

But we certainly plan to grow the Rule of 40.

[Tom Ernst:]

Correct.

[Steve Winn:]

Moving into 2020.

[Sterling Auty:]

Got you. Got you. And then, together the different moving parts. So, implementation timing, some of the areas you mentioned that underperformed, some of that overperformed et cetera, is it fair to say that you're probably going to take at least a couple more quarters before we see that turn in growth because it's going to take time for some of these changes to basically take effect?

[Tom Ernst:]

Yes. Thanks Sterling. So we entered -- we entered Q3, really I think seeing organic growth stabilize as we kind of looked at the linearity of the quarter in Q2. And we're encouraged with seeing a stable 9% organic growth into Q3. And I think we felt encouraged that we had a lot of reasons why we could see acceleration. Well, really what we saw as Q3 progressed is stability in that metric. And so, a lot of the things we're excited about have actually launched to market. And Steve highlighted just a couple of the things we launched at RealWorld from the new product standpoint. I think he highlighted some of the things that we've done on the Yes-To-Success that are in the market. The blend overall of execution in particular when taken into account the Utility Management business, that has us at kind of a stable 9%. So it's prudent to talk about an 8% to 9% growth for Q4. But certainly, we believe that we're invested and we have a whole bunch of innovation to do better than that. And when we're executing to better growth, we'll start talking about higher numbers. But right now we're growing at 9%.

[Sterling Auty:]

Got it. Thank you.

[Operator:]

Your next question comes from the line of Pat Walravens with JMP Securities. Please proceed with your question.

[Joey Marincek:]

Hi, this is Joey on for Pat. Thank you for taking our questions. First, we are wondering, how does Buildium compare to competitors like AppFolio and Propertyware?

[Steve Winn:]

Buildium is a -- probably has a lower average units per client in the Buildium customer base. Buildium is -- got just an unbelievably easy user interface and self-provisioning capability that supports multiple asset classes. And they have accomplished what we are striving to accomplish with some of our products. They are moving up market. And so if you look at the AppFolio installed base they're larger and Buildium is competing from the bottom. Propertyware addresses a larger single-family holders and operators with trust accounting needs and more sophisticated requirements and they're competing with the RealPage OneSite installed base above AppFolio. So we're encouraged because we're going to be able to plug capabilities into Buildium that Propertyware and OneSite already have. The good thing about these capabilities and we've already reengineered them to be self-provisioned and they can be clicked on by the Buildium customer base. So we're going to give Buildium customers a much richer AI Screening capability of a complete suite of leasing and resident experience that they don't have. They'll have a better Renters Insurance a much more powerful payment processing platform. And probably most significant from an ARPU standpoint we're plugging in an extraordinary utility billing capability called SimpleBills that we acquired earlier in the year that has just a huge ROI for single-family owners and operators. So we think there's a big opportunity here for Buildium to become a much more formidable competitor and continue to -- they're tracked to move up in the market.

[Joey Marincek:]

And then my last question is what impact does the settlement between Yardi and property solutions have on RealPage?

[Steve Winn:]

We're told that they have settled, but we've not heard anything more than that. So in terms of the -- what we're seeing in the market there is no change. And I think that the whatever settlement they reached was confidential so we'll probably never know.

[Joey Marincek:]

Thank you.

[Operator:]

Your next question comes from the line of Matt Hedberg with RBC Capital. Please proceed with your question.

[Dan Bergstrom:]

It's Dan Bergstrom for Matt Hedberg. Thanks for taking the questions. Congrats on Buildium. Could you talk a little bit about the timing there, why it makes sense now? I know recently you've talked somewhat about a somewhat underappreciated opportunity at the lower end of the market and around single-family? Is it simply that?

[Steve Winn:]

Well if we look at the three segments that we compete in the enterprise which is 20000 units and above; corporate which is 5 million to 20 million; and SMB which is under 5000; multifamily units plus all of the single-family HOA market that's about 50 million units in SMB. We're generating about $306 million out of that space. And I believe that it is by far the most underpenetrated area of the market. And so, it just made a lot of sense to us to acquire a very successful competitor in that space and really double down if you will on SMB. We think there's a lot more growth opportunity there than anywhere else in the market right now.

[Dan Bergstrom:]

Great. And then could you talk a little bit about their presence in student housing? I believe there is some. You yourself you've had a lot of activity there this year top 10 student housing leader win press released recently. You acquired SimpleBills. You hosted a student summit earlier this year. Just a little bit more around that combined opportunity could be helpful.

[Steve Winn:]

You know a lot about what we're doing. We do think student is an interesting market. It's clearly not the size of conventional or affordable or SMB. But it's interesting because the revenue instead of calculating revenue based on the unit you calculate it based on the bed. So, you generate more revenue out of a student property than you do a conventional property. So, it is a focus of ours. We've I think played a little catch-up with one of our other competitors who focused on this area. And we've -- we now have what we believe is a compelling offering for the student market. SimpleBills was originally designed for students. So, that's been a home run for us. But it's a good important market and then we're focused on it.

[Dan Bergstrom:]

Thanks Steve.

[Operator:]

Your next question comes from the line of Ryan Tomasello with KBW. Please proceed with your question.

[Ryan Tomasello:]

Good evening everyone. Thanks for taking the questions. Just first, parsing through the 4Q guidance, can you perhaps rank the drivers of the reduction from what I believe was previously a 10% organic guide in the fourth quarter to revise 8% to 9%? How much of that relates to -- specifically to these ongoing implementation issues versus the other headwinds that you laid out in the Leasing and Marketing rollout and the resident utility management customer base? And then secondly, absent Buildium, would you have expected otherwise to be operating within your target 10% to 12% organic revenue growth range in 2020?

[Tom Ernst:]

Thanks Ryan. I'll take those questions in reverse order. So, I would say that right now we're executing towards 9% organic growth. That's what we did in Q1 coming off 10 in Q -- what we did in Q2 coming off 10% in Q1 9% in Q3 and the mid our range for Q4 implies 8% to 9%. So, I think to score where we're at fairly, we have about 9% organic growth momentum. So, as we think about looking forward we're looking to drive a Rule of 40 improvement on that 9% plus our margin of 20 -- at the midpoint again would be 28.5% which would score out of 37.5%.

[Ryan Tomasello:]

And then just on the other part of the question on how much of the 9% -- of the 8% to 9% for the fourth quarter relates to the invitation versus these other issues that you laid out?

[Tom Ernst:]

Right. So, I would say that the bigger two effects were the -- our revenue timing on a couple of the new product initiatives that Steve talked about along with the resident utility management billing business. And those are roughly equivalent in terms of the impact when we think about our second half projection. So, you look at the midpoint of our guidance range and we did end up reducing our outlook for the second half by about $6 million, the bigger two are those and they're about equal.

[Ryan Tomasello:]

Okay. Thanks for that. And then, on Buildium, realizing you're limited in what you can say, but can you help us understand what the potential revenue and cost synergies for that business will be in 2020 and beyond? You mentioned the deal will be 150 bps accretive to organic growth before any cross-selling and investment. So just wondering where do you see that 28% top line organic growth potentially going and what the potential EBITDA contribution might be in 2020? I think in the past you've given stabilized EBITDA multiple targets for some of your acquisitions. So I'm not sure if you're able to give that. And I know that's a pretty loaded question, but any color you can give would be helpful.

[Tom Ernst:]

Absolutely, Brian. Thanks. Unfortunately, we can't hard quantify or give you guidance on the close for the combination. We did try to give some insight. So, Steve talked in his prepared remarks about how we believe that, with the limited overlap in the market today between Buildium and RealPage that we have a big opportunity to go to -- together jointly with cross-selling of products and also bringing new products together that are just -- are enabled by our market presence. So there certainly are things that we're going to look to do that are going to create revenue synergies and are certainly operating synergies as well. So what I tried to highlight on the call is, our plan is to take both of those and apply the synergies to investing for growth. We're expecting Buildium to turn EBITDA positive in Q4. And what our plan today is that we want Buildium to be non-dilutive to our EBITDA next year, so all upside to synergies we want to imply and reinvest back in the business. So before synergies, looking at Buildium and just adding their momentum today, it would add about 150 basis points on the way we calculate organic growth to our organic growth momentum. And it would be dilutive to EBITDA margin by 150 basis points, so effectively neutral to our overall Rule of 40 score.

[Ryan Tomasello:]

And then just one last one, if I could. The RPU for Buildium looks to be around $30 today, based on the $60 million run rate. Is there a TAM for that RPU that you see over time?

[Tom Ernst:]

Yes. Good question. We do plan on walking you through in detail, some TAM analysis that we are evaluating and want to evaluate jointly when the deal closes. So there is a significant expansion. We do expect in the TAM as we go to market jointly and as we revise our look in the SMB market. I think, we talked a little bit about our view on the TAM in this market expanding as the market is more and more ready. And frankly, just as our software and software from the best-in-class platform of Buildium has come to market with its push buttons, self configured, low cost of support. The product is strong and the market's ready. So we'll go through that in detail when we close the deal and have our Analyst Day.

[Ryan Tomasello:]

Thanks for taking the questions.

[Tom Ernst:]

Thank you.

[Operator:]

Your next question comes from the line of Stephen Sheldon with William Blair. Please proceed with your question.

[Stephen Sheldon:]

Hey. I guess, first, can you talk some about what Buildium gives you that you couldn't have tried to build out yourself? And then secondly, just maybe on the timing, why this was the right time to complete an acquisition of some magnitude, especially as you're still working through some areas where you've talked about trying to improve execution?

[Steve Winn:]

Well, Buildium is the catalyst for expanding our investment in the SMB space. It's a $300-plus million business for us, and we think we can grow it at a substantially faster rate. So we want to invest in this area that is so underpenetrated. Could we have built the same thing that Buildium has? Yes. It would take time. And more important, we wouldn't have two million more units which matters.

[Tom Ernst:]

I'll add one more thing on top of that. One thing that we're particularly excited about is bringing on the team and the culture of Buildium. So the leadership team is bubbling with excitement about this as we've talked about the opportunity for things we can bring to market. The team of Buildium right now is having a town hall with some of our RealPage leaders that are joining to form a joint leadership of our go-to-market plans. And I think we're excited about the people and the culture, we're bringing together.

[Stephen Sheldon:]

Okay. And then I guess you've talked about investing more in the Propertyware business. Can you maybe just talk about what those investments could look like in terms of the product and the go-to-market strategy?

[Steve Winn:]

I wouldn't characterize it as Propertyware specific. It's SMB specific. Everything from a value-add service perspective which represents the lion's share of the revenue opportunity that we integrate into Propertyware will also be integrated into Buildium.

[Stephen Sheldon:]

Okay. Thanks.

[Operator:]

Your next question comes from the line of Jason Celino with KeyBanc. Please proceed with your question.

[Jason Celino:]

Hey, guys. Thanks for taking my question. I kind of have two related to Buildium. The first one is if we just take an average from the press release it comes out to about 120-ish units per customer for Buildium. Do you see an opportunity for that to get larger? And then second related question as we think about the growth opportunities in SMB in Buildium with two million units potential TAM of 50 is this more of how do you think of growth between units and ARPU expansion for SMB? Thanks.

[Tom Ernst:]

Yeah. Thanks, Jason. So one of the more exciting things about Buildium is that they have engineered the products to work so well. They offer 24/7 phone support as a normal course of business. So it's something that none of the other competition does, because their products just don't work so well. So the phone support is expensive and they make a part of a premium package. As a result Buildium has had tremendous success selling to customers with 30, 40, 50 units, 100 units, 200 units. And so that segment of the market they serve it efficiently and effectively like no one else can. The platform gets stronger every year. And I think there was a previous question on, why now? Buildium really has a rich platform that is ready to take them to mixed-use asset class. And as we've talked with Buildium over time we share kind of a vision for where the market is going and how we can engineer the best of what we have in our products with the best of what they're having to bring out more products. So certainly, we project that Buildium can scale well beyond this. And we'll talk a little bit more about the state of the business when we can get more details, but there's a bright future for that platform as there's a bright future for the Propertyware platform. which today serves typically much larger more complex customers. And as Steve highlighted, as well, the development that we're going to build together with the combined installed base and the data that can fuel the capabilities we can develop really unlocks the SMB opportunity. Operator? Jason are you there?

[Operator:]

Your next question comes from the line of Peter Heckmann with Davidson. Please proceed with your question.

[Peter Heckmann:]

Good afternoon, gentlemen. Could you talk a little bit more about bookings year-to-date where you've seen strength? And if possible can you quantify in terms of the percentage year-over-year, how bookings have looked and if possible by segment and by tier?

[Tom Ernst:]

So I'll give you some qualitative comments. We -- as you know we don't disclose all of our overall bookings growth. But we are seeing healthy bookings growth. Our bookings growth is -- I think as I commented in my prepared remarks are growing because we've expanded the capacity of our sales organization. So that's up about 6% year-on-year. And we are also seeing productivity lift on top of that At the same time I would say there's a couple of the issues that Steve pointed out. In particular we're not -- our bookings on the back of some of our new innovations we've launched this year are timing out later along with -- we've seen some marginal weakness in our utility management business. So on net, I would say that our bookings are healthy and certainly supportive of our outlook for 9% to 10% growth in Q4.

[Peter Heckmann:]

Okay. And then if you may defer this to your Analyst Day but any thoughts on how Buildium helps you achieve the 2020 goals you laid out?

[Tom Ernst:]

Yes. I think let us finish our strategic planning process and get past the HSR and give you a combined plan. But before we talk about synergies and go-to-market plans Buildium itself does change the model a little bit. It accelerates our organic growth. It has an equivalent negative impact the EBITDA margin percentage. And we are certainly going to outline a plan for you on how we plan for long-term growth and what we're going to do in 2020 at the Analyst Day.

[Peter Heckmann:]

Okay. Thanks.

[Operator:]

Your next question comes from the line of Mark Schappel with The Benchmark Company. Please proceed with your question.

[Mark Schappel:]

Thanks for taking my question. Most of my questions have been answered. Just one though. Tom with respect to the extended implementations that you're addressing through your Yes-To-Success programs I was wondering if you could just give us a little better idea of when the company expects those issues to largely be resolved?

[Tom Ernst:]

Well, I think we're putting in place the things to attack it with rigor. And Steve highlighted a few of them. And to put an exclamation point on we're getting much more sophisticated with tracking the whole Yes-To-Success process and the customer journey through that process. And so I think to the extent we have more time in that mapping through all phases of it we can get better and better. So we've been saying this all along that there's certainly short-term things that we think we're going to improve but we recognize we're in a long-term game. And as we think about where we want to be over the very long term we want to drive dramatic reductions in time from the time a customer decides they want to buy our services to the time they're fully successful. So we think there's a huge opportunity there. So it's a little -- it's a mix, continues to be a mix of a short- and long-term game. And we're going to send modest expectations for what we do as we think about the immediate future.

[Mark Schappel:]

Okay. Thank you.

[Operator:]

Ladies and gentlemen, we have reached the end of the question-and-answer session and this does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.