RealPage Inc
Q4 2019 Earnings Call Transcript

Published: 28 Feb 2020

[Operator:]

Greetings, and welcome to the RealPage Fourth 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 fourth quarter ended December 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. And welcome everyone and thank you for joining us. Q4 was a strong quarter for RealPage and I'm pleased that we exceeded the high end of our revenue and EBITDA guidance. 2019 was a pivotal year for RealPage as we released more internal innovations and acquired more external innovators than any time in our history. Our platform is thinly penetrated across the $580 billion rental housing market in the US. We estimate this market only spends about 1% of that amount on technology excluding telecom. As part of our 2019 investments we expanded our strategic platform to provide enhanced benchmarking transparency to help owners identify yield leakage. We believe our industry can capture 300 to 400 basis points of incremental yield by increasing technology spend and our benchmarking platform enables them to zero in on where to find this yield opportunity. The pace of new product innovation for resident services our largest and fastest growing product category continued to increase. In December, we deployed active building e-commerce a solution that is purpose-built to enhance the resident experience and drive incremental yield from amenities like spaces services and events. A radically redesigned custom branded mobile app enables residents to reserve and pay for amenities spaces and events directly including such things as parking, guest suites, self-storage, clubs at club houses conference rooms, yoga classes, dog walkers and more.

[Tom Ernst:]

Thank you, Steve. Good afternoon, everyone. During 2019, we launched one of the largest waves of innovation in the company's history, made six strategic acquisitions including one in January and implemented a comprehensive program that is yielding returns and driving our Yes-To-Success client journey. Our strong results for 2019 reflect these efforts and put us on favorable footing as we enter 2020. We close three of these acquisitions since we reported earnings last quarter. Buildium, IMS and Modern Message. We are very excited about the combined go-to-market and infusion of talent to drive growth in our SMB institutional and leasing and marketing business areas. Collectively these acquisitions did $71 million of revenue in 2019 including $54 million from Buildium. We believe there's significant potential for organic revenue growth especially as the cross selling and integration efforts Steve highlighted can take root. Financial performance for 2019 reflects strong revenue growth of 13% compared to the prior year. Adjusted EBITDA growth of 22%. We generated approximately $240 million of operating cash flow reflecting 28% growth compared to the prior year, excluding the impact from changes in restricted cash relating to accounting treatment changes and excluding a $12 million working capital impact related to the Buildium acquisition. Moving on to the fourth quarter financial performance exceeded our guidance. Total revenue grew 12% year-over-year which was 9% on an organic basis. The acquisitions of Buildium and IMS contributed approximately $2.5 million of revenue during the quarter and adjusting for this our total revenue performance exceeded the high end of our guidance by approximately $700, 000. Adjusted EBITDA grew 25% and exceeded the high end of our guidance range by nearly $200,000 despite a slight negative impact from Buildium and IMS. Payment processing when combined with renter’s insurance continued to be the biggest drivers of growth compared to the prior year. Other drivers of growth included asset investment management, business intelligence, property management capabilities such as op solutions in addition to our vacation rental platform. From a product family perspective, property management grew 10% year-over-year; leasing and marketing grew 8% and asset optimization grew 13% year-over-year. We did experience headwinds in leasing and marketing related primarily to the contact center where prices are declining as new AI BOT replace what humans used to do.

[Operator:]

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

[Daniel Bergstrom:]

Hey guys. It's Dan Bergstrom for Matt Hedberg here. Thanks for taking our questions. See the initial organic growth rate outlook for 2020 is impressive, I think 10% to 12%, 100 to 300 basis point acceleration, as you mentioned. Could you just highlight a couple of things here that have changed over the last several quarters that really have you in a better position to execute on that 10% to 12% growth rate here versus previously?

[Steve Winn:]

Thanks Dan. I'll take that. We, first and foremost have made some acquisitions that will drive some organic revenue growth. And just as important, we've introduced so many new innovations into the market that are driving significant incremental yield to our customers that we are very confident that organic revenue growth is going to accompany that or launch of those products. 2019 was a year of heavy investment for us and 2020 is the year that we expect to start to reap the benefit of some of that investment.

[Daniel Bergstrom:]

That's great, Steve. And maybe more specifically on one of those potential organic drivers, in the prepared remarks, you talked about Buildium traditionally purchasing outside value-added services. I think those would be things such as payment, screening, things like that. I'm assuming those haven't contributed much from a financial perspective? And it sounds like you're expecting more profitability with attach of RealPage value-added services. Is there any way to get a sense of the potential magnitude of that opportunity? Is there a way to measure it as potential ARPU uplift per unit or building or something like that?

[Steve Winn:]

Well, Buildium was under penetrated in value added services compared to RealPage. So, we clearly see an opportunity to accelerate the penetration of all the products you just mentioned. We also, candidly have a much higher profit margin on our value-added services than Buildium had primarily because they were buying them through third parties and so this is one of the reasons why Buildium was such an attractive acquisition. We see a lot of revenue, synergy opportunity and just as important we see the expense efficiencies that we can achieve just simply by using RealPage products that are better because we've been around a lot longer and are less expensive to operate because of our size.

[Daniel Bergstrom:]

Great, thank you.

[Tom Ernst:]

I'd add one more thought there, Dan. We also bring on just over 1,000,006 and unique units to our SMB marketplace, which gives us it brings on that rich data pool right so that we can have even stronger value-added services and bring more innovation of our overtime. So, this combination here as some pretty incredible firepower as we look down the road.

[Operator:]

Your next question comes from line of John Campbell with Stephens. Please proceed with your question.

[John Campbell:]

Hey, guys, great close to the year, Congrats. It seems like you've got the stage set for a kind of new and exciting year on the, I guess on the SMB front, I'm guessing you guys are going to attack that market pretty hard this year. I mean, you have Buildium in place. Sounds like you're gearing up to investments as well. I talked about some of the sales. The headcount increases sequentially versus 3Q. But could you maybe just talk through what else you need to do to better position yourself for that SMB opportunity. I mean is there a continuation of sales team growth, do you need to adapt some of your, I guess, legacy offering some ancillary offerings to better service in the market, any kind of update will be great.

[Steve Winn:]

I think the plan is, exactly as I explained it, we're focused on improving the capabilities of all of the value-added services that Buildium offers. We're going to for example be pushing our website technology into Buildium which is much better than any other competitive offering in the SMB space. We're pushing our renter's insurance platform into Buildium. Our AI Screening, we push into to Buildium; our payments engine which is much more profitable than theirs will be pushed into Buildium. So, all I miss maybe the most important SimpleBills which is a product, a company we bought in mid 2019, is just dead on the best solution for managing utility bills and we're seeing immense interest in the owners and operators of single-family properties in deploying the SimpleBills platform. By the way, the resident pays for that not the owner. So, it's a kind of cost neutral, but it dramatically reduces the cost and the owners incur to manage utilities as their resident base turns over.

[John Campbell:]

Okay, that's all for me, Steve, I want you to trying to get thoughts on CoStar, the pending acquisition of RentPath and how that might alter the ILS landscape?

[Steve Winn:]

Andy is nothing if he's not gutsy. He couldn't buy RentPath before because the DOJ would have tied him up in court, probably forever. So, he just waited until their high yield lenders forced him into bankruptcy. Of course, now you can argue that the failed firm defence should allow him to move forward with this acquisition. I'd like this is a chapter right out of the Robert Baron playbook. RentPath is a good company and it would be fine if their lenders didn't smother them with high yield debt. And I certainly understand why CoStar wants to buy them. It's the last piece of the puzzle they need to dominate the ILS lead aggregation space and multifamily. Based on our on our analysis over about 16 million guest cards submitted in the last 12 months CoStar and RentPath together represents approximately 70% of all lease is generated through ILS channels. So, this is an extreme concentration. I don't think lead aggregators are the friends of our industry. Once they control who shows up at the front door, they control our clients. CoStar is a great company and I admire the management but they have a market capitalization of $25 billion and after this acquisition should it go through, I think that will continue to grow kind of following in the footsteps of the hotel aggregators who have essentially seized huge amount of the equity stack out of that industry. I hope the DOJ and more importantly, I hope the industry figures out what's happening here and stops it

[Operator:]

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

[Ryan Tomasello:]

Good evening, everyone. Thanks for taking my questions. I was wondering if you can talk about how you expect the organic revenue growth and margin performance to ramp throughout the year, and perhaps what the 1Q guidance suggests for organic growth, if you didn't already give that in your prepared remarks, considering we're already close - about to close out the first quarter here. And perhaps you can give us some real-time insight on how the reacceleration is performing, and how Buildium is performing in the early stages so far.

[Tom Ernst:]

Sure. So, Ryan, I hope you're well. So, our Q1 guidance includes a range of 10% to 11% on an organic growth on the top line and as we highlighted on the call as well, organic growth for the year is a 10% to 12% range. Our EBITDA margin ramps through the course of the year. As we look at our margin expansion in Q1, we're expecting about a 200 to 250 basis point year-over-year decline in EBITDA margin. There are a couple of factors here at play. First, we are expecting about 100 basis points decline in gross margin. This is primarily due to acquisition integration in the mix along with the continued investment we've been talking about Yes-To-Success. The rest is growth investment for the year, as we think about that growth investment, the growth investment is front end loaded on the sales and marketing side. And we ramped a little bit more smoothly on the product development side as we look across.

[Ryan Tomasello:]

Got it. That's helpful. And I was wondering if you can provide us with an update on AI Screening. I know you've provided some color in your prepared remarks. From my understanding, this is one of the first large new product launches where you took the free trial type of approach with a push-button, self-configure product. So I was wondering if you can say how many units are actually paying for that tool today. And what kind of take rate that represents of the 1.7 million units that you mentioned opted into the product so far? And is this free trial method something that you plan to utilize more going forward to encourage adoption of new products?

[Steve Winn:]

We may use it in the future but 90% of the clients that opted into that so-called free trial, it wasn't a free trial on screening. It was a free trial on the price increase that was associated with the AI Screening product 90% of the 1.7 million units deploy it on have pass their date when they could make a decision not to continue to use it. I might add we have not turned this on yet with the onsite screening customers because we're just finishing the integration of AI Screening into on site. So, we're expecting another fairly significant lift when this deploys in the next quarter or two. What do we do it again; it's just going to be on a case by case basis. I think anytime we can self-provision a feature like this. The benefit of turning it on for everybody and telling them that you can turn it off and you don't have to pay for the increase or you just let it run is a way to drive adoption very quickly of these new features. So, we like the concept and I wouldn't be surprised if you see it again.

[Tom Ernst:]

Ryan, the impact on 2019 was just under a $1 million in revenue, I think you identified correctly that we launched this first as a free product for the first three months and then a money back guarantee for the next three months in last year and roll this out to customers and in a remote push button, self-configured launch over the course of Q3 and Q4. So, the run rate of businesses we enter 2020 is a little bit higher than that I called about 40 basis points lift plus to our growth in revenue for 2020. And the other one of the exciting things about this product too is that that's the installed base growth. So, I think the sales organization account management organization is excited about the opportunity to go out and win new business with this product as we look forward.

[Ryan Tomasello:]

Great. And then just if I can squeeze one last one in, a large competitor that - a large competitor that was just alluded to earlier also recently launched a suite of digital tools for owners at the low end of the rental market, primarily screening and online leasing and payments. I think it seems the focus of that push is actually even at a lower point than Buildium initially. But Steve and Tom, I was wondering if you had any thoughts around that? And if you think that this might, in some way, increase the competitive pressure on Buildium's cross-selling strategy?

[Steve Winn:]

Look, I think CoStar is who we're talking about is doing what they should do. I think the bundle package to the low end of the market makes a lot of sense. But I also think if you're a building in customer and RealPage offers the same thing, tightly integrated with their system of record, the clients are going to use that and not a standalone product that's not tightly integrated, particularly on the payments. I mean that you may get a screening payment through that platform, but I can't imagine that anybody would pay their rent through CoStar.

[Operator:]

The next question comes from line of Matt Walravens with JMP Securities. Please proceed with your question.

[Matt Walravens:]

Great, thank you. I guess two questions Tom one for you. Which is the operating cash flow came in way above what we'd modelled. So, love to get some colour there and then I'll just, I'll just throw the second one out. Steve, I'd love some more colour on how you think only Buildium will change the competitive dynamics with Yarid and AppFolio?

[Tom Ernst:]

Yes, thanks. Thanks that will take the cash flow question first. So, we do continue to be encouraged by our operating cash flow leverage. I think we continue to see that tracking well with our EBITDA expansion. I think we're applying good discipline to our investments in terms of CapEx that enables us to track quite well. So, I think we are happy with the expansion of operating cash flow unlevered free cash. So, I think as we look into next year, you should be expecting that we will pick up a little bit more interest expense associated with the acquisitions, but otherwise, I would continue to expect that relationship to track between cash flow and EBITDA.

[Steve Winn:]

With respect to the SMB market AppFolio and Yardi a product called Breeze is are the two primary competitors in that space or a bunch of other smaller ones. But those are the two primary competitors. By combining all of the value-added services that RealPage offers into our Buildium and property ware solution, I think we have a clear product leadership position against both of these competitors. Please recognize this is a huge market. I think if you take SMB, there's north of 50 million units there. So, there's a lot of opportunity for all of us to continue to grow in that space. If you look at our revenue breakdown now, we've got about 325 million of revenue in SMB coming out of 2019. And I clearly believe that segment will be the fastest growing category or segment of the market that we compete in. So, the colour you're looking for?

[Matt Walravens:]

Yes, that's good. And what would also be helpful just to sort of to just simplify it a little bit for us. Steve, what in terms of the number of units like how do we think about where Buildium is a real sweet spot is, where AppFolio sweet spot is and where Yarid might be in the SMB?

[Steve Winn:]

Well, I think Buildium is slightly below AppFolio, they tend to sell to owner operators that manage fewer number of properties. Now that's changing because as we surround Buildium with all of the capabilities that RealPage has then there's really no constraint on our ability to move up market with Buildium. I think AppFolio average unit counts about 300 on their customers and Buildium about 90. So that's clearly, we want to move up in the market and that's Buildium focus. And where I think we're going to really win is in the service levels that Buildium offers in the self-provisioning capabilities that Buildium provides. The accounting solution that RealPage brings to the table is far superior to AppFolio. I just think we got a good run here. But, it's a huge market, so I wouldn't - everybody's going to win.

[Tom Ernst:]

Yes, I'll add to that that we're closing in on 10 million total units in the SMB market at RealPage. Obviously, we're stronger before the Buildium acquisition in the upper end of that SMB market. But it certainly feels to me like the combination of Buildium and RealPage doesn't leave a sweet spot in the middle anymore.

[Operator:]

Your next question comes from line of Joe Vruwink with Robert W. Baird. Please proceed with your question.

[Joe Vruwink:]

Hi, good afternoon. I just wanted to follow up by saying it was said in the prepared remarks that maybe end markets are changing a little bit be it slower rent growth or higher vacancy rates. No question the market is still healthy, but has some of the more recent changes maybe help drive increased engagement with prospective customers maybe more so than was the case throughout most of 2019?

[Steve Winn:]

The multifamily rental housing market is still robust. I mean its rents are growing occupancies are at near record highs. But you are seeing some weakness in certain markets particularly in the Class A new construction area because of the amount of supply that's coming in concentrated in that particular asset class. As the markets loosen a little bit that's really good news for RealPage because our products become more and more important at least from the perception of the buyer. I personally think our products are important notwithstanding what market you're in. But as markets soften a little bit, I think people all want to start using revenue management. The idea of monetizing amenities that they adhere to for given away for free is a big deal. The efficiency of their - of the way they generate leases is very important. If they can improve conversion rates, it helps soften the blow of lowering price if you're not getting enough demand. So, we like where we are and candidly, I hope these markets just continue to move along the way they have been. I really, I think in sort of a perfect spot right now from a macroeconomic perspective.

[Joe Vruwink:]

That's great. And if I can squeeze one more in just on Buildium, I think I heard it exited the year at $54 million. And I think a quarter ago; the thought was maybe $52 million. I know kind of small numbers. But anything you point out that maybe helped build the finish ahead of the original plan in 2019?

[Tom Ernst:]

Sure, absolutely, Joe. And thank you and congratulations for launching coverage, by the way, as well. So, yes, Buildium exceeded what we thought would be $52 million. Now I think they had a healthy close to the year. And I think that's just natural momentum. Like we highlighted the business has seen some accelerating performance throughout the course of last year. So that trend did continue. But there's nothing exceptional about it, just a healthy close to the quarter.

[Joe Vruwink:]

Okay.

[Steve Winn:]

It turns profitable, guys. I think that that's -

[Tom Ernst:]

That's a big deal.

[Steve Winn:]

And we like to highlight that.

[Operator:]

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

[Unidentified Analyst:]

Hi, thanks for taking the question. This is actually Devin on for Jason. Another question on Buildium, if I may. So, I know that you guys have laid out somebody's integration plans for Buildium. But just wondering if you can give us a bit of comments on the feedback from customers on Buildium?

[Steve Winn:]

We've only owned this since the - what December 18 or something like that, right. So it's a little early for us to start quoting success stories, but I expect we're going to have a bunch of them to talk to you about, if you come to Analyst Day in July, generally the market is absolutely thrilled to see what they perceived to be a great company now having access to value added services that are best of class. So, generally, I think this, this market is, is highly receptive to this combination, and I think it's going to be a space for us.

[Tom Ernst:]

Yes. I'll add to that, Jason. I mean, what we - excuse me Devin, what we have seen is the teams that have come together so the RealPage, SMB teams, that is now integrated into the Buildium team to form one unit. And the excitement out of the Buildium and the RealPage that have come together is palpable. So, they are not only working on the things that Steve talked about, but the things that we're not ready to talk about yet, which is what's in their future roadmap and kind of the big things they're looking to tackle. So, I think you're going to hear - you hear a lot more about that. And I certainly expect that we will be able to expose some of that team to you at the Analyst Day when you when you come to real world and be able to hear from some customers directly there as well.

[Unidentified Analyst:]

Right, definitely looking forward to so many success stories. Another question I have is can your sales and marketing line which is around 16% out of total revenue, which is kind of like flat year-over-year? Just wondering if you can elaborate on that? And were like any major changes that happen and should we expect this trend to continue?

[Tom Ernst:]

Absolutely. So, we did ramp investment in the sales and marketing line, particularly as Q4 progressed. So, we are entering a year on a bit more of an aggressive posture in terms of the way we invest. We've also been continuing that investment expansion here in January. So relative to last year, I would say that the expansion sales marketing is coming a lot more around the December January time frame. And, strategically we plan on doing the bulk of the expansion here earlier in the year than I think we did last year.

[Operator:]

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

[Jackson Ader:]

Thank you. This is Jackson Ader on for Sterling tonight. Good evening. Our question - our first question, I should say, Steve, you mentioned a couple of times now the SMB market being large enough to where it's going to allow multiple winners. So if you think about maybe that 15 million unit total addressable market, how much of that do you perceive to be a Greenfield where you can basically go up against no incumbent or very little competition?

[Steve Winn:]

I think the bulk of it, if you look at that market, it includes apartments are multifamily was under 5,000 units that's pretty heavily penetrated at this point. Its single family is about 24 million units and that's got a lot of upside. It's not very penetrated at this point, particularly in the value-added services, I mean, there's they just, it's backwards and it needs new technology. And then the last category is HOA, which we entered through the acquisition of Click Pay they had a couple million HOA units that they were selling payments through. And it turns out Buildium offers the other half of the suite that HOA is need, which is all the management functionality. And so, we now have a complete solution for HOA. We believe the ARPU potential opportunity in HOA is about $100 a unit. And so that's how it breaks down but, it's all mostly Greenfield if you if you look at look at it from dollar perspective.

[Jackson Ader:]

Okay, okay. And then a quick follow-up. I guess sticking with the HOA market and ClickPay, any material overlap there that we should be aware of in that space?

[Tom Ernst:]

You mean with Buildium?

[Jackson Ader:]

Yes.

[Tom Ernst:]

Yes. In terms of the user account what so Buildium brings on as a significant HOA base as well, it's about 700,000 units coming in from Buildium in HOA that they get added on. And I don't know, if we've solved for the full overlap on that and perhaps the team has, I think a lot of those are unique units as well. But what's most important is that the combination of those two is our makeup. A very powerful platform that no competitor has right, the underlying property management plus the payments is a RealPage is bringing as a first in one platform to the market.

[Operator:]

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

[Stephen Sheldon:]

Thanks and congrats on the results and momentum. First, I wanted to ask about progress integrating different products like Click Pay, SimpleBills, and AI Screening into Buildium. How complicated is that integration? How long do you foresee that taking, where you could start to see, I guess, strong uptick in attach rates for those products within Buildium's existing unit base?

[Steve Winn:]

In the grand scheme of things, it's not that big a deal. It's building API's now, but essentially links all of those products. And the good news about the products we're linking in is they're generally self-provision already so they fit right into the building a model of click a button and turn it on. So, I think you're going to see beginning, literally, by the end of this quarter, you'll start to see some of it and throughout the year you're going to see this move pretty quickly. I think we've already sold our first SimpleBills deal in the Buildium. So, this is not that hard.

[Tom Ernst:]

Not that too hard, Stephen, I'll add that we're making sure that we ensure that we have a seamless customer experience on this. And that's important. I know we talked about last quarter and I know you understand that. Part of what really differentiates Buildium is how easy it is to use and how just seamless the customer - of our customers experiences. So, we want to make sure that we have it engineered just watertight as we launch so you'll probably see us do this and in a phased approach over the course of the year to ensure that that customer experience stays absolutely best in class.

[Stephen Sheldon:]

Got it. That's great. And then you clearly talked about taking Buildium more upmarket relative to their current average unit count by client. I guess do you also envision taking that down market as well at some point to go after the even bigger unit opportunity there? I know that there'd likely need to be a different go-to-market strategy but do you see that as an opportunity at some point?

[Steve Winn:]

Well, I don't see us going down to the owner of a single-family home at least not anytime soon. I think we really look at 20 units or more as the target market for Buildium that may change. But right now, we need to focus on the low hanging fruit and I don't think that's at that extreme low end.

[Tom Ernst:]

Right now, Steve, there's just so much opportunity to penetrate above that target market that we have far more growth than we can handle by doing that, but over the long run obviously we're building software that's self-configured and we'll be able to penetrate the full range of the market, it's not the focus now.

[Stephen Sheldon:]

Makes sense. And one last one, if I could. Good to hear that Buildium turned profitable. Any rough ballpark on what you've included for adjusted EBITDA for Buildium in 2020?

[Tom Ernst:]

I don't know that I'll break it down in detail, but we are expecting some margin expansion from Buildium. The focus is on growth in our single-family business, as we're bringing all these products to market together but we will see them expand comfortably into the single digits of margin this year as a percentage.

[Operator:]

Ladies and gentlemen, that was our final question and this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.