RealPage Inc
Q2 2017 Earnings Call Transcript

Published: 3 Aug 2017

[Operator:]

Good afternoon, and welcome to the RealPage Second Quarter 2017 Results and Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Rhett Butler, Vice President of Investor Relations. Please go ahead.

[Rhett Butler:]

Good afternoon, and welcome to the RealPage financial results conference call for the second quarter ended June 30, 2017. With me on the call today is Steve Winn, our Chairman and Chief Executive Officer; and Bryan Hill, our Chief Financial Officer and Treasurer. In our remarks today, we will include statements that are considered forward-looking within the meaning of Federal Securities laws. In addition, management may make additional forward-looking statements in response to your questions. Forward-looking statements are based on management's current knowledge and expectations as of today, August 2, 2017, and are subject to certain risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. A detailed discussion of such risks and uncertainties is contained in our Annual Report on Form 10-K previously filed with the SEC on March 1, 2017, and our quarterly report on Form 10-Q previously filed with the SEC on May 8, 2017, and our earnings release and materials distributed today. RealPage undertakes no obligation to update any forward-looking statements except as required by law. Finally, please note that on today's call, we may use or discuss non-GAAP financial measures as defined by Regulation G. The GAAP financial measure most directly comparable to each non-GAAP financial measure used or discussed and a reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure are included in today's press release. In addition, please reference the explanation of non-GAAP financial measures section of today's earnings press release for more information. With that, I'll hand the call over to Steve.

[Steve Winn:]

Thanks, Rhett. Good afternoon, everyone and thank you for joining us on our second quarter conference call. This has been an outstanding and very active quarter for RealPage and we are excited to share the results with you, and of course discuss our progress towards achieving our 2020 goal of $1 billion in revenue and 30% adjusted EBITDA margins. In summary, our financial performance highlights exceptionally strong execution against our mission reflected across the key metrics of revenue growth, margin expansion and cash flow generation. I am particularly pleased with operating cash flow of over $46 million for the quarter, up 46% compared to last year. Growth acceleration within our asset optimization and leasing and marketing solutions returning to positive organic growth in the second quarter. In addition, the industry continues to consolidate including our latest acquisitions of AUM, which closed mid-June, and our more recent agreement to acquire On-Site which we announced in a separate press release today. My remarks today will focus on four areas. First, the macroeconomic health of our industry. Second, the importance of suite sales in our go to market strategy. Third, an update on acquisition activity since the beginning of the year, and I will close by discussing major areas of innovation and investment that the company is making to position RealPage for continued growth and prosperity in the future. Beginning with macroeconomic trends, the rental housing market continues to exhibit strength. According to our data, occupancy for the second quarter was 95%, which was essentially full performance but behind the mid-2016 rate of 95.3%. Annual rent growth registered 3.6% exhibiting stabilization after 2016's decelerating rent growth. Units under construction topped 560,000, which is still very strong in a historical context but shy of the 2016 peak of around $650,000 units. Today's strong demand for apartment reflects the combination of solid job formation, continued limited loss of renters to home purchase and widespread availability of appealing new apartments. We continue to migrate our sales emphasis away from cross-selling individual products to selling bundled suite solutions. We are pleased with the success we are experiencing here. Our clients are best advocates of this strategy. CAPREIT Residential Management from Rockville, Maryland, recently chose a bundled suite of RealPage products after an extensive competitive review process. COO, Miguel Gutierrez, who oversees a 12,000 unit portfolio, sought a more integrated and multi-dimensional view of his business. Gutierrez said that when he began the review process, he wasn’t expecting all the software he needed to come from a single company. However, RealPage offered him the most comprehensive suite of products from the perspective of both price and functionality. CAPREIT is in the process of implementing our accounting and financial suite, property management, business intelligence, training, online leasing, mobile facilities, revenue management, the contact center and our learning management system. Data is extending the power of our solutions even further. For example, Parker Management, a 10,000 unit firm focus on the affordable segment, recently commented that our business intelligence solution is completely changing the way they do business. They can now look at trends across their portfolio regarding things like vacancy service request and leasing patterns to make strategic decisions and drill down as needed to identify specific problems and opportunities. There eagle eye view on the data is helping to drive a results oriented culture, even encouraging BI use at the site level to enable efficient and cost effective decision making. This is quite encouraging because in my view the broader the adoption of our data analytics platform, the more opportunities we have to help clients understand where operating weakness exists and where our software can be deployed to optimize performance. These examples demonstrate the power of selling a data oriented platform instead of single point solutions. We intend to continue promoting suite sales which should contribute to our organic growth objectives and potentially accelerate growth in the future. Now on to acquisitions. This has been a busy six months with the acquisition of AXIOMetrics and American Utility Management, which both have closed. In addition, we have entered into agreements to acquire the LRO business Rainmaker and now On-Site, which has not yet closed. Through a well executed acquisition strategy, we see strong opportunity to extend our visionary leadership, complement our internal innovation with great ideas that have been brought to market by smaller companies and expand our massive repository of data. Moreover, we possess the capital structure and cash flow to support an active acquisition strategy. All while maintaining comfortable level of debt leverage. We will invest just under $700 million on these four acquisitions with a debt leverage ratio of slightly below four times trailing 12-months pro forma EBITDA upon closing of four transactions and existing 2017. Given the cash generation power and predictability of our financial model, we expect this leverage ratio to come down by one turn within a year and we are comfortable with this level of leverage. These acquisitions and the related integration efforts are being led by different RealPage executives. So we maintain sufficient span of control to appropriately manage the integration of the businesses. Finally, with our service bus and Unity technology platforms, we feel comfortable that we can integrate these acquisitions much faster and for less cost than was required for prior acquisitions. The integration of AXIOMetrics is proceeding ahead of plan. We recently announced the next generation of RealPage data analytics that combines AXIOMetrics MPF Research and real capital analytics with the YieldStar forecasting engine. This announcement was made at our RealPage user conference a couple of weeks ago with great reviews from clients in attendance. Our acquisition of American Utility Management announced and closed in June, bolsters our resident utility management platform while providing incremental energy and water consumption and cost savings. By combining the RealPage platform with data available from AUM, we expect to create the largest and most accurate data base of utility consumption and cost data in the industry. Our new RealPage utility management will provide utility management solutions to over 2.5 million units affording the scale we need to improve the service and lower cost. The closing of the acquisition of LRO from Rainmaker is still pending regulatory review which we expect to be completed in the next several months. To facilitate an orderly review process and to give us greater flexibility in the event any issues arise or if we require to litigate the matter, RealPage and Rainmaker have entered into an amendment to the asset purchase agreement that would allow for an extension of the terms under certain circumstances. We remain optimistic that the deal will be cleared by the Justice Department given the wide variety of options in the market. In fact our data shows that the overwhelming majority of multifamily properties price their units using methods other than commercial revenue management software offered by RealPage, Rainmaker and various other software providers. Most units are priced using property managers own proprietary in-house revenue management systems or with other pricing data analytics services. And as a result, our penetration into this market is quite low. Of course, we look forward to finalizing the process and completing this acquisition. Today we also announced our agreement to acquire On-Site. On-Site offers a comprehensive suite of leasing and marketing solutions with a primary focus on resident screening services. On-Site has little penetration into clients using our property management solution but are heavily penetrated into Yardi, MRI and AMSI clients with 1.5 million units using one or more of their products. This acquisition will give us a very powerful leasing platform that integrates well with peer property management systems. We plan to combine RealPage's advance prospect websites, resident portals, lead management and payment solutions, with the On-Site leasing platform. We are excited to get going with this acquisition as it presents many operating and revenue synergies. Accordingly we expect to cross-sell rich property Web site content into the On-Site installed base including 3D animated tours, rich property photography with proper digital rights, enhanced SEO relevance in our new omnichannel contact center. From a screening perspective, we expect to incorporate our massive rental payment history database into On-Site to help improve their scoring models. In addition, we will offer credit optimizer to On-Site clients enabling them to dynamically adjust credit thresholds based on supply and demand imbalances while simultaneously adjusting rent to cover the cost of additional risk. After combining with On-Site, RealPage will offer screening services to about 5 million units enabling us to achieve economies of scale and eliminate duplicate costs since both of us utilize similar data sources. From a lease management perspective, we expect to incorporate On-Site's robust online and on-premise lease document library and workflows into the RealPage offering. Critically, we will continue to support integrations with peer property management systems, particularly with Yardi where we have built joint, dedicated teams that work on integrations between our platforms and various Yardi products. We want to ensure that joint clients are not harmed and can seamlessly move their front-end leasing platform to RealPage in what has become a tumultuous environment for clients utilizing certain front-end products. Lastly, from a data analytics perspective, we expect to add consumer credit, demographic and socio-graphic data from On-Site to the RealPage data analytics platform. We expect this to further increase the accuracy of solutions that rely on that data to help operators optimize yields to help real estate investors optimize the placement and the harvesting of capital. Depth of demand by price point is critical to both of these constituents and On-Site's incremental data gives us -- gets us a little closer to solving one of these key issues in the rental housing industry. Finally, I would like to talk about investments for future opportunity. Attendance at our user conference a couple of weeks ago increased to 18% over last year and we announced a number of important new products and discussed our investment in the RealPage Unity platform. Unity is the term we use to describe a major technology platform enhancement that we started a few years ago to create a single source of data truth across all of our solutions to provide a single sign-on and authentication of roles and rights for all solutions, and to adopt a single user experience across our platform. We showcased the progress we have made with Unity and received enthusiastic feedback that Unity would significantly improve ease of use, accelerate implementation times and reduce operating expenses from our clients, at the user conference. We also continue to invest in the next generation of our leasing and marketing product family, introducing a major enhancement to our contact center offering called Omnichannel. Omnichannel enables customers to use any form of communication, voice, text, chat, email or social, to communicate with a property staff member and all communications is captured in a single history file. We also introduced the idea of Omni-agent, whereby leasing agents and contact center agents interact seamlessly between each other from a single desktop application. Finally, we announced major improvements in our property Web site and landing pages. RealPage will be using state of the art new photography tools to capture rich content for all of our clients over the next year. We expect our leasing and marketing solution to show accelerating growth and believe this area is ripe for disruptive technology improvements addressing the $150 to $250 per unit per year spent by our clients on advertising and marketing. We believe leasing and marketing solutions from RealPage can drive that cost down by originating more leads through channels with the highest conversion from lead to lease. Finally ,at the user conference we introduced next generation of RealPage data analytics, which combines the capability of AXIOMetrics MPF research and real capital analytics with the precision forecasting functionality from YieldStar. RealPage data analytics will be rolled out later in the year and will enable owners, operators and investors to underwrite expected property performance for over 70,000 multi-family properties in our database. Notwithstanding these investments, we are still able to grow adjusted EBITDA margins by 280 basis points in the second quarter. While we expect the level of investment in our future will increase over the next few quarters, we are still committed to delivering 200 basis points per year of margin expansion. In summary, our strong second quarter results reflect our success in executing our strategic mission to drive value for our clients across their operations. Our data rich platform, integrated comprehensive suite, innovative and acquired technology and our large market opportunity, all support our long-term goal of reaching $1 billion in annual revenue and $300 million of adjusted EBITDA by 2020. I will now turn the call over to Bryan Hill.

[Bryan Hill:]

Thanks, Steve, and good afternoon everyone. The strength of our Q2 financial results reflects another step forward in our mission to optimize real estate asset values for both property owners and real estate investors. The strong results also highlight our steady execution towards achieving our 2020 objectives, our intent to invest and innovation and our compelling financial model. To achieve our 2020 financial objectives of $1 billion in revenue and $300 million in adjusted EBITDA, it is imperative that we drive operating discipline and efficiency throughout the organization. With each quarter, we come closer to our objective and our entire organization has seen the value driven from their efforts. It's also equally as imperative that we invest timely and prudently. The investment Steve discussed, our recent acquisitions of AXIOMetrics and AUM, our pending acquisitions of LRO and On-Site, all have the same purpose. To deepen adoption of the RealPage platform by leveraging our unique data, to drive revenue growth acceleration and to ultimately drive increased profitability and compelling cash flow. The acquisition of On-Site we announced today is another great example of how we complement our organic investment strategy. We are very familiar with the On-Site business. There is considerable overlap with what RealPage offers today. However, in some instances, the On-Site has advantages. The asset is expected to extend our screening platform, improve our lease management platform, add approximately $700,000 new units and offer significant synergy opportunities. But perhaps one of the most compelling reasons for the acquisition, On-Site has deep integration into most major property management systems outside of the RealPage platform and possesses a vast amount of consumer oriented data, both of which are strategically key. We expect the property management systems integration will help accelerate the adoption of the RealPage platform in the near-term especially with leasing and marketing solutions and the data will play a pivotal role long term. In addition, given the scale of the combined offering, we believe there is a significant opportunity to enhance the platform for our clients while achieving significant synergies over time. In concert with our technology acquisition investments, we continue to invest modestly in certain areas of the sales force while achieving higher sales force productivity. Total new sales bookings and sales team productivity experienced strong growth during the second quarter with productivity up over 20%. We are extremely pleased with this performance. Our second quarter results reflect a couple of key takeaways that I would like to highlight. First, on-demand revenue grew 14% compared to the second quarter last year. The subscription component represented 91% of on-demand revenue and grew 15%. Units grew 4% compared to the prior year quarter excluding units related to our former senior living referral service. Revenue per unit was nearly $57 and grew 15%. Annual client value was $649 million, representing 18% growth. The main drivers of this performance were continued consistent growth from property management of 8%, continued strong growth from resident services of 19%, and accelerating growth from asset optimization of 47%. In addition, the leasing and marketing product family returned to positive organic growth after four quarters of decline. Property management growth was driven by accelerating growth in our [spend] [ph] management solution, as well as solid adoption of our one-site solution. Resident services is benefitting from strong growth from our payment processing, renters insurance and utility management solutions. Leasing and marketing's return to growth was driven by screening, online leasing and organic lead-generation solutions. Contact center continues to be a headwind but we are excited about our new Omni-channel functionality which we unveiled at Real World and expect this capability to drive incremental revenue growth in the contact center over time. Asset optimization continues to see accelerated growth driven by our data analytics, revenue management and BI solutions. Asset optimization organic revenue accelerated again sequentially and grew 21% compared to the same period last year. AXIOMetrics continued to achieve revenue growth above our expectations. Second, our profitability performance continues to be impressive notwithstanding the investments we are making to the RealPage platform. We achieved $39.4 million of adjusted EBITDA, a margin of 24.3%, reflecting margin expansion of 280 basis points and growth of 29%. Looking at the components that drove the margin expansion and relative to our long-term goals, gross margin was 63% excluding depreciation, amortization and stock-based compensation and was accretive to aggregate margin expansion of 70 basis points. As a reminder, our 2020 goal assumes a moderate amount of gross margin expansion per year and a target of approximately 65% to 66%. This target is dependent on revenue mix and is worth noting that from a gross margin perspective, in order of highest to lowest, our product families are asset optimization, property management, resident services and then leasing and marketing. Total operating expense on a non-GAAP basis for the fourth quarter was again at one of the lowest levels in company history of 41% of revenue. Our 2020 goal assumes total operating expense will represent approximately 35% to 36% of revenue, when excluding depreciation, amortization and stock-based compensation. As we look at the components, product development expense as a percent of revenue was 12%, down 20 basis points, exhibiting leverage despite incremental cost from acquisitions, infrastructure and product initiatives. For the back half of 2017, we expect product development to slightly increase as a percentage of revenue as we incur incremental development cost around the Unity platform, other technology or platform and investments mentioned by Steve, and acquisition integration activities. Sales and marketing expense as a percent of revenue was 19%, declining 60 basis points. The leverage was a result of scaling our historical investments offset by incremental cost from acquisitions, as well as moderate investment primarily in our SMB and corporate sub-markets and sales and support functions. General and administrative expense as a percent of revenue was 11%, down 140 basis points. Leverage was driven by our domestic and international infrastructure investments enabling scale. From a profitability perspective, I want to highlight again the inherent leverage within our financial model. We are investing in the integration of acquisitions, significant enhancement of our leasing and marketing solutions, our next generation Unity platform and in many other areas throughout the RealPage platform, including all these investments our contribution margin for the quarter was 44% on year-over-year revenue growth. Next, our capital allocation strategy which focused on insuring we have a robust capital structure in place with the most cost effective sources of capital and to allocate capital efficiently to drive the highest risk adjusted returns for our shareholders. During the quarter we strengthened our capital structure by issuing $345 million of unsecured convertible notes. The debt offering was a success and included certain inherent tax advantages which results in a 3.3% pre-tax cost of capital, a very cost effective source of capital, especially when considering our acquisition program typically generates capital returns in excess of 25%. Furthermore, our current free cash flow return on invested capital exceeds 23%, much higher than most peer comps, representing a strong validation of our capital allocation strategy. Moving to our 2017 acquisitions, including the pending acquisition of LRO and On-Site. We will have deployed just under $700 million of capital to our acquisition program. The assets acquired or that we intent to acquire fit within our broader strategy to extend existing solutions and add incremental units that provide significant cross-sell opportunities. Most importantly, the assets also provide a significant amount of data that we expect to leverage across the RealPage platform to help property owners optimize operating returns and to help real estate investors optimize the placement and harvesting of capital. We believe these assets will drive significant free cash flow generation not only in 2018 but over the long-term. Accordingly, we expect to drive an aggregate purchase price valuation of approximately ten times adjusted EBITDA on a run rate basis as we exit 2018 from these acquisitions. Moving to cash flow performance. During the quarter we generated over $46 million of operating cash flow representing growth of 46% compared to last year's quarter. We expect to generate approximately $150 million of operating cash flow into 2017 representing impressive growth of 28% when excluding the accounting treatment and tenant reimbursements related to our 2016 headquarters move. Capital expenditures were $17 million during the second quarter, including some shifting of headquarters related spend in the 2017 and in light of recent acquisitions, investments related to those acquisitions and content and data analytic investments, we expect capital expenditures to be approximately 8% of revenue in 2017. However, we are still targeting 5% of revenue longer-term. Now moving to guidance. We are excluding LRO and onsite financial performance from our outlook until we have certain close dates. For the third quarter 2017, we expect non-GAAP revenue in the range of $172 million to $174 million. Adjusted EBITDA is expected to be $40.7 million to $42.2 million and non-GAAP diluted earnings per share is expected to be $0.23 to $0.24 per share. For the full year of 2017, we expect non-GAAP revenue of $661 million to $267 million. Adjusted EBITDA is expected to be $159 million to $163 million and finally, non-GAAP diluted earnings per share is expected to be $0.89 to $0.93. In conclusion, our focus on our 2020 objective are innovation and investment strategy, our focus on efficiencies, are all helping to drive strong financial results. This concludes our prepared comments. Operator, I would like to open the call for questions.

[Operator:]

[Operator Instructions] First question comes from Pat Walravens with JMP Securities. Please go ahead.

[Pat Walravens:]

Congratulations, you guys on the execution. That’s terrific. So I have two that are sort of related, that are around the acquisition side of the strategy. The first one, help us understand why it's important to acquisition businesses that have these relationships with other property management systems, like Yardi and MRI. And I will just give you the second one now too. So the second one I guess would be, how much risk is there that the antitrust reviews end up stymieing your acquisition ambitions.

[Steve Winn:]

Those are two tough questions. You know On-Site is an interesting company. They have built lease management integration into Yardi, MRI and AMSI and it's really probably the most well respected leasing platform into those property management solutions. We have not integrated our online leasing or payments platform into those property management solutions. So what On-Site gives us is the ability to offer a much richer integration into these peer property management solutions. So that’s why it's so attractive. One of the reasons why it's so attractive. On the antitrust side, the Department of Justice has their views and hopefully they will change them as they receive more information from us regarding this market and the way it competes. We believe it's less than 20% of the market uses any commercial revenue management system. And that the customers that aren't using it have built proprietary revenue management systems that they believe are better than what we offer. So they don’t use them. They don’t use a commercial revenue management system. So it's -- when we think about competition in this market in order to reach these customers that are not buying a commercial system, we are going to lower price, it can't go up. So this s what I think the DoJ maybe missing. But we need more time. What they have asked for is a lot of data and we provided that and I expect to, as soon as they have had an opportunity to digest that, we may be able to convince them that this is not a winning argument on their side. On-Site, I don’t see much risk of any antitrust issue here, given that screening is a fairly well-penetrated into rental housing and you have all of the major credit bureaus that offer screening solutions directly to owners and operators. You have got core logic and first advantage. Yardi and MRI and probably 20 other regional screening companies. So this is a very competitive area and so I don’t think there is any real risk in antitrust in this particular deal.

[Bryan Hill:]

This is Bryan. Let me add a couple of comments. To your first question, while it's extremely important to have, just from a functionality perspective, the integration into other property management systems, recognize that much of the data that we utilize in our data analytics solutions resides in those property management systems. So as the case is with On-Site as well as LRO, those applications are either gathering data and inserting that data into those peer property management systems or they are pulling data out of those peer property management systems. And that becomes data that we can then combine with the RealPage data to just provide the most comprehensive set of data in the industry. Secondly, as it relates to your question related to the regulator review process. In my view, I don’t see this as slowing down or acquisition opportunity for the very reason that this is a such a rich market opportunity for RealPage. The industry is jus underpenetrated and many of the ancillary solutions therefore, if not anti-competitive, and it's an opportunity for RealPage to penetrate the market, not just through the acquisitions but just through our organic means. It's just a very underpenetrated market which is the opportunity presented to RealPage.

[Operator:]

Next question comes from John Campbell with Stephens Incorporated. Please go ahead.

[John Campbell:]

Congrats on the continued success. If I look at On-Site, I mean obviously it looks like it's going to dilute margins a little bit in the back half of this year and you have got a clear cost synergy plan for that in '18. Also you are terming out cost of AXIOMetrics and then the American Utility Business, both next year as well. I know 2018 is still ways a way but just assuming those big synergies, out of those three businesses, and then if you can continue kind of healthy asset optimization growth, at a higher margin. Just directionally, I mean is there any reason you shouldn’t be, maybe a good bit ahead of that 200 bps of kind of annual margin expansion you guys imply on that 2020 goal.

[Bryan Hill:]

Well, we feel we have opportunity for margin expansion. What we are comfortable with is the 200 basis points per year as we proceed through to the 2020 goal. Because what we are really doing John is we are also investing for opportunity to expand margin and accelerate revenue growth beyond 2020. And those are the investments that Steve mentioned related to our Unity platform. Also related to leasing and marketing and our data analytics solutions. So that is some headwind to increasing margin expansion above 200 basis points. But I believe if you look at the guidance that we have provided for this year in 2017, we are on track to achieve the 200 basis points. AUM which is built into our guidance, that’s actually a bit of a headwind in the back half of the year because they are currently at around a 16% EBITDA margin. On-Site we feel, as we move into 2018, can provide some nice accretion to our EBITDA margin.

[John Campbell:]

Okay. That’s helpful. I appreciate the comments about the ten times EBITDA post-synergies of all four of these acquisitions. Next year, is it fair to assume that right now they are kind of all-in running like mid-20s and that you basically double that up next year, is that a good away to think about it?

[Bryan Hill:]

No. We have provided good guidance on each of the acquisitions. If you go back and review some of the comments that have been made in prior quarters, you will be able to get to the margins of the combined businesses. But as you reach that ten times purchase price valuation, you will be well above 30% margin on the businesses collectively.

[John Campbell:]

Okay. That’s helpful. And then last one from me. Back to On-Site. What the kind of rough revenue mix between subscription and transaction.

[Bryan Hill:]

The On-Site business, their pricing methodologies that they utilize tend to be per application, which has more of a transactional bias. And so it will add to the overall transactional revenue mix of RealPage but will still be beneath 15% of total on-demand revenue and historically we have had levels of 20% or higher.

[John Campbell:]

Okay. And is that predominantly going to be falling in the leasing and marketing or is it spread across asset optimization as well. It will be predominantly in leasing and marketing. But what I will also add to the transactional profile of the revenue stream, it's very re-occurring and predictable. But what it does carry with it is some seasonality through the leasing season which becomes peak revenue quarters being Q2 and Q3 with Q4 and Q1 being slightly lower than those two middle quarters of the year.

[Operator:]

Next question comes from Brandon Dobell with William Blair. Please go ahead.

[Brandon Dobell:]

Thanks. Guys, at the users conference you talked a lot about of various number of technology, efforts, innovations etcetera, in the past 12 or 18 months. How much of that was, I guess, important or critical or necessary to put you in a position to where you can take advantage of LRO and On-Site. Could those have happened without what you have done, and I guess from a technology point of view, or just kind of an organizational point of view in the last year?

[Steve Winn:]

Well, the technologies we described were Unity which is intended to consolidate our data into one place. So you have one source of the truth to move to a single sign-on and user authentication platform and to provide a single user experience across all of our platforms. Unity also helps with the integration. It's made it much easier for us to integrate the acquired companies because we simply have to plug them into the Unity platform and we can have them appear integrated even though they are still operating the way they have always operated. And I think the acquisitions strategy is dependent on Unity. It would just cost us more if we didn’t have Unity to integrate.

[Brandon Dobell:]

Okay. Fair point. And then from I guess this quarter's organic growth perspective, looking at the core business, 8% year on year growth, the lowest we have seen in a while. Was there anything that is worth calling out relative to kind of the 10% to 12% that it's been or even better than that but it's been the past couple of years that would have driven that lower. Maybe your customer loss etcetera or particular part of that line that was slower than anticipated?

[Bryan Hill:]

So the total revenue growth, I think you are referring to property management. The total revenue growth of 8% has been pretty consistent over the last several quarters. Brandon, this is an area where we tend to add our unique units and then we cross-sell into those units. So we are comfortable with that level of growth. Now what I would point out, again is the acceleration that we are seeing in asset optimization which is a very high margin business for us. It was 21% organic growth for the quarter. We expect that to be able to continue at that level. We see continued strong growth from resident services of 19% and for the full year our revenue guide is revenue growth of 17% to 18% which we feel is pretty solid performance for the year.

[Brandon Dobell:]

Right. And then looking at leasing and marketing, as we think about the back half of the year, expectations for organic growth out of ad business and recognize the comparisons get a little bit easier but even beyond that, how do you feel about the opportunity for that segment to accelerate its growth rate off what we saw the second quarter?

[Bryan Hill:]

Well, this is the first positive organic growth quarter. We had not built into our guidance a significant turnaround in that business so that would be viewed as outperformance opportunity to the extent that we can continue to accelerate organic growth within leasing and marketing. What we are really excited about is the opportunities that will come through On-Site, once we have On-Site integrated as well as deploying our Ominichannel feature to our contact center, because the contact center has been somewhat of a headwind for the last several quarters. And to the extent we can take that revenue stream which is a very significant revenue stream within leasing and marketing, and turn it more to positive churn for as that will certainly result in much better revenue performance within leasing and marketing.

[Brandon Dobell:]

Okay. And then final one from me. You talk about a percent of revenue for CapEx getting down to five. If you were to look at 2017 CapEx and exclude the dollars associated with the headquarters move, what would that look like? We are talking a point lower than what it's going to be or a couple of points lower. I am just trying to gauge kind of a like for like comparison if you take out that kind of one timish spend on the headquarters.

[Bryan Hill:]

That’s a great question, Brandon. So the headquarters shift and the capital expenditures from '16 to '17 represents about 1 percentage point. And then the additional capital expenditures that we are experiencing related to acquisition integration. Some of the content generation that we are currently going through related to our data analytic products, leasing and marketing products. That adds another 1 to 1.5 percentage points. So that results in us feeling very confident that one, by 2020 we will be at the 5% and in 2018 and 2019 we should be in that 6.5%, driving down to 5% range as we move into 2020.

[Operator:]

Next question comes from Mark Chappell with Benchmark. Please go ahead.

[Mark Chappell:]

Nice job on the quarter. Bryan, starting with you, going back to On-Site, [indiscernible] many of their capabilities were similar to existing RP solutions. And could you just detail a few of those overlapping capabilities for us.

[Bryan Hill:]

On-Site has a lease management system that converts an applicant to lease or has a workflow that converts applicants into leases and they perform credit screening as part of that workflow. And that is a direct overlap to RealPage. However, most of On-Site's clients are injecting leases into competitive property management systems, not On-Site. They have several marketing platforms that help manage lead to leas ratios and give you feedback on how well your marketing platform is performing which are virtually identical to what we offer. They have an interesting forms product where they have automated a set of legal forms through a network of lawyers around the country and many of their customers are using these lease forms and we think that’s a valuable product that some of our One Site customers might want to, who would find attractive. So we know this business very well. It's everything they do we are very familiar with and we know the people that work there. So it's a comfortable acquisition for us. And one that we have candidly looked at a couple of times and could never get across the [indiscernible] line.

[Mark Chappell:]

Okay. Thank you. An then, Steve, if I recall correctly, when Ashley was hired, she reorganized parts of the sales force around [indiscernible] such as housing. And now it's been a couple of quarters since this changes took place and if you could just [indiscernible] on the success you are seeing, the early days success you are seeing with respect to these changes.

[Steve Winn:]

I think the segmentation of our sales force was a very good and successful move. So we now got teams of salesmen that focus on conventional affordable senior vacation, single family and even within multifamily at the large enterprise deals, corporate deals and SMB deals. And this has enabled our sales force to get closer to the customer and better understand the unique needs of the each one of these segments. So they are more effective in selling. So we are very pleased with that change.

[Mark Chappell:]

Would you say that this segmentation is part of improve sales productivity that you are seeing?

[Steve Winn:]

I think that there is many things that have contributed to that but that’s clearly one reason why productivity is up. I think suite sales is the second reason why productivity is up, instead of having to go in and sell one product at a time the salesmen have become fairly proficient at bundling multiple products into a single sale. So that drives our productivity numbers up.

[Operator:]

The next question comes from Nandan Amladi with Deutsche Bank. Please go ahead.

[Nandan Amladi:]

So, Steve, you have touched on this a little bit in your script. The $700 million in acquisitions that you have announced so far this year. Two questions on that. One is, how do you manage integration when you are making such large acquisitions relative to your history. And then second maybe for Bryan as well, how do these valuations stack up. There seem to be price here than the acquisitions that you have done in the past. So how do you sort of rationalize the higher valuations.

[Steve Winn:]

All right. To your first question, these companies will be integrated into different executive management teams. So the asset optimization acquisitions are going to be run by one team, the On-Site acquisition will be run by another team and the AUM acquisition will be run by a third team. So from a span of control standpoint, we don’t have an executive trying to digest multiple acquisitions at the same time. We also have really built an engine here that can acquire companies much more efficiently than it could in the past. We have got teams that are now focused on M&A activity and integration activities and we have got technology that makes this easier for us. So while digesting one of these deals three years ago, probably would have been pretty difficult for us, I don’t think what we have now is going to be terribly stressful for us. We also know the management teams that run these companies and we are acutely sensitive to the culture and the capabilities of the teams that we are picking up and we are candidly, extraordinarily pleased with the leadership that has come along with these acquisitions. And in many cases those leaders are running larger divisions of RealPage now.

[Bryan Hill:]

Yes. And, Nandan, to add on to Steve's comments related to integration. Generally, these larger companies have much more superior infrastructure in place than the smaller companies. They have much more competent employees and result in some ways a less complicated integration effort. From my view, I would much rather integrate one $50 million revenue company versus $5 million-$10 million revenue company. So the large companies tend to provide opportunities for scale much quicker and bring the unique unit aspect which should not be overlooked because in the case of On-Site, there revenue per unit is $20 per unit and we are bringing in $700,000 units with the opportunity to first take that to our company average of $57 per unit. The next milestone is to take it to the average of our 50 RPU clients which are at $183 per unit. So that is a significant opportunity for RealPage, which leads really into your second question. The revenue synergy opportunity provides RealPage with the unique position to pay slightly higher valuation than we historically have for much smaller acquisitions but more quickly start realizing the returns. I mean all these acquisitions have an internal rate of return north of 25% for the company and as we indicated in the call, we just raise capital at 3.3% pre-tax. So the economic value add on that capital deployment is significant and that’s just a unique position that RealPage has for this vertical market.

[Steve Winn:]

We had competition in all of these transactions. So we obviously always like to pay less but these were assets of high value to RealPage and the reason we can prevail is because we have so much more synergy that we can bring to the table that our private equity firm or even a strategic that is not already in this business. So I think it makes sense to pay up for the best assets and that’s what we have done.

[Operator:]

This concludes our question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.