RealPage Inc
Q1 2016 Earnings Call Transcript

Published: 4 May 2016

[Operator:]

Good afternoon and welcome to the First Quarter 2016 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Mr. Rhett Butler, Vice President of Investor Relations. Please go ahead.

[Rhett Butler:]

Thank you operator. Good afternoon and welcome to the RealPage financial results conference call for the first quarter ended March 31, 2016. 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 the 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, May 04, 2016 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 for 2015 previously filed with the SEC on February 29, 2016 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 will refer to certain non-GAAP financial measures in which we will exclude certain non-cash or non-recurring items, otherwise included in their corresponding GAAP measures. Please reference today’s earnings press release for more information on our non-GAAP financial measures and a reconciliation of non-GAAP performance measures to GAAP financial results. We believe non-GAAP financial measures provide useful information to investors regarding certain financial and business trends relating to our financial condition and results of operations. With that, I’ll hand the call over to Steve.

[Steve Winn:]

Thanks, Rhett. Good afternoon everyone and thank you for joining us today for our first quarter earnings call. I’m pleased to report that first quarter results were strong, compared to the prior year quarter non-GAAP total revenue grew 16% and adjusted EBITDA grew 37%. Revenue performance was driven by strong client adoption across most of our product families, I'll comment on performance of each family later in my remarks. Strong expense discipline continues to drive margin expansion and as Bryan will discuss shortly we raised our full year adjusted EBITDA expectations reflecting our focus to drive higher profit and ultimately compelling cash flow generation. Today I'd like to give an update on the rental housing landscape and brief overview of the drivers of our operational performance. Our MPF research division the industry's leading rental market intelligence division reported that occupancy for the first quarter was 95.8% up from 95.5% in the first quarter of last year. Occupancy did cool slightly sequentially down 10 basis points compared to the fourth quarter. Today's occupancy rate is very tight but the slack or the slight backtracking seen in the first quarter is significant because it runs counter to the normal pattern of seasonality in performance statistics. Occupancy tends to lose a little bit of momentum at the end of every year and then holds steady or climbs a bit at the start of the next year. We didn't see that this quarter and some selected markets especially those hit by labor reductions in the oil industry are showing deceleration as the supply demand pendulum swings back into balance. First quarter rent growth on average across the country was 5% - an acceleration compared to the 4.5% growth experienced in the first quarter last year. Our sluggish demand and slight cooling of our occupancy in early 2016 is leading us to reset our expectation of rent growth to about 4% during the near term which is healthy performance relative to long term norms but still well under the increases that have been posted in prior years. Ongoing construction has remained at or around 500,000 units for the past four quarters but was down over 30,000 units sequentially. 51.1% of the households with expiring apartment leases chose to renew which continue to be at a record level. Moving on with the drivers of operational performance for RealPage the leasing and marketing product family was down 2% compared to last year and experienced less transactional revenue than we expected. As I mentioned in the macro update, with higher renewal rates residents are not moving as much and this translates into less revenue tied to leasing velocity although we believe some markets are beginning to soften. Our screening, online leasing and website solutions continue to drive revenue growth in this category offset by a decline in contact center revenue driven by increased pricing pressure from new and existing competitors. RealPage is the largest provider of contact services and extended services in the rental housing scene industry and we believe our scale, global footprint and extensive experience in delivery of this service gives us a competitive edge but pricing pressure in the contact center is expected to continue. We remain optimistic about our leasing and marketing products because some markets are beginning to weaken and new construction is an all time high which should translate into more leasing and marketing spend in the future. In addition RealPage continues to invest in this area with disruptive product that we anticipate will enable owners to fill vacancies with fewer but more qualified leads. The property management product family grew 11% compared to last year, revenue growth was driven by our core multifamily and single family property management solutions, our spend management products and services and continue traction with our accounting solution. In addition the NWP smart source solution contributed to total growth. Smart source provides back office accounting and IT infrastructure solutions that enable property owners and managers to focus on optimizing core property operations while converting back office fixed cost to a more efficient variable cost structure. The residence services product family grew 36% compared to last year. During the quarter we realized approximately one month of revenue from the NWP acquisition. As a reminder NWP's primary solutions are comparable to our resident billing platform velocity and I’ll provide an update in a moment on our integration of NWP. Overall growth for the product category continues to be driven by strong customer adoption of our payments, velocity and renters' insurance products and services. Renter's insurance is a great example of how utilizing our massive database can drive continue revenue growth as our client outperform the market. In a recent white paper we statistically proved that requiring residents to carry renters' insurance when leasing the apartment does not negatively affect revenues for property management companies. While mandated insurance is more the norm at the largest operator some clients have been hesitant to mandate renters' insurance as they thought renters would choose properties and revenue would be affected. After analyzing same store leasing data from 2008 to the present, where hundreds of properties across the country that mandated renter’s insurance compared to those that didn’t, we found no correlation between mandated renter’s insurance and lower revenues. These types of insights can only come from RealPage where we have a massive repository of lease transaction data, the data sciences team to interpret the data and strong product innovation that incorporates that inside into solutions that help clients outperform. The asset optimization product family grew 18% compared to last year. Growth was driven by YieldStar revenue management and business intelligence solutions. We continue to be encouraged with a strong traction of our data agnostic BI solutions which accept data from any property management system. Many of our largest clients have already adapted YieldStar revenue management and are now expanding their utilization of our platform with business intelligence and benchmarking products. Adaption continues to accelerate in the institutional market with performance underway or recently completed with four of the NMHC top 50 owners. Institutions typically utilize multiple fee mangers that run their companies using multiple property management systems. Because our YieldStar solutions work with any property management system, they can view performance of their entire portfolio using the same set of dashboards and reports without having to force standardization on one property management system. Pinnacle and NMHC top three managers became the first national owner to make a portfolio commitment to implement lease transaction performance benchmarking and will be providing a service to their clients, many of which are institutional investors. YieldStar was able to consolidate analytics and benchmarking performance across all their institutional clients without regard to what property management system they use. Strong adaption of our analytics suite within both the NMHC top 50 owners and managers highlights the opportunity within YieldStar asset optimization to help owners outperform their peers and operating or in optimizing asset performance regardless of what operating platform they used around the property. Accordingly this product category will continue to receive significant investment as we position asset optimization as the leader in multifamily analytics. Now over the next couple of quarters we intend to launch additional stratification capabilities including features around customized competitor selection by asset class, age or distance, or lease transaction and benchmarking more robust reporting capabilities and incorporation of data from other RealPage products. Longer term, we also plan to utilize our best in class data to optimize the transaction side of multifamily. YieldStar has historically focused solely on optimizing operating yields on multifamily assets during the time that they were owned. Data suggest that on average up to two thirds of the return on an asset is determined by how well you buy and sell the asset, and one third is determined by how well you operated during your holding period. The multifamily asset class is attracting record levels of capital with over $150 billion in transactions in 2015. Clearly, YieldStar possess the data to help owners operate their assets better but just as important to help them improve yields when they buy and sell assets, with much better insight into projected performance. This has been and will continue to be an area of heavy investment for RealPage. Lastly, a brief update on the NW acquisition that we completed in the first quarter. We are nearing completion of our integration plan now. We’ve identified opportunity around duplicative processes and scale in three major areas. We believe we can achieve cost synergies in these areas while improving client service levels. First, NWP was essentially operating as a public company incurring corporate governance and control cost redundant to RealPage such as financial audit, security audits, technology audits and board fees. Second, future development and general and administrative cost can be combined with our velocity operations and significantly streamline. Lastly, we’ve identified synergies from improved scale of the combined business regarding operating and processing cost as well as overlapping sales and marketing spend. We remain confident in the synergies that we originally anticipated and expect NWP to result in a valuation of 5-6 times EBITDA post the achievement of synergies. RealPage has grown organically and through acquisition from its inception. We are very pleased with our free cash flow return on invested capital which was 23% in the first quarter. This ranks near the top of all of our peers and one of the core industries that we use to make decision about whether to invest internally or to acquire customers and technology through acquisitions. As long as we maintain valuation discipline and our free cash flow return on invested capital remains high, we believe both forms of growth or appropriate. Before I hand the call off to Bryan I want to note that we're quite encouraged by the results of our expense efficiency initiatives where they have led to margin expansion. Adjusted EBITDA grew 37% compared to last year and margins expanded 320 basis points. We believe we can continue to drive margin expansion and believe our progress today validates our long term goal of at least 30% adjusted EBITDA margins. Another core focus of ours is to drive shareholder value through continued cash flow growth and ultimately free cash flow return on invested capital. We expect to achieve this through a keen focus on organic margin expansion, a disciplined acquisition program and opportunistic capital allocation such as our share repurchase program. To date we've acquired 3.5 million shares or approximately 5% of outstanding stock since the program's inception. As we announced today our board recently authorized an additional one year $50 million authorization that we expect to deploy opportunistically. In summary first quarter results were strong. We expect to invest in innovation that leverages our massive repository of data while simultaneously achieving significant margin expansion. I'll now turn the call over to Bryan for an overview of our financial performance and a look at guidance.

[Bryan Hill:]

Thanks Steve and good afternoon everyone. Q1 marks another quarter of strong financial execution, we achieved 16% total revenue growth, 37% adjusted EBITDA growth representing 320 basis points of margin expansion and 55% non-GAAP EPS growth. All of which exceeded the high end of our Q1 guidance. Q1 has been a very active and productive start to 2016, during March we closed the NWP acquisition which contributed to the quarter's performance, we raised $125 million of debt capital which increased our borrowing capacity under our existing credit facility to 325 million. During the quarter we continued our focus on capital allocation methods to maximize shareholder returns in purchasing close to 800,000 shares of common stock. Our financial performance combined with our capital allocation strategy enabled us to achieve a 23% free cash flow return on invested capital. We believe the most sustainable method to grow shareholder value is to balance the top-line growth, improve profitability and free cash flow growth which ultimately will drive return on invested capital. Our M&A strategy and share repurchase program are important components of our growth in capital allocation strategy. Now I'll provide you with more details into our operational performance. On demand revenue for the first quarter grew 16% compared to last year. Our subscription revenue stream grew 18% compared to the prior year and represented 90% of on demand revenue. Revenue growth was driven by the acquisition of NWP and solid adoption across our property management, residence services and asset optimization product families. Annual client value grew to 529 million or 24% compared to the prior year. Our top 100 ACV clients possess an average RPU of $71. We ended the quarter with 11 million units representing an increase of 13% compared to the same quarter last year. RPU was $48 an increase of 9% compared to the prior year. Our top 50 RPU clients possess an RPU range of $129 to $331 with an average of a 169. It is important to note that our average RPU for top clients is nearly four times as penetrated as our average RPU over $48. The top 50 RPU clients include a diversified representation of our enterprise, corporate and SMB submarkets with each category possessing clients well above $200. Moving on to profitability for the quarter. Profit performance was another area of strong execution. Our disciplined cost containment strategies continue to drive both gross margin and adjusted EBITDA margin expansion. Gross margin was 64% for the quarter, up 100 basis points compared to the prior year. Gross margin expansion is the result of strong revenue growth from higher margin solutions such as our renters' insurance and data analytics products, a higher international labor mix providing scale and efficiency and general cost savings resulting from optimizing certain business processes. This performance is even more impressive when understanding the NWP acquisition diluted total gross margin expansion by approximately 90 basis points during the quarter. Total operating expense grew 10% compared to last year. As a percentage of revenue it declined nearly 240 basis points to 44%. We are improving margin expansion by leveraging our international workforce further integrating office locations resulting from our acquisition program and optimizing operational functions. With respect to the individual components of total operating expense, product development expense grew 7% and as a percentage of revenue they declined over 100 basis points. The primary driver of expense growth is headcount and cost related to additional features and functionalities as well as incremental cost from NWP. As Steve mentioned, the additional features and functionality will be primarily related to our property management, leasing and marketing and asset optimization product families. Sales and marketing expense grew 16% compared to the last year. But as a percentage of revenue it was down slightly. The primary driver of expense growth was increased sales team headcount and higher marketing cost to drive demand across our entire portfolio of products. Sales team headcount was 400 at the end of the first quarter, up 82 sales team members or 26%. Our SMB and lead generation teams continue to represent the majority of our headcount investment while NWP added 15 members to the team. General and administrative expense grew 6% compared to last year. But as a percentage of revenue, it declined 100 basis points to 12%. The primary drivers of expense growth are increased personnel costs resulting from approximately 40 STEs from the acquisition of NWP. Leverage continued to be driven by headcount mix that contains a higher international component, similar to other expense categories. Non-GAAP net income for the first quarter was $12.7 million or $0.17 per diluted share. Adjusted EBITDA for the first quarter was $27.5 million over 21% of revenue, representing 320 basis points of margin expansion. Q1 marks the fourth consecutive quarter of year-over-year margin expansion and we expect to continue to yield to further margin improvements. Moving to cash and liquidity. Cash and cash equivalents grew over $57 million at March 31, 2016 compared to $31 million at December 31, 2015. Cash flow from operations for the quarter was $29 million, representing 29% compared to last year. DSO was 50 days, down 51 days from last year, or down from 51 days from last year. Total debt was $124 million. As a reminder, debt levels are elevated compared to the same period last year due primarily to our actions to expand and solidify our capital structure, which included $125 million term loan that increased our total borrowing capacity to $325 million under our existing credit facility. A portion of the term loan funds were used to fund the NWP acquisition. I would like to point out, we have excellent financial partners. They move swiftly during the process demonstrating confidence in our future business prospects. Capital expenditures for the quarter were $10.2 million. We are still targeting $60 million for the full year, net a $19 million tenant improvement reimbursement which will be reported through operating cash flow. We are on schedule to move into our corporate headquarters by September 1, 2016 driving the majority of our capital expenditure activity into the third and fourth quarter. The elevated spin in 2016 is one-time in nature and we are targeting 5% of revenue for capital expenditures in 2017 and beyond. As I previously mentioned, during the quarter, we repurchased nearly 800,000 shares of our commons stock, and for a granted day we purchased over 3.5 million shares. At current stock levels, we continue to believe share repurchases are compelling use of capital with the potential for significant return. Accordingly, our Board recently authorized the purchase of up to 15 million of our common stock over the next 12 months. Now moving to guidance for the second quarter of 2016. We expect the following

[Operator:]

We will now begin the question-and-answer session [Operator Instructions]. Our first question comes from Matt Hedberg of RBC Capital Markets. Please go ahead.

[Dan Bergstrom:]

It's Dan Bergstrom for Matt Hedberg. Looking at the RPU is up nicely quarter-on-quarter up about $4 or not quite $4 just about $4. Is that simply the acquisition there, or is there any other things that are driving the move?

[Steve Winn:]

The acquisition Dan drives the majority of that move organically our RPU would be $45.80 or right under $46.

[Dan Bergstrom:]

Great, still a nice move up. And then you’ve given us the peer as far as RPU for ACB tier few times. If we look at the product set for those in the top 50 RPU clients, is there something that they’re adopting that the lower tiers aren’t? Or is it simply a matter of everyone adapting more products as far as moving the RPU up.

[Steve Winn:]

It's very different for each client and with each of the respective tiers. The RPU across our three major tiers which we separate the segment or divide the segment into clients with less than 5,000 units, clients with 5-20,000 units and clients with 20,000 units above. The ACV and the RPU within those separate segments is relatively even in fairly close to our average of the $48. So there is not any one product group that I would suggest that is being adapted at the high end versus the low of the market.

[Dan Bergstrom:]

And maybe an update on sales capacity. I know you ended the year with wrapped up 25% last quarter we had some comments around the 10 year of the sales force being and I think just about the best you’ve ever had. How do you feel about the sales capacity here now and do you plan to continue to hire on the sales force through the year?

[Steve Winn:]

So we’ve added 52 reps since the end of the year and 15 of those reps came through the NWP acquisition. Our primary focus is to continue to ramp sales force productivity. We hired 30% increase in reps in 2014 as you just mentioned 25% in 2015 and now for the first quarter we’re at 26%. So we really are at a point where we’re taking in that investment, we’re focused on sales force productivity through our training, through our lead generation teams and various marketing campaigns and marketing program, strategies. So we’ll probably see that number come down to 12% to 15% growth in 2016 as we exit the year compared to 2015 with the focus being predominantly on sales force productivity.

[Operator:]

[Operator Instructions] Our next question comes from Jeff Houston of Northland. Please go ahead.

[Jeff Houston:]

Looking at the leasing and marketing business unit, growth was returned back to negative I think it's negative 2% in the quarter. Is there some seasonality into that because looking at last first quarter in 2015, it declined 9% but then it recovered to 6% and was positive the rest of the year. Should we expect a similar trend this year, or just curious to get an updated thoughts on that and as you’ve seen it?

[Steve Winn:]

So for the leasing and marketing product family during the quarter the 2% down year-over-year, that’s not seasonality driven Jeff that’s more driven by some pricing pressure within the contact center and quite honestly the macro-environment still driving down transactional revenue. Transactional revenue within leasing and marketing was down 7% year-over-year, both the 2% down for the total product family and the 7% for the transactional was a surprise for us. The macro data had been indicating that while it was still mix that a pivot more towards an environment that would be favorable for leasing and marketing was ahead. We saw the last three quarters with an average of 5% revenue growth from those quarters. So we were a bit surprised by being down 2%. Now our guidance for the full year we are expecting a small growth of maybe 3% to 5% from this product family but seasonality isn’t the driver of the quarter.

[Jeff Houston:]

And looking at the other product families residential services 36% growth. What was the organic growth rate on that?

[Steve Winn:]

So the Indatus and NWP acquisitions contribute to the growth to 36% and we typically are focused on total growth. But organic within resident services is 18%, 19%, so high teens for the quarter. And we also had some very nice growth from asset optimization, which accelerated to 18% during the quarter. That was primarily driven by our BI products, and we continue to have steady growth within our property management suite of products.

[Jeff Houston:]

And then I’ll end up on the asset optimization. Is that mostly the bigger REITs that are adapting those type solutions?

[Steve Winn:]

Typically when we roll out new products you’re right they tend to have greater adaption at the higher end of the market. Now what we have found with the DI products is there is some acceptance in the corporate and middle market as well. We attribute that to the precursor to our BI products being the yield engine, yield management products that optimize our product, which has already had fairly broad adoption all three segments of our business.

[Operator:]

Our next question comes from Patrick Walravens of JMP Securities. Please go ahead.

[Natasha Asar:]

This is Natashha on for Pat. I was wondering if you could please shed some light on the competitive environment and has there been any emerging competitors in the industry or is it pretty consistent with before?

[Steve Winn:]

Well the competitive environment is intensifying in the sales and marketing area. We’ve seen pricing pressure particularly on the contact center and there has been a strengthening of existing competitors and a couple of new ones. What we’re doing to combat that is we’re seeing more and more bundled deals. It’s interesting that the market is now quite favorably inclined to take the entire bundle of all of our products, or a large number of our products. So, we’re seeing RPU deals that are well north of $100 that are bundling multiple product families together. So, I think there is a good counter to the competitive environment we’re seeing. But it clearly has intensified particularly in sales and marketing.

[Operator:]

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