RealPage Inc
Q1 2015 Earnings Call Transcript

Published: 9 May 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to RealPage First Quarter 2015 Financial Results. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Rhett Butler, Director of Investor Relations. Please go ahead sir.

[Rhett Butler:]

Thank you, Amanda. Good afternoon, and welcome to the RealPage financial results conference call for the fourth quarter and year ended March 31, 2015. With me on the call today is Bryan Hill, our Chief Financial Officer and Treasurer. Steve has a severe cold and unfortunately won't be attending today's call. Bryan will be sitting in for Steve. In our remarks today we will include statements that are considered forward-looking within the meaning of securities laws. In addition, management may make additional forward-looking statements in response to your questions. Forward-looking statements are based on managements' current knowledge and expectations as of today, May 05, 2015, 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-Q previously filed with the SEC on March 02, 2015. 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 exclude certain non-cash or non-recurring items depending on the measure such as acquisition related and other deferred revenue adjustments, depreciation and asset impairments, amortization of intangible assets, net interest expense, income tax expense or benefit, stock based compensation expense, any impact related to Yardi litigation including related insurance and settlement costs, stock registration costs and acquisition related costs. We believe that these non-GAAP measures of financial results provide useful information to investors regarding certain financial and business trends relating to our financial condition and results of operations. Please refer to today’s press release announcing our financial results for the first quarter ended March 31, 2015 available on the Investor Relations portion of our Web site for a reconciliation of these non-GAAP performance measures to our GAAP financial results. With that, I’ll hand the call over to Bryan.

[Bryan Hill:]

Thanks, Rhett. Good afternoon everyone. First let me share Steve's disappointment in being unavailable for today's discussion. We had positive results to share with you and Steve wanted to take part. I am excited to share with you our financial results for the first quarter 2015. We are pleased with our Q1 results in the progress we made over the last several quarters. Revenue and adjusted EBITDA came in above expectations and our data driven platform of solutions continues to resonate with clients. Specifically non-GAAP revenue was $110 million, $1 million higher than the top-end of our guidance. Adjusted EBITDA was $20 million also $1 million higher than the top-end of our guidance. Today I will discuss the rental housing market, progress of result of investments made in 2014, product family performance and a detailed discussion of operating results. First the rental housing market remains strong and demand accelerated in the first quarter. According to Greg Willett, our Chief Economist and Head of MPF Research, occupancy for the first quarter was 95.5%, up 50 basis points compared to the prior year period. First quarter rent growth was up 0.7%, and annual rent growth was 4.6% both basically in line with fourth quarter levels. Importantly running counter to the historical pattern as seasonally slow leasing during the winter months, apartment demand accounted for a total of 64,000 units registered across the country's 100 largest metropolitan areas in the first quarter of 2015. This product absorption volume topped the demand tally for the initial three months of 2014 by 55%. MPF Research is forecasting that U.S. apartment occupancy will ease moderately to 95% over the next year and that the annual rent growth pace will quote between 3.6% to 3.9%. While demand should remain very strong absorption will likely not to keep pace with completions just over 400,000 units are currently under construction the nation's top 100 metros, with 280,000 to 290,000 of those units being scheduled to be completed during the next 12 months. Second, I want to briefly cover the progress we’re making as a result of commitments investing and our SaaS delivery and data infrastructure product development and our sales force. Our server and data storage capacity grew substantially in 2014 in order to meet demand and performance requirements. We processed approximately 430 billion transactions during the last 12 months. Due to investment in our data processing infrastructure storage performance has vastly improved. Transaction response time was reduced and fault tolerance capabilities were improved as well. We expect all of these improvements to affect availability and performance of our applications which in term is expected to drive accelerated client adoption and increased client retention in addition the improvements are also expected to enable our infrastructure to scale as we continue to leverage the largest database of rental information and the industry to power our solutions. Product investments are also showing progress. Our new data analytic solutions experienced revenue growth about 20% and bookings for these solutions were up sharply during the quarter compared to the prior year period. Client feedback especially from large institutional property owners has been positive. Clients are excited at the notion of being able to take a holistic view of their operational performance as well as benchmark their performance metrics against 10 million units of real-time transaction data. Our investments in vacation rental solutions are also yielding strong revenue growth. Bookings during the quarter were exceptional, up four times our quarterly average since entering this market early last year. We completed the integration at InstaManager our U.S. based bookings in reservation system and Kigo our European booking in reservation system late last year. The new streamline easy to use platform marketed worldwide under the trade name Kigo includes more comprehensive marketing channel partnerships, simple reservation management tools and attractive web designs for vacation rental property owners and managers. In addition we recently announced new revenue management capabilities. Kigo revenue management removes the need for manual analysis of rates, market research in the time consuming process of changing rates to help owners and managers maximize occupancy and generate higher revenue per unit through optimized pricing. Kigo is a great example of our land and expand strategy that we have successfully used into new market segments in the past. We typically land in a new market segment such as vacation rentals and then integrate variations of many ancillary solutions that we offer in other markets. Our vacation rental solutions started out as a bookings and reservation system and now supports Web sites, electronic payment, insurance and revenue management. We expect to continue to expand the suite of offerings that we make available to vacation rental property managers. Other product development investments related to upgrading product platforms, improving usability and enhancing integration are also yielding positive results. Specifically our accounting affordable and payment solutions were standout and all experienced strong revenue and bookings growth during the quarter. Our last investment area our sales force received the majority of investment dollars in 2014. We're actively measuring the return on these investments by analyzing total bookings production including product family performance, sales rep mix and bookings productivity per rep. During the first quarter, total bookings were 8% compared to the prior year period. Our resident services and property management product families were particularly areas of strength in addition to our new data analytics solutions which I mentioned earlier. The top 10 client booking represented close to 20% of total bookings and the majority of ACV contained a multiple product families. On a trailing 12 month basis, booking were up 23% compared to the same period last year. This performance let us to believe our sales force investments are yielding momentum and that our platform vision is resonating with clients. When analyzing sales rep mix, we aligned our sales force by tenure and by market segment. Since the first quarter of 2014, we've added 66 sales reps and support staff aggregating the 318 total reps and support staff at the end of the first quarter. Nearly 30% of our multifamily quota carrying sales reps have been with us less than one year and are not up to full productivity. These new reps are primarily allocated to our corporate SMB and vacation rental segments based on market needs. If you will recall we breakdown our market segments by clients that own or manage more than 20,000 units or enterprise clients that own or manage 5,000 to 20,000 units are corporate and clients that own or manage less than 5,000 units are SMB. Each of these segments represents a large ACV opportunity in which we're thinly penetrated. In addition each of these segments contributes relatively evenly to our total company ACV of 427 million. While deal size and quotas are much larger in the enterprise segment that has a concentrated client base, the corporate and SMB segments contain a significant number fragmented client and require continued investments to achieve the proper coverage. The vacation rental market is very similar and requires significant international resources to address the vast number of vacation rental property managers. We expect this strategy of resource allocation to continue to yield a diversified ACV pipeline. Sales force productivity is another area where we're focused. Multifamily bookings productivity on a trailing 12 month basis was at nearly 10% compared to the prior year period, considering that approximately 30% of our sales reps are under one year in tenure and are still ramping to full productivity, we see no signs that we should moderate our investment in the sales force and believe we’re generating positive returns. I am confident that productivity for the entire sales team will continue to improve as we move through the year. Similar to the bookings momentum we achieved in the back half of 2014. Before I move on I wanted to briefly mention the successful sales kickoff summit we held recently. The theme was One Voice and focused on our mission of providing a complete set of solutions to the rental housing industry and acting as a unifying force to add a despair ecosystem of players. The summit contained updated value propositions for our data driver platform solutions and culminated in the dissemination of the largest collection of sales collateral we've ever created. I want to congratulate our marketing team for tremendous efforts to refine and sharpen our focus and arming our sales force with improved sales readiness assets that underscores how data unites our solutions. Feedback from the sales team is enthusiastic and we expect our sales teams will leverage our refine positioning to more effectively compete in the marketplace. Now I would like to briefly cover product family performance. Leasing and marketing continues to face headwinds as expected and was down 9% compared to the prior year period. However leasing and marketing solutions did grow 9% or $2.4 million sequentially. The organic lead generation, online leasing and screening solutions for a subscription growth that was offset by continued transactional weakness primarily related to the pricing pressure in the context center as well as continued IOS deterioration. Property management grew 13% compared to the prior year period. The product family was primarily driven by strong performance for our vacation rental solutions, Propertyware, and OneSite. Resident services grew 23% compared to the prior year period. Strong payments, online resident and renter's insurance growth were the primary drivers. And lastly our asset optimization product family grew 7% compared to the prior year period. Results were driven by strong growth from our new data analytics offerings. I would now like to provide greater detail regarding our financial results. During this discussion some of the financial measures I will use are non-GAAP measures internally used to manage our operations. Our earnings press release issued earlier today provides a reconciliation of these non-GAAP measures to the most comparable GAAP items. As I mentioned earlier, we’re quite pleased with our financial performance for the first quarter 2015. Our 2014 investments and product development and our sales force were showing positive results. In our addition on our focus on operational efficiency resulted in substantial margin expansion from the fourth quarter of 2014. These factors have resulted in an upward revision to our 2015 expectations. I will provide more detail on our revised outlook shortly. Total revenue for the first quarter was 110 million, an increase of 8% compared to the first quarter last year. Revenue exceeded the high-end of our guidance of the quarter led primarily by our property management and resident services solutions. Our on demand subscription revenue grew 14% compared to the prior year period and represented 89% of on demand revenue. We continued to be encouraged by the strength of our subscription revenue. The details on the components of revenue are as follows. Total on demand revenue for the first quarter was 106 million an increase of 8% compared to last year. ACV or annual client value grew 427 million or 7% increase compared to the prior year. Our top 100 ACV clients posses a weighted average RPU of $60. We ended the quarter with 9.7 million units representing an increase of 4% compared to the same quarter last year. RPU was $44.03 an increase of 2% compared to the prior year quarter. And finally our top 50 RPU clients posses a RPU range of $116 to $219 with the weighted average RPU of $150. I will now turn the discussion to gross profit operating expense and profitability. Overall our profit performance exceeded the high-end of our guidance of the quarter. Gross profit for the first quarter was 68.7 million representing a gross margin of 62%, this compares to gross profit and gross margin for the last year's 67.2 million and 66% respectively. The lower margin is driven by investments in our SaaS delivery and data infrastructure, higher transaction processing fees resulting from strong payment solution growth and an increase in context understaffing ahead of the strong leasing periods through the second quarter and third quarters. Total operating expense for the first quarter was 51.3 million compared to 45.1 million last year. As a percentage of revenue operating expenses were 47%. The details on the components of operating expense are as follows. Product development expense for the first quarter was 14.7 million up 13%. Higher product development was driven by our 2014 investments strategy to develop, launch and improve new and existing solutions. As we move through 2015, we expect margin improvement to be driven by further leveraging our global workforce and lowering exposure to high cost labor markets as it relates to product development. Sales and marketing expense for the first quarter was 22.4 million, an increase of 12% compared to last year. Our strategy to expand our sales force was the primary driven for the increase expense. Compared to the prior year quarter, we added 66 sales reps aggregating to a total of 318 again multifamily bookings productivity on a trailing 12 months basis improved nearly 10% compared to the prior year period, so we continue to be encouraged that our sales force investments are paying off. General and administrative expense for the first quarter was 14.2 million, an increase of 17% compared to the prior year period. The primary drivers for the increase were higher cost associated with creating the capacity to scale our operations, investing in infrastructure to support the growth of our global operations and improvement to the efficiency of our management tools. Operating income for the first quarter decreased to 15 million or 14% of revenue compared to the first quarter last year of 20.3 million or 20% of revenue. Net income for the first quarter was 8.9 million or $0.11 per diluted share. Adjusted EBITDA for the first quarter was 20.1 million or 18% of revenue exceeding the high end of our guidance. We were pleased with the sequential improvement margins which grew 160 basis points compared to the fourth quarter of 2014. We are making progress on our strategy to derive margin expansion through leveraging offshore labor markets, streamlining our real-estate footprint and optimizing certain operational functions. Now turning to the balance sheet and cash flow metrics, cash and cash equivalents were 27.8 million at March 31, 2015 compared to 26.9 million at December 31, 2014. Cash flow from operations for the first quarter was 22.5 million, which was primarily driven by reduction in our DSO. For the first quarter we reduced DSO to 51 days from 57 days in the prior year period. Capital expenditures were 6.2 million. During the quarter we purchased over 400,000 shares of common stock for a value of $7.9 million. Program to-date we have purchased 1.4 million shares for a value of 23.5 million. In addition today we announced our Board of Directors approved an extension of our ongoing stock repurchase program through May 6, 2016 permitting the purchase of up $50 million of our common stock over the extended one year period. Next I will provide our financial expectations for the remainder of 2015. As I mentioned earlier based on positive results for the first quarter, we're raising our full year outlook. For the second quarter of 2015 we expect the following, total revenue in the range of 112 million to 114 million, adjusted EBITDA in the range of 20.5 million to 21.5 million and non-GAAP EPS of $0.11 to $0.12 per share. For 2015 full year we expect the following, total revenue in the range of 453 million to 461 million, adjusted EBITDA in the range of 83 million to 87 million and non-GAAP EPS of $0.44 to $0.47. In summary, our financial results were strong and validate investments we made in 2014. We continue to believe our investment strategy during 2014 was appropriate course of action and will yield improved financial performance as we move through 2015. And now I'll open the call up for any question.

[Operator:]

[Operator Instructions]. Our first question comes from Nandan Amladi from Deutsche Bank. Your line is open.

[Nandan Amladi:]

So, Bryan, the first question is the revenue growth this quarter. Was there any inorganic component? There was a small deferred revenue adjustment in the non-GAAP at the end of the press release, but you should've lapped I think the major acquisitions in the December quarter.

[Bryan Hill:]

Yes, the organic revenue growth was slightly less than 1% difference so it was around 7%.

[Nandan Amladi:]

And then I know you've talked about continued weakness in the leasing and marketing solutions. How much of that is related to the industry, just lower turnover in the industry versus perhaps competitive forces around similar products that other people offer?

[Bryan Hill:]

We feel that our leasing and marketing products are highly depended upon leasing velocity as it relates to the transactional component and those components are represented by the contact center, the variable component of the contract center, Internet listing service primarily and those did experience a decline year-over-year and again that's highly coordinated to the leasing velocity. On a positive note sequentially that revenue stream improved from Q4 and the subscription elements within leasing and marketing grew year-over-year. So we’re seeing some positive sign but this is a one quarter trend and we need a few more data points before we become quite a bit more optimistic on this product line.

[Operator:]

Our next question comes from the line of Brandon Dobell from William Blair. Your line is open.

[Brandon Dobell:]

A couple of things to hit -- maybe if you could talk a little bit about I think last quarter, you mentioned some opportunities to monetize some of the renter info and I know there's a number of ways you guys can do that. How do you feel you are tracking relative to your expectations? Do you see that being I guess a noticeable contributor to kind of what you expect to be an acceleration in growth this year, or are we talking more 2016 when that starts to make a difference?

[Bryan Hill:]

We believe that the massive amounts of data that we've collected over the years is a significant differentiator for us Brandon, and that in fact that data set is what’s driving the new version of our analytic products that are coming out and today we've sold over 300,000 units of those products on -- units on these products. So we think that there is good traction. Now significant component of that 300,000 is the higher-end of the market so more the institutional side of the market, which is a good sign, because generally the middle market will follow suit over time and in fact we do have some clients within what we refer to as the corporate segment that have also acquired those products. So that’s just one example and then we expect that those products will contribute to our 2015 revenue performance.

[Brandon Dobell:]

And I think last quarter you guys talked about the property management service line or product line accelerating this year off of I think, what is it -- a 12% number 2014. It picked up a little bit in the first quarter, but maybe if you could comment on how much more should we expect that property management service line to accelerate this year and what might be the couple of big things that you could point to that give you some confidence on that?

[Bryan Hill:]

Well within that product line our OneSite products are still continuing to grow and what’s driving a lot of the OneSite is adoption or further adoption of our accounting and budgeting solutions. In addition to that within OneSite we have our compliance monitoring solutions which if you recall that was an acquisition that we completed in 2013, and we've had significant cross sell to date with that product and we expect that to continue to be a contributor to this product group's revenue growth. And finally Propertyware and Kigo are contributing significantly. So we achieved 13% growth in Q1, that's slightly up from what we experienced in the prior quarter and we believe that we can continue to accelerate growth within this group throughout the years. We've mentioned on prior calls that we feel that this product group is a longer-term and mind-teen. So lower high-teen type growth opportunity for us and we see no reason why we can't achieve that.

[Brandon Dobell:]

And to confirm one thing, I think you had in your prepared script the top 10 client bookings -- I forgot -- I was writing it down here -- that was 20% of total bookings or if those top 10 clients grew their bookings 20%. If you could clear that up for me, that would be great.

[Bryan Hill:]

They represented 20% of the bookings for the quarter, and within those bookings we were encouraged is it covered a multiple products sets. So it wasn't our top clients it was the top client bookings for the quarter, to provide some clarity.

[Brandon Dobell:]

And then final one for me. It's the first time we've seen I think any year-on-year growth on the professional services line in quite some time. Was that just kind of one-time-ish stuff? Is there any take-away from that over $3 million number in the quarter? Should that be the new run rate going forward or I guess just a bit more context would be helpful.

[Bryan Hill:]

That was principally driven by the strong bookings quarter of Q4, generally what you will see is a little bit higher tick up in our professional and other revenue following extremely strong bookings quarter. So that provides some context. However we feel that we can maintain that $3 million level as we proceed through the year.

[Operator:]

And our next question comes from the line of Michael Nemeroff from Credit Suisse. Your line is open.

[Alex Hu:]

This is Alex Hu in for Michael Nemeroff. Relative to the subscription versus transactional revenue breakdown you provided, I think you saw -- I believe you saw 15% growth for last year, which is about in line with this quarter. How much of the growth in subscription was acquired versus organic last year? I know it's a relatively small contribution, but I just wanted to make sure we are all on the same page.

[Bryan Hill:]

The contribution from acquisition was between 500,000, 750,000 during the quarter.

[Alex Hu:]

For the subscriptions?

[Bryan Hill:]

It was all subscription based revenue.

[Alex Hu:]

And remind us please how much of your current business is targeted at the low end of the market like several hundreds to a few thousand units, let's say?

[Bryan Hill:]

No, the way we've analyzed the segmentation of the market is by looking at ACV and segmenting by the client segments that are provided in the prepared comments. And when you evaluate it in that manner our ACV is relatively evenly distributed our across those segments I mean to upper end of the market has slightly more and the middle and lower end are fairly comparable in size, and interesting enough the RPU across those segments is fairly consistent as well.

[Alex Hu:]

And one last question. Can you just give us an update on the competitive environment? Have you seen any changes or new faces, particularly in the lower end of the market?

[Bryan Hill:]

In analyzing the competitive landscape, you really have to look at a product level because it varies very much by product. We predominately compete against point of solution providers except for in the case you already MRI that seemed to have slightly larger product offerings specifically Yardi. But we're not seeing a tremendous change in the landscape at this point.

[Operator:]

[Operator Instructions]

[Operator:]

At this time, I am showing no further questions. Ladies and gentlemen thank you for participating in today's conference. This does conclude the program and you now may disconnect. Everyone have a great day.