RealPage Inc
Q2 2015 Earnings Call Transcript

Published: 6 Aug 2015

[Operator:]

Good day ladies and gentlemen and welcome to the RealPage second quarter financial results conference call. At this time all parliaments 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 call is being recorded. I would now like to introduce your host for today's conference, Rhett Butler, Vice President of Investor Relations. Please go ahead, sir.

[Rhett Butler:]

Thank you, Mallory. Good afternoon and welcome to the RealPage financial results conference call for the second quarter ended June 30, 2015. 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 statements 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 management's current knowledge and expectations as of today, August 5, 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 quarterly report on Form 10-K previously filed with the SEC on May 8, 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 will exclude certain non-cash or non-recurring items. Please reference today's earnings press release for more information on our non-GAAP financial measures and for 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 second quarter earnings call. Based on performance through the first half of the year, I feel confident that the investments we've made in our data infrastructure, product development and sales force are working. Total revenue was over $114 million for the second quarter or growth of 21%, up nearly $20 million compared to the second quarter last year. We experienced revenue growth across all of our product families and we maintained expense discipline as adjusted EBITDA margins expanded significantly compared to last year. RealPage is a market leader in an under penetrated, underserved massive rental housing market and we possess an unparalleled breadth of real-time transaction data that we are leveraging to differentiate ourselves against all other contenders in this space. For example, other market participants may aggregate asking rents from apartments that no one has the depth of actual transaction data for both revenue and expense that we can harvest from over ten million units each day. Our data is the underpinning of our competitive advantage and helps drive a balanced operating model of top line growth and profitability. We recently held our annual user conference which was a great success. The overarching theme of the conference was big data and how we use it to enable our clients to outperform their peers. I'll delve into our strategy for leveraging data and why we believe it will create a network effect for our platform of solutions. But first I would like to give you an update on the macro economic backdrop for rental housing. Our MPF research division has been the information source for the rental housing market intelligence for several decades and has powered the investment decisions of pension funds, investment banks, institutional advisors, operators and even the US government. MPF has access to millions of units of lease transactions including demographic and psycho graphic attributes. MPF research reported after final adjustments that occupancy for the second quarter was 96.0%, up slightly from the 95.6% last year. Second quarter rent growth was a whopping 4.9% which is at a 15-year high. This exceeded the high end of our previous forecast driven primarily by very rapid revenue growth in the western portion of the United States. Based on the exceptionally strong growth in the second quarter, we expect full-year rent growth for 2015 to be between 4.4% and 4.7%. Ongoing construction has been running around 400,000 units over the last year or more so developers have cranked up the engine to full throttle for some time now. Today product under construction totals approximately 450,000 units and that's excluding New York which has an abnormally high number of new starts as developers scramble to start projects prior to a property tax abatement that was scheduled to expire June 15, 2015. As we discussed recently, investments in our platform have enabled us to further analyze the massive repository of data we've collected. We believe this data can drive operating performance in three major ways. Benchmarking, enabling property and owners and managers to access granular operating data and trends, and compare their performance against peers, market analytics, a new product we introduced at our user conference which allows owners and institutions to analyze economic and demographic indicators on both a trailing and forward-looking multi-year timeline. And, three, the network effect where big data generated from one product is used to improve the accuracy and capabilities of another product. Some examples are rental payment history data which we use in our screening decisions and lease transaction data which is being used in all of our asset optimization products. We believe our bench marking capabilities far surpassed anything else the industry currently offers and can help drive actionable decisions for operators to enhance results. Our customers who use our benchmarking products are able to quickly and accurately evaluate the performance of their portfolios relative to the applicable sub markets and identify opportunities to accelerate returns, all without having to separately mine for data using spreadsheets or inefficiently aggregated reports from disparate day source. The data instantly available via virtually any desktop or mobile device enables transparency into the opportunities that improve profitability. We expect to have the only lease transaction-based multi-dimensional benchmarking solution for multi-family marking a significant evolution in performance measurements for the industry. Market analytics is an extremely important new product from MPF research that will provide owners and institutions with an unprecedented level of granular data, accurate down to street corner views with historical and forward-looking analysis of hundreds of variables. Expert commentary will be included analyzing correlations between various data fields that will provide insight never before available at such granular levels of detail. MPF has recently partnered with real capital analytics to add their exceptionally detailed and accurate sub market level cap rate performance and return expectations. Property owners and managers will be able to forecast market performance and asset level revenue expectations for any market or sub market, all using actual historical and current data. This partnership along with continued focus on highlighting meaningful data-driven metrics for the industry should help solidify our position as a market research leader in the rental housing market. Now we believe our data strategy will fuel revenue growth momentum across our entire platform and our strong second quarter revenue growth underscores this. On a product family basis, we experienced growth in every category, leasing and marketing solutions grew 6% compared to last year ending four straight quarters of negative growth. Sustaining growth was primarily responsible for positive product family results along with our portals and organic lead generation solutions. Leasing and marketing growth was partially offset by our internet listing solutions and modest price pressure on our contact center as we continue to transition customers to high volume subscription agreements. Property management grew 14% compared to last year accelerating sequentially and from last year's growth of 11%. Growth was primarily driven by one site, our spend management solutions and Propertyware. I would like to point out that our back office accounting solution which is part of one site, has grown 25% per quarter now for the past five quarters. And we're now approaching 20,000 multi-family properties. We've continued to invest in our back office accounting solution and after many years and millions of dollars of investment, we're seeing very positive momentum here. We also believe our budgeting platform is now preferred over Yardi and other property management accounting solutions and is being used to manage thousands of sites. Resident services grew 50% compared to last year and is now our largest product family at 31% of total on-demand revenue. Growth was primarily driven by our payments solution which grew over 90% compared to last year and a more normalized renter insurance level and finally, the acquisition of Endatus. Asset optimization grew 14% compared to last year and significantly accelerated sequentially. Growth was primarily driven by YieldStar and our new database business intelligence solutions. And as I mentioned earlier, we just introduced market analytics which should contribute to accelerating growth in this product family next year. During the year, we also acquired Endatus, a leading provider of cloud-based smart answer automation and routing solutions that handle maintenance calls for over 11,000 apartment communities with approximately 2.2 million total units. Live agent response is the most effective way to significantly increase capture rates for leads and improve resident satisfaction on service calls. But new smart answer automation capabilities fill a need for some properties wanting a low-touch option for calls to be answered and managed. We expect to combine Endatus with our level 1 live agent solutions by the end of 2015 and the new platform will not only address multi-family but also single family and vacation rental markets. We are excited about the many cross-selling opportunities enabled through the acquisition of Endatus and the significant number of new units that we've added to our platform. We refer to these as unique new units and there's about 500,000 of them that resulted from the acquisition raising our total units to 10.3 million. The second quarter also marked another quarter of continued sales force investment. Compared to the second quarter of last year, we've hired 53 reps or growth of 18%. On a trailing 12-month basis, as of the second quarter, multi-family sales team productivity was up 3% compared to the prior year period. Total sales team productivity was modestly down taking into account the dilution of new sales reps across our single family and vacation rental categories. Our sales strategy will continue to focus on investment in scaling our demand renovation engine to significantly increase our pipeline in refining our marketing assets and focusing on sales training. One of our greatest assets is our industry-leading sales force. We believe we have the most sophisticated and highly specialized sales force in the industry. Not only do we have the expertise and knowledge to meet the needs of institutional and enterprise clients managing 20,000 or more units, but we are also adept at penetrating the meat of the corporate market which managed between 5,000 and 20,000 units. Finally, we also have a very successful lower cost customer acquisition model for smaller SMB multi-family clients managing under 5,000 units as well as single family and vacation rental markets. I'm excited about the continued prospects from our sales team and I look forward to continued progress under the direction of our new Chief Customer Officer Darrell Raleigh. During the quarter we elected Cathy Marinello to the Board of Directors. Cathy brings a wealth of experience in financial selves industries which are playing an important role in our growth. Cathy has been a member of the Board of Directors of General Motors corporation since 2009 and also serves on the Board of Directors of AB Volvo group and Nielsen holdings. In her career, she's been Chief Executive Officer of several multi-billion dollar public and private companies in various financial service areas including insurance, consumer finance, electronic payment and card services, payroll services and outsourced BPO service. So we welcome Cathy to our Board and we're optimistic that her wisdom and leadership will be important in helping to guide our strategy, not only for our financial services business but our industry-leading platform of solutions. In summary, second quarter results were strong and reflect returns on our investment in the RealPage platform and the expense discipline we've maintained while also continuing to invest in our sales force. We continue to believe that by leveraging data, we will not only solidify our position as market leader but also help property owners and managers enhance returns. I'll now turn the call over to Bryan for an overview of our financial performance and look at guidance.

[Bryan Hill:]

Thanks, Steve and good afternoon. I'm excited to share our Q2 results with you which were strong. Our 2014 investments continue to pay dividends. We achieved 21% revenue growth, significant margin expansion and record operating and free cash flow during the quarter. Strong revenue growth was driven by accelerated customer adoption across all of our product families. Our subscription revenue stream grew 18% compared to the prior year period and represented 88% of on-demand revenue. Transactional revenue grew 43% after four quarters of negative revenue growth. Driven primarily by significantly improved renters insurance performance compared to the prior year. Total on-demand revenue for the second quarter grew 20% compared to last year. ACV, or Annual Customer Value, grew to $454 million or 24%. Our top 100-ACV clients possesses an average RPU of $60. We end the quarter with 10.3 million units representing an increase of 10% compared to the same quarter last year. As Steve mentioned, our acquisition Endatus contributed approximately 500,000 new units to our unit growth. We are pleased with both continued organic unit growth and the new units from Endatus that are expected to provide us with a significant cross sale opportunity. RPU is $44, an increase of 12% compared to the prior year quarter. And if you recall, RPU can be influenced by the number of units we capture on our platform and most new units originate with lower RPU levels that be our average RPU we disclose. Our top 50-RPU clients possess a RPU range of $118 to $245 with an average RPU of $157. This demonstrates our ability to penetrate our customer base. Moving on to profitability for the quarter. Our focused plan to minimize expense growth and optimize our operations has resulted in significant margin expansion. Gross margin was 63% for the second quarter up nearly 150 basis points compared to last year. Gross margin expansion was primarily driven by leveraging our fixed cost structure, offset by a higher revenue mix of solutions with a greater variable cost component such as payments. While total operating expense grew 10% compared to last year, as a percentage of revenue, it declined over 440 basis points to 46%. I am pleased with our expense discipline and progress leveraging our international workforce, further integrating office locations resulting from our acquisition program and optimizing certain operational functions. These initiatives have enabled us to improve margin while continuing to invest in the business. With respect to the individual components of total operating expense, product development grew 11% compared to last year. But as a percentage of revenue, it declined 115 basis points to 13%. The primary drivers of expense growth were higher personnel costs related to increased head count and higher variable compensation, offset by a higher international labor mix as part of our global product development strategy. Sales and marketing grew 5% compared to last year. As a percentage of revenue, it declined 300 basis points to 20%. The primary driver of the modest expense growth was adding 53 individuals to our sales team. As Steve mentioned, our multi-family sales team productivity was up 3% compared to the prior year period which despite the dilution from added employees is an indication that our sales investments are yielding results. Personnel costs were partially offset by expense savings related to driving efficiencies within our SEN and SEO activities in sport of our leasing and marketing solutions. General and administrative expense grew 18% compared to last year. But as a percentage of revenue, it declined nearly 30 basis points to 13%. The primary drivers of expense growth were higher personnel costs related to scaling our international operations as well as increased consulting and professional fees. Net income for the second quarter was $9.6 million or $0.12 per diluted share reflecting growth of 106% and 100% respectively compared to the prior year period. Adjusted EBITDA for the second quarter was $21.4 million or 19% of revenue. This represents over 550 basis points of margin expansion. We're extremely pleased with not only the year-over-year expansion but the sequential improvement of 50 basis points. Cash and cash equivalent were over $29 million at June 30, 2015 compared to approximately 27 million at year-end 2014. Cash flow from operations for the second quarter was over 26 million or growth of 38%, operating cash flow benefited from higher profitability and changes in working capital. For example we reduced DSO to 51 days from 55 days in the prior year period. During the quarter we repurchased nearly 370,000 shares of our common stock for a value of 7.2 million, we have purchased 1.7 million shares for a value of 30.7 million since initiating our share repurchase program in 2014. Now I will discuss the outlook for 2015 full year and a third quarter. For the full year we expect revenue of approximately 461 million to 466 million, adjusted EBITDA in the range of 86 million to 89 million and non-GAAP EPS of $0.47 to $0.49. As a result of our strong first half performance combined with the acquisition Indatus we’re pleased that the midpoint of our new guidance was higher than our initial 2015 guidance by approximately 9 million for revenue, 5 million for adjusted EBITDA and $0.05 for non-GAAP EPS. For the third quarter of 2015 we expect revenue of approximately 118 million to 120 million, adjusted EBITDA in the range of 22 million to 23 million and non-GAAP EPS of $0.12 to $0.13. In summary we’re very pleased with our 2015 first half performance, our second quarter results were strong with 21% total revenue growth, 550 basis points of adjusted EBITDA margin expansion and record operating cash flow of 26.3 million. I will now turn the call over to questions.

[Operator:]

[Operator Instructions]. Our first question comes from the line of Matt Hedberg with RBC Capital Markets. Your line is now open.

[Unidentified Analyst:]

Could we get an update on the sales force capacity and maturity I believe last quarter you said 30% of the force has been there for only one year and not yet fully ramped, now has this trending and then our new sales hires predominantly focused on the corporate SMB, and any markers?

[Steve Winn:]

Yes so as we progress through the year during Q1, the hiring of new sales reps was predominantly in the vacation rental market but as we move into Q2, we are excited as we have added many more multi-family sales reps, so it's predominantly multi-family in Q2 the reps that we added and you’re right on point. Most of the hiring has been in the core SMB space, however we have hired 2 to 3 enterprise institutional level reps that carry a much higher quota and come with much experience and the multi-family housing industry. As it relates to the tenure of the reps we’re tracking within that 30% which you mentioned from last quarter and we expect that the mix will continue to track at that level as we heard many reps last year and they come online with a year of 10 year and as we continue to hire reps this year.

[Unidentified Analyst:]

And then any change in the contribution of enterprise corporate and SMB customers to the ACV and ARPU I believe historically they contributed equally to the ACV and anyone quarter and they have had similar ARPUs? It's remarkable that stat stays very constant which demonstrates our ability to touch the high end of the market as well as the low end of the market. The ACV is spread thoroughly evenly across those three segments and there is differences in the RPU I mean they are nominal so that stat just continues to be very consistent.

[Operator:]

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

[Brandon Dobell:]

If you look at the research that you’ve on the different market dynamics if you were able to line up markets where you’ve seen supply of new multi-family dwellings grow faster or where that supply demand balance is now tilted in favor of, it will be a little bit too much supply or are you seeing rental growth, will those kinds of markets line up with the kinds of markets where you’re having more success with some of the newer areas of the products, just trying to figure out if you’ve got any evidence to your yes or no or that are bad with what a local market dynamic may do to your conversion rates on the sales opportunities.

[Steve Winn:]

No we have not analyzed the growth in the western part of the U.S. to the rest of the country. What we experienced in the second quarter was nearly a 7% rent growth in the up and down the West Coast of the U.S. into Arizona and Nevada and about 3% in most of the rest of the country. So we’re seeing supply and demand come closer together in a large slot of the U.S. but on the West Coast it's still, nowhere near even supply to meet the available demand but I don’t - in one quarter I don’t think there is any you can read anything into what we have sold in California versus what we sold in the rest of the country, it's pretty spread out.

[Brandon Dobell:]

Okay, and then dovetailing off of the prior question around sales force metrics. As you look at across the organization maybe some color on where you feel from a product perspective or geographic perspective are there any still glaring holes obviously you added a decent amount of people year-to-date but any glaring holes that you’re having trouble finding people to fill or made any kind of organizational changes to try and tighten up some of those opportunities?

[Steve Winn:]

Well we need to continue to expand the sales force I mean this is an ongoing strategy and it's not going to change, in terms of I don’t really see any gaping holes in the personnel area. Obviously very experienced reps in the corporate enterprise market or the area where we’re most sensitive to turnover and then hiring the right new reps because the quotas tend to be so high but generally we’re doing well-attractive new sales talent and it's an area of constant focus but it's not an area that I'm alarmed about.

[Brandon Dobell:]

And then final one for me, Steve, coming out of the users conference, what let me give us your kind of top 2 or 3 takeaways from conversations with customers about your products maybe it's things that customers are looking for that you don’t quite offer yet or areas of the product suite where people are now incrementally more excited than they were 12 months ago about what you guys are doing.

[Steve Winn:]

Well I think there is a lot of interest in the resident services product family in payments we have now got a solution where you can collect rent through credit cards and not have pay a fee to the card association, at least the owner doesn’t, we pay it for them. I say we have a lot of excitement around the many new RealPage analytics products. We introduced a product called performance analysis last year that allowed you to benchmark performance of your properties against your peer group that’s now being deployed in several 100,000 units and we’re getting lots of really positive feedback on that. I'm also extremely pleased with the progress we have made in accounting. We have traditionally being stronger I would say on the front office and the back office. We made a very concerted effort to expand the back office accounting functions and now for the past five quarters we have been growing that particular product about 25% per quarter compounded. We’re in nearly two 20,000 properties so I'm very pleased with the progress we have made in accounting. Property work continues to grow like weed, screening is also kind of took off. We added new functionality to that product and I think it's been very well received. We don’t have a product that I really am struggling with. We’re really seeing a lot of positive momentum across the board.

[Operator:]

Thank you. Our next question comes from the line of Michael Nemeroff with Credit Suisse. Your line is now open.

[Unidentified Analyst:]

This is Kyle Chin [ph] sitting in for Michael Nemeroff. Steve, I guess relative to the guidance can you remind us what you’re prior revenue expectations were for Indatus for 2015, what was the contribution in Q2 and if you could exclude that from your updated revenue guidance how does that compare to the guidance last quarter?

[Steve Winn:]

So when we acquired Indatus what we announced at that point in time was an expectation around 7 million of revenue from Indatus and approximately $1.2 million of EBITDA. Our current guidance that we just provided as I mentioned in the prepared comments from a midpoint perspective is approximately $9 million over in revenue. it's approximately 5 million over in EBITDA and $0.05 of EPS. I mean we’re pleased and in fact we’re very excited that our most recent quarter and the visibility that it's provided to give us the ability to raise our guidance. As it relates to Q2 guidance revenue we have moved up the midpoint $7 million, adjusted EBITDA is about $2.5 million higher and that we have added $0.03 of non-GAAP EPS.

[Unidentified Analyst:]

And I guess, trying to get a sense what the cross sale opportunity is within your customer base given your large portfolio. I know in the past you've talked about your top 50-RPU clients but curious what that looks like beyond the top 50 and if there's an appetite for more tools and services within your mainstream clients?

[Bryan Hill:]

You know, as Steve mentioned, this is a large under penetrated market. We're less than 4% penetrated in the overall market opportunity, $12 billion but more importantly, when you look at just our captive client base, we're less than 14% penetrated into that base. If we were to sell our opportunity, our full opportunity into 100% of our clients, we would be a $3.6 billion revenue company.

[Unidentified Analyst:]

I guess lastly, as you look across your three market segments, enterprise, corporate, SMB, where do you see the most market opportunity for expansion and incremental investment and where do you see yourself making more investment and how should we think about that from a competition and share gain scenario versus Greenfield opportunities?

[Steve Winn:]

The enterprise group is probably the group most interested in the analytics suites that we're introducing so I would expect they would probably buy higher percentage than, say, SMB. But the rest of the products sell pretty well across all three segments of the market. So I don't think you're going to see a big difference candidly in the growth rates of these three markets. We do expect to continue to grow them about the same with enterprise maybe having a little bit more opportunity, but I wouldn't read a lot of meaning into that. And that's just our multi-family markets. I mean we're extremely excited about vacation. You know, single family where we're still growing that. Mid 20s percent. So there's a lot of other markets or some of the smaller markets that we compete in but we feel that we still have significant opportunity to grow those markets as well.

[Operator:]

Thank you. The next question comes from the line of Patrick Walravens with JMP Securities. Your line is open. Please go ahead.

[Unidentified Analyst:]

It's actually Matt on for Pat. One question, I know you guys mentioned some strength in property management due largely to your budgeting platform. You made some tweaks to it and it seems like you're more of a preferred solution over Yardi. Can you maybe dive in that a little deeper and talk to me about some of the advance you've made?

[Steve Winn:]

You know, I must have said that wrong for you to come to that conclusion. Accounting is growing faster than the overall property management group at 25%. But the overall group is growing at 14% this quarter, and that includes the property management software that we sell to multi-family and single family. It includes our spend management solutions. Budgeting is sort of part of the accounting suite and it's very small relative to the opportunity and property management. We're just very encouraged with property management because it's never seems to slow down. It's continued to add core OneSite and Propertyware sites. We continue to do well with spend management solution and I guess the big surprise is these investments in accounting the back office side of the solution have really paid off with expansion now to nearly 20,000 properties using our back office solutions. So there's nothing about property management that I can think of as a negative. It's all pretty positive and getting better.

[Operator:]

[Operator Instructions] Our next question comes from the line of Jeff Houston with Northland Capital. Your line is now open.

[Unidentified Analyst:]

This is Andy filling in for Jeff. Regarding competition, how often do you see [indiscernible] competitively? For which products and what is your win rate?

[Steve Winn:]

We compete with primarily in the single family space. Their solution is I would say slightly lower in capability. For example it doesn't have a strong accrual basic accounting system to it. They are a strong competitor. A lot of their success is coming from payments which I have to admit is also an area that we're experiencing a lot of success with. They do have some presence in the very low end of the multi-family market. But we don't see them a lot there.

[Unidentified Analyst:]

My next question, is, with around $30 million in cash, what is your current appetite for acquisition and what areas do you think are most attractive at this time?

[Steve Winn:]

We have $30 million of cash on balance sheet. We also have a large credit facility that we can tap into as well as our stocks. So we don't feel that we're limited in the size of acquisition at least to a point. But really our capital allocation strategy is first a focus on organic growth and then we have an eye towards acquisition much like Endatus. Endatus is a fabulous acquisition. It carries a high IRR and quite honestly, it's an acquisition where just current cash flow will pay off any borrowings related to that acquisition over a three on four quarter period. And then finally, as a part of our capital allocation strategy, we review and analyze opportunities to repurchase our common stock. So from a capital allocation perspective, that's how we think about things. As far as acquisitions are concerned, we're constantly in the market. We're the largest vertical player within this market. We're the natural consolidator so we see every deal that comes across. As many vertical markets are experiencing today, valuations are creeping up. They continue to creep up. So we're very disciplined in the filter we use in determining return requirements. So we're not really at this point just focused in on any one area. Our acquisition strategies can include adding clients as well as adding functionality to our platform. In any gaps that we have in identifying a quicker ability to go after the market. So I think the way to view our acquisition strategy is we're constantly in the market. We're an inquisitive company and I expect that to continue.

[Unidentified Analyst:]

One more question. What is the current update with regards to penetration in the vacation market in the US and Europe?

[Steve Winn:]

We're still very early on in the vacation market which is one of the reasons why we're so excited. It looks much like the single family market from a client perspective. It's very disaggregated. There's no one large player and we feel given our broad solution set, it's another market that we can go after either through organic growth or continuing through acquisitions. So we're very early on. We have small penetration in that market with much upside.

[Operator:]

Thank you. I'm showing no further questions at this time. With that said, this does conclude RealPage second quarter 2015 financial results conference call. Everyone may disconnect. Have a great day.