RealPage Inc
Q3 2015 Earnings Call Transcript

Published: 4 Nov 2015

[Operator:]

Good day ladies and gentlemen and welcome to the RealPage Third Quarter 2015 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 will be recorded. I would now like to introduce your host for today’s conference, Rhett Butler, Vice President of Investor Relations. You may begin, sir.

[Rhett Butler:]

Thank you, operator. Good afternoon and welcome to the RealPage financial results conference call for the third quarter ended September 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 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, November 3, 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 August 7, 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 third quarter earnings call. We’re pleased with our financial results for the quarter which exceeded expectations. Compared to the prior year quarter, revenue grew 16%, adjusted EBITDA margins expanded over 430 basis points. Diluted EPS grew 88% and cash flow grew 170%, a very nice quarter. Our management team has embraced solid expense discipline while we continue to invest in our future through expansion of our sales force and delivery of new and innovative products and technology to our clients. Deciding how much to invest in the future versus how much to harvest in the present, has always been a balancing act. And we’re pleased with both top line revenue growth and expanding margins. The third quarter marks the fifth consecutive quarter of sequential margin expansion and we’re back in the 20s. Today I’d like to give an update on the rental housing environment, provide a brief update on our sales investments and infrastructure expansion, and cover third quarter revenue drivers for each of our four product families. Our MPF research division, the industry’s leading source of rental market intelligence with access to millions of units of lease transactions, reported that occupancy for the third quarter was 96.2% up from 98.8% last year. Third quarter rent growth was a whopping 5.6% which is at a 15-year high. While apartment rents are rising at a significant pace all across the country, the nation’s average price increase is being skewed quite a bit by the surging rents in the Western region of the country. Among the nation’s 15 largest markets, 14 areas now register annual rent growth of 7% or more and 10 of those are in the Western region. Ongoing construction was over 450,000 units which, is on par with the last seven quarters. While new supply tends to slow rent growth historically, that hasn’t been the case as of late. Construction of luxury units in the most desirable neighborhoods results in new product rents that are too high to pull many residents out of the existing stock. Nationally, the typical monthly rent for new communities is around $1,600 more than 15% above typical rents in the best properties built prior to 2010. Going forward, MPF expects overall occupancy to inch down very slightly which would reflect the volume of new product moving through initial lease-up rather than any real softening in the performance of most individual existing communities. MPF also expects annual rent growth for new leases to remain above 4% through the end of 2016. Whether or not the Western region metros can sustain their significant price increases, is a key question. While underlying fundamentals are very strong in the west, if the economy experiences an unforeseen stumble, there is perhaps greater risk of a price correction there. Lastly, in the third quarter, 51.1% of households with expiring apartment leases chose to renew. Retention rates have been climbing steadily over the last five years, though they are very seasonal peaking in the winter months when cold weather discourages moving. Helping to drive overall results is our continued sales force investments. We’ve added 67 sales reps compared to last year. Our multifamily sales team productivity experienced a slight decline in the third quarter but not material enough to impact our expectations for the year. Multifamily productivity grew sequentially driven primarily by gains from tenured reps with more than two years in each of our enterprise, corporate and SMB categories. We believe a factor of play here is all of the work and training that’s gone into simplifying our platform of solutions. The result has been an increased level of multi-solution richer RPU deals. We’re focused on continuing to support tenured reps to increase productivity as newer reps ramp up to full contribution. The fourth quarter is typically our most significant booking quarter our pipeline is strong across all market segments. And as a result, we expect sequential productivity improvements as we exit the year. In the third quarter, we also completed moving our first data center to a co-location facility near our new corporate headquarters. We increased the infrastructure capacity of the data center by nearly 10 fold to support the vast expansion of processing capacity we expect in the future, largely related to new analytic products that we have introduced. In early 2016, we plan to move our second data center to another co-location site and expand its capacity as well. Overall, the move and infrastructure expansion for both data centers represent a one-time capital expenditure of between $11 million and $12 million spread out over two years. We expect to invest approximately half of this amount in 2015, which has been reflected in our guidance and approximately half in 2016. With this infrastructure expansion, we not only expect to support significantly elevated processing capacity that can be leveraged more efficiently over the long-term but we also expect it to enable us to support international growth in a cost effective manner. Moving on to product family performance, leasing and marketing solutions grew 1% compared to last year, which is the second consecutive quarter of year-over-year growth. Screening continues to lead product family results along with our portal and organically generation solutions. Leasing and marketing growth was partially offset by continued revenue decline within our internet listing solution and modest pricing pressure in our contact center which was flat to slightly down compared to last year. We are becoming more efficient with the contact center, and as a result we’re able to maintain margins despite pricing pressure when compared to last year. In addition, we expect to add new features and functionality in the near term that will further differentiate our contact center as a leading call-center for the rental housing industry. Also related to leasing and marketing, in connection with our preparation of financial statements for Q3, we identified certain indicators of impairment related to the trade name intangible assets resulting from our acquisition of MyNewPlace in 2011. Declining MyNewPlace revenue over the last couple of years combined with a shift in strategy influenced taking an impairment charge during the quarter. We’ve learned a great deal through our ownership of MyNewPlace. Despite execution challenges related to the iOS, we still believe we have the necessary components to market a holistic leasing and marketing solution that is designed to optimize the conversion of leads to leases. We expect to extend and evolve our lead generation and lead management capabilities to focus on leases rather than the lead based approach most internet listing services currently employ. We are pleased that Zillow announced last week that they have successfully integrated our online pricing and availability widget into their rental listing service because we believe providing real-time pricing will improve conversion rate which is our goal. We’d like to partner with other internet listing services to improve conversion rates and we believe that our partnership with Zillow was a good example of how the combination of RealPage’s massive rental data and strong lead generation can create a better consumer experience and generate more leases with fewer leads. Property management grew 13% compared to last year, driven primarily by OneSite, Spend Management Solutions, Propertyware and Kigo. Diving into OneSite, our front-end lease accounting, back-office accounting and compliance monitoring solutions are all helping to fuel growth of OneSite. Revenue from our accounting solution has continued to grow in the mid 20% range with nearly two thirds of the growth coming from new units and the remainder from RPU expansion. New deals for our accounting solution have been coming in at a much higher RPU level than historically, and this gives me confidence that we have essentially closed any perceived functionality gap between other third party mostly single solution accounting providers. Our core front-end, OneSite solution has continued to be a steady grower and is showing no signs of slowing down. Growth is in the double-digits and it’s derived relatively equally from new units and RPU growth. New deals in this area have also been coming in with higher RPU levels. We also continue to see significant growth in our property where single-family property management solution and our Kigo vacation rental property management solution. In the fourth quarter, we plan to introduce our resident-direct payment processing platform into Propertyware and expect this should accelerate single-family growth. Finally, our compliance monitoring solutions are experiencing significant adoption growing revenue over 40% compared to prior year periods. This business originated from our acquisition of Windsor compliance in late 2013. Many affordable housing property owners, managers are outsourcing compliance monitoring obligations for their affordable housing portfolios to RealPage using our SAS solutions. Even the very largest property owners and managers are able to cut cost and improve reliability and compliance using our solution. The number of units using Windsor has nearly doubled over the past year and we expect more growth from this solution now that this business is fully integrated into our operations and systems. Resident Services, our largest product family grew 34% compared to last year. Growth was driven primarily by our Q2 acquisition of Indatus, our payments and our renters’ insurance solutions. Our payment solutions continue to benefit from a market that has not fully embraced the benefits of electronic payments. We believe we are the leading payment processor in the multifamily industry with $28 billion of rent worthy payments processed as of September. Rent, utilities and insurance in the rental housing market generates nearly $440 billion in annual payments. So we are still thinly penetrated at only 6% of the overall market. Our new resident-direct payment solution has been well received resulting in the adoption of nearly 100,000 units to date on the solution in little over one quarter since it was generally available. Resident-direct payments, is fundamentally different from most traditional credit card payment processing solutions. And there are compelling reasons why clients and residents are finding it so attractive. When a client offers the resident-direct payment option to its residents, the residents are able to pay their rent by credit card and the client receives the full amount of the rent payment while avoiding the financial impact of credit card fees associated with traditional payment processing. This is made possible by RealPage payment services, our wholly owned subsidiary that is licensed and operates as a nationwide My Services business. Residents that choose to pay by credit card, registered directly with RealPage for our money transmission services, much like they would if they were using PayPal, a resident simply tells RealPage how much money needs to be sent to their landlord and we initiate the money transmission transaction. The client receives the full amount of rent due under the lease and the resident fairs the cost of the transaction. 6% to 7% of residents prefer to pay by credit card each month when money is tight, so this is an amenity that owners and managers want to offer but were hesitant to offer in the past due to the legality of charging a credit card convenience fee to cover the cost of accepting payment in this form. With resident-direct RealPage solves this problem with improved compliance, controls and proper licensing. Asset optimization grew 16% compared to last year and accelerated again sequentially. Growth was primarily driven by YieldStar and our new data-based business intelligent solutions. Bookings on ACB levels for our data analytic solutions have been pretty significantly since general availability in Q1 of 2015. Year-to-date, YieldStar has added 30 new logo clients, the majority of which are property owners and managers who own 5,000 or more units. These new logo deals contain three of our primary competitor’s largest customers. Year-to-date for our new analytic solution, we’ve added over 30 new logo clients as well, primarily in our enterprise and corporate sales categories which is typically how adoption starts before going down market into the S&B category. Clients with nearly 530,000 units have adopted our new analytic solutions so far this year. We’re also seeing a significant percentage of clients that are interested in the entire analytic solutions once they’ve deployed a single solution. One of my favorite example is a multifamily client who owns over 30,000 units, two years ago, YieldStar was deployed on a couple of hundred units as a test. During that time we displaced our primary competitor because the client concluded through actual results that our statistical based pricing model was better. Today that same client has standardized all 30,000 units on YieldStar. With a pricing engine that relies on real-time lease transaction data as well as analytics that are based on the same data, we expect customers to drive revenue to outperform between 200 and 300 basis points higher than by simply comparing market rent cost between properties. Asset Optimization released its market analytics product in the third quarter. RealPage market analytics allows our clients to compare their performance to their peer performance across an extensive library of data points based on actual lease transaction data. These are at low value surveys or web scrapes, the data is sourced in real-time directly from millions of units we service through any number of our solutions. At micro levels, they protect our client’s confidentiality. Here is an example. Other providers’ rent data is based on asking rents for new leases which means only a small number of units are available at any given time. Right now, less than 4% of units in the entire multi-family market are actually vacant. There is very limited value in tracking 4% of the market to determine appropriate or performance evaluation, especially when the composition of that 4% continually changes significantly, devaluing any kind of comparison or analytics. Our competitors don’t have access to the 96% of units already leased nor do they know the actual rent level, the term, the starting lease date, the amenities or many other details about each lease. We provide our clients with bottom line alpha metrics on actual rental revenue, actual rent roll movement, actual renewals, actual lease terms, actual lease over lease rent change, and this is just a fraction of the pricing intelligence we deliver to our clients. In addition, we have expansive geographic coverage with significant historical perspective. We’ve pioneered a new approach to forecasting that is already paying dividends. Our market analytics product leverages these forecasts and our exclusive lease transaction data and a host of other tools as part of a very powerful easy-to-use interface. Additionally, our research and data sciences’ team produced a framework to understand renters in ways never before accomplished in the apartment industry. They’ve harvested data across our platform to review income, marital status, age and rent levels and then leverage the data to group renters into seven distinct groups. The findings helped our clients identify underserved renter groups. For example, while the industry narrative has been highly focused on reaching wealthy urban dwelling, what we call moneyed millennials, our research proved this group represents only 15% of apartment households, another 39% fell under what we call mainstream millennials. These are renters more likely to live in suburbs, live alone, yet still command decent salaries, very little apartment products specifically targets this group today, yet they are the single largest cohort in the country. Our research shows that opportunities were especially pronounced in places like Atlanta, Las Vegas and Virginia Beach. This industry-first research adds substantial value for our clients. Operators can better market prospective residents. Investors, asset managers and developers can better identify underserved niches or inefficient markets. So, in essence, real analytics requires real data and we believe RealPage is currently the only company that can provide such a deep understanding of renter data and how it can affect and improve operating performance for our clients. To summarize, we’re quite pleased with the third quarter financial performance which continues to be driven by broad customer adoption across the entire RealPage platform and expense discipline we’ve maintained. 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. We’re very pleased with our performance over last quarters, several quarters, particularly the third quarter. Financial performance for the third quarter demonstrated broad customer adoption across all of our product families and strong expense discipline. We achieved 16% total revenue growth over 430 basis points of margin expansion, 88% diluted earnings per share growth and significant operating cash flow growth during the quarter. Total on-demand revenue for the third quarter grew 16% compared to last year. Our subscription revenue stream grew 18% compared to prior year and represented 89% of on-demand revenue, while transactional revenue was slightly down. ACV or annual customer value grew to $467 million or 16% compared to the prior year. Our top 100 ACV clients possess an average RPU of $62. We ended the quarter with 10.4 million representing an increase of 10% compared to the same quarter last year. RPU is nearly $45, an increase of 5% compared to the prior year quarter. Our top 50-RPU clients possess a RPU range of $122 to $285 with an average RPU of $161. Tracking our RPU customers is an important measure of our success penetrating the market and our installed base with the entire platform. The top-50 RPU customers included diversified representation of our enterprise, corporate and SMB submarkets. The top RPU level for each submarket is $200 for enterprise, $250 for corporate and $285 for SMB. In the aggregate our top 50 RPU clients grew their ACV 24% year-over-year. Continued market education, sell-strategy focusing on richer RPU deals with multiple solutions and our new analytic solutions are helping to drive performance here. Moving on to profitability for the quarter. Our expense discipline continues to drive significant results. This discipline also extends to our integration efforts with our Indatus acquisition. During the quarter, our plan around cost synergies is beginning to achieve traction as in data’s operating expenses were nearly 30% lower than anticipated. We still have a long-way to go but this early progress is very promising. Gross margin was 62% for Q3 2015 up over 60 basis points compared to last year. Gross margin expansion continues to benefit from leveraging our fixed cost structure, such as our IT infrastructure, offsetting this by a higher revenue mix of solutions with a greater variable cost component such as payments. Total operating expense grew 6% compared to last year, as a percentage of revenue it declined over 430 basis points to 44%. Our plan to improve margins by leveraging our international workforce further integrating office locations resulting from our acquisition program and optimizing certain operational functions is driving this performance. With respect to the individual components of total operating expense, product development expense declined 2% compared to last year. And as a percentage of revenue, it declined nearly 220 basis points to 12%. Leverage continues to be driven by a higher international labor mix as part of our global product development strategy. International labor now accounts for 56% of total product development headcount compared to 48% in the prior year quarter. Sales and marketing expense grew 10% compared to last year. But as a percentage of revenue, it declined 130 basis points to 21%. The primary drivers of the modest expense growth were headcount related cost attributed to hiring 67 additional sales reps compared to the prior year, over half the increase is attributed to SMB reps and international lead generation reps. As Steve mentioned, we will continue to monitor productivity though we’ve experienced some sequential momentum that we expect to continue as we exit the year. General and administrative expense grew 8% compared to last year. But as a percentage of revenue, it declined nearly 90 basis points to 11%. The primary drivers of expense growth were variable compensation costs as well as increased professional feels. Net income for the third quarter was $11.3 million or $0.15 per diluted share. Adjusted EBITDA was $24.2 million or 20% of revenue, representing over 430 basis points of margin expansion. The third quarter marks the fifth consecutive quarter of margin expansion and we continue to yield further margin improvements. Now moving to the balance sheet and cash flow metrics as Steve indicated in connection with preparing our Q3 2015 financial statements, we identified certain indicators and impairment for identified intangible assets primarily related to the MyNewPlace trade name. As a result, we took $20.3 million non-cash, non-tax deductible income statement charge to impair those assets. The issue was primarily driven by our iOS revenue stream that has declined significantly over the last several years and the shift in strategy that Steve mentioned. We continue to believe the market needs a holistic solution for lead generation, lead management and lead capture. We believe we are the best position to deliver this vision to our clients and to aggressively pursue this large market opportunity. As an example, our subscription based organic lead generation solutions have achieved 22% growth in 2015. Moving to cash and liquidity. Cash and cash equivalents were nearly $19 million at September 30, 2015 compared to approximately $27 million at December 31, 2014. Cash flow from operations for the third quarter was nearly $20 million representing growth of 170% compared to last year. We reduced DSO to 50 days from 55 days in the prior year period. We also reduced our debt to $44 million down $6 million from Q2, 2015. Capital expenditures were over $7 million, a decrease of 25% compared to the same period last year, but down 36% year-to-date. Year-to-date capital expenditures were $19 million. Our initial guidance for the year was approximately $37 million which is in-line with 2014 levels. Despite elevated capital for Q4 related to the infrastructure expansion Steve mentioned as well as our initial expenditures for our 2016 headquarters move, we expect total capital expenditures to be lower than originally anticipated and within a range of $31 million to $33 million. Also during the quarter, we repurchased over 800,000 shares of our common stock. In the program to date, we have purchased 2.5 million shares. At current stock levels, we continue to believe share repurchases are compelling use of capital with a potential for significant return for our shareholders. Now, as we look ahead to Q4 performance, we expect the following. Total revenue, in the range of $120 million to $122 million, adjusted EBITDA in the range of $24 million to $25 million and non-GAAP EPS of $0.14 to $0.15 per share. This guidance translates into the following for our full-year expectation. Total revenue, in the range of $465.2 million to $467.2 million, adjusted EBITDA in the range of $89.7 million to $90.7 million, and non-GAAP EPS of approximately $0.53. Before turning the call over for questions, I’d like to mention that we are pleased with how well the business has performed during 2015. Due to execution and accelerated performance, our revenue expectations for the year are now $11 million higher than the mid-point of our initial 2015 guidance. In addition, adjusted EBITDA expectations for the year are now $8 million higher than the mid-point of our initial guidance. Fourth quarter margin is expected to be about 20% and we expect to continue this trajectory into 2016. I’m very proud of the commitment our management team has demonstrated to improve margins. And now, we’ll open the call up for any questions you may have.

[Operator:]

[Operator Instructions]. And our first question comes from the line of Jeff Houston from Northland. Your line is now open.

[Jeff Houston:]

Hi guys, thanks for taking my questions.

[Steve Winn:]

Hi Jeff.

[Jeff Houston:]

Yes, hi. Given the potential for continued high occupancy, which is very high in rental properties, how are you adjusting your go to market strategy and R&D efforts in leasing and marketing?

[Steve Winn:]

Well, this is Steve. This is a trend that has continued now for several years. We still have 49% of the units in the industry that turnover each year, that’s less by about 10% than it was when we started this trend several years ago. But there is a significant need for leasing and marketing tools to fill the 49% of units that do need to be re-leased every year. Our strategy is to focus mostly on organic techniques for generating leads. And we’re especially interested in getting of the strategy of generating more leads, we want less leads and more leases. So we focus on conversion rates. And that is the primary strategy that we’re adopting. The industry loves this strategy because higher conversion rates mean they have to manage fewer leads that come in the front door. So, their overall cost for leasing agents and advertising goes down. So, we’re very optimistic that we have the right strategy and we intend to continue to execute.

[Jeff Houston:]

Great. And then following up on that, it looks like three out of the four product groups met or exceeded expectations. So, two questions, is that accurate? And then looking at leasing and marketing, it’s great that it was still positive growth but it was down from last quarter’s 6% growth. Was that in line with your internal expectations? And should we expect that to stay roughly 1% level or so in the fourth quarter?

[Bryan Hill:]

So, Jeff, all four of our product groups exceeded our expectation for the quarter which resulted in our revenue being $1 million over the high end of our guidance. As it relates to leasing and marketing, earlier in the year we indicated that we were expecting on a full-year basis, leasing and marketing to be flat year-over-year. And we still have that same expectation which would translate into slight growth in Q4.

[Jeff Houston:]

Great. Then last question from me, what was the organic revenue growth and on demand growth for the quarter?

[Bryan Hill:]

The organic revenue growth was 13%. And it’s the same by total as well on demand.

[Jeff Houston:]

Got it. All right. Thank you.

[Operator:]

And our next question comes from the line of Patrick Walravens from JMP Securities. Your line is now open.

[Pete Lowry:]

Hi great, it’s actually Pete Lowry in for Pat. Hi, congratulations on a nice quarter.

[Steve Winn:]

Thank you.

[Pete Lowry:]

You’re welcome. Can you talk about what the competitive landscape looks like for apartment analytics and then how you think about how big an opportunity that might be?

[Bryan Hill:]

Well, we’ve invested heavily in analytics area, introducing a new business intelligence product, a performance analytics product and most recently a market analytics product. Our differentiator is we use real-data not shopped data or analytics product or family of products. We’re seeing great adoption now and expect this area will accelerate in the future. We have significantly expanded the data center capacity in order to, and really in anticipation of much higher transaction processing levels of, in large part driven by our analytics suite of products. So this is an important focus for us. In terms of competition, most of our competitors are marketing market survey type of products, where they’re basing their analytics product on rules versus statistical data because they don’t have nearly as much data as we have. So, I’m bullish about this area and I think we are extremely well positioned in this space.

[Steve Winn:]

One other product we mentioned was benchmarking. We’re now benchmarking as part of our performance analytics product. Many metrics of performance so that owner operators can drill down and see exactly how their property is performing on multiple dimensions relative to their peer groups surrounding them. So they can start to drive the car looking at the front window instead of the rear-view mirror.

[Bryan Hill:]

And Pete, we’re really excited about these products. And you can see the impact we’re having in the acceleration of revenue within asset optimization. I mean, during the quarter, asset optimization is now 16% year-over-year, revenue growth. We expect that to further accelerate into Q4. And then secondly, we have not had a product set that rolls out in such a short period of time to have 530,000 units of adoption. And that speaks to the power and the need for these tools in what also is compelling within that is it’s just not the high-end of the market. We have clients within the corporate segment as well that have been early adopters to the product.

[Pete Lowry:]

Okay, great, thank you.

[Operator:]

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

[Kyle Chen:]

Hi, this is Kyle Chen in for Michael Nemeroff. Thank you for taking the question and congratulations on a solid quarter. Just to start off, can you give, just given your expanded portfolio of products can you talk a little bit about the timing cadence across or within existing clients? I’m just trying to get a sense of the appetite for suite or multiple module purchases. Are customers buying more modules initially or are they just coming back prior to the annual renewal cycle?

[Steve Winn:]

Well our strategy has always, been land and expand. So, we’ll determine the customers’ pain-point and the sales reps almost always have a product or service in their bag that addresses that pain-point. We are bundling more of our solutions into suites at this point. So, we’re seeing the average deal size get larger. And of course cross-selling is a critical element of our overall strategy and nothing has really changed here.

[Kyle Chen:]

Got it. That’s helpful. And I guess, just ending, on demand units were a little lower than we were expecting this quarter, particularly given the expectations of another quarter of maturation of your recent sales hires. Can you discuss some of the puts and takes in the quarter from a unit and sales execution perspective? And just given the lower productivity this quarter, what’s your confidence in your year-end outlook?

[Bryan Hill:]

So, Kyle, I mean, as far as our guidance was concerned for Q4, we’re very confident and it’s based on the current visibility that we have. As it relates to units, we’ve been growing steadily on an organic basis of 5% over the last several quarters. Sequentially that typically means unit increase of 100,000 units. So our view is, it’s been in line with the current pace that has resulted in 16% revenue growth this quarter, 18% subscription revenue growth which we feel is solid execution. And we expect to repeat in Q4.

[Kyle Chen:]

Okay. That’s helpful. I appreciate it.

[Operator:]

And our next question comes from the line of Matt Headberg [ph] from RBC Capital. Your line is now open.

[Matt Swanson:]

Thanks. This is Matt Swanson on for Matt. And thanks for taking my question and congratulations on another strong quarter. There has, recently been some larger mergers and acquisitions in the industry that seem to be betting on rising rents. I think you mentioned rents at a 15-year high right now, such as like Starwood Waypoint and Colony American in the single-family residential market, and Sam Zell selling 23,000 apartments. What do large deals like this mean for the industry?

[Steve Winn:]

Generally, this is still a very fragmented industry. While you see units trading hands, the only significant concentration of units has been the merger of Riverstone and GrayStar which did create about 350 to 400,000 units. They are by far the largest concentration now and RealPage, GrayStar is our largest client. Although GrayStar buys from everybody, they’re so big. I think the market for transaction of sales is actually better because prices are so good, I mean, this is not a bad time to sell an asset when cap rates are as low as they are and market is as strong as we’ve seen. So I would expect you would continue to see properties trade hands. But I’m not expecting what I would consider a consolidation of the industry that’s everybody has been forecasting that since we got into this business and it just hasn’t happened.

[Matt Swanson:]

Thanks. And then you guys mentioned during the call that the Western part of the United States is having kind of a different growth cycle right now. Is there anything notable about RealPage’s exposure to these areas as opposed to the rest of the country?

[Steve Winn:]

Well, we’re strong across the country with the notable exception of New York because that is such a heavily rent-controlled market. Using the word exposed, I’m not sure that’s the way I would characterize it. We have a lot of market share in the West. And that’s good.

[Bryan Hill:]

Yes. I mean, our products, we feel are diversified and complete they meet the needs of owners and operators throughout the lifecycle of the renters. So just focusing on occupancy and the revenue side is not the only area that our products address. And in fact, we’ve been very supportive and a part of the message that we’ve been communicating is even in high, rent-high occupancy environments, operations should be forcing turnover to even further maximize asset yields. So exposure would be, again, an unusual word for us to use. I mean, the industry is doing well and that generally means the providers of the industry will do well.

[Matt Swanson:]

All right, thank you. Congratulations again on the quarter.

[Bryan Hill:]

Thank you.

[Operator:]

[Operator Instructions]. And our next question comes from Nandan Amladi from Deutsche Bank. Your line is now open.

[Nandan Amladi:]

Hi, good afternoon. Thanks for taking my questions. So, Steve, you mentioned adding infrastructure at the flow that increases your capacity by 10x. Was this 10x reference strictly to the analytical part of your portfolio? I can’t imagine that you would expand your overall capacity by that much.

[Steve Winn:]

We didn’t, I didn’t say capacity, I said infrastructure. So, that includes the really all the backbones, the firewalls, the internet connectivity. We, in terms of transaction processing volume, we’ve steadily increased that, we got about 430 billion transactions we processed in 2014 and that number is going to be up 40% or 50% this year. We’re expecting candidly, the market is using more and more of our products and the products that they’re using more off are the analytics products that tend to be more transaction intensive. So, we felt it was vitally important that we expand the infrastructure of our data center so that we could support loads up to 10 times the current size.

[Nandan Amladi:]

Okay. That’s actually helpful clarity. And then one other question on your R&D shift if I could, you’ve talked about this for a couple of quarters now. Where do you achieve steady state, I think you said you’re up 56%, up from 48%. Where do you reach a steady state and when?

[Steve Winn:]

I’m sorry Nandan, we didn’t catch that full question. Do you mind repeating?

[Nandan Amladi:]

Yes, I’m sorry. I’m at the airport. No, I was asking about the R&D going offshore, some of that effort that you began a few quarters ago. And I think, Bryan, you said you have 56% of your development headcount now in international low-cost regions, versus 48% a year ago. Hopefully I got those numbers right. But my question is, where do we reach steady state, at what level and when?

[Bryan Hill:]

Well, so we still feel that we have opportunity to take more positions offshore. What we’ve been doing is actually reducing the footprint domestically but we’re at a level now where there could be more headcount shift but most of the growth continuing to be offshore. So it’s really been two strategies here. One strategy is off-shoring the second strategy is to the integration of our acquisitions and reducing the number of product development teams and departments that we have. We gained a tremendous amount of efficiency by appointing those teams together.

[Nandan Amladi:]

Right. Okay. Thank you.

[Operator:]

And our next question comes from the line of Keane McCarthy from William Blair. Your line is now open.

[Keane McCarthy:]

Hello, guys. Thanks for taking my question. First one, in terms of, I guess, how should we think about new multifamily development over the next year or two possibly being a contributor to unit growth for you guys?

[Bryan Hill:]

Well, we’re seeing about 450,000 new units added in multifamily a year. Typically they tear down between 100,000 to 150,000 so that supply is growing 300,000 to 350,000 per year.

[Steve Winn:]

Yes, we don’t see that the new stock coming on is a significant driver. I mean, we have been growing units at a 5% organic level we actually have grown in total 10% this year given the incremental units that came with Indatus. But our revenue growth is driven even more so due to cross sell opportunity. I mean, today we’re at $45 of RPU on a blended opportunity, north of $250 when you look at the market as a whole. So, I mean, there are several different levels that we can address as a company.

[Keane McCarthy:]

Okay. And I’m just curious on how a contract behaves at a property. Let’s say there is some turnover, like a property owner or a property manager. In the event that that does take place, what type of retention or renewal rates do you guys typically see at that specific property?

[Bryan Hill:]

Well, if a property is sold, the new owner and the new fee manager will typically shift their systems in some cases not all to whatever the system of record they’re using for the other properties that they own or manage.

[Steve Winn:]

However, I mean, we possess 50% or close to 50% in the multifamily, we’re actually over 50% of the multifamily units that are available. So we benefit just as much from sales and transfer of management as we would do as a detriment. In fact I mean, our existing client base is growing their units every quarter as they are applying more units to their portfolio as well as our products to those units for management purposes.

[Keane McCarthy:]

Okay. Got it, that’s helpful. And then final one from me, Steve, I think you mentioned that you are planning on adding some functionality to the contact center in response to some pricing pressure there. I’m just curious to get a little more detail on what exactly that functionality would be. Thanks.

[Steve Winn:]

We’ve added a feature called instant call reply to e-mail which improves conversion rates on e-mails. We haven’t announced the features that will be added to the contact center. But we are very certain that we can improve the conversion rate that we are achieving now. We’re achieving on-average about 2.7x, increase in conversion if you use a contact center. And we think there is a way to get that number higher through some new features that will be incorporated and I’ll announce next year. Contact center, we have a big advantage here because we’re by far the largest. We have four contact centers around the world. So where we compete with someone that may have won contact center, they are highly vulnerable to outages. We’re not we can shift the load dynamically across the world. We really like the contact center, I think it’s vitally important product. And it’s one that we want to continue to invest in to continue to differentiate. And we also want to drive more efficiency into the contact center. We think there is lots of opportunity to actually lower price and hold margin which we’ve been very successful at doing. Did we lose you?

[Operator:]

I’m not showing any further questions. Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may now all disconnect. Everyone, have a great day.