RealPage Inc
Q1 2014 Earnings Call Transcript

Published: 6 May 2014

[Operator:]

Good day, ladies and gentlemen. Thank you for your standing by, and welcome to the RealPage Q1 2014 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference to our host, Mr. Rhett Butler, Director of Investor Relations. Sir, you may begin.

[Rhett Butler:]

Thanks, Eric. Good afternoon, and welcome to the RealPage financial results conference call for the first quarter ended March 31, 2014. With me on the call today is Steve Winn, our Chairman and Chief Executive Officer; and Bryan Hill, our Chief Financial Officer and Treasurer effective May 15. 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, May 6, and are subject to certain risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. A detailed discussion of such risks and uncertainties is contained in our annual report on Form 10-K previously filed with the SEC on March 3, 2014. 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 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, 2014, available on the Investor Relations portion of our website, for a reconciliation of these non-GAAP performance measures to our GAAP financial results. With that, I'll turn the call over to Steve.

[Stephen T. Winn:]

Thanks, Rhett. Today, I will review our performance for the first quarter and provide some color on expected full year results. Non-GAAP on-demand revenue grew 15%, and non-GAAP total revenue grew 15% both compared to the first quarter of last year. Adjusted EBITDA grew 19% compared to the same period last year. We ended the first quarter with 9.3 million on-demand units, representing 9% growth from the prior-year period. Revenue per unit, or RPU, grew 5% over the same period last year. Annual customer value was $399 million, an increase of 14% compared to the prior-year quarter. The rental housing market continued to sustain strong performance. According to MPF Research, a division of RealPage, apartment occupancy for the first quarter of 2013 came in at 95.0%, slightly above the prior-year period. Annual revenue growth for the multi-family rental housing market, which includes the shifts in both occupancy and effective rents, was 3.3% as of the first quarter, up from 2.6% in the first quarter of 2013. Ongoing construction for the 100 largest markets in the U.S., which are expected to be completed within the next 18 to 24 months, was approximately 366,000 multi-family units at the end of the first quarter. Overall, we continue to be pleased with the growth of the business. We compete in a $10 billion market and are well positioned to continue to shape -- to take share considering our product breadth and sales footprint. RealPage is an ecosystem that provides 7 product families and 55 different product centers to help owners and managers of rental properties increase money, revenue, reduce expense and mitigate risk. Some product centers have been in the market for a long period of time, and others have only been released more recently. However, no product center is more than 20% penetrated into the total multifamily opportunity of 18 million units, and we're still in the beginning stages with respect to penetrating the single-family opportunity of 25 million units and the vacation rental opportunity of 3 million units. So we've got a lot of room to run. And to that end, we are increasing our focus in marketing sales and our implementation teams. From a marketing perspective, we've increased our investment in data-driven marketing initiatives, which position RealPage to drive demand for our solutions across all platforms and devices, including mobile, tablet and desktop. We expect these initiatives to drive significantly more brand awareness, ultimately driving increased productivity and revenue. On the sales side, we hired 26 reps in Q1 compared to the fourth quarter, and we intend on hiring more reps in the second quarter. We intend to benefit from new rep production starting in the third quarter. And by the end of the year, we expect booking increases to drive some acceleration in revenue compared to the performance during the last 2 quarters. Implementations are another area where we are narrow -- where we have narrowed our focus on a few core initiatives

[Bryan Hill:]

Thanks, Steve. 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 item. Total revenue for the first quarter was $101.9 million, an increase of 15% compared to the first quarter last year. The details on the components of revenue are as follows

[Operator:]

[Operator Instructions] And our first question comes from Brandon Dobell from William Blair.

[Brandon Burke Dobell:]

Wanted to focus on the sales force for a second. First, just a numbers question. I think, Steve, you referenced 26 reps and I think, Bryan, you referenced 30, maybe just rounding. But I want to make sure I got the right numbers for how many you hired maybe on a net and a gross basis in the first quarter and where we should expect the sales force to be at year-end '14, kind of, the first question there.

[Stephen T. Winn:]

What we expect to do in 2014 is to increase our sales reps between 20% and 25%, so that would be a net increase of 45 to 55. But in the quarter, we actually increased our sales reps 26 on a net basis. The 39 was compared to prior year.

[Brandon Burke Dobell:]

Okay, got it. Sorry about that. Okay. And I was hoping you guys have talked a little bit about the different product families in terms of relative growth rates or contributions to growth. And I want to make sure I also -- within that commentary, touch on the ILS, which was obviously a challenge last quarter. Is it performing to your expectations? Do you guys still think it's going to be kind of bottomed out in the second quarter? Maybe just some commentary there as well.

[Stephen T. Winn:]

Okay. I'll take the first half of your question. During the quarter, from an absolute dollar perspective, we had some of the same product families contribute more significantly than others. That was OneSite, LeasingDesk Insurance, LeasingDesk Screening, as well as Propertyware and Velocity. Payments was also a nice contributor in the quarter. But from just a percentage perspective, we still see continued traction within our LeaseStar software. It was a very large contributor in the quarter, as well as Propertyware, Payments and online leasing.

[Bryan Hill:]

At the ILS, it continued to be a headwind in the quarter. It was effectively down $1.4 million year-over-year, and it was a headwind to our growth of about 1.5 percentage points.

[Operator:]

Our next question comes from Jeff Houston with Barrington Research.

[Jeffrey L. Houston:]

Following up upon Brandon's about the ILS. How much revenue came into the quarter from that product, and how much does your guidance assume that ILS will generate for the rest of the year?

[Stephen T. Winn:]

Jeff, the ILS still continues to be less than 2% of revenue, and we expect that to continue throughout the year. If you recall, the ILS has been a headwind to revenue since starting in Q2 2013. So we hope that we get that behind us as we proceed through Q2 of 2014.

[Jeffrey L. Houston:]

Okay. Then keeping with the theme of the full year guidance, I was just wondering if you could give us some color around what gives you comfort that growth will accelerate throughout the year? And should we expect unit growth to remain at roughly 9% year-over-year growth and maybe more improved growth within RPU, I think, it was 5% year-over-year growth for the quarter.

[Bryan Hill:]

Well, we continue to compete in an under-penetrated market. Most of our products and services are very under penetrated into the market. And so, we view the increase in our sales headcount will continue to provide bookings acceleration, as we exceed through the back half of the year. So that's what provides us the best visibility into the full year. And then, also, as it relates to the revenue growth acceleration, revenue percentage, that is, as we get through Q2, we have the ILS behind us, we expect there to be a continued pickup.

[Jeffrey L. Houston:]

So it sounds like more improved growth within the RPU mix of total ACV?

[Stephen T. Winn:]

In Q1, we saw most of our ACV growth or a higher percentage of it come through unit expansion. But we generally have found that our bookings and our ACV growth has come through deeper penetration into our product base. So you're right as it relates to the RPU expansion.

[Operator:]

Our next question comes from Brendan Barnicle from Pacific Crest Securities.

[Brendan Barnicle:]

Bryan, was there any difference between the growth rate and the organic growth rate at ACV units or RPU. I know, in the past, you've broken that out for us if there was a distinction.

[Bryan Hill:]

Acquisitions contributed about 1 point to our ACV growth year-over-year and 2 points to our revenue growth.

[Brendan Barnicle:]

Okay, great. And, Steve, on the competitive front, last quarter, with the move into vacation rentals, we talked about some HomeAway and potentially Zillow as bigger competitors in addition to the legacy competitors like Yardi. Any change in the competitive landscape of this most recent quarter?

[Stephen T. Winn:]

Well, I wouldn't characterize HomeAway or Zillow as competitors. Those are lead-generation channels that we syndicate to and partner with, and that hasn't changed. We do like the vacation rental space and are expanding in that area through partnerships with HomeAway and Bookings.com (sic) [Booking.com] and TripAdvisor and many other lead-generation channels. Overall, competition remains strong. I think, everywhere, we've not experienced any change in our churn rates, and we believe we compete effectively in all of the product categories that we market.

[Brendan Barnicle:]

Great. And then, Steve, you mentioned a few newer products that you'd be coming to market with this next quarter and certainly this year. Is the go-to-market strategy and distribution for those going to be any different? And as you bring on these new sales reps, are you going to start to assign portions of that product portfolio to some reps versus others?

[Stephen T. Winn:]

The go-to-market strategy is the same. We sell into multifamily with the sales force that covers all of our products. We do have a separate group for single-family, vacation and senior. But none of that is changing, so we're just going to have a larger bag.

[Operator:]

Our next question comes from Peter Lowry from JMP Securities.

[Patrick D. Walravens:]

It's actually Pat from JMP. Maybe now that we have the benefit of a little bit more time going by, it would be helpful if you could just summarize what you've learned about what went wrong in Q4 and how you think the efforts to fix those things are going.

[Stephen T. Winn:]

Well, what we've -- we are addressing the sales expansion. I think that is very important. And so, we've got to spigot wide open on hiring sales reps, and it does take a while for them to become productive, but that's happening and we plan to continue to hire more reps. We are improving the implementation teams. They've now had another quarter of operating under the new organizational leadership that was put in place in July of last year. And so, we're seeing increased -- or improved execution in the implementation area. We still see continued higher renewal rates in this industry than have traditionally been the case. And that hasn't changed in the first quarter. So we're hesitant to predict that it's going to change. It hasn't gotten worse. And then, I guess, the ILS is deteriorated the way we expected it to. And we're migrating away from the traditional way of lead generation to newer organic channels. And those products are performing very well, and we're optimistic that LeaseStar will perform well for us going forward.

[Operator:]

Our next question comes from Nandan Amladi from Deutsche Bank.

[Nandan Amladi:]

Steve, you talked about a lot of new products that you're launching this year. Are these essentially all ready to go, or is there more work left as we progress through the year?

[Stephen T. Winn:]

Most of the products that I mentioned are either in beta or moving into beta. I do not expect a significant revenue contribution in 2014, but they are important and significant products for us and will help continue to differentiate RealPage from competition.

[Nandan Amladi:]

Okay. And then related question to that. You talked a lot about hiring -- continuing to hire new sales people. What is your, sort of, approach to OpEx between R&D and sales for this year?

[Bryan Hill:]

Well, we expect the sales and marketing line to move similar to the increase in headcount, so a 20% to 25% increase product development. In G&A, we would expect to leverage those as a percent of revenue and have operating leverage as we progress through the year.

[Operator:]

[Operator Instructions] Our next question comes from Michael Nemeroff.

[Michael J. Anderson:]

This is Mike Anderson on behalf of Michael. First one, Steve, can you remind us -- I think you said, with the new hires, you're expecting them to start contributing to bookings by the third quarter of this year. How long should they take your new classes to become fully productive in your system?

[Stephen T. Winn:]

Well, we -- it takes about 6 months to get a rep on boarded and through our training classes and through our mentorship programs and productive. So 6 months is the rule of thumb that you use. Some take longer than that. Some takes less. But I think 6 months is a good rule of thumb.

[Michael J. Anderson:]

Great, and that's helpful. And then, with respect to -- I think you said the acquired revenue, it was added 2 percentage points to total revenue and 1 percentage point to ACV growth. How would -- I think in the past you guys have also given the total organic units added on a trailing 12-month basis. Can you give us an idea of what that number was for this quarter?

[Bryan Hill:]

Acquisitions added 1 point of growth to unit growth as well.

[Michael J. Anderson:]

And then, with respect to the full year, I think you said the implied on-demand revenue growth would be between 16% and 19% for -- so for forward modeling, how should we be thinking about the organic growth in on-demand? And with that, would you expect that to accelerate going into the second half of this year?

[Bryan Hill:]

Acquisitions -- the acquisitions that we've completed today will contribute between 1 and 2 percentage points to that.

[Michael J. Anderson:]

Got it. And then, lastly, I noticed there was a litigation expense in your reconciliation. Was that -- is that just a one-time charge this quarter? And just out of curiosity, what's that related to? Are there going to be any more of those going forward?

[Stephen T. Winn:]

This matter has been disclosed in our SEC disclosures for the last several periods, but it's related to Yardi litigation. And this is not expected to be ongoing. This closes out the final chapter of the Yardi litigation.

[Operator:]

Our next question comes from Pat Lowry of JMP Securities.

[Patrick D. Walravens:]

So it's Pat Walravens. My follow-up is as we get through all this, Steve, is this still a 20% to 25% organic growth story for on-demand revenue?

[Stephen T. Winn:]

We believe the market supports our target growth objectives, which is 20% to 25%. We're way under penetrated. And this is about execution, not lack of demand for the products and services that we offer.

[Operator:]

And that concludes our Q&A session. Ladies and gentlemen, that does conclude today's conference. Thank you for your attendance. You may all disconnect. Everyone have a great day.