RealPage Inc
Q3 2014 Earnings Call Transcript

Published: 5 Nov 2014

[Operator:]

Good day, ladies and gentlemen, and welcome to the RealPage Q3 2014 Financial Results Conference Call. (Operator Instructions). As a reminder this conference is being recorded. And now I would like to turn it over to your host, Rhett Butler, Director of Investor Relations.

[Rhett Butler:]

Good afternoon, and welcome to the RealPage financial results conference call for the third quarter ended September 30, 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. In our remarks today we will include statements that are considered forward-looking within the meaning of securities laws. In addition, management may make additional forward-looking statements in response to your questions. Forward-looking statements are based on managements’ current knowledge and expectations as of today, November 4, 2014, and are subject to certain risks and uncertainties that may cause actual results to differ materially from the forward-looking statements and are described in today’s press release. A detailed discussion of such risks and uncertainties is contained in our Form 10-Q previously filed with the SEC on August 8, 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 noncash or nonrecurring items. 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 third quarter ended September 30, 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 hand the call over to Steve.

[Steve Winn:]

Thanks, Rhett. Today, I’ll review our performance for the third quarter and provide some perspectives on market conditions, product strategies and go-to market initiatives. We were pleased with our financial performance and key metrics this quarter. Total revenue, revenues were 10% on a sequential basis and 4% on a year-over-year basis. This reflected continued growth in our less cyclical business such as property management and resident management and our renter’s insurance revenue returning to normalized levels. Our recurring annual client value was $404 million reflecting growth of 5% on a year-over-year basis and 10% sequentially. I would like share observations on the rental housing, market conditions and why we believe RealPage is well positioned for accelerating growth in the future. First, the rental housing market continued to show solid performance with occupancy and rent growth continuing to accelerate despite the introduction of new supply. According MPF Research a division of RealPage apartment occupancy for the third quarter of 2014 came in at 95.8% slightly above the prior year period at 95.4%. Annual revenue growth for the multifamily rental housing market which includes the shifts in both occupancy and effective rents was 4.1% as of the third quarter, up from the 3.2% in the third quarter of 2013. Annual completions were approximately 236,000 new units as of the third quarter and we estimate total completions will reach between 260,000 and 270,000 by the end of 2014. The current macroeconomic environment continues to presents a headwind for our leasing and marketing solutions. Overall property performance is robust which we believe is causing some property owners and managers to scale back spending on leasing and marketing in general. However while the apartment market is generally very strong we are seeing the leasing environment in some segments of the market grow more competitive, especially high-end A property where supply is finally catching up with demand in many parts of the country. Also it’s noteworthy that the federal regulators recently announced that home mortgage requirements could be loosened, opening the door for Fannie Mae and Freddy Mac to guarantee loans with down payments as little as 3%. This coupled with the fact that the oldest segment of the Millennial Group has reached their early thirties and is starting to couple up and have kids suggests demographic trends that will spur home purchases and at the same time make it easier to buy a house. We believe this could translate to more churn in the rental base which could result in an increase need for RealPage solutions, particularly in our leasing and marketing area. Second we expanded our sales force aggressively during 2014 resulting in sales booking growth of 40% in the third quarter compared to the prior year period. We believe this sales momentum positions us to accelerate revenue growth in future quarters. Finally we have the broadest and deepest suite of products of anyone in this industry. We are on track to introduce 10 newly or new internally developed products in 2014 more than in any year in our history. While the cost of this expanded development investment has depressed earnings we are receiving very positive feedback from the market and believe these products will contribute to revenue growth in future quarters. Moving on to more detail on our revenue categories, our non-leasing and marketing revenue which makes up 70% of our total on-demand revenue grew 13% compared to the same period last year and accelerated sequentially growing 13%. Included in this group are our property management systems, resident management systems and YieldStar. Our property management systems which represents 29% of total on-demand revenue grew in the low double-digits in line with our expectations. Overall growth continues to be driven by OneSite and Propertyware with Kigo growing significantly off a small base. Resident management services, which represented 30% of total on-demand revenue grew over 20% in the third quarter. Growth is being driven primarily by strong payments and portal traction. Our payments platform exhibited an annual run rate of over $23 billion processed as of month ended September 30th. Portals also grew significantly added by solid traction in our new ActiveBuilding product and acquisition made in 2013. In addition in line with our expectation our renter’s insurance solution rebounded improving dramatically from the second quarter. YieldStar which represented over 10% of total on-demand revenue continue to experience solid growth, primarily driven by the core YieldStar offering. Importantly as of the third quarter, Performance Analytics, a new product introduced at our user conference in July has now sold 17 customers, representing over 450,000 units that are in early adoption of this product. In addition our new business ,intelligence product line has experienced encouraging early adoption. We believe this underscores the compelling value of the next generation YieldStar solutions and are encouraged by the performance to-date. Now moving to our leasing and marketing solutions which represented $30 million of in-quarter revenue, this division was down 10% compared to the prior year period. The decrease was primarily driven by less revenue from the contact center and from our Internet listing services both OurParents and MyNewPlace. Despite less contact center revenue compared to last year we are seeing some contact center traction as unit market share continued to grow year-over-year and sequentially underscoring continued success at transitioning customers to more recurring arrangements with higher volume limits. Internet listing services represents a small percentage of our revenue now so we believe this drag will be completely behind us by the first half of 2015. Our organic lead generation tools grew 17% compared to the prior year so we are happy with the traction there despite the decline in total leasing and marketing solutions. So while leasing and marketing products have experienced a headwind in the last couple of years we are encouraged by the progress made during this quarter. In summary third quarter was a good quarter and we remain very committed to our strategies to create long-term value for our shareholders. While we continue to face some headwinds due to extraordinary end market conditions we believe our products and sales strategies position us to both weather the near-term and outperform over the long-term. We believe the best times are still ahead of RealPage and as we have never felt better positioned on a competitive landscape basis. One last comment we are of course aware of the recent press reports suggesting we maybe a target of a takeover proposal and as you would expect for a public company we have a policy of not commenting on rumors or market speculations. We’ve seen these rumors before and this has always been our position. As you know in May we initiated a share repurchase program demonstrating the Board’s belief that our stock was undervalued. The Board takes its fiduciary responsibilities very seriously and is committed to maximizing shareholder value. The purpose of today’s call is discuss our third quarter earnings results and tremendous progress we have made over the past few months and we’d appreciate if everyone would please keep the focus of today’s call on that topic. With that I will now hand the call over to Bryan.

[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 to the most comparable GAAP items. Total revenue for the third quarter was $104.1 million, an increase of 4% compared to the third quarter of last year. Revenue exceeded our guidance for the quarter led primarily by our property management and resident management solutions. The details on the components of revenue are as follows

[Unidentified Analyst:]

… how should we think about revenue and profitability ramping as we go through 2015. Are there certain areas where you’ll be looking to be reducing costs? I know you mentioned product development should be going down year-over-year but just a little bit more color there would be great?

[Bryan Hill:]

I am sure Jeff. So for Q3 of 2014 we had 4% revenue growth. We’re seeing that in our guidance accelerate to 7% to 9% and we would expect to have further acceleration as we progress through 2015. That will allow us to further leverage our operating expenses and we should see margins moving consistently with that. The opportunities that we have much like in Q3 is moving more headcount offshore. As an example in 2013 for the same period we had 26% of our workforce offshore and now in the current year we’re at 30%. So we see a continued opportunity to move headcount offshore. [Technical Difficulty].

[Bryan Hill:]

I do not see us moving back from our investment in our sales force. We have a stated plan of increasing our sales force 20% as we move into 2015 much like this year, which we’ve exceeded that goal this year to-date. Our sales force despite the addition of the sales reps we’re seeing additional productivity occurring within our sales force, we’re up slightly this year over the prior year which is a good sign that the market can hold for us to continue to add sales reps.

[Unidentified Analyst:]

Okay, thank you.

[Operator:]

Thank you. Our next question comes from Matt Hedberg with RBC Capital Markets. Your line is now open.

[Dan Bergstrom:]

Hi, guys, its Dan Bergstrom for Matt Hedberg. The guidance for the fourth quarter reflects a level that is essentially flat from the third quarter. Could you remind us of any normal expected seasonality in the fourth quarter?

[Bryan Hill:]

Well during the fourth quarter what we experience is a seasonally low quarter for leasing velocity and that’s what baked into our guidance. On the low end is that continued seasonality. But again the guidance reflects a 7% to 9% growth which is higher than Q3 and reflects also the seasonality that occurred last year in Q4 as we transition from Q3 to Q4.

[Dan Bergstrom:]

Thanks. And then could you talk about the roll out of next generation of OneSite. Is that still expected over the next 18 months or so and then there is no pricing change with the new platform, right?

[Steve Winn:]

This is Steve. The roll out of the new OneSite platform is proceeding on plan. It is designed where literally a customer can turn it off and on at the particular location for one user at a time. So they are able to adopt it at their pace and not really have to worry about retraining large number of users in big slugs. We’re pleased with this. So it’s a new more contemporary user interphase and it incorporates the new three tier data-based architecture that we announced at our user conference that makes it perform better.

[Dan Bergstrom:]

Thank you.

[Operator:]

(Operator Instructions). We have a question from Pat Walravens with JMP Group. Your line is now open.

[Pat Walravens:]

Great, thank you. Steve, how should we think about – you talked about organic on demand revenue growth in sort of 20% to 25% range. How should we think about that now?

[Steve Winn:]

Well, we’ve always refereed to that as a target operating model that implies we’re very under penetrated with the existing products we have. We have been historically adding 8% to 10% new units every year and we did probably 9% in the third quarter of this year and we make up the rest of the growth through penetration of existing products and the new products that we’re building. I certainly believe the market will support that rate of growth. We have encountered headwinds. As you know I’ve talked about them repeatedly on these calls in area of leasing and marketing. We are optimistic that’s beginning to turn. It will take a while but there are clear signs that the imbalance between supply and demand particularly at the high end of the market is beginning to shift. So that is a good positive development for us that we hope plays out over the – starting in 2015 and improves sequentially every quarter.

[Pat Walravens:]

Okay. You mentioned new sales booking momentum and you guys have a lot of new sales guys. I mean just to help us figure out how well that’s going, did they – are they coming in ahead of their goals? Are they achieving their goals? Are they still falling short?

[Steve Winn:]

No, we added, I believe 34% increase in the number of sales reps and bookings are higher than that. So we’ve actually seen productivity improvements in the sales force, which is a good indicator because it means that the market will take more reps and then if you start to see booking per rep decline that may suggest you are saturating the market with more reps than you need. But we’re just not seeing that. We’ve also started this hiring last year. So some of the reps are starting to get some experience under their belt and for that reason their productivity is up and we’re generally very pleased with what the sales force is delivering for us.

[Pat Walravens:]

Great and then last one for me. Can you just talk about competition a little bit? What’s going on with the Yardi and do you ever see MRI?

[Steve Winn:]

Yardi is, I would – clearly the strongest competitor for us because they compete with us across a large number of the product categories that we’re in. They are clearly strongest in the property management area and less competitive but strengthening in other ancillary products. MRI we don’t see very often.

[Pat Walravens:]

Okay, thank you.

[Operator:]

Thank you. And at this time I’m showing no further questions. Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may all disconnect.