RealPage Inc
Q4 2014 Earnings Call Transcript

Published: 3 Mar 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to RealPage Q4 2014 Financial Results Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Rhett Butler, Director of Investor Relations. Please go ahead.

[Rhett Butler:]

Thank you, Sam. Good afternoon, and welcome to the RealPage financial results conference call for the fourth quarter and year ended December 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. 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, February 26, 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-Q/A previously filed with the SEC on November 12, 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 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 cost, stock registration costs and acquisition related cost. We believe 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 fourth quarter and year ended December 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 hand the call over to Steve.

[Steve Winn:]

Thanks, Rhett. Good afternoon everyone. This call officially ends 2014, a year with many challenges for RealPage, but a year that is ending with good financial momentum. Generally we're pleased with our financial results and key operating metrics of performance for this quarter, not just because of absolute improvement in the quarter but because we are seeing accelerating growth in many key areas of the business. Non-GAAP total revenue grew 8% compared to the prior year quarter and reflected continued growth from our property management and asset optimization product families, and exceptional growth from our resident services product family. Our annual client value or ACV was $405 million, reflecting growth of 7% compared to the prior year quarter. Market conditions for the multifamily housing industry remained very strong by historic standards, perhaps the best market I've ever seen. According to Greg Willett, our Chief Economist and Head of MPF Research, occupancy for the fourth quarter was 95.3%, up 30 basis points compared to the prior year period. Fourth quarter rent growth was up 0.5%, which bucked the normal seasonal trend of flat to slightly declining pricing. Annual rent growth was 4.6%, almost in line with the 4.8% growth seen in 2011, which looks to us to be near or at the peak of the cycle. Combining the shifts in occupancy and rent growth equates to a 4.9% annual revenue growth for this industry. In addition, ongoing construction is at a record 406,000 units with approximately 250,000 of those units scheduled to be finished in 2015. This means total completions are expected to be in line with the extremely high 2014 levels. While we continue to believe the market will remain tight from a leasing velocity perspective, we do not leave this low level of resident churn for the overall industry is sustainable and we are seeing signs of supply is catching up with demand in some markets. We also see signs that mobility may be on the rise, which drives resident turnover. According to the Bureau of Labor Statistics, employment growth in 2014 jumped roughly 25% from the level seen in the previous two to three years and a growing share of the jobs added were in relatively higher paying industries. Historically, when the economy improves, people change jobs more frequently and household composition can change dramatically, related to life events like marriage, divorce and having children. Finally, credit requirements and down payments for home ownership are becoming more attractive. All of these factors are mobility triggers, which could influence resident turnover and leasing velocity, and would be positive developments for our leasing and marketing solutions in the future. Having said that, 2014 was a challenging year for our leasing and marketing solutions and renter’s insurance. Renter’s insurance was heavily impacted by ice storms that generated abnormally high claims that impacted our contingent commissions in the second quarter. We believe this was an anomaly and our renter’s insurance business has rebounded nicely since the second quarter. Leasing and marketing was heavily impacted by pricing concessions, lower than expected sales of lead generation products and a general deceleration of leasing velocity, which translates into lower demand for leasing and market products in general, because owners simply don’t need to advertise as much when vacancy is low. Aside from these challenges, the majority of the business continues to be strong. On-demand subscription revenue grew 15% in 2014 and accelerated to 17% in the fourth quarter. Renter’s insurance is continuing to gain traction and we expect leasing and marketing solutions to return to positive growth in the second or third quarter of 2015. For these reasons we feel confident in strong guidance with revenue acceleration expected beginning in the second quarter of this year. The reasons for our optimism were three fold. First, the product development investments we made in 2013 and 2014 are showing signs of returns with new sales traction from these products. We invested well in excess of $100 million over the last two years in our product development to build the next generation of solutions and expand the number of products we offer with most of these products entering the market in recent quarters. Second, we continue to witness positive returns from our investments in our sales force. Our sales force headcount grew to 299, an increase of 32% compared to the prior year. We spoke about productivity increasing during the back half of 2014, once past the initial dilution of new rep additions and accordingly, quota-related productivity of our multifamily and single family reps was up in 2014 compared to the prior year. In addition was strong third and fourth quarter booking growth, up over the prior year by 41% and 22% respectively in the third and fourth quarter. We feel confident that more sales -- that will continue to translate into more sales. Lastly, we continue to leverage one of the largest databases of resident information in our industry. The real long-term power of our model is tapping into the enormous repository of data that we manage for nearly 10 million rental units and 30 million household residents. Residential real estate is the single largest asset class in the U.S. worth approximately $23 trillion according to the December, 2014 report from the Federal Reserve. Housing represents over 15% of GDP, which is larger than any other asset class. As part of housing, the U.S. rental housing market includes $44 million units, and over 33% of the U.S. population lives in a rental home. This market includes four important constitutions; property owners and managers, vendors, current residents and prospective residents. The number of transactions that occur between these constitutions represents opportunity for RealPage to monetize new revenue streams. Scaling and mining the strategic asset to improve current solutions and develop future solutions is critical to our long-term growth. Accordingly during the last two years, we’ve heavily invested in our SaaS delivery and data infrastructure, primarily related to scaling our transaction processing capabilities, building a three tier data architecture, vastly expanding our datacenter capacity, enhancing our client performance monitoring functionality and improving transaction response time. To give you a sense of the size of this infrastructure, we processed over 430 billion transactions during 2014, maintaining well north of 99% availability with transaction response time measured in milliseconds. What’s incredible is that we maintained this kind of performance even during the month-end and year-end close cycles. To put this in perspective salesforce.com recently spoke about the number of transactions that they processed being $450 billion for the trailing 12 months as of the second quarter of 2015. Now we’re using this immense amount of data and infrastructure for many purposes outside of simply managing rental properties. For instance, during the resident screening process we utilized our vast database of over 26 million rental payment records to help to identify the credit risk and associated potential bad debt cost of a resident. Property owners and managers can use this information to raise rent or the deposit to mitigate risk. Our mission is to automate and monetize the enormous amount of transactions in the rental housing industry, some of which we do currently and many of such opportunities, we are exploring and plan to implement in the future. Next, I'd like to cover the impact our investments have had on our product family performance during 2014 and our expectations for 2015. We began rebranding RealPage a couple of years ago to eliminate a large number of the smaller brands and focus instead on the RealPage brand itself. We've organized many of our product centers around four categories or product families. Property management was our original offering and we have since added additional capabilities to this family of products and significantly diversified our total revenue stream. This product family now includes back office accounting property management for multiple asset classes and markets, spend management solutions and infrastructure hosting, basically, everything a property owner or manager needs to manage the day-to-day operations of their property regardless of size. For the full year 31% of our on-demand revenue came from property management solutions. Revenue from this product family grew 12% compared to the prior year. Growth during the year was influenced by rapid expansion in single-family rentals, affordable properties, especially tax credit rentals and our entry into the vacation rental market. Single family properties are growing much faster than our multi-family property management solutions because there are so many more units in the single-family market that have not adopted any property management solution, and we now offer the most complete solution having integrated many of our ancillary products into the property with our [ph] platform, which significantly increases our cross selling opportunity. We recently signed a contract with NRT, a subsidiary of Realogy Holdings, and the largest residential brokerage firm in the U.S. which has approximately 20,000 residential properties under management. Single-family is under penetrated and we expect continued rapid growth here, which will accelerate growth of the overall property management product family. Our affordable solution is experiencing solid growth due to the strength and breadth of our platform. During the year we signed Interstate Property Management, a 35,000 unit management companies and the second largest property management company for affordable properties. In addition we have already doubled the compliance service revenue for the affordable segment that was part of the Windsor acquisition that we made last year. Finally during the year we also entered the vacation rental market through two acquisitions and we've been busy integrating the two platforms into a single vacation rental management platform that we are marketing under the trade name Kigo, or get your key and go. The next generation of Kigo will also integrate revenue management capabilities that were recently acquired. We estimate the total addressable market for our vacation rental solutions to be over $1.6 billion for the U.S. and Europe alone. This includes approximately 2 million vacation rental properties managed by professional fee managers in the U.S. and Europe, multiplied by a gross potential RPU of $800 per unit per year. We're excited about this market and feel there is ample opportunity over time to cross sell a portion of our current software solutions into professionally managed vacation rental companies through the integrated Kigo solution. For 2015, we expect to see an acceleration of revenue from our property management family due to the strength in the areas that I just mentioned. Our asset optimization product family includes YieldStar and Business Analytics, and represents 11% of our total on-demand revenue for the year. During 2014 this product family grew 13%. We believe revenue will accelerate in 2015 due to YieldStar's thin penetration and the next generation solutions we have been building over the past two years. These include three dimensional optimization or simple 3DO, which optimizes three dimensions, price, demand, and credit to optimize revenue at a property. Performance analytics which includes owners and managers -- which enables owners and managers to compare their performance against their peer group on multiple dimensions of performance and revenue forecast which enables owners to better predict how a property will perform in the future and which variables are most likely to influence the outcome. Finally, we’re also seeing solid traction with our new business intelligence platform, which leverages our 3 Tier data architecture. Over the last 90 days, the sales team has significantly ramped bookings and three large clients with over 15,000 units under management have each begun deployment. Resident service is our strongest product family at this time and represents 28% of our total on-demand revenue for the year. During 2014 this product family grew 15%, which was affected by a lower level of renter’s contingent commission in the second quarter that I’ve already mentioned. However, despite this headwind we experienced strong revenue growth from payments, resident portals, resident billing, and our renter’s agent commissions. But what is most exciting for us was the acceleration of revenue for this product family as a whole, growing 29% in the fourth quarter alone, in large part due to our payments platform. In the quarter our annualized payment processing volume increased 9% compared to the prior year to approximately $22 billion in annualized rent payments. We will be introducing a new form of payment processing called resident direct in the next couple of months, which once licensed in each state enables us to collect payment processing fees such as credit card convenience fees, directly from the resident. We expect continued strong growth from this product family in the future. Lastly, leasing and marketing solutions represents 30% of our total on-demand revenue for the year. During 2014 this product family declined 5%. The leasing and marketing product family has been partially impact by pricing decisions we made to successfully grow market share in our contact center, however, we believe most of the impact was related to lower levels of leasing velocity. Low leasing philosophy hurts demand for leasing and marketing solutions as well as lowers transactional revenue volumes. For 2015 we expect continued growth from our organic lead generation tools as well as improved ILS performance related to better lead monetization and our relationship with Zillow, where we monetize some of our minute place listings today. Finally, a brief note on expenses and Brian will provide more detail about this shortly. Our goal is to make structural changes needed to support continuous improvement in margins over the long-term. Specifically we expect to continue increasing the efficiency of our global labor force. This will include consolidating our real estate foot print to the most efficient and cost effective locations. In addition we expect to see reductions in our expense to revenue ratio for product development and implementation with a goal to expand adjusted EBITDA margins approximately 200 basis points per year for the next few years. In summary, 2014 was a year that brought challenges and a year that we invested in for the future. During 2015 we expect to build off these investments and believe that with solid execution our strategy will accelerate revenue and results in continuous margin improvement going forward. Brian will talk in more detail about expense control initiatives that are underway, but I wanted to discuss a couple of items with you before turning the presentation over to Brian. First, during the quarter we’ve strengthened management with the addition of Daryl Rolley as our Chief Customer Officer responsible for sales, marketing, customer success management, global shared services and our spend management solutions. Daryl led global operations for Ariba where he helped grow revenue from $300 million in 2007 to $550 million in 2012, eventually selling the business to SAP. He started his career with McKinsey and Company, working as an Engagement Manager in Pittsburgh and Brazil and has had many international senior management assignments. In addition to bringing the strong sales and marketing skill set, his global operations background should be useful to RealPage as we expand internationally and Daryl brings additional bench strength within our senior management team. I was also sad to report that our Chief Legal Officer, Margot Carter is retiring to spend more time with her family. We will be replacing Margot and are considering very qualified internal and external candidates for this position. We want to thank Margot for her five years of service at RealPage and wish her well in the future. We’ve also been listening to our shareholders who have made numerous suggestions for improving investor understanding of our business. As such, we expect to enhance our disclosure efforts over the course of 2015. Following our call today, we will disclose enhanced trended business metrics, which you can access on our investor portal. In addition we are expecting to provide an enhanced marketing overview of our platform of solutions detailing the features and benefits of each product family. All of these disclosures will be posted on the Investor Relations home page. I'd now like to turn the presentation 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 measures to the most comparable GAAP item. Total revenue for the fourth quarter was $104.2 million, an increase of 8% compared to the fourth quarter of last year. Revenue was in line with our guidance for the quarter, led primarily by our property management, resident services and asset optimization solutions. Importantly, our on-demand description revenue stream, which represents 85% of total revenue and 90% of on-demand revenue grew 15% for the full year compared to 2013, and gained momentum through the back half of the year, exiting the fourth quarter with 17% growth. The details on the components of revenue are as follows. Total on-demand revenue for the fourth quarter was $101 million, an increase of 9% compared to last year. ACV or annual client value grew to $405 million or 7% compared to the prior year. Our top 100 ACV clients possess an average RPU of $59 and have averaged 26% annual ACV growth since our IPO in August 2010. We ended the quarter with 9.6 million units, representing an increase of 6% compared to the same quarter last year. Based on average units of $9.5 million, RPU was $42.39, an increase of 1% compared to the prior year quarter. Our top 50 RPU clients possess an RPU range of $109 to $229 with an average RPU of $147. Since our IPO we have averaged 18% annual RPU growth for this client group. I will now turn the discussion to gross profit, operating expense and profitability. Overall, our profit performance was at the high end of our guidance for the quarter. Gross profit for the fourth quarter was $63.7 million, representing a gross margin of 61%. This compares to gross profit and gross margin for the fourth quarter last year of $63.7 million and 66% respectively. The lower margin is driven by investment in our implementation and IT infrastructure combined with higher transaction processing fees resulting from strong payment solution growth. Total operating expense for the fourth quarter was $49.5 million, compared to $41.1 million last year. As a percentage of revenue, operating expenses were 48%, the details on the components of operating expense are as follows

[Operator:]

Thank you. (Operator Instructions) Our first question comes from Brandon Dobell with William Blair. Your line is open.

[Brandon Dobell:]

Couple of quick ones. Going back to the sales force headcount and productivity, any sense of productivity color, maybe comparing bookings per quota-carrying rep year-on-year, or ‘14 versus ‘13? Just trying to get a sense of how that headcount increase is going to turn into bookings growth in 2015?

[Steve Winn:]

As we indicated early in the year Brandon, as we were investing in our sales force, we expected that it takes between six and nine months for our sales rep to get productive. And what we saw in the back half of the year was our productivity despite the increase in investment in our sales force, our productivity slightly increased for multifamily and also for single family. But what you have also consider is we’ve added through acquisition, several vacation sales reps, which carry a lower quota. So overall for the Company, bookings per rep is down. However within the major categories of multifamily and single family, bookings per rep is slightly higher. As far as when we’ll see the revenue growth from our bookings, a lot of that as we’ve mentioned in the past is dependent upon product mix because some products take slightly longer than others to implement and then also if you're an existing client you tend to implement faster. So generally we see revenue from our bookings to start coming in 120 to 150 days after the bookings.

[Brandon Dobell:]

That’s helpful. Maybe for either 2014 or for the fourth quarter, the contribution from acquisitions, some of the key metrics like ACV, unit growth, just trying to get back to some organic ones -- I know it was a relatively small contribution, but I want to make sure we’re all on the same page with organic versus acquired.

[Steve Winn:]

I think the best way to think about it is acquisitions added 1% both to revenue and ACV growth.

[Brandon Dobell:]

Okay. And then the final one from me, as you guys think about operating leverage through the year, is there any seasonality to the operating leverage, meaning is the expense structure going to get more leverage first part of the year, back part of the year? And, is that going to be related to the pace of spending, or is it just more about the revenue -- the pace of revenue growth for the year?

[Steve Winn:]

So, as it relates to where we expect to see leverage in our margins, gross margin we expect that to be fairly in line with 2014 dependent on revenue mix. As we indicated in our prepared comments, the majority of the leverage will come through product development. In G&A that's both the result of our initiatives around moving labor to our International operational centers and controlling expense in general. And then of course, as we proceed through the year, the larger revenue also leverages margins.

[Operator:]

Thank you, our next question comes from Michael Nemeroff with Credit Suisse. Your line is open.

[Kyle Chen:]

This is Kyle Chen in for Michael. Thanks for taking the question. Relative to the guidance, how should we think about on-demand revenue growth in 2015? What's the mix there? And how much visibility do you have into that forecast? What macro assumptions are you baking into that guidance, and is the achievement of that guidance contingent upon any significant events or milestones?

[Steve Winn:]

So our on-demand revenue represents 95% of our total revenue. So I would correlate that as you think about on-demand revenue. As we think through our four primary product families, the macro has impacted the leasing and marketing product family the most, and we have not built a turnaround or shift in what we're currently experiencing the macro as it impacts product family. However, our organic lead generation tools and online leasing products that are within the leasing and marketing product family we expect those to experience growth in 2015. So on balance that will result in higher growth from that product group. But the strong booking and backlog that we're experiencing entering into the year is provides us confidence in the guidance and you'll see in Q1 revenue growth comparable to Q4 of '14, but we expect to continue to accelerate from that level as we proceed through the year.

[Kyle Chen:]

And also, I'm trying to get a sense of -- given that RPU growth is a major pillar of your growth strategy, trying to get a sense of what your average attach rates of incremental products per customer are. How many products is each average customer utilizing? How has that trended? And if you can help us with some stats or some color around that, that would be appreciated.

[Steve Winn:]

The way to think about our penetration into the base is we're less than 15% penetrated into our base based on the potential of our products. Our top 50 RPU clients average RPU of 109 to 229. That's the range with the average of 147 and we've had success growing the top clients 18% since our IPO. Those top clients are represented by the three primary segments of our client base. So I think what you should be considering as you look into 2015 is the majority of our revenue growth will come from cross sell and penetration into the base.

[Operator:]

Thank you. (Operator Instructions) Our next question comes from Patrick Walravens with JMP Securities. Your line is open.

[Pete Lowry:]

It's Pete Lowry in for Pat. Is there any update you can give us on the competitive environment, whether it's Yardi or otherwise? Have you seen any changes there?

[Steve Winn:]

The ILSs are undergoing the same leasing velocity problem that we have. So we've seen lead volumes decline on many of the traditional ILSs, which is making them get more price aggressive. There hasn't been what I would consider a material change in the competitive landscape in other areas. Property management is primarily Yardi. They're a strong competitors and always have been. Asset optimization, we are very strong there, and the competitive landscape is smaller. Resident services is our fastest growing product family and there's a lot of competition in that area but we're winning more deals than we lose by far in that particular space.

[Operator:]

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