Appfolio Inc

NASDAQ:APPF

Earnings Call Transcript 2022-Q3

[Operator]

Good day, and thank you for standing by and welcome to AppFolio Q3 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Lori Barker, Investor Relations. Please go ahead.

[Lori Barker, Investor Relations]

Thank you. Good afternoon, everyone. I am Lori Barker, Investor Relations for AppFolio and I'd like to thank you for joining us today as we report AppFolio's third quarter 2022 financial results.

With me on the call today are Jason Randall, AppFolio's President and CEO and Fay Sien Goon, AppFolio's Chief Financial Officer. This call is simultaneously being webcast on the Investor Relations section of our website at www.appfolioinc.com.

Before we get started, I would like to remind everyone of AppFolio's Safe Harbor policy. Comments made during this conference call and webcast contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties. Any statement that refers to expectations, projections or other characterizations of future events, including financial projections, future market conditions or future product enhancements or development is a forward-looking statement. AppFolio's actual future results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in our SEC filings. AppFolio assumes no obligation to update any such forward-looking statements, except as required by law. For greater detail about our risks and uncertainties, please see filings with the SEC, including our Form 10-K for the year ended December 31, 2021, which was filed with the SEC on February 28, 2022, as well as the company's other filings with the SEC.

With that, I will turn the call over to Jason Randall, AppFolio's President and CEO. Jason, please go ahead.

[Jason Randall, President, Chief Executive Officer]

Thank you, Lori and welcome to everyone joining us for AppFolio's third quarter 2022 financial results. I am pleased to report that revenue was up 31% to $125 million in the third quarter and we now serve approximately 7.1 million units.

This marks two sequential quarters where we have added more than 1 million units on a year-over-year basis. We delivered growth across the business and revenue from payments continue to be especially strong. With inflationary pressures, it is an important time for our customers to continue investing in AppFolio solutions to save cost and increase efficiency.

I'd like to thank our investors and customers for meeting us two weeks ago in Santa Barbara. For investors unable to attend our investor meeting, we have posted the video and slides on our IR website. For those of you who did attend, you heard Fay Sien talk about how we are focused on returning to profitability and in this third quarter, we delivered positive free cash flow.

We are pleased that our 10th Annual AppFolio Customer Conference sold out as we welcomed about 850 customers from 250 cities. This three day event was an excellent opportunity for customers to get a pulse on real estate trends, gain industry insights, connect and learn from each other and deepen their understanding of what AppFolio offers.

Customers told us they appreciated the time for learning and networking and we heard important feedback that will drive continued product and service innovation. Anthony Luna, Chief Executive Officer of Coastline Equity, with nearly 1,000 units throughout California on AppFolio Property Manager Plus, or APM PLUS, told us, "It's incredible how far AppFolio has come over the last ten years. A significant part of Coastline Equity's success is because of the tools we use and without a doubt, AppFolio has been a pillar in our growth. During AppFolio's customer conference, we learned about the innovation that will be added to their platform and how prop tech will continue to shape professional property management companies in the real estate industry."

This customer quote is a perfect endorsement of keeping customers happy, one of the key elements of our long-term strategy. We believe our customers' success is essential to our long-term success and we place significant emphasis on our customers' experience to differentiate our solutions from competing products. The two things we've heard our customers talk about time and again are centralization and automation.

Centralizing labor-intensive tasks across accounting, leasing and maintenance helps free up the front-office staff, so they can focus on the residents, automation on the other hand can eliminate busy work.

We have delivered a significant amount of innovation to what we call our AI factory. AppFolio is focused on creating a solid foundation that allows us to rapidly deploy and apply machine learning to help add value to any customer segment in many aspects of their business. We are at a stage now where we are able to leverage AI in every single one of our customers' primary workflows.

Bank feed is a new AI feature we announced at our customer conference that is designed to enable automatic reconciliations of our customers' bank transactions with their accounting records. Reconciliations usually involve a lot of manual data entry and analysis. We've helped make that work largely disappear, which we believe will drive value to customers of all sizes.

Also at the customer conference, we introduced a new capability called Smart Insurer. Smart Insurer uses AI to detect when an insurance policy no longer covers a unit, which results in that unit being automatically added to the customer's liability insurance policy.

Early results from our rollout show increased insurance coverage and usage of the tool across active users. Smart Insurer is designed to reduce risk for our property management customers by helping ensure coverage without any manual interventions.

We've also introduced another new capability, Report Builder, for our larger customers with more complex reporting requirements. We featured a demo of Report Builder in our recent investor meeting, and it's another example of a product innovation influenced by customer feedback.

It also supports our goal to have customers centralize their accounting and reporting on our platform. Report Builder, Bank Feed and Smart Insurer are just a few ways we keep our customers happy and we're constantly evaluating new and innovative opportunities to continue doing so.

Another element of our long-term strategy is acquiring new customers. We ended the quarter with more than 18,000 customers. The Corporate segment was yet again our fastest-growing residential segment this quarter and a key driver behind our expected future ARPU growth.

With our push up market, we will continue to position APM PLUS to corporate customers and also to the upper end of mid-market for those customers poised to take advantage of this platform's purpose-built capabilities.

We are also driving growth upmarket by expanding our capabilities through additional property types and through integration partnerships with AppFolio Stack, which has seen strong and immediate adoption in our customer base.

Several hundred thousand units have begun to leverage Stack in the four months since we launched. We believe that this adoption will enable upmarket growth with mixed portfolio customers. We are just getting started with integration partnerships and Stack gives our customers a choice to continue using familiar tools.

Affordable housing is another significant multiyear expansion opportunity for us upmarket. We are focusing significant development efforts on expanding the foundational product capabilities and subsidy programs and line tech capabilities we already have in place to better support customers' needs in our Corporate segment.

Affordable housing is another example of an opportunity to provide a purpose-built solution to enable our customers to manage their entire business in one place on one powerful platform.

In addition to our customer acquisition gains, we continue to make progress on our long-term strategy to expand adoption and use. We are becoming increasingly competitive in the Corporate segment as we expand adoption use to our value-added services and APM PLUS. One of our new value-added service offerings is a security deposit alternative.

At our customer conference, we unveiled AppFolio guarded security deposit alternative. This partner fueled innovation allows our customers to seamlessly integrate the security deposit alternative into APM, and this is a type of service where a single platform gives us the ability to quickly roll out new, powerful solutions to a large customer base.

We are also adding another payments offering, Apple Pay. The addition of Apple Pay is designed to simplify the customer experience and reduce friction in a time for property managers to get paid. It works with any credit or debit card into a resident's Apple Pay wallet versus manually typing in the card detail. After a successful pilot earlier this year, we expect to add this new payment method to our online portal for all our customers.

The economics for AppFolio are the same as our credit card and debit card model. In addition to incremental revenue generation in our payments value-added service, Apple Pay adds additional convenience to the payment process, helping us achieve greater adoption for the entire platform while contributing to growth and retention.

Short-term rentals, which we announced at our customer conference, is another. Many of our customers have short-term rental units in their mix portfolios and this new feature capability allows us to expand the types of customers we target. We are currently validating this new product with a select number of charter customers.

Our long-term growth strategy is rooted in keeping our customers happy, acquiring new customers, expanding adoption and usage and moving into adjacent markets. We are building a scaled foundation of operational excellence and in all of these areas people are at the core of our success.

In that regard, congratulations to the entire AppFolio team on becoming one of Fortune's 40 Best Large Workplaces in technology. This is AppFolio's debut on the list marking a big win for our organization, bolstering our reputation among customers as well as among current and future team members as an innovation leader.

This is an exciting time at AppFolio, our long-term strategies and investments are showing traction as we continue our leadership in SMB, win upmarket and grow value-added services.

I will now turn the call over to Fay Sien for more detail on AppFolio’s third quarter financial results.

[Fay Sien Goon, Chief Financial Officer]

Thank you, Jason. We are pleased with our continued strong revenue growth rate and return to positive free cash flow. As Jason said, at $125.1 million in revenue, we grew revenue 31% year-over-year in the third quarter. This growth is an excellent example of how AppFolio is landing new customers, expanding our units served and growing our ARPU through APM PLUS and value-added services.

Let's review the numbers for the third quarter. Core Solutions revenue was $33.9 million in Q3, another strong quarter and a 26% year-over-year increase. At the end of the second quarter, we managed approximately 7.1 million property management units from 18,109 Property Management customers compared to 6 million Property Management units from 16,844 Property Management customers a year earlier.

This represents a 17% increase in our ending property management units. In addition to the number of units we serve it is important to note that core revenue also grew as we continue to focus on customers with larger unit portfolios that drive higher adoption rate of APM PLUS.

In our recent investor meeting, I pointed out the strategic importance of APM PLUS. These units have more than a 60% higher ARPU versus APM core and the penetration in our Corporate segment is more than six times greater.

Regarding value-added services revenue in Q3, we experienced a strong 35% year-over-year growth to $88.4 million. This continued year-over-year increase is primarily due to the rise in Property Management units under management.

The expansion of our offering and the increased adoption and utilization of our value-added services, especially our electronic payment services, as is typically the case in the third quarter, our streaming business declined slightly in Q3 on a sequential quarterly basis and we expect another sequential decline in Q4. This sequential quarterly decline is typical and follows the leasing season, which peaks in the summer months.

Before addressing expenses, I would like to refer you to the GAAP to non-GAAP reconciliation in our press release from earlier today. Going forward, all costs and operating expenses commentary will refer to non-GAAP cost and operating expenses.

In Q3 of 2022 and 2021, the cost of revenue, exclusive of depreciation and amortization was 40% of revenue. While a mix – while a higher mix of value-added services and related expenses for third-party service providers are increasing our cost of revenue, additional headcount efficiencies offset that in the current quarter.

Turning now to operating expenses, our year-over-year increase in operating expenses for Q3 is primarily related to additional headcount growth of 13% to 1,758 employees. Sales and marketing expenses, as a percentage of revenue remained comparable to the prior year at 19%.

R&D expenses, as a percentage of revenue increased from 16% in Q3 last year to 20% this year as we continue to expand our product capabilities including projects like Stack, stay manager, affordable housing and the other capabilities that make our products easier to use.

Meanwhile, our G&A expenses as a percentage of revenue decreased from 15% in the same quarter last year to 13% this year as we continue to scale and find efficiencies. Our non-GAAP income from operations in both the third quarter of this year and the third quarter of last year was approximately 4%. Free cash flow turned positive. It was $11.9 million or approximately 10% of revenue in Q3, compared to $6.8 million or 7% in the same quarter last year.

Turning to the balance sheet. We ended the third quarter with $184.5 million in cash, cash equivalents and investment securities. We are increasing our projected full year 2022 revenue guidance range to $462 million to $466 million. The mid part of the range represents a full year growth rate of 29%.

Please note, as mentioned earlier, we typically see a sequential decline in value-added services revenue in the fourth quarter as fewer residents move during the winter months, impacting tenant screening, insurance and payments for security deposits. In 2021, given the easing of COVID, the typical move in pattern didn't occur, but by all indications this year, we expect normal pre-COVID seasonality.

We continue to expect full year 2022 cost of revenue, exclusive of depreciation and amortization to increase slightly as a percentage of revenue compared to prior year due to changing product mix. Cost efficiencies are partially offsetting changes in the mix.

Full year non-GAAP operating margins are expected to be a loss of 1.5% to 2.5%. Basic weighted average shares outstanding are expected to be approximately 35 million for the full year. In our recent investor meeting, I outlined our goal to get to positive free cash flow as a start to a healthy free cash flow margin. We now expect full year 2022 to be above breakeven for free cash flow.

As many of you know, I became AppFolio's CFO one year ago and I can tell you it has gone by really fast. Our foundation for long-term growth is paying off, with substantial new units added to the platform and growth in ARPU driving revenue expansion.

In the recent investor meeting, you heard the underpinnings of our success, keeping our customers happy, acquiring new customers, expanding adoption and use, entering and expanding into adjacent markets and building a skilled foundation of operational excellence. We believe our long-term strategy is resilient and will continue to fuel success.

Thank you all for joining us today.

And thank you and this concludes today's conference call. Thank you for participating. You may now disconnect.