Q2 2020 AppFolio Inc Earnings Call

Second quarter 2020 financial results conference call.

This time, all participants are in English only mode.

If anyone should require assistance during the conference. Please press star zero or your attach 20 telephone.

As a reminder, this call is being recorded I wouldn't know wants to turn the call over to your host Ms. Erica Abrams you may begin.

Thank you good afternoon, ladies and gentlemen, and thank you for joining US today as you report hopefully its second quarter 2020 financial results.

With me on the call today.

Jason Randall absolutely as president and CEO.

Thank you Don King absolutely as Chief Financial Officer.

This call is simultaneously being webcast on the Investor Relations section of our website at Www Dot Appfolio IEC Dot com.

Before we get started I would like to call everyone's attention to our safe Harbor policy.

Please note that certain statements made on this call maybe forward looking statements within the meaning of the federal Securities laws.

That are subject to considerable risks and uncertainties.

Actual results or performance, maybe materially different from any results performance expressed or implied by the forward looking statements.

Forward looking statements, including any such statements, referring to the potential effects or impacts of the cobot 19 pandemic on Apple is business may relate to future plans and financial conditions results of operations business forecasts and planned strategic plans and objectives product development plans.

Trends affecting our business and industry and the economy as a whole capital needs and financing plans and various commitments and contingencies, including with respect to the outcome of legal proceedings or regulatory matters.

Please see our filings with the FCC, including her Kim our form 10-Q, which was filed earlier today for greater detail about risks and uncertainty.

Forward looking statements are based on reasonable assumptions as of today and we assume no obligation to update any forward looking statements. After today, even if new information becomes available in the future unless required by law.

Now I will turn the call over to eat a king CFO about folio.

Thank you Erica and welcome to everyone joining us on the call today for at Folio second quarter fiscal year 2020 financial result.

Before I get started on the financial highlights for the quarter I wanted to take a moment to think are over 1300 employees and their families for their professionalism and dedication during these difficult times.

Alright billions have remained focused on developing innovative products and providing excellent service has been support to our customers and we're proud of their commitment to our business.

We believe our people in culture or the heart of our success in the current environment has only amplified that belief.

Turning to the numbers, we reported total revenue of $81 million during the second quarter, a 27% increase year over year.

GAAP net income was $19.3 million or 54 cents per diluted share for the quarter.

Including an income tax benefit of $13.5 million, which is attributable to tax benefits associated with stock based compensation expense.

And research and development tax credits that follow our forecasted pre tax results for the year.

Also included in our second quarter results or $2.8 million in non cash charges related to stock based compensation.

For those of you who track non-GAAP results. Our form 10-Q was filed today and includes more details that you may find helpful. In calculating non-GAAP results on your own.

Second quarter revenue from core solutions grew 21% to $26.1 million, primarily driven by 17% growth in the average number of property management units under management, resulting from.

In the average number of property management customers.

Second quarter value plus services revenue was $51.6 million east, 32% increase year over year also driven primarily by the increase in property manager customers and units we serve.

A significant majority of our value plus services revenue comes directly and indirectly from our customers use over electronic payment services tenant screening services and insurance services.

Our electronic payments and screening services experienced increased demand during the most recent quarter as residents property managers owners and customers transacted more business online.

We ended the second quarter with 15011 real estate property manager customers managing an aggregate of 4.9 million units in their portfolios compared to 13737 customers and 4.23 million units under management reported one year ago.

In the legal vertical we reported 11.

That was in 305 customers up from 10631, one year ago.

Oh, sorry, our software solutions enable to digital transformation that many businesses need to grow especially today.

Well, we are encouraged by the demand we have seen since our last earnings call. We continue to see some demand variability related to our product and service offerings.

We believe the remainder of the year, we'll continue to be dynamic and it is unclear the extent to which the recent trends will continue.

Turning now to expenses.

Total cost and operating expenses for the second quarter increased 22% year over year on a GAAP basis compared to an overall, 27% increase in total revenue.

Our year over year increase in cost is primarily related to our 15% year over year growth in headcount to support new offerings in customers and to enable future growth that we believe will positively impact long term shareholder value.

Included in cost of revenue expense in the quarter is $2 million an annual maximum incentives earned during the period.

Third party service providers related to program intended to increase adoption and utilization of online payments.

This was recorded as an offset to cost of revenue during the second quarter.

Under this program, we would we could be eligible for an additional 2 million dollar incentive in 2021.

Included in general administrative expense is $4.25 million related to the potential settlement of all claims and allegations arising out of or related to the previously disclosed FTC investigation into our tenant screening value plus service.

We believe this pretty reasonable estimate based on information currently available to us.

For additional information you can refer to noknine commitments and contingencies.

In our financial statements.

During the quarter, we extended a remote workplace timeframe through at least the end of this fiscal year.

As I mentioned in the first quarter earnings call, we have significantly reduced both cost associated with running our facility as well our employees are working remotely and non essential expenditures.

In addition, advertising and promotion costs decreased in the second quarter, primarily due to the cancellation or postponement of in person event and reduced online marketing spend.

Offsetting some of those cost reductions is our continued investment in headcount, which we believe will help us continue to make long term business progress.

We also saw an adjustment to performance based compensation expense of $2.8 million related to increases in estimates for annual performance accruals.

We have a limited history of the long term impact of remote work and the resulting types of investments necessary for our employee base and could have more variability in our expenses related to this then we would have otherwise expected as we progressed through the balance of 2020.

Moving to the balance sheet, we closed the quarter with approximately $80.2 million in cash cash equivalents and investment securities.

Including our first quarter of 2020 draw down on our revolving facility and the amount of $49 million. We ended the second quarter with $97.1 million of total debt.

We generated $24.3 million from operating activities in Q2.

Our primary uses of cash in the quarter, where capital expenditures of $6.3 million related to the Buildout of our corporate headquarters in Santa Barbara that was substantially completed during the second quarter of 2020.

We also realized capitalized software development costs of $5.9 million in connection with continued investment in our technology and service offerings.

Despite the generally positive quarterly results. We continue to proceed with caution given the uncertainty the cobot 19th pandemic could cause a markets we serve in on the broader economy.

We are still unable to predict with any reasonable degree of certainty the full extent of the potential impact of the pandemic honored business and financial results.

As a result, we're not communicating full year revenue guidance for fiscal year 2020.

We continue to expect our diluted weighted average share count for the year to be approximately 36 million shares.

With that I'll turn the call over to Jason for additional comments.

Thank you eat them.

And thanks to everyone for joining us today.

In the second quarter 2020, we continued on our mission to revolutionize vertical industry businesses.

Regarding great software and service to our expanding customer base.

I want to echo his remarks regarding our employees professionalism and commitment.

The cobot 19 pandemic and remote work environment have unquestionably personal and professional challenges for many of us.

And her team has continued to lead and despite those challenges and we all appreciate your continued effort in that regard.

With that said, we continue our focus on delivering long term value be a transformational technology and remain committed to our strategy of delivering rapid and consistent innovation, an exceptional customer experiences, while maintaining a strong team our culture and trusted partner relationships.

In our real estate vertical in the second quarter, we partner with customers to provide education and peering networking opportunities shifting our focus to hosting a variety of events in customer networking exchanges virtually rather than in person.

Through our commitment to innovation, we're helping our customers meeting in advantage in the areas of remote where capabilities and communication and for our property manager customers. We are bringing key workflows such as leasing Omar.

To that end, we expanded our appfolio property manager capabilities in Q2 to include Folio virtual showings, Oh virtual we've seen experience that allows customers to conduct leasing operations, even during times of social distancing.

Since releasing virtual showings would seem encouraging customer adoption industry feedback on that's increasing importance for property management businesses in the long term.

According to a recent now fully industry survey, 71% of respond to accept their priority for implementing virtual showing says increased.

Which only reinforces our belief that property managers you virtual showings is more than just an immediate solution to a short term problem. In fact, 64% absurd respondents said they believe virtual showings are here to stay.

We also expanded the virtual leasing experience with the release about pulliam Threed tours in the second quarter, which is designed to make it easy for prospective residents to engage with available units himself qualified at a distance with the Threed virtual tour I can be embedded into our customers are polio powered web sites.

Another critical issue for our customers. During this time is resident retention.

With the enhancement of our integration with Blue Moon software one of the most widely used all mightily services.

Our customers now have even more streamlined lease renewal and all my leasing expanding capabilities to help facilitate a great experience for renters.

And I fully owned property manager plus our customers managing larger portfolios in teams at scale now have access to an advanced leasing metrics dashboard that organizes key leasing data into a single real time view.

Eliminating time consuming manual data collection validation and analysis analysis, allowing leasing managers to focus on optimizing team performance.

These capabilities are designed to enable our larger customers diminished distributed teams and portfolios across multiple regions.

Bringing together and and performance data on critical workflows managers have increased visibility and oversight to drive that efficiency and continuity.

We believe that this is especially important now with team members working remotely.

We're seeing these innovations translate into positive outcomes for our customers.

For example, John Snow, who manages over 1100 units on a fully a property manager CEO President Kennedy managements.

Recently said.

I folio has been quite frankly, a central to the rapid growth of our business I simply can't imagine thriving in today's multifaceted environment without the tech for solutions about polio.

For our customers managing community Association portfolios, we remain focused on areas that streamline proficiency and help them better serve their homeowners and board members.

In the second quarter, we released auto reconciliation functionality, which allows our customers to reconcile their bank accounts using wide data from our major bank partners saving time by doing away with the repetitive manual tasks associated with being statement reconciliation.

Additionally, we extended features to include a community map with real time, GPS tracking violation management from the field and bulk processing of violations.

Turning to our polio investment management, we expanded key capabilities in the second quarter that allow real estate investment management customers to provide an exceptional investor experience will also gathering the insights and maintaining the visibility they need to more effectively manage and grow their business.

This includes new investor level metrics Investor investment reports that customers can leverage to calculate can share customize performances orange Patrick's directly with the investors in the folio and.

In Investor portal.

Additionally, we improved the system activity and all that logs that maintain a record of all activities across investment investing entities and distributions, providing enhanced visibility and oversight for investment managers.

And our legal vertical my kids continued to help law firms acquire new clients and adapt to remote work.

Thats Flotek managing partner at sporadic Law group said I can't imagine what a firm would do if they didn't have my case in the midst of cope with my team.

It would be so much more difficult to operate keep everything organized and communicate kind of seamless way.

In that regard to help firms acquire new clients, we released online recapture forms to allow our customers to more easily collect information from prospective clients and manage the resulting leads in my case.

We also expanded the functionality of E signatures law firms are clients and the court systems increasingly rely on technology. The supports remote interactions in the current environment.

As I said at the outset, our team has continued to develop innovative products and deliver exceptional supporting services in a difficult environment.

We believe engaged happy employees deliver a better customer experience.

Andrew Greenberg, Vice President and trilogy management, and that polio property Minister plus customer recently summed it up.

When you partner with that Folio, you were not wholly signing up for the software today, but everything that has to come in the future. The team that fully was treated us like partners versus customers.

Our commitment to our customer success has not gone unnoticed during the second quarter, we were recognized for our dedication to these principles.

The product innovation and cultural standpoint.

Gtwo crowd listed that folio property manager and the 2020 top 100 software product solely based on customer feedback and reviews.

Well software and information Industry Association Codie Award solicit that folio property venture plus as he 2020 best business intelligence solution finalist.

And for the third year running.

Received certification is a great place to work like great place to work I recognize it's already on global work place culture.

In summary, we remain focused on our customers are innovative technology and our robust services and support from will continue to make investments that drive long term growth in the business.

We're paying close attention to our customers unique needs. During this time partnering with them for the future while continuing to monitor adapt to the changes in the market.

Thank you all for joining us today I will now turn the call back to the operator. Please go ahead.

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