Q4 2022 Appfolio Inc Earnings Call

The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.

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Good afternoon. Thank you for standing by and welcome to the AB Folio Inc's fourth quarter 2022 financial results Conference call. Please be advised today's conference is being recorded and a replay will be available on Apple iOS Investor Relations website, I would now like to hand, the conference over to Lloyd Barker Investor Relations.

Thank you good afternoon, everyone I'm Lory Barker Investor relations for asphalt lay up and I'd like to thank you for joining US today as we report at Folio as fourth quarter 2022 financial results with me on the call today are Jason Randall Apollo as President and CEO and Fei Shan good portfolio as chief financial.

This call is being simultaneously webcast on the Investor Relations section of our website at Www Dot App called Airlink Dotcom.

Before we get started I'd like to remind everyone about folio 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 and future market conditions, our future product enhancements or developed is a forward looking statement <unk> actual future results could differ materially from those expressed in such forward looking statements.

For any reason, including those listed on our SEC filings apply.

<unk> assumes no obligation to update any such forward looking statements, except as required by law for.

For greater detail about risks and uncertainties, please see our SEC filings.

Our to be filed Form 10-K for the fiscal year ended December 31st 2022 and.

In addition, this call includes non-GAAP financial measures.

Conciliations of those non-GAAP financial measures within the with the most directly comparable GAAP measures are included in our fourth quarter earnings release posted on our Investor Relations section of our website.

With that I will turn the call over to Jason Randall <unk>, President and CEO , Jason. Please go ahead.

Thank you Lori and welcome to everyone joining us for our fourth quarter and fiscal year 2022 financial results.

I'm pleased to report that that volume continued to show resilience in the changing real estate industry and evolving macroeconomic environments.

Fourth quarter revenue grew 30% year over year to $124 million chopping off the annual 31% increase to $472 million.

<unk> grew 15% for the year to $7 3 million.

Also the total number of our customers expanded opco increased payments continued to grow and we're pleased with adoption.

Property manager plus.

Focused on larger unit count customers.

And focus on delivering innovation that positively impacted our customers resulted in continued high retention.

As customers continue to recognize the value.

Polio to drive operational excellence in their business.

One recent example of innovative solutions, you've heard US talk about is the Apple your stack partner integrations marketplace.

Another important Jason point, because our investments in AI.

As of the end of 2020% to 40% of our customers now use one or more AI enabled features or services, including our newest ones like smart insurer to help property managers enforced or insurance requirements and bank fees.

Martin accounting tool that automatically imports bank transactions and supervise reconciliations.

These examples reflect our continued efforts to help our customers save time and money and drive operational efficiency.

Driving operational efficiency is also important within our folio as we look to scale our business.

Our path to increasing profitability is focused on growing revenue, while executing a companywide initiative to be more efficient.

We're always evaluating how various businesses meet our customers' needs and I believe our strategic priorities.

And in 2020 to be divested in wound down a non core asset to try focusing our business.

We are continually working to identify areas, where we can improve our cost structure, such as transforming our sourcing and procurement capability.

Right sizing, our real estate footprint and migrating certain roles third party resource providers.

In addition, we have been moderating and will continue to moderate our head count growth rate.

We are pleased with the early progress from these efforts and look forward to continuing them in 2023.

From a macro perspective. It is an important time for our customers to continue investing that Apollo to save cost and operational efficiency.

Earlier this week, we published our inaugural all your benchmark reported nearly five.

1000 property management employees.

The report found that the growth outlook is positive among property management organization, despite broader economic challenges.

And then 80% expect the organization's revenue to increase in 2023, nearly three quarters expect net operating income to grow.

They reported their top priorities are.

Adding new units to the portfolio, increasing revenue improving customer service and growing their staff. They also expressed a desire to leverage data to make faster better decisions to make financial interactions easier for both residents and businesses. They worked with their processes, while rent payments online and improving their accounts payable process.

These are all priorities that Apollo has been and will continue to help with.

I believe that long term strategy is at its core all about helping our customers solve problems in innovative ways.

Goal is to keep our customers happy resulting in low churn growing <unk> added new customers and units.

In 2020, we will continue to innovate at a fast pace. For example, we are building on our one powerful platform for mixed portfolios as we expand support for property types and capturing new revenue streams.

Another example is accounting and reporting this functionality is at the core of our product offering.

We will focus R&D efforts around the themes of automation centralization and flexibility.

These are the types of each customer's business and it is critical that we remain a source of record for property level accounting.

And we are delivering service excellence at scale by enabling an intuitive onboarding process and leveraging technology to make it easier for customers to get the help they need when and how they need it.

These are just a few of our long term projects is more in the pipeline for 2023 and beyond.

Also core to our long term strategy, our sustained efforts investments behind acquiring and supporting larger customers.

Our corporate segment is quickly growing and is a major contributor to our increasing ARPA.

The strategic bets, we made in 2022 drove success with more than six and a 60% growth rate in our <unk> property manager plus or APM plus tier.

These units are fueling our go to market efforts in improving our ability to win our market large customers are increasingly coming to us to partner on the current and future needs.

And our team is introducing new and creative ways to help our fastest growing customers organize around their future residential portfolio expansions.

Let me share an example.

Every day since the AGM bus customer managing a mixed portfolio of 30000 units across the U S.

And they have a goal of six figure unit growth through a focus to organic growth and acquisition strategy.

They are heavily invested in the Apollo technology platform and together, we have worked closely to maximize their adoption of performance and the <unk>.

Testament to the strength of this partnership evidenced recently early renewed a multiyear agreement without polio.

According to Matthew Whittaker CEO whatever nest.

We are growing rapidly and Apollo technology hubs covering us accelerate growth we're.

We're happy to be working closely with their polyethylene to achieve our growth goals.

We will continue to deliver differentiated experiences to meet the needs of more customers like evidenced.

Large and small customers alike are embracing stack our partner integrations marketplace that launched in June 2022.

Stack seamlessly integrates our customers preferred software applications with our platform, giving customers more choices as they focus on boosting productivity improving the rest of their experiences.

More than 800000 of our customers that are now connected on stack and a number of partners. We've onboarding has more than doubled since tax launch spending marketing and leasing smart home technologies.

<unk> management inspections and maintenance in our newest category of compliance.

J T Morrison President of Horizon's asset management, LLC, a Columbus, Ohio, a customer since 2016 was just under 1000 units in APM plus recently said quote Hollywood integrations experiences helped horizon is focused on our team's enjoyment of their duties introducing more mobile and user friendly software that removes many daily administrative burdens.

This allows our teams to concentrate on maintaining the asset closing in on active renters and heading home to their families more energized and quote.

Large customers are also looking for functionality to serve their mixed use housing portfolios.

We've previously shared our plan to deliver purpose built features for the affordable housing segment.

In 2022, we partner with charter customers to deliver meaningful affordable housing capabilities, such as tools to manage subsidy programs more easily.

This year, we plan to go further to support customers' needs through a focus on building integrated workflows to differentiate our product in the market.

Payments continues to be the fastest growing of our value added services and we are working to find additional creative ways to deliver customer value to our growing ecosystem of end users.

One example is our integrated security deposit return future announce at our October customer conference.

Longer is it necessary to write a check it out and make residents go and take it to the bank for deposit the whole process is now done electronically we have seen meaningful adoption of this new offering helping more than 4000 customers automatically returned funds to another 75000 restaurants.

Another customer conference announcement with Apple pay now.

Now when a resident wants to pay their rent they don't need to type in their credit card information that can just put twice a day.

For property managers Thats removes friction in the payment process. It was the one time payment the lives of our customers.

Early indications show that resident card transactions increased by approximately 6% when our customers adopt apple portfolios linked with Apple pay.

Based on these early results, we plan to expand Apple pay capabilities and use cases, and we anticipate the full rollout to be complete in the first half of 2023.

While we are making meaningful strides in achieving our market growth, we remain committed to growing our SMB customer base by adding capabilities simplifying the service experience and driving deep adoption across our leasing accounting and maintenance domains.

In 2023, our SMB efforts will focus on improving the owner experienced increasing self service rates and reducing the rate of effort to achieve success.

You've just heard about the innovative ways, we are expanding and it is all made possible through our people.

And your own employee kick off a bit earlier. This month, we discussed the importance of sharp execution and a focus on the actions that will deliver the greatest customer impact as I've.

Already mentioned this year, we are looking to improve our internal efficiency.

We'll continue to invest in our current team can simplify Apollo to create an environment built for meaningful impact that powered by performance.

We also continue to embrace a hybrid workplace and I'm proud that our team and culture are recognized as an employer of choice in.

In 2020, we were selected among glass doors best places to work in Fortune's best workplaces in technology great.

Great people make a great company and I'm confident in our new nearly 800 at <unk> ability to achieve our goals.

As we enter 2023, we are well aligned on growing the business and increasing our focus on profitability during.

During 2022, our payments business achieved an exceptional growth rate fueled by increased adoption and usage of electronic payments for 2023, we expect that cardiac <unk> growth rates will naturally moderate while.

We are becoming more efficient we also need to continue to invest in R&D to support our move up market.

All of our estimates for revenue growth and expenses as a moderate level of free cash flow in <unk> will take you through more details shortly.

Over and over Applebee's business have delivered consistent resilient results in various market conditions.

Growing steadily by driving efficiencies for owners property managers residents and vendors and we have a debt free balance sheet and a healthy cash position.

I am proud of our accomplishments I believe in our ability to drive continued success through our committed focus on innovative products and services trusted customer partnerships and a strong team and culture.

I will now turn the call over to <unk> for more details on that <unk> fourth quarter financial results.

Thank you Jason we are pleased to report that in the fourth quarter revenue was up 30% year over year to $124 $1 million. This marks five quarters in a row of 30% or better growth evidenced that we are driving success by making it increasingly easy for all.

Customers to manage their business in an ever changing world.

Core solutions revenue was $35 $4 million in Q4, another strong quarter and a 23% year over year increase full year core solutions revenue grew 26%.

At the end of the fourth quarter, we manage approximately $7 3 million property management.

18441 property management customers compared to $6 3 million property management unit from 17215 property management customers.

This represents a 15% increase.

Pending property management units. In addition to the number of units is there. It is important to note that core revenue also grew as we continue to focus on customers with a larger unit portfolios that drives higher our booth through increased adoption rates of APM plus an additional value added services we got.

Value added services revenue in Q4.

Experienced a stronger than expected growth.

35% year over year.

So $86 $3 million.

And our full year value added services grew 36% during 2022 revenue from both payments and value added services benefited from the rise in property management units under management.

The expansion of our offerings in addition to increase adoption.

Utilization to sequential quarterly decrease of 2% in value added services is typical and fulfill leasing season, which peaks in the summer months in Q4 of 2022 and 2021.

non-GAAP cost of revenue exclusive of depreciation and amortization was 40% of revenue full year 2020 to cost of revenue exclusive of depreciation and amortization was also comparable with the 2021 for you.

Product mix shifted due to the higher annual growth rate of value added services revenue. However, the related increase in expenses for third party service providers.

Partially offset by additional head count efficiencies.

Now to non-GAAP operating expenses Oh, Yeah about your increase in operating expenses for Q4 is primarily related to head count growth of 12% to 1700 and 85.

So employee costs associated with hiring and retaining talent continues to increase more than in prior years, particularly in specialized areas such as R&D and <unk>.

Back to the third quarter expenses also increased to accrue for.

Thomas bonuses and that was some incremental marketing expense for advertising related to recent product launches sales and marketing expenses as a percent vishal revenue increased from 20% in the prior year to 21% in both the fourth quarter and full year.

R&D expenses as a percentage of revenue increased from 18% in Q4 of last year to 21% this year.

During the year.

Continue to invest in expanding our product offerings, including projects like stack affordable housing and some other capabilities that make our products easier to use.

For the full year R&D, Inc.

Increased from 17% to 20%.

Our G&A expenses as a percentage of revenue remained comparable with the same quarter last year and 15% for the full year G&A decreased from 15% to 14% as we continue to scale and find efficiencies.

I think all of us together.

Our non-GAAP operating margin in the fourth quarter of this year was a two 7% loss compared to a first quarter loss last year of approximately 0.4%.

For the full year, our non-GAAP operating margin was slightly better than expected at a loss of <unk>, 6%, we exceeded our guidance for revenue and expenses were in line with our forecast the full year.

Lots of 0.6% compares to income of two 2% in 2020, what free.

Free cash flow was a positive $1.3 million approximately 1% of revenue in Q4 compared to a loss of two 1% in the same quarter last year. This marks the second quarter in a row of positive free cash flow and for the full year, our free cash flow margin was 0.9 person.

Compared to three 6%.

Turning to the balance sheet, we ended the fourth quarter with $185 million in cash cash equivalents and investment securities.

We're targeting end of 2020 three revenue of 565 million to $575 million. The midpoint of this range represents a healthy full year growth rate of 21% well.

Well, we haven't been delivering a higher revenue growth rate and we have conviction of our strategy in this economic environment. We also want to make sure we are being prudent in our outlook also our guidance assumes that high growth in the use of cards will normalize in 2023.

In terms of the seasonality in our value added services in a typical second quarter tenant applications to increase in our property managers experienced an expansion of new tenants in the third quarter.

This results in higher demand for our insurance and screening services.

Yeah.

Then in the fourth quarter the business is seasonally low for us.

We expect seasonality to continue in 2023.

We expect that Chinese Chinese free cost of revenues exclusive of depreciation and amortization decreased slightly as a percentage of our revenue due to a changing product mix with value added services revenue now growing at a more normalized rate.

Our training 23 percentage increase in head count is projected to be very modest.

And as you heard from Jason we are working on various projects to increase efficiency and reduce operating expenses on a percentage of revenue basis.

Bringing all this together full year non-GAAP operating margins are expected to be about breakeven and non-GAAP free cash flow is projected to grow two 2% to 3% of revenue.

Basic weighted average shares outstanding are expected to be approximately $35 million for the full year.

Thank you all for joining us today.

And believe our long term strategy is resilient and will continue to fuel success and look forward to speaking with all of you in future calls operator. This concludes our call today.

Thank you ladies and gentlemen, this does conclude today's conference you may all disconnect have a great day.

The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.

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