Q1 2023 AppFolio Inc Earnings Call

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Good afternoon. Thank you for standing by and welcome to our full year, Inc. 's Conference call. Please be advised that today's conference is being recorded and a replay will be available on that folios Investor Relations website, I would now like to hand, the conference over to Lori Barker Investor Relations.

Thank you good afternoon, everyone I'm worried Barker of Investor Relations for AB polio.

I'd like to thank you for joining us today as we report that folios first quarter 2023 financial results.

On the call today are Shane Trigg.

He was president yeah inflation I'll call. He is the Chief financial Officer.

<unk> is being simultaneously webcast on the Investor Relations section of our website at Www Dot Oh really dot com.

Let me get started I would like to remind everyone of alcohol safe Harbor policy.

Comments made during this conference call 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.

Junction future market conditions, our future product enhancements.

Or development is a forward looking statement absolutely those actual results could differ materially from those expressed or these statements for any reason, including those listed in our S. E T.

Absolutely assumes no obligation to update any such forward looking statements, except as required by law for greater detail about risks and uncertainties. Please see our SEC filings, including our form 8-K fiscal year ended December 31st 2022 which was filed on February 1920 23.

In addition, this call non-GAAP financial measures reconciliation of these non-GAAP financial measures with the most directly comparable GAAP measures are included in our first quarter earnings release posted on the Investor Relations section of our website.

With that I will turn the call over to Shane Shane. Please go ahead.

Thanks, Lori and welcome everyone to our first quarter 2023 earnings call and my first as President and CEO about folio beef.

Before I move through our discussion on the quarter and our strategy I'd like to take a moment to acknowledge Jason Randall the accomplishments and wish him the very best either Mitch gratitude for Jason and all past and present our plans.

Grow the company and I'm honored to have this opportunity to lead up folio and so what I'm confident is a bright future for our customers employees and shareholders.

I joined this organization three years ago to guide our real estate business with a mission to make out folio, the leading property management platform.

Today, we're making rapid progress towards that goal through a differentiated product vision and our go to market strategy that inspires customers to choose and grow without fully yet.

Results from the first quarter of 2023 demonstrate that we're right on track.

I'm pleased to say first quarter revenue grew 29% year over year to $136 million.

We now have more than seven 5 million units on platform and our total number of customers has expanded to nearly 19000.

We continue to see strong growth in our payments business.

Attributing to growing our two.

We're pleased with the continued adoption about folio property manager plus.

What are the first things I did stepping into the CEO role was to reflect on the strength of our strategy.

I believe the real estate industry needs, a polio today more than ever.

I also believe that our strategy built on three key pillars.

Unequally positions us and our customers for success.

The first pillar of our strategy is creating truly differentiated experiences that solve the challenges our customers are facing and help them better achieve their goals.

Continuously listening to our customers helps us understand their challenges and highlight areas in which they're seeking folios investment and innovation.

And today, our customers' highest priority is streamlining and automating their business processes.

One solution to this challenge we frequently talk about is AI based innovation.

We invested in AI early and in recent quarters have told you about our successes with products like smart maintenance bank feed and our AI leasing assistant Lisa the last of which was recently awarded a patent for its powerful technology designed to optimize the least.

Process by matching tenants with available units.

Our ongoing AI investments are paying off for our customers, increasing their productivity and bringing them closer to their customers.

We've had time to build the right team thoroughly integrate AI into our technology platform.

Repeatable processes their frameworks to rapidly turn AI advancements into immediate customer benefits.

A major transformation is happening right now with the emergence of large language models.

Our product and engineering teams that started piloting new capabilities, such as introducing AI generated real estate listing descriptions into our leasing workflow.

I'm excited to see where this will lead and I'm confident that I'm fully it will continue to be an AI leader building market differentiation well into the future.

There was another important way in which we solve the challenge of increasing productivity one that ties directly into why our customers choose a polio they.

The ease of use of our entire portfolio of platform.

I hear this all the time and my conversations with customers.

Let me give you a simple example of how focused investment in our team and platform is generating highly impactful improvements to our customers' productivity.

We've recently released a series the search related enhancements, including filtering search results by category expanding search capabilities to additional documents.

Seamlessly accessing recent queries and many more all of which are designed to make our product even easier to use than it already is today.

Helping customers achieve their outcomes through constant innovation has a measurable positive impact on customer satisfaction.

And our recent strategic relationship survey customers rated us polio number one among our competitive set for continually innovating the products.

The second pillar in our strategy is acquiring new customers upmarket.

These sophisticated businesses frequently rely on a broad range of point solutions to complement their property management software and need the capability to power their mixed portfolios with multiple property types.

Last year, we launched a polio stack our marketplace for integration partners to address these customer needs and we continue to gain momentum.

The number of units connected the stock is growing and we're proud to be adding even more leading prop tech partners to the marketplace.

We're now at 26.

The most recent addition is meso and we expect to soon integrate with rent dynamics latch and point central.

I fully in stock is a good example of an upmarket capability. We've built that is also benefiting SMB customers, who are adopting at a high rate.

Our nine year partnership with real property management or E. R. R. P M.

Franchise Corporation with 60000 residential units is an excellent example of how at folio is evolving to meet our customers complex and growing needs using stock.

<unk> P. M chooses one property management service provider for all of its franchise locations and not fully up continues to earn their business year after year.

They cite stack is a key reason they continue to grow their business without folio.

According to air Brackins director of systems and I quote.

With the advent about folio stock marketplace RPM has the capabilities to elevate our operational efficiencies through data aggregation and automation fueling our goal of delivering best in class client experiences.

Yeah.

Portfolio characteristics about market customers are often a mix of conventional residential and other property types like affordable housing.

Expanding our coverage of additional property types contributes to our ability to win and retain these types of customers and.

In 2022 we worked with charter customers to develop meaningful enhancements to our affordable housing capabilities.

In the first quarter of 'twenty to 'twenty three we added functionality designed to enable these customers to seamlessly manage complex compliance obligations to fulfill state reporting requirements and monitor property compliance for affordable units.

The third pillar of our strategy is to expand customer adoption of our folio property manager plus and our value added services.

We found that comprehensive adoption is often linked to successful customer onboarding.

To that end one of our service goals. This year is empowering customers to confidently adopt the core workflows of accounting.

Leasing and maintenance within the first 90 days of Onboarding.

One of the ways, we're doing that is by enabling new customers to import their basic folio data on their own including for example bank owner property and tenant information.

Across the industry on boarding is often a time intensive manual process that can Bob property managers down and take much important time from their customers.

By integrating self service onboarding into a fully as a platform and automating it steps we significantly reduced the time it takes new customers to get up and running.

In Q1, 75% of SMB customers.

Pleated their data submission in 10 days or less.

Not only do time to value improvements like this result in faster adoption of our value added services and higher customer satisfaction.

They also approved the productivity of our support team, which now spend less time on data migration and more time, helping customers expand on our platform.

It's an example of what our customers are winning we win as well.

We've demonstrated that our rapid pace of innovation drives increasing value for customers of all sizes.

We will continue to focus on aligning the value we deliver with the value we capture as we scale to meet the unique needs of our customers across all segments.

Meeting and exceeding our customers dynamic needs doesn't happen without fully is great team of people.

We remain committed to building a diverse and inclusive company were each up fully and has the opportunity to thrive.

We'll continue to invest in our team in ways that deliver products and services that make our customers' lives easier.

To that end I'm happy to announce that Elizabeth Barrett has been promoted to be our new chief people officer.

Elizabeth has been instrumental in building our culture during her six plus years at a polio and I'm excited to see her continue to grow in this new role.

To close by focusing on our three strategic pillars, we have an incredible opportunity to deliver extraordinary customer value and drive efficient growth.

I'm honored to lead up folio into our next phase rooted in our values inspired by our customers and fueled by our people and World class innovation.

I'll now turn the call over to page 10 for more detail about fully is first quarter financial results.

Thank you and welcome Shane I look forward to partnering with you.

This next phase we are pleased with our continued strong revenue growth rate in the first quarter, we delivered revenue growth of 29% year over year.

$136 $1 million or solutions revenue was $37 $2 million in Q1, another strong quarter and a 21% year over year.

The increase driven by new customers and additional units on platform along with the continued adoption of <unk> property manager plus APM plus.

As we move up market at the end of the first quarter, we manage approximately seven five.

Or do you manage that.

From 18834 property management customers compared to six six minute properties.

That's from 17550 property management customers.

Earlier this represents a 7% increase in customers and a 14% increase in our ending property management isn't it.

So value added services revenue in Q1, <unk> continued to grow 35% year over year to $96 8 million.

Well its very attractive the payments business growth rate was more moderate than in the previous few quarters as we indicated in last quarter's call. Our 'twenty to 'twenty three guidance. It seems that the high adoption rate of cards from payment will normalize in 2023.

Also we saw increased adoption and utilization of our risk mitigation product called Cologuard and screening services as well as a continued benefit from the rise in property management.

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Turning to spending it.

<unk> grew 6% over the first quarter of 2022.

<unk> 1769 at the end of the first quarter of 2023.

One 5% from fourth quarter due to normal attrition and then slower hiring rate in.

In Q1 of 'twenty to 'twenty, three 2022 the non-GAAP cost of revenue exclusive of depreciation and amortization was 41% of revenue.

Our product mix has continued to shift due to an increasing mix of value added services.

However, the related increase in expenses for third party service provider or not.

Firstly offset.

By additional head count efficiency.

Turning now to other non-GAAP operating expenses.

But yes all of the increase in operating expenses from Q1 is primarily due to employee costs associated with it.

Retaining talent, particularly specialized areas, especially.

And also due to headcount growth on a percentage of revenue basis, combined sales and marketing R&D and G&A fell to 15, 6% in the first quarter of 2023 from 58% in first quarter of 2022.

Sales and marketing expenses as a percentage of revenue.

Increased from 22% in the prior year to 20% in the correct yes.

R&D expenses as a percentage of revenue increased from 20% in Q1 last year to 24% this year.

During the quarter.

Continue to invest in expanding our product offering innovation in AI and capabilities that help us continue to move up market such as stack affordable housing and some other capabilities that also make our products easier to use.

Our G&A expenses as a percentage of revenues decreased from 15% in the prior year to 13% in the first quarter of 2023.

Overall.

non-GAAP operating margin in the first quarter of this year improved.

Improved to a one 6% comp.

Compared to a first quarter loss last year of five 3% free cash flow. This quarter was approximately breakeven compared to a negative seven 2% in the same quarter last year.

Turning to the balance sheet, we ended the first quarter with.

$182 million in cash cash equivalents and investment securities.

We are increasing our projected full year 2022 2023 revenue guidance range to 570 million to $580 million.

The midpoint of this range represents full year growth rate of 22% as we indicated last year, we have strong conviction in our growth strategy, our guidance assumes that high growth they use of carbs.

So payments moderate gradually in 2020.

And in this economic environment, we are being prudent in our outlook regarding the seasonality in our family at a submission.

And with prior years.

A typical second quarter tenant applications increases and our property managers experienced an expansion of new tenants in the third quarter.

This results in higher demand for Reis, and mitigation and screening services in the third quarter.

In the fourth quarter the business seasonally so rackspace such seasonality to continue into 2023.

The fact that it's 2023 cost of revenue exclusive of depreciation and amortization decreased slightly as a percentage of revenue due to changing product mix with value added services revenue now growing at a more normalized rate.

Train three.

Increase in head count is projected to be modest and we are working to increase efficiency and reduce operating expenses on a percent of revenue basis.

Yeah, increasing our full year non-GAAP operating margin expectations to one 2% of revenue and free cash flow is projected to grow two two and a half to three 5% from Russia.

Basic weighted average shares outstanding are expected to be approximately 36 million for the full year.

The first quarter was going to kick off 2020 estimate and that new customers expanded our residential units and increased our all while looking for efficiencies to drive growth in our free cash flow a long term strategy and track record of delivering real estates.

Innovation position us well for continued success. Thank.

Thank you all for joining US operator, this concludes our call today.

Thank you for participating in today's conference. This does conclude the program and you may now disconnect everyone have a great day.

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