Q2 2023 AppFolio Inc Earnings Call
Okay.
Good afternoon. Thank you for standing by and walked out Folio Inc's second quarter 2023 financial results Conference call. Please be advised today's conference is being recorded and a replay will be available on our Investor Relations website I would now like to hand, the conference over to Lori Barker of Investor Relations.
Thank you good afternoon, everyone and Lori Barker industrial relation scrap Hollywood and I'd like to thank you for joining US today as we report absolutely our second quarter 2023 financial results.
With me on the call today are Shane Trigg, absolutely as president and CEO and thinking God I totally I was chief financial Officer.
This call simultaneously being webcast on the Investor Relations section of our website at <unk> Dot com.
Before I get started we would like to remind everyone of absolutely our 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.
That shows or other characterizations of future events, including financial projections future market condition or future product enhancements or development in support looking statements.
I told you it was actual future results could differ materially from those expressed in such forward looking statements for any reason, including those listed and not as a society.
Our polyol it sounds no obligation to update any such forward looking statements, except as required by law.
For greater detail about risks and uncertainties. Please see our filings, including our Form 10-K for the fiscal year ended December 31st 2022, which was filed with SEC on February 19 2023.
In addition, this call includes non-GAAP financial measures reconciliation of Geek non-GAAP financial measures with the most directly comparable GAAP measures are included in our second quarter earnings release clusters on the Investor Relations section of our website.
With that I will turn the call over to Shane Trigg Shane. Please go ahead.
Thanks, Lori and welcome to our second quarter 2023 earnings call.
This quarter, we continued to execute our strategy, while continuing to make progress towards increasingly profitable growth.
We saw a healthy 25% year over year increase ending at $147 $1 million.
Unisom platform grew to approximately $7 7 million at quarter end, we had 19145 customers.
Our non-GAAP operating margin continue to move further into positive territory growing from 1%. This time last year.
Six 4% in Q2 this year.
Free cash flow also improved to approximately four 2% up from negative one 2% in the same quarter last year.
Our results this quarter, primarily stem from two interrelated drivers.
First is our pace of innovation.
We believe business is undergoing a new wave of digital transformation. Thanks to the rapid advancement and generative AI ushered in by large language models.
The promise this holds for property management companies is clear.
Recent fully a survey of more than 2000 property managers, we heard that employees are spending more than a third of their time on repetitive tasks. They consider busy work.
By automating those jobs with generative AI solutions at folio is able to give customers tying back to deliver a better resident experience and improve overall job satisfaction.
We're in our fifth year of making meaningful R&D investments in AI through products like smart maintenance, our AI leasing assistant Lisa banks see Smart Bill entry Folio Guard smart insurer and more and now we have a fully around which unites all of our AI powered capabilities and better.
Positions us to deliver on our product vision to create a world where choosing living in investing and owning and managing humidity skills magical and effortless freeing people to thrive.
As a part of that fully around we're piloting a new conversational interface powered by large language models that allows customers to ask tell.
Hell and teach the software to complete tasks trapped and send communications initiate actions and automate processes on their behalf all without having to navigate a traditional graphical user interface.
Last month, we had the opportunity to showcase our AI capabilities, including a fully a realm to more than 500 customers and prospects at <unk>.
Hey, a apart mineralized the largest multifamily industry of that.
In the words of Simon Wong CEO , Hogan invest and not fully a property manager plus customer since 2019 with more than 1800 units on platform and I quote the innovation and not fully around is going to propel our productivity. These AI capabilities or just fuel our competitive edge.
They're helping us become an industry leader and quote.
The second driver behind this quarter's results is our continued commitment to increasing operational efficiency.
We sharpened our focus on the closest to home initiatives that drive efficient growth and deliver extraordinary customer value.
We've taken steps to optimize headcount prioritizing critical hires to fuel innovation for our customers.
We've also begun driving meaningful improvement in infrastructure spend and our support sales and G&A functions.
These improvements allow us to reinvest in our platform and accelerate our industry leading innovation.
The relentless execution of our strategy continues to propel the success of our business.
The first pillar of that strategy is building engaged and lasting customer relationships by delivering differentiated customer experiences.
The ability to quickly understand the changes in business performance is a critical need of our customers.
One we've recently addressed with a series of improvements to our reporting infrastructure, allowing customers to filter and surface actionable insights nearly twice as fast.
In addition, customer using a fully <unk> property manager plus will soon have more flexible data access via our reporting API.
We also continue to find ways to deliver service excellence that makes it easy for customers to get the help they need when and how they need it.
We recently released a new self service capability that allows customers to engage with health and support resources at the point of need.
Results have been outstanding.
The number of customer issues were resolved within the first 24 hours has increased by 17%.
We've also increased the number of cases customers can solve immediately on their own through self help resources.
Case resolution not requiring human assistant.
Now accounts for just under a third of our total case volume customer.
Customer satisfaction has improved and our support team is better able to focus on high value interactions with our customers.
Another pillar about fully the strategy isn't locking residential unit growth by acquiring new customers up market.
We continue to expand our addressable market through innovation like the affordable housing management introduced last month, so all our folio property manager management plus customers.
Managing affordable housing comes with a unique set of challenges for property managers in fact in a recent survey 75% of affordable housing operators ranked operational efficiency is their number one challenge.
Qualifying and recertifying residents of affordable housing requires a vast amount of reporting often on disjointed systems affordable operators also have to meet much higher compliance standards and there than their counterparts in conventional housing.
I fully as product allows property managers to manage their affordable housing and market rate units all on one platform managing compliance streamlining processes and consolidated accounting operations.
Over the last year, we collaborated with the grip the charter customers to build a product that embodies our customer centric innovation, our ease of use and critical compliance capabilities.
One of those customers, Dan Mccoy Executive Vice President of operations of G. S. F properties, serving the Fresno, California area through a mixed portfolio of more than 10000, affordable and multifamily units on a polio had this to say and I quote when a folio started pursuing afforded.
Warehousing capabilities, we were fortunate to be able to have our compliance team work with them. It's good to know how we do business is reflected in the way that the platform was built and quote.
Customers up market require a broad range of point solutions to complement their property management software empower their mixed portfolios.
In the second quarter alone, we announced seven new partnerships on a fully staff, our beta b marketplace, bringing our total to 33 partners.
Since launching last year, we've seen tremendous adoption of stock within our customer base. In fact, we closed the quarter with 1.2 million conducted units by growing our partner ecosystem, we've been able to expand our footprint without having to build native native capabilities accelerating the value we deliver to our growing.
Customer base, while improving our focus.
Let me give you. An example, one of our new integration partners as latch they.
They provide a terrific solution for smart lock technology and class a and new developments.
The integration allows our folio customers to automatically sync resident information and provision accessed through large managers ecosystem of devices software and services saving teams time and increasing their efficiency.
The third pillar of our strategy is to expand customer adoption about folio property manager plus and our value added services.
Payments continues to be the fastest growing of our value added services and we're rapidly expanding our payments platform to help businesses create superior resident and vendor experiences in a safe and secure environment.
We've previously talked about Apple pay which is now available in the App folio online portal for all residents.
Since then we've made additional exciting enhancements.
One example is our flexible rent partnership with financial platform Best day, which when available to all customers. Later this year, we'll get renters, the flexibility to divide their payments into smaller more manageable amounts that better align with their lifestyle and income schedule.
Another example is the enhancements we've made to <unk> accounts payable solution designed to reduce the manual burden our property managers to pay their vendors.
Soon vendors will be able to securely submit payment information through the vendor portal and choose their payment preference, resulting in more transparency and flexibility for vendors with significantly fewer steps and the payment process for property managers.
As a part of this new experience fully will also be adding instant payments.
New functionality powered by Ingo money.
That eliminates bank processing time, it allows vendors to receive payments instantly post payment approval.
Andros, who choose to use this service will pay a percentage of the total transaction amounts.
Adoption of our payments platform continues to grow as we deliver increasingly increasing value on our platform over time.
As this happens aligning the value we provide with the value. We receive is critical to delivering a safe and sustainable payments platform that our customers can trust.
Accordingly.
Implementing a change to our resident E check payments.
Beginning July 31.
We're no longer waiving the resident E check transaction fee.
This change also apply to property management customers using our community Association products.
We recognize this is a change for our customers and are working closely to support them. During this transition.
Update like this help us continue to meet our responsibility to provide a secure reliable and compliant platform, while reinvesting to innovate at a rapid pace.
Wrapping up we're quickly becoming the technology partner of choice for leading real estate businesses.
From AI powered innovation, including a fully around to our entry into the affordable housing segment. The addition of new affiliates stock partners and the expansion of our payments platform, we're focused on executing our strategy and delivering increasingly more value to our customers and their communities.
We look forward to sharing more innovation at our annual customer conference in September .
And to hosting a virtual and in person Investor meeting later this year.
I'll now hand, it over to phase in.
Thank you Shane we are pleased with our revenue growth rate and increasing profitability in the second quarter as you heard from Shane we delivered revenue growth of 25% year over year to $147 $1 million and grew our free cash flow.
42% of revenue.
So there are shown as revenue.
So do you have any quantified.
Q2, and 19% year over year increase driven by new customers. Additional total units on platform and continued adoption of <unk> property manager plus Oh, APM, plus particularly as you move up market.
And if the second quarter, we manage approximately $7 7 million property management units from 19145 property management customers compared to $6 8 million property management unit.
17870 property management customers earlier this represents a 7% increase in customers and a 13% increase in our ending property management units.
Yeah that services revenue in Q2, 30% year over year to $106 $1 million, while still attractive the payments business growth was more moderate than in the previous few quarters as we indicated in our last quarter's call our 'twenty to 'twenty three guidance it seems that the high.
The adoption rate of cards for payments over the past few years they'll normalize in 2020.
Also we saw increased adoption and utilization of our risk mitigation product called Folio guard and screening services as well as a continued benefit from the rise in property management.
Yeah.
Turning to spending.
<unk> decreased 3% year over year to 17, <unk> hundred 23 at the end of this quarter due to normal attrition and the slower hiring rate as we strategically replaced and enhanced key positions with an eye towards operational efficiency and our pays off.
Patient.
In Q2, Australia, China and.
non-GAAP cost of revenue exclusive of depreciation and amortization was 39% of revenue compared to 40% in the second quarter of 2020 two.
Our product mix has continued to shift.
An increasing mix of value added services revenue, however, additional head count efficiencies offset the related expenses for third party service providers.
Now turning to non-GAAP operating expenses.
Oh yea over year dollar increase in operating expenses for Q2 is primarily due to employee costs associated with retaining talent, particularly in specialized areas such as R&D.
These costs were.
Partially offset by a modest decline in <unk>.
Ending head count on both a year over year basis, and on a sequential quarterly basis.
As Shane indicated we have taken steps to optimize head count, while maintaining or increasing our pace of innovation.
On a percent of revenue bases, combined sales and marketing R&D and G&A fell to 51% in the second quarter of 2020.
From 54% in the second quarter of 2022.
As a percentage of revenue sales and marketing expenses decreased from 21%.
At 218 per se in the current year.
R&D expenses.
<unk> revenue increased from 19% in Q2 last year to 22% this year.
Shane said, they continue to invest in expanding our product offerings.
Clothing innovation in AI, and polar realm and capabilities that help us move up market, especially at the affordable housing and further expansion of the stock market place.
G&A expenses as a percentage of revenue decreased from 13% in the prior year.
7% in the second quarter of 'twenty.
Our stock based compensation expenses.
The sensation of revenue, but lower than usual at seven 3% in the second quarter of 'twenty 'twenty compared.
Compared to eight 5% in the prior year due to forfeitures associated with changes in our leadership team.
Overall I am pleased that our non-GAAP operating margin in the second quarter of this year imposed to fix my fault per cent compared to 1% in the second quarter of last year.
Free cash flow this quarter was approximately four 2% compared to negative one 2% in the same quarter last year.
Turning to the balance sheet.
And then the second quarter with $164 million in cash cash equivalents and investment securities.
If you have some shame on July 31st should we no longer need the E check transaction fees and this will enable us to continue to invest in a platform that our customers can continue to trust as a result, we are increasing our projected full year 2023 revenue guidance.
Range to 592 million to $598 million the midpoint of this range represents full year growth rate of 26%.
The change in guidance is primarily due to the new pricing on E check transaction and as I said earlier.
Seems that high growth in the use of cards for payments, but moderate gradually in 2023.
Regarding the seasonality you know value added services.
It's done with prior years, our property managers experienced an expansion of new tenants in the third quarter.
They typically result in higher demand for at least mitigation and screening services in the third quarter than in the fourth quarter. These value added services are seasonally slower.
We expect such seasonality to continue in 2023.
They expected 2023 cost of revenue.
Depreciation and amortization.
Notice that Q2 2023.
But decreased slightly as a percentage of revenue due to changing product mix some asset value added services revenue.
As a result of our increase in revenue guidance and operating efficiencies from moderation hiring we're pleased to increase our full year non-GAAP operating margin guidance.
Five 5% six 5%.
And free cash flow is projected to grow from 6% to 7%.
Basic weighted average shares outstanding are expected to be approximately 36 million.
For the full year guidance and second quarter results show that our growth strategies.
And we are improving profitability for a sustainable business. This is an exciting time to be at that full working with our customers and employees on building industry, leading real estate platform well being at the forefront of new technologies like AI.
You for joining us on this journey and for participating in our call today.
Operator.
I'll close the call today.
Thank you ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.
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