RealPage Management Discusses Q4 2012 Results - Earnings Call Transcript

Feb.20.13 | About: RealPage (RP)

RealPage (NASDAQ:RP)

Q4 2012 Earnings Call

February 20, 2013 5:00 pm ET

Executives

Rhett Butler

Stephen T. Winn - Founder, Chairman, Chief Executive Officer and President

Timothy J. Barker - Chief Financial Officer, Principal Accounting Officer and Treasurer

Analysts

Jeffrey L. Houston - Barrington Research Associates, Inc., Research Division

Robert P. Breza - RBC Capital Markets, LLC, Research Division

Michael B. Nemeroff - Crédit Suisse AG, Research Division

Brendan Barnicle - Pacific Crest Securities, Inc., Research Division

Justin Furby

Operator

Good day, ladies and gentlemen, and welcome to the RealPage Fourth Quarter 2012 Financial Results Conference Call. [Operator Instructions] As a reminder, this call may be recorded.

I would now like to introduce your host for today's conference Mr. Rhett Butler, Director of Investor Relations. You may begin.

Rhett Butler

Thanks, Ashley. Good afternoon and welcome to the RealPage financial results conference call for the fourth quarter and year ended December 31, 2012.

With me on the call today is Steve Winn, our Chairman and Chief Executive Officer; Tim Barker, our Chief Financial Officer and Treasurer; Bryan Hill, our Senior Vice President of Finance.

In our remarks today, we will include statements that are considered forward looking within the meaning of securities laws. In addition, management may make additional forward-looking statements in response to your questions. Forward-looking statements are based on management's current knowledge and expectations of today, February 20, 2013, and are subject to certain risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. A detailed discussion of such risks and uncertainties is contained in our most recent quarterly report on Form 10-Q filed with the SEC on November 9, 2012, its registration statement on Form S-3ASR and related prospectus supplement previously filed with the SEC on September 13, 2012.

RealPage undertakes no obligation to update any forward-looking statements except as required by law. Finally, please note that on today's call, we will refer to certain non-GAAP financial measures, in which we will exclude certain noncash and nonrecurring items depending on the measure, such as acquisition-related deferred revenue adjustments, depreciation and asset impairments, amortization of intangible assets, net interest expense, income tax expense or benefit, stock-based compensation expense, any impact related to Yardi Systems litigation, stock registration costs and acquisition-related costs.

We believe that these non-GAAP measures of financial results provide useful information to investors regarding certain financial and business trends relating to our financial condition and results of operations. Please refer to today's press release announcing our financial results for the fourth quarter ended December 31, 2012, available on the Investor Relations portion of our website for a reconciliation of these non-GAAP performance measures to our GAAP financial results.

With that, I hand the call over to Steve Winn.

Stephen T. Winn

Thanks, Rhett. Today, I will briefly review our company's fourth quarter performance, provide an update on the industry, discuss 2012 operational highlights and give you an outlook for 2013.

Fourth quarter performance was solid with non-GAAP on demand revenue growing 22% compared to the prior year period. Non-GAAP total revenue grew 20% over the same period and adjusted EBITDA grew 34%. We ended the fourth quarter with $8.1 million on demand units, representing an 11% growth from the prior year. Revenue per unit, or RPU, grew 10% over the same period last year. Annual customer value was $333 million, an increase of 23% compared to the prior year quarter.

I'd like to take a moment to discuss the macro backdrop of the rental housing industry, as well as the general leasing environment that we're seeing. The 2011 American Housing Survey was recently released and indicates that rental housing units have increased on a net basis, any new construction less obsolescence by 3.3 million units from approximately 39.7 million to 43 million. Multifamily units are up 700,000 units from 14 -- excuse me, 17.4 million to 18.1 million and single-family units are up 2.6 million units from 22.3 million to 25 million. We've been using 39.7 million units in our discussion of the overall market size and are now adjusting that to reflect the margin larger market opportunity. We now estimate that our total addressable market is $9.6 billion of which we are approximately 3.4% penetrated based on our total ACV opportunity.

The rental housing market continues to be solid according to MPF Research, which is an independent division of RealPage, apartment occupancy for the fourth quarter of 2012 came in at 94.9% compared to 94.7% in the prior year period. Annual revenue growth for the rental housing market, which includes the shifts in both occupancy and effective rents was at 3.2% as of the fourth quarter. This reflects the normal slowdown in leasing activity from the third quarter to the fourth quarter combined with the moderation of rent growth that MPF Research has talked about throughout the year.

Ongoing construction for the 100 largest markets in the U.S., which are expected to be completed in the next 18 to 24 months, was 224,000 units at the end of the fourth quarter. Development activity continues to accelerate and MPF expects ongoing construction to reach approximately 275,000 units during 2013.

Next, there are indications that a recovery is starting to emerge in the for-sale market. The effects of this are sometimes negatively portrayed as it relates to rental housing, so I'd like to discuss the demand drivers in rental housing.

Historically, apartment demand was tied to job formation, and to some extent, the for-sale market. However, current apartment demand is operating independent of these 2 variables, while new home sales and foreclosures certainly influenced the number of prospects coming into and out of the rental stream, we see excess demand coming from a significant influx of Gen Y renters and pent up demand from young adults who have been living with mom and dad because of the recession.

We believe this robust demand, combined with rental housing supply level that is below historical norms will continue to drive the rental housing market. However, keep in mind that our products and solutions possess ROIs obtainable in both favorable and unfavorable rental housing environments.

Looking at overall apartment demand, another factor is the general leasing environment, which includes leasing velocity and renewal rates. If you'll recall, we discussed increased renewal rates in 2011, which we believe resulted in less move-ins as property owners focused on retention. This lower level of move-ins impacted some of our product centers in 2011 which were sensitive to leasing velocity.

Our outlook for 2012 included these lower level of leasing activity and it was in line with our expectations as we exited the year. Our guidance for 2013 includes no major changes in the renewal rates for 2013, but the same level of leasing activity as we experienced in 2011 and '12.

Overall, 2012 was a solid year across all of our metrics. Non-GAAP on demand revenue grew 28% compared to the prior year and total non-GAAP revenue grew 25%. Adjusted EBITDA grew 30% compared to the prior year, resulting in approximately 100 basis points of margin expansion, which is in line with our expectations at the beginning of 2012. Cash flow from operations continues to grow and exited 2012 with 19% growth compared to the prior year.

During the year, all of our product families grew with exceptional growth in some areas. YieldStar showed clients that the deployment of a statistical-based pricing solution can consistently deliver 3% to 5% better revenue performance over market, in both good markets and bad markets, and continued to build its statistical modeling advantage by utilizing what we believe is the largest, most accurate and most current database of leasing transaction data in the U.S.

Our payment solution delivered significant growth and hit another milestone in the fourth quarter with a run rate of $14 billion of rental payments processed. We also expanded our payment solution capabilities with the introduction of e-money order, which you can learn more about on our Payments page of our website and the ability to take rent payments over the phone. This focus on delivering different types of electronic payments for customers resulted in higher yielding forms of transactions.

Propertyware continued to attack the single-family rental space resulting in significant revenue growth. During the year, Propertyware unveiled a mobile version, which provides single-family property owners with immediate access to valuable property management data directly from their iPhone or iPad.

Our Senior Living solution also continued to grow significantly. During the year, we launched the industry's first enterprise-wide Senior Living solution that integrates Care Management, community management and marketing management into a single offering. With our unique solution, Senior Living property owners can provide better service to their residents while optimizing revenue and expense.

In addition in early 2013, one of the largest operators of senior communities in the U.S. selected RealPage to provide management of all inbound marketing prospect calls. Servicing as the central leasing office, RealPage senior contact center will handle all of their inbound marketing responsibilities from answering leasing calls and e-mails to scheduling site appointments and tours to realtime management and tracking of prospect leads.

2012 was also a year of investment in LeaseStar. I believe we are getting closer to where we need to be in this space with the launch of our new online leasing design services, marketing services and the LeaseStar suite during 2012. The LeaseStar suite and online leasing both experienced new sales momentum exiting the year. Some of the software around LeaseStar is also experiencing solid growth like our LeaseStar syndication and posting services, lead tracking and management and LeaseStar Social. For the fourth quarter, total LeaseStar revenue grew organically in the midteens and we expect this growth to accelerate in 2013.

Our strategy for 2013 will continue to focus on innovation for all of our solutions and continued investment in LeaseStar. The investment will focus on expanding content for our LeaseStar website's posting and listing services, as well as ramping up the implementation support and sales infrastructure for LeaseStar, affording us the opportunity to accelerate penetration of this suite into our install base of 8.1 million units. The enthusiastic response we're getting from clients who want to reduce cost by shifting advertising spend away from expensive internet-listing services to owner-branded marketing strategies offered by LeaseStar is extremely encouraging, so we are increasing our investment in LeaseStar, which may have a slight impact on the growth of our EBITDA margins in 2013, as it did in 2012.

As we progress through 2013, our core operating strategy will be to expand ACV through increasing our rental housing unit footprint and cross-selling additional solutions into our install base resulting in incremental RPU. From actively marketing dozens of solutions that optimize net income for property owners and managers, our recurring revenue stream is extremely diversified and we are not reliant on any single solution. It is precisely this, a broad integrated platform of software solutions, that is our greatest strength and we will leverage it again 2013.

With that, I'd now like to hand the call over to Tim.

Timothy J. Barker

Thanks, Steve. During this discussion, some of the financial measures I would use are non-GAAP measures internally used to manage our operations. Our earnings press release issued earlier today provides a reconciliation of these non-GAAP measures to the most comparable GAAP item.

Total revenue for the fourth quarter was $85.7 million, an increase of 20% compared to the fourth quarter last year. The details on the components of revenue are as follows: on demand revenue for the fourth quarter was $81.8 million, an increase of 22% compared to the fourth quarter last year. Organic on demand revenue growth was 21% during the same period. ACV, or annual customer value, grew 23% during the fourth quarter to $333 million compared to the prior year quarter. Organic ACV was 21% during the same period. We ended the quarter with 8.1 million units, representing an increase of 11% compared to the same quarter last year. Excluding acquisitions, we added approximately 744,000 unique units or an increase of 10% compared to the prior year period. Based on average units of 8 million, RPU for the fourth quarter was $41.05, an increase of 10% compared to the prior year quarter.

On premise revenue for the fourth quarter was $1.3 million, a decrease of approximately $220,000 from the same period last year. Professional and other revenue for the fourth quarter was $2.6 million, a decrease of $270,000 compared to the same period last year and represents approximately 3% of total revenue.

We will now turn to the discussion to gross profit, operating expense and profitability. Our gross profit for the fourth quarter was $57.4 million or 67% of revenue compared to gross profit for the fourth quarter last year of $46.9 million or nearly 66% of revenue. Margin expansion was primarily the result of leverage in our core multifamily business.

Total operating expense for the fourth quarter was $38.5 million compared to $32.6 million in the fourth quarter of last year. As a percentage of revenue, operating expenses were 45%, representing a decrease of 90 basis points compared to the prior year, driven by leverage and product development and general and administrative expense. The details on the expense components are as follows: Product development expense for the fourth quarter was $11.6 million, an increase of 9% compared to the fourth quarter last year. The modest increase is primarily attributed to incremental development costs related to emerging products. Product development expense declined 140 basis points to 13.6% compared to 15% last year.

Sales and marketing expense for the fourth quarter was $16.6 million, an increase of 26% compared to the fourth quarter last year. The increase is primarily attributable to increased sales force headcount and related compensation. Compared to the prior year quarter, we added 39 sales FTEs aggregating to a total of 202 sales reps. Sales and marketing expense as a percent of revenue was 19.3% compared to 18.4% last year.

General and administrative expense for the fourth quarter was $10.3 million, an increase of 16% compared to the fourth quarter last year. The year-over-year increase is primarily related to higher costs associated with our administrative support functions driven by overall company growth. General and administrative expense as a percent of revenue was 12% compared to 12.4% last year.

Operating income for the fourth quarter was $17.3 million or 20% of revenue compared to the fourth quarter last year of $12.6 million or 18% of revenue.

Net income for the fourth quarter was $10.2 million or $0.14 per diluted share compared to $7.2 million or $0.10 per diluted share in the fourth quarter last year. Adjusted EBITDA for the fourth quarter was $20.8 million or approximately 24% of revenue compared to $15.6 million or 22% of revenue in the fourth quarter of last year.

Now turning to the balance sheet and cash flow metrics. Cash flow from operations for the year ended December 31, 2012, was $58.4 million compared to $49.2 million in the prior year or 19% growth. Primary uses of cash were $18.8 million in capital expenditures and $22 million in acquisition-related payments. In addition, we paid down $40.4 million in debt.

Cash and cash equivalents were $33.8 million at December 31, 2012, compared to $51.3 million at December 31, 2011. We ended the quarter with accounts receivable of $51.9 million. DSO for the fourth quarter was 52 days. Total term debt was $10 million with approximately $140 million in availability on our revolving credit facility.

Cash from operations for the fourth quarter was $17.3 million compared to $19.5 million in the fourth quarter of last year. The year-over-year decrease is primarily related to timing in our payables. Capital expenditures for the fourth quarter were $3.2 million.

Next I'd like to give you our outlook for the first quarter and the full year 2013. For the first quarter ended March 31, 2013, we expect the following: non-GAAP total revenue in the range of $88 million to $89.5 million, reflecting total growth of 18% to 20% and this suggests on demand growth of 20% to 22%; adjusted EBITDA in the range of $20 million to $21 million, reflecting growth of 24% to 28%; non-GAAP net income in the range of $9.6 million to $10.2 million or $0.13 to $0.14 per diluted share.

The year ended December 31, 2013, we expect the following: non-GAAP total revenue in the range of $382 million to $390 million, reflecting total growth of 19% to 21% and on demand growth of 20% to 22%; adjusted EBITDA in the range of $90 million to $93 million, reflecting growth of 23% to 27%; non-GAAP net income in the range of $43.9 million to $45.7 million or $0.57 to $0.60 per diluted share. We expect capital expenditures in the range of $20 million to $22 million.

With that, I will turn the call over to Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Jeff Houston of Barrington Research.

Jeffrey L. Houston - Barrington Research Associates, Inc., Research Division

The first is out of the RPU of $41.05, how much of that is paid by the owner versus the tenant and versus the -- maybe a third party?

Timothy J. Barker

We don't disclose how much of the $41. But of our product centers, products like renters insurance, be paid by the tenant, in our OpsTechnology product, there are some fees paid by suppliers. In our screening product, in effect there's an application fee that's paid by the residents. In our Velocity billing services, there are some fees that can be paid by the resident. So our point in the past has been that of the $330 RPU -- available RPU amount, that doesn't all come from the owner, it comes from various people. But we haven't disclosed the mix in the $41.

Jeffrey L. Houston - Barrington Research Associates, Inc., Research Division

Got it. And then separately, revenue in the quarter looks like it was $1 million below where the Street was although it was in line with guidance. Was there any particular product or segment of your customers that came in below plan?

Timothy J. Barker

No. The revenue is in our range of guidance. We talked, as we exited Q3, that LeaseStar was growing in the midteens. It did not accelerate, it's actually down a little bit. That was expected based on some of that revenue is in the variable transaction fees, which is part of the Q4 seasonality. Also on that variable piece, it's related to leasing velocity. That came in at our expectations, but again that was lower and we didn't experience any uptick in that. And then not a material part of our revenue stream but as you heard both on premise is down and Professional Services were down. So that could be $0.5 million to $1 million of revenue, if those are flat to slightly up on the other revenue side.

Operator

Our next question is from Robert Breza of RBC Capital Markets.

Robert P. Breza - RBC Capital Markets, LLC, Research Division

Tim, just as you look at the full year range, the variance between the $382 million and the $390 million, what would be the bigger influence going from the lower end of the range to the higher end of the range? And how should we think also about -- like the shape of the year kind of going forward from just a seasonal perspective?

Timothy J. Barker

The range suggest organic on demand growth of 20% to 22%. That is a narrowing of what we've given in the past which has been 20% to 25%. Based on our current visibility and the performance in 2012, we think that's an appropriate range. We also think that narrowing is appropriate based on the size of our revenue stream growing. That doesn't suggest any improvement in leasing Velocity and it doesn't suggest improvement in LeaseStar. So LeaseStar momentum and improvement would move you to upper end. Any movement in leasing velocity would help even though that's kind of 1 point to 1.5 points type of movement, and then there is general sales and implementation of all our products. We're seeing strong bookings across all areas but what moves the needle is something like a LeaseStar that's growing midteens moving up closer or above the average.

Robert P. Breza - RBC Capital Markets, LLC, Research Division

And maybe just as a follow-up I know in the past we've talked about the bundling strategy that you guys are going to be kind of taking on. Maybe Steve if you could comment on how that's kind of manifesting itself in the sales force.

Stephen T. Winn

You're probably referring to the LeaseStar bundle, although we do bundle many products, so that's not the only one. The LeaseStar bundle is what we call the LeaseStar suite, includes website, the syndication product, the posting product, the social product and a new version of our listing service called LeaseStar Places. That's all been packaged together as a suite, and I would say, a significant percentage of the sales activity that we're looking at is really suite-based interest because there is an economic advantage to buying the suite versus each of the individual components. So we're optimistic that the suite will be the primary driver, although customers can pick and choose out of the suite if they want to.

Operator

Our next question is from Michael Nemeroff of Credit Suisse.

Michael B. Nemeroff - Crédit Suisse AG, Research Division

Just to follow-up on the LeaseStar issue from last quarter. Was the functionality that was delayed or that caused the miss in Q3, was that released in Q4 as you guys guided to after -- on last quarter's call?

Stephen T. Winn

The released it on the exact day that we planned to release it, so we were very happy with our product development team. It was released late in the fourth quarter. So it's, obviously, going to take some time for that product to start to be implemented. There is a lag there. But yes, we did release online leasing and we've got very positive feedback from our customers.

Timothy J. Barker

We've seen new booking, new sales momentum in our LeaseStar product suite.

Michael B. Nemeroff - Crédit Suisse AG, Research Division

So the 17% LeaseStar growth in '12, given some of the new functionality that you released late in Q4, you would expect that to accelerate in 2013, for the LeaseStar's product specifically?

Timothy J. Barker

We have high hopes of LeaseStar accelerating in 2013.

Michael B. Nemeroff - Crédit Suisse AG, Research Division

And then, Tim, on the guidance of 20% to 22%, understanding that the range was brought down just -- you narrowed a little bit, what would need to happen with sales execution to only achieve the low end, the 20% on demand revenue growth? What kind of a slowdown in new bookings or deceleration would you have to see? How come -- I guess, I'm trying to ask how comfortable are you that it's going to be at least 20%?

Timothy J. Barker

Our target operating model is consistent. We've been 20% to 25%, 20% organic on-demand growth and we've consistently performed in that range. This year -- for the year is 21.5%. It hit a low in Q3 and came back in Q4. So we feel good about the low end of our number. And obviously, narrowing the range from a 25% down to 22% gives you more comfort also.

Michael B. Nemeroff - Crédit Suisse AG, Research Division

And then just lastly, Steve, competitively, if you could just talk about the landscape. Are there any smaller competitors that may be taking share in certain point solutions? Or are there -- how is it going with Yardi now that the settlement is out there? Is there any change competitively?

Stephen T. Winn

There's not a material change. There's obviously lots of competitors, particularly in the marketing suite. I think there's a lot of companies that see the same opportunity that we do. So there's plenty of competition to go around. But I haven't seen a material change. And I do think the advantage that RealPage brings to the table is our ability to offer integrated, very broad suites that can compete effectively against competitors that may only have 1 or 2 solutions.

Operator

[Operator Instructions] Our next question is from Brendan Barnicle of Pacific Crest.

Brendan Barnicle - Pacific Crest Securities, Inc., Research Division

Tim, when we look at the 20% to 22% growth for next year, is there any difference in the split between unit growth and RPU growth than what we've seen this past year? Would it still be fairly even? Or do you any change there and what you're expecting to grow faster?

Timothy J. Barker

No. We've been pretty consistent at growing units in that 9% to 11%. And then the rest coming from RPU and the compound of that gets you to that 22%. So I would expect the same thing, say, 8% to 10% unit growth and the rest from RPU. So we're not seeing any changes there.

Brendan Barnicle - Pacific Crest Securities, Inc., Research Division

And also when you think about the earnings for the year on a quarterly basis, any reason -- anything that will be different this year in terms of the quarterly flow or should it look similar to what we saw this past year with sort of progressively getting slightly more earnings as you move through the year?

Timothy J. Barker

Yes, it's progressive. It's similar to past years. What happens in Q1 is a reset in my payroll taxes and I had some raises, and then in Q3, I have my user conference. But other than those items, it does build the way you're talking -- the way you see it.

Operator

Our next question is from Laura Leatherman of William Blair & Company.

Justin Furby

It's actually Justin, for Laura. Just a couple of questions. I guess, first, I think you mentioned this, Tim, but it looks like you're bringing in EBITDA expansion guidance to a little bit below your target, was it to say that there's something different, more demand that you're now seeing in the LeaseStar business or why exactly have you made the decision over the last quarter to put more money in that from an investment standpoint? Or are there other pieces of the business as well that you're invested in, more so than you had initially thought?

Timothy J. Barker

It's mainly LeaseStar, and it's really in sales and marketing and implementation. We're seeing their ramping at the bookings and we want to go after that important market. But I think the other thing that you're seeing is with a target operating model of organic growth of 20% to 25% and we're marching our adjusted EBITDA to a target of 30% to 35%. When we talk about the opportunity to move that 200 to 400 basis points a year, obviously, the 400 comes at the higher growth and the 200 comes at the lower. And so the obvious point there is when you're guiding revenue of 20% to 22%, it starts off at the lower expansion number and the investments are on top of that. So we're showing expansion of anywhere from 100 to 150 basis points and based on revenue growth of 20% to 22%.

Justin Furby

Okay. Can you comment at all in terms of we're 1.5 months into the year, what you're seeing with LeaseStar thus far. And if you -- maybe you could get a little bit more precise in terms of your expectations with that business as it relates to your 20% to 22% on-demand guidance for the year?

Timothy J. Barker

We said that bookings are accelerating as we exit the year. We don't give -- we have 51 products. We don't give product-level pricing. We don't give product-level performance. We sometimes give highlights. Our guidance of 20%, 22% is in line with what we performed at this year and LeaseStar was less than the total growth average. So we're not reliant on any one product. We have a broad suite, my ACV of $333 million heading into the year provides a good visibility. So we're going to hit all areas to drive our growth.

Justin Furby

Okay. So you're not expecting -- I mean, you are expecting acceleration but not necessarily inside of your guidance that you're offering today.

Timothy J. Barker

I'm not relying on acceleration for hitting my guidance.

Justin Furby

Okay. And then can you just comment quickly on the RPU. It looked like it dipped down a little bit sequentially. Is that -- any commentary there would be helpful.

Timothy J. Barker

Q4 is seasonally low on the leasing side. So you saw it last year, we had about a $2 million impact to revenue. It's similar this year. So that's where you get the downtick. That's the majority of the downtick. It's 10% growth year-over-year which is a nice growth.

Operator

Thank you, ladies and gentlemen for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.

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