RealPage (RP) Q2 2013 Earnings Call August 1, 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
Robert P. Breza - RBC Capital Markets, LLC, Research Division
Patrick D. Walravens - JMP Securities LLC, Research Division
Lauren Choi - JP Morgan Chase & Co, Research Division
Brendan Barnicle - Pacific Crest Securities, Inc., Research Division
Nandan Amladi - Deutsche Bank AG, Research Division
Michael B. Nemeroff - Crédit Suisse AG, Research Division
Keane McCarthy
Jeffrey L. Houston - Barrington Research Associates, Inc., Research Division
Operator
Good day, ladies and gentlemen, and thank you for standing by, and welcome to the RealPage Second Quarter 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, today's conference may be recorded. It's now my pleasure to the floor over to Rhett Butler.
Please go ahead, sir.
Rhett Butler
Thank you. Good afternoon, and welcome to the RealPage financial results conference call for the second quarter ended June 30, 2013.
With me on the call today is Steve Winn, our Chairman and Chief Executive Officer; and Tim Barker, our Chief Financial Officer and Treasurer.
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 as of today, August 1, 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 annual report on Form 10-K, previously filed with the SEC on February 27, 2013, and our most recent quarterly report on Form 10-Q filed with SEC on May 7, 2013.
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 or 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 second quarter ended June 30, 2013, 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'll turn the call over to Steve.
Stephen T. Winn
Thanks, Rhett, and good afternoon, everyone. Today I will briefly review our second quarter performance, provide an update on the industry, discuss our operational highlights and provide a brief update on our recent user conference.
The second quarter performance was solid and underscores continued execution against our goals of significantly growing our recurring revenue base and improving profitability levels. Specifically on-demand revenue grew 21% and non-GAAP total revenue grew 20%, both compared to the second quarter of last year. Adjusted EBITDA grew 22% compared to the same period last year.
We ended the second quarter with 8.6 million on-demand units, representing 14% growth from the prior year period. Revenue, or RPU -- revenue per unit, or RPU, grew 6% over the same period last year. And finally, annual customer value was $365 million, an increase of 21% compared to the prior year quarter.
The rental housing market continues to show strong demand and accelerating rent growth. According to MPF Research, an independent division of RealPage, apartment occupancy for the second quarter of 2013 came in at 95.3%, up compared to 95.2% 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 3.1% as of the second quarter, up from 2.6% from the first quarter of 2013.
Ongoing construction for the 100 largest markets in the U.S., which are expected to be completed within the next 18 to 24 months, was approximately 297,000 units at the end of the second quarter, which has now slightly surpassed the norm of approximately 275,000 units that was seen from the late 1990s through 2008, before the recession brought the volume to a post-World War II low by the end of 2010.
Moving on to our financial performance for the quarter, the top solutions that drove the most incremental revenue growth in absolute dollars were LeasingDesk, YieldStar, OneSite, Payments and Velocity. From a percentage increase, the top solutions that drove the most incremental growth were our search engine optimized property websites with online leasing functionality, and lead-to-lease, which are both part of the LeaseStar suite, SeniorLiving.Net, Propertyware, YieldStar and Payments. This continued performance, combined with strong growth from our emerging solutions, underscores the strength of our diversified product portfolio and that we are thinly penetrated against our overall opportunity.
Especially encouraging is the strong performance of our organic lead generation solutions like lead-to-lease and SEO-enabled websites with online leasing and our social marketing solutions. These solutions are helping to drive LeaseStar growth despite continued revenue deceleration from the traditional portion of our MyNewPlace iOS.
Interestingly, this quarter is the first quarter where revenue from organic lead generation channels represents a larger portion of total LeaseStar revenue than inorganic lead generation channels. This precisely mirrors what we believed would happen as customers are shifting more dollars -- more marketing dollars to organic channels.
I believe there's still untapped value around the MyNewPlace asset, given the traffic it generates and the overall brand recognition that has been built. We will continue to uncover ways to leverage this asset in the quickly evolving competition for rental housing marketing dollars. But I'm confident we are well positioned to take a significant share of the marketing dollars being allocated to more organic channels of lead generation.
Moving on to our user conference, the conference, which was held in Denver, was a great success. Much of the conference was centered around some near-term tactical and long-term strategic improvements to our portfolio of solutions. A key example of near-term improvement to our platform was the release of our single sign-on functionality, which allows customers to access RealPage's specific applications with a single password. And in addition, through the extension with Microsoft Active Directory, customers can also log into non-RealPage applications with the same password.
Another example of near-term improvements to our ecosystem is the Smart Leasing Tablet, which enables leasing agents to detach from their desk and lease apartments from anywhere on the property. This functionality highlights our mobile strategy offering clients tremendous flexibility across mobile devices when accessing our solutions, resulting in increased productivity.
We also announced some long-term product enhancements that are moving into beta tests later this year. YieldStar is releasing the next generation of revenue management, which really begins to factor in property yields in addition to revenue.
Three-dimensional, or 3D optimization, is the idea that pricing, screening and marketing should work in unison, providing customers transparency into their relative value to one another with respect to lease acquisition. The goal for most property owners and managers is to optimize revenue and reduce exposure as vacancy is typically one of the largest drivers of net operating income.
In order to look at this problem the right way, you need to optimize the way pricing, marketing and screening work together. Which lever will produce the most revenue? Which will be the quickest to pay off and the most sustainable over the long term? Each of these levers has an opportunity and a cost. A single harmonized solution is the key to fully optimizing revenue and managing risk for property owners and managers.
Revenue Forecaster is the second major product we expect to be released by YieldStar later this year. Revenue Forecaster enables owners to forecast revenue based on the operating characteristics of each property and also leverages YieldStar technology, coupled with intermediate and long-term economic forecasts provided by MPF Research.
With Revenue Forecaster, owners can gain significant insight into how revenue is going to perform and, more importantly, how sensitive the revenue forecast is to each variable that influences it.
Finally, revenue forecaster will provide the ability to continually update a customer's revenue forecast as YieldStar and MPF update their models each quarter, resulting in the increased accuracy as the year progresses.
One last new product that we announced at the user conference is a business intelligence offering called Performance Analytics, which allows property owners and managers to compare the performance of their assets against benchmarks of best practices, along detailed metrics of revenue, expense and risk. This product should allow owners to quickly determine how they are performing, relative to market, and making adjustments in those areas that enable the most significant uplift to net operating income.
Both Revenue Forecaster and Performance Analytics are tools that will make the multifamily industry more transparent and should be a great interest to institutional investors who may have avoided the multifamily real estate sector in the past due to the lack of robust solutions that measure property performance in real time.
In summary, financial performance for the quarter was solid. We have the most integrated and comprehensive platform in the industry that enables property managers and owners to outperform their peers. We continue to build that advantage with further innovation that simplifies and optimizes property operations, resulting in additional value to our customers.
With that, I'll turn the call over to Tim.
Timothy J. Barker
Thanks, Steve. During this discussion, some of the financial measures I will 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 second quarter was $94.5 million, an increase of 20% compared to the second quarter last year. The details on the components of revenue are as follows: On-demand revenue for the second quarter was $90.8 million, an increase of 21% compared to the second quarter last year; ACV, or annual customer value, grew 21% during the second quarter to $365 million compared to the prior year quarter.
We ended the quarter with 8.6 million units, representing an increase of 14% compared to the same quarter last year. Excluding units added through acquisition, we added 153,000 unique units or an increase of 11% compared to the prior year period. Based on average units of 8.6 million, RPU, or revenue per unit, for the second quarter was $42.34, an increase of 6% compared to the prior year.
On-premise revenue for the second quarter was $1 million, a decrease of $250,000 from the same period last year. Professional and other revenue for the second quarter was $2.6 million, an increase of approximately $20,000 compared to the same period last year.
I will now turn the discussion to gross profit, operating expense and profitability. Our gross profit for the second quarter was $61.3 million or 64.9% of revenue, compared to gross profit for the second quarter last year of $51.7 million, or 65.6% of revenue. The impact to gross margin was primarily related to investments in our implementation infrastructure.
Total operating expense for the second quarter was $42.1 million compared to $36.1 million in the second quarter last year. As a percentage of revenue, operating expenses were 44.6%, representing a decrease of 120 basis points compared to the prior year, driven primarily by leverage in product development expense. The details on the expense components are as follows: Product development expense for the second quarter was $11 million, up modestly compared to the second quarter last year. Product development expense as a percent of revenue declined 190 basis points to 11.7% compared to 13.6% last year. Sales and marketing expense for the second quarter was $19.7 million, an increase of 29% compared to the second quarter last year. The increase is primarily attributable to increased sales headcount.
Compared to the prior year quarter, we added 31 sales FTEs aggregating to a total of 213 sales reps. Sales and marketing expense as a percent of revenue was 20.8% compared to 19.3% last year.
General and administrative expense for the second quarter was $11.5 million, an increase of 13% compared to the second quarter last year. The year-over-year increase is primarily related to general headcount growth across the company. General and administrative expense as a percent of revenue decline 70 basis points to 12.1% compared to 12.8% for the same period last year.
Operating income for the second quarter was $17.7 million or 18.7% of revenue, compared to the second quarter last year of $14 million or 17.7% of revenue. Net income for the second quarter was $10.4 million or $0.14 per diluted share, compared to $8.2 million or $0.11 per diluted share in the second quarter of last year, reflecting 28% growth -- 28% growth and 27% growth, respectively.
Adjusted EBITDA for the second quarter was $21.1 million or 22.3% of revenue compared to $17.4 million or 22% of revenue in the second quarter of last year, reflecting 22% growth and 30 basis points of margin expansion. Adjusted EBITDA margin expansion for the 6 months ended June 30, 2013, was 80 basis points compared to the prior year period.
Now turning to balance sheet and cash flow metrics. Cash flow from operations for the second quarter was $17.4 million and was impacted by the timing of working capital items. Cash and cash equivalents were $34.3 million at June 30, 2013, compared to $33.8 million at December 31, 2012.
We ended the quarter with accounts receivable of $58.9 million. DSO for the second quarter was 56 days.
Next I'd like to give our outlook for the third quarter and for the full year ended December 31, 2013. For the third quarter ended September 30, 2013, we expect the following: Non-GAAP total revenue in the range of $99 million to $100 million, reflecting total growth of 19% to 20% and suggests on-demand growth of 21% to 22%; adjusted EBITDA in the range of $23 million to $24 million, reflecting growth of 23% to 28%; and non-GAAP net income in the range of $11.3 million to $12 million or $0.15 to $0.16 per diluted share.
For the year ended December 31, 2013, we expect the following: Non-GAAP total revenue in the range of $385 million to $390 million, reflecting total growth of 20% to 21% and suggests on-demand growth of 21% to 22%; adjusted EBITDA in the range of $90 million to $93 million, reflecting growth of 23% to 27%; and non-GAAP net income in the range of $43.9 million to $45.7 million or $0.58 to $0.60 per diluted share.
With that, I'll turn the call over to Q&A.
Question-and-Answer Session
Operator
[Operator Instructions] And our first question will come from the line of Robert Breza with RBC Capital Markets.
Robert P. Breza - RBC Capital Markets, LLC, Research Division
Tim, obviously, we saw a step-up really nice with the revenue per unit. I was wondering if you could talk more or dive into that what drove that up. It was a really nice step-up.
Timothy J. Barker
Yes. We continued to see the 2 main drivers of our recurring revenue, which is represented through ACV, being our units continue to grow at a nice pace. It's 14% organically; it was 11%. The other half of it is penetration into our products, and you see that through RPU. We gave a couple of metrics. Our top 100 ACV customers, they continue to grow. Their growth has been averaged over 30% since we came public. That's been for 12 straight quarters. So those top customers are driving it. Their ACV is up to $56 per unit for those top guys. We also give our top 50 RPU customers. These are guys that are most penetrated with our product suite. Those guys are using $133 per unit. And last quarter, that was $126.5, so we're seeing continued adoption of our products with our customer base. That group now has a range that's up into the $214. So that's top RPU customers continue to grow at ACV and in RPU penetration. So it's what we've expected all along. We just continued cross-selling into our base.
Robert P. Breza - RBC Capital Markets, LLC, Research Division
Maybe just as a follow-up. I mean, you mentioned the cross-selling being a key success factor for you. Is there any 1 or 2 products sets that you're seeing additional uptake that customers are taking more? Or is it just a refined cross-selling execution in the sales force?
Timothy J. Barker
Yes, Steve tried to highlight some of those in his script. But it that continues to be YieldStar, Payments. Those are the 2 primary drivers. But it's some of the emerging products.
Operator
Our next question will come from Pat Walravens with JMP Securities.
Patrick D. Walravens - JMP Securities LLC, Research Division
Tim, I may have missed it, but did you give us the organic on-demand revenue growth rate?
Timothy J. Barker
No, I gave the total, which was 21%. The run rate of the acquisitions would have impacted it 1%, so it would've been 20%.
Patrick D. Walravens - JMP Securities LLC, Research Division
Okay. And Steve, it's interesting because the space is attracting a lot of interest recently, and I think, from sort of venture investors around a number of these private companies that are showing pretty high growth rates. And I'm wondering if you could address whether you feel your competitive situation has changed at all. I mean, did it use to be just you guys and Yardi, and is it getting more crowded?
Stephen T. Winn
Well, most of the new entrants into the space are in the marketing area, so you're seeing lots of activity and competition in the virtually all of the new organic lead origination channel products. And I think that's where most of the companies that you're referring to play. I would say this is a -- it's very early. We feel very comfortable with our position because we have a complete suite of search engine optimization, capacity websites, social referral networks, posting suites, syndication and a listing service, both an old, traditional style listing service and a newer listing service that accentuates the owner brand much better. So I feel very comfortable with where we are positioned. But I also recognize that there's a gigantic shift here as the market moves away from the traditional Internet listing service model to other more efficient ways of generating leads. So I'm not surprised to see a lot of competition, and all I can say is the day, it's early.
Operator
Our next question will come from Lauren Choi with JPMorgan.
Lauren Choi - JP Morgan Chase & Co, Research Division
Steve, I think you made some management changes and recently added a Chief Revenue Officer. Just a big picture, I'd like to get the sense in terms of why the change, as well as kind of how you think about what these people bring to the table.
Stephen T. Winn
Well, Ashley Glover was responsible for that area. And I guess, the better part of a year ago, she's made a decision to advance her career into another direction, and she gave us plenty of lead time. Mike Sabbatis, we feel very fortunate to have attracted to RealPage. He's run the tax division of Wolters Kluwer, which is a huge business, and ran the sales forces with hundreds of professional salesmen in them, had run large service organizations. And he was a great catch, and I'm really pleased to have him on board. Ashley will be sticking around until the end of the year to help Mike transition into that role. But candidly, I don't expect he's going to need a whole lot of transitioning because he's a very seasoned executive.
Lauren Choi - JP Morgan Chase & Co, Research Division
That's very helpful. And then in terms of -- I think you guys have mentioned in terms of smaller acquisitions, maybe 2 or 3 a year. And so far, we haven't seen any this year. So I just kind of wanted to get a sense of your acquisition strategy, if that has changed at all, and what types of things are maybe hosted [ph] in your portfolio.
Stephen T. Winn
We did buy RentSentinel...
Timothy J. Barker
Yes, we've had 2 this year, SeniorsforLiving and RentSentinel, but...
Stephen T. Winn
Both small.
Timothy J. Barker
Yes, both small.
Stephen T. Winn
And yes, we're not changing our view regarding acquisitions. I think there are a lot of innovative companies out there that would extend our product or extend our market share. And we have an active team looking at those opportunities. And I would expect we will continue to make acquisitions in the future.
Operator
Our next question will come from Brendan Barnicle with Pacific Crest Securities.
Brendan Barnicle - Pacific Crest Securities, Inc., Research Division
I just wanted to clarify. I think you gave us an organic number for on-demand growth. Would organic ACV number be about the same?
Timothy J. Barker
Yes, it would be about a point of dilution.
Brendan Barnicle - Pacific Crest Securities, Inc., Research Division
Okay. Perfect. And Steve, I think in the script, I was just trying to find it again, you mentioned that you've seen revenue declines from MyNewPlace. So that acquisition is about 2 years old. Is the primary benefit of that then to give you the knowledge to build these new products? And with the sort of expectation that you'd see that decline in the legacy piece is that just the nature of the industry? Or has there been some underperformance in that unit?
Stephen T. Winn
No. MyNewPlace has done exactly what we expected it to do. We've split it into an old and a new model. And the old model is declining. It does not represent, at this point, a significant percentage of our overall revenue. It's under 2% of the total revenue represents the old model of MyNewPlace. And the new model is one of the channels that we're promoting and is doing well.
Brendan Barnicle - Pacific Crest Securities, Inc., Research Division
And then just lastly on ACV, you guys have historically said to think about that in the 20% to 25% kind of growth range. Any change in that at all?
Stephen T. Winn
No. That's still a good goal, and that will drive the organic on-demand revenue in the same range.
Operator
Our next question will come from Nandan Amladi with Deutsche Bank.
Nandan Amladi - Deutsche Bank AG, Research Division
You talked about the new products that you announced at your conference. In terms of lead generation for your own new customers, how productive was it? And the combination of new products as well as new leads, when should we expect to see that turn into additive revenue?
Timothy J. Barker
Well, we're constantly adding new products. This is not new. I think the portfolio will continue to expand, and it usually takes a new product a while to gain initial traction. And I'm particularly excited about the asset optimization suite of new products that are coming out because they are going to have such a dramatic impact on the transparency of this industry, which I -- that's first. And second, they now start to bring in other product centers. So 3D optimization, for example, works with the LeasingDesk screening service that we offer. And the lead optimization capability within this new 3D optimization suite requires LeaseStar in order to dynamically adjust lead flow through your yield engine. So what we're doing is taking the tentacles of YieldStar and pushing them into other areas of our business. So I'm excited about these products. I think they're very important and significant to our longer-term growth. But they are -- I mean, you won't see a short-term impact from them until -- it will take 12 to 18 months before you really get a meaningful take down if they perform as we expect they will.
Nandan Amladi - Deutsche Bank AG, Research Division
Okay. And I have a quick follow-up, if I may. You talked about the penetration of faster-growing products. How far are you penetrated, do you think, with this new -- with the parts that have a faster growing profile in your portfolio?
Timothy J. Barker
We're still -- in our total -- our suite into our customer base is less than 15% penetrated. So there's -- it's thinly penetrated and a lot of room to grow.
Operator
Our next question will come from Michael Nemeroff with Crédit Suisse.
Michael B. Nemeroff - Crédit Suisse AG, Research Division
I'm just trying to understand. Of the new units, where's the split between single-family and multifamily? What percent of -- if you give us that split, that would be helpful.
Stephen T. Winn
It's going to be predominantly multifamily, but they're looking it up right now.
Michael B. Nemeroff - Crédit Suisse AG, Research Division
And which is growing faster, is it the multifamily or the single family?
Stephen T. Winn
Well, percentage-wise, the multi single-family would be growing faster.
Michael B. Nemeroff - Crédit Suisse AG, Research Division
And just on LeaseStar, has there been some stabilization in that business? Is it still growing sub 20%?
Stephen T. Winn
Yes, it's still outperforming below our target growth objectives.
Michael B. Nemeroff - Crédit Suisse AG, Research Division
And then lastly, the apartment churn rate, Steve, you've mentioned in the past, maybe some metrics around that. Has that changed at all in the last quarter?
Stephen T. Winn
We have not seen a material change in the churn.
Timothy J. Barker
And Mike, on your unit question, less than 15% of the unit growth is from single-family.
Operator
Our next question comes from Ken McCarthy with William Blair.
Keane McCarthy
I'm just wondering if you could comment on your views, I guess, on how much of a driver to growth you think the new multifam developments are? I guess, in other words, if permitting slows a little bit, how much of a headwind, if any, is that to incremental growth for you guys?
Stephen T. Winn
Well, a, I don't think permitting is going to slow. I think this is going to continue for some time. There is that need for additional supply, so we're not expecting that. The bulk of our growth comes from the existing inventory and not from the new units that are constructed each year. So while I'd like new units, I don't think it represents a material portion of our overall growth, as evidenced by the fact we were able to grow during periods of time when there were not a lot of new units coming into the market.
Keane McCarthy
Okay. And I guess could you just give us the ending sales rep for the second quarter?
Timothy J. Barker
It's 213.
Keane McCarthy
213. Okay. Given the sales org changes, have you seen any kind of pickup in churn or anything like that?
Timothy J. Barker
No. And we're expected to have a new class come in shortly that will pick that number up. It was kind of loaded-heavy in Q1, not much in Q2. And it will come back in Q3 with a new boot camp. One follow-up on that. The maturity of our sales rep is more mature today than it's been. I mean, when we started the year, 30% had been here less than 6 months. At this point, it's 10%, 11% that have been here less than 6 months. So we're expecting good things as we move into the year.
Operator
[Operator Instructions] Our next question will come from Jeff Hudson with Barrington Research.
Jeffrey L. Houston - Barrington Research Associates, Inc., Research Division
I have a few about the new business intelligence tools. To begin with, what has been the initial feedback from the beta testers? And when do you expect it to be generally available? And then lastly, will these new tools be applicable and affordable for just the largest of property managers?
Stephen T. Winn
Well, the products are in alpha now. They are not in beta. They will be going into beta. Those clients that have been working with us to design and build them are -- enthusiastic is probably an understatement. And no one has ever been able to drive a property looking through the front-view window. We almost all have to look through the rear-view mirror. And what these products are going to do is allow you to benchmark the best practices of this the, say, top 25 operators in your area against multiple metrics of performance so that you can see or rifle in on those specific metrics that you can improve. So I'm optimistic that the industry will embrace this. I think more importantly, the institutional market that may not be managers of properties but have a significant equity or debt interest in the properties are going to start looking at relative comparisons of performance with a great deal of interest because this data is just not available today in this industry.
Jeffrey L. Houston - Barrington Research Associates, Inc., Research Division
And then when do you expect the first of them to be generally available? And will they be appropriate for all sized property managers or just the largest ones in addition to the other potential buyers?
Stephen T. Winn
I think we'll start selling this GA in the first quarter. And I would expect the larger operators will be the early adopters of these products. Although there's some very sophisticated midsized operators that this will be applicable to as well. But it will start with the most sophisticated operators and work its way down, kind of like YieldStar did.
Jeffrey L. Houston - Barrington Research Associates, Inc., Research Division
Okay. That makes sense. Separately I had a question about the marketing suite. I'm just curious about what functionality you think it's missing or lacking that you are building out internally or could be acquired.
Stephen T. Winn
I think we have a very complete suite at this point. So we may add functionality on the edge, but it's generally, we have everything that we need.
Operator
That does conclude our time for questions, and we'll conclude today's conference call. Ladies and gentlemen, thank you for your participation, and have a wonderful day. You may now all disconnect.
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