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RealPage (NASDAQ:RP)

Q1 2014 Earnings Call

May 06, 2014 5:00 pm ET

Executives

Rhett Butler -

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

Bryan Hill -

Analysts

Brandon Burke Dobell - William Blair & Company L.L.C., Research Division

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

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

Patrick D. Walravens - JMP Securities LLC, Research Division

Nandan Amladi - Deutsche Bank AG, Research Division

Michael J. Anderson - Crédit Suisse AG, Research Division

Operator

Good day, ladies and gentlemen. Thank you for your standing by, and welcome to the RealPage Q1 2014 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the conference to our host, Mr. Rhett Butler, Director of Investor Relations. Sir, you may begin.

Rhett Butler

Thanks, Eric. Good afternoon, and welcome to the RealPage financial results conference call for the first quarter ended March 31, 2014.

With me on the call today is Steve Winn, our Chairman and Chief Executive Officer; and Bryan Hill, our Chief Financial Officer and Treasurer effective May 15.

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, May 6, 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 March 3, 2014.

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 non-cash or non-recurring items depending on the measure, such as acquisition-related and other 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 litigation, including related insurance and settlement costs, 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 first quarter ended March 31, 2014, 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. Today, I will review our performance for the first quarter and provide some color on expected full year results. Non-GAAP on-demand revenue grew 15%, and non-GAAP total revenue grew 15% both compared to the first quarter of last year.

Adjusted EBITDA grew 19% compared to the same period last year. We ended the first quarter with 9.3 million on-demand units, representing 9% growth from the prior-year period.

Revenue per unit, or RPU, grew 5% over the same period last year. Annual customer value was $399 million, an increase of 14% compared to the prior-year quarter.

The rental housing market continued to sustain strong performance. According to MPF Research, a division of RealPage, apartment occupancy for the first quarter of 2013 came in at 95.0%, slightly above the prior-year period. Annual revenue growth for the multi-family rental housing market, which includes the shifts in both occupancy and effective rents, was 3.3% as of the first quarter, up from 2.6% in 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 366,000 multi-family units at the end of the first quarter.

Overall, we continue to be pleased with the growth of the business. We compete in a $10 billion market and are well positioned to continue to shape -- to take share considering our product breadth and sales footprint.

RealPage is an ecosystem that provides 7 product families and 55 different product centers to help owners and managers of rental properties increase money, revenue, reduce expense and mitigate risk. Some product centers have been in the market for a long period of time, and others have only been released more recently. However, no product center is more than 20% penetrated into the total multifamily opportunity of 18 million units, and we're still in the beginning stages with respect to penetrating the single-family opportunity of 25 million units and the vacation rental opportunity of 3 million units. So we've got a lot of room to run. And to that end, we are increasing our focus in marketing sales and our implementation teams.

From a marketing perspective, we've increased our investment in data-driven marketing initiatives, which position RealPage to drive demand for our solutions across all platforms and devices, including mobile, tablet and desktop. We expect these initiatives to drive significantly more brand awareness, ultimately driving increased productivity and revenue.

On the sales side, we hired 26 reps in Q1 compared to the fourth quarter, and we intend on hiring more reps in the second quarter. We intend to benefit from new rep production starting in the third quarter. And by the end of the year, we expect booking increases to drive some acceleration in revenue compared to the performance during the last 2 quarters.

Implementations are another area where we are narrow -- where we have narrowed our focus on a few core initiatives: quality, process and capacity. More and more of our clients are subscribing to multiple RealPage software and software-enabled services. So it's important for RealPage to look across an entire workflow rather than just a single product line.

From a quality perspective, we continue to refine our implementation strategy by reorganizing our resources around engagement manager -- management, which is the implementation of products and services; and client success management, the ongoing continuous improvement in how our products are used by our customers.

While much of the last 2 quarters focused on preparing the organization, cross-training implementation professionals and evolving processes to align to the strategy, we are now in the execution phase and seeing some positive results.

We also improved our cost and capacity base by making some of the conversion, migration and implementation task -- removing some of these tasks to our Manila operation, where we can scale repeatable task that drive efficiency and take the load off our clients for implementation. We expect these activities will also help us design automation tools to accelerate our time to implement longer term.

While we still have some work ahead of us, these actions are critical to our long-term growth and will enable our clients to get the most out of our solutions while delivering more effective and efficient implementations and ongoing support.

We're also focused on continuing to drive revenue through new features and functionalities from our current product. To that end, we made improvements to our database architecture in mid-2013, with a focus on improving long-term scalability. As a result, we are seeing high availability of our applications with virtually no volatility in transaction response time, even during month end and year end closing periods.

The databases are now separated so that realtime transaction processing is performed on 1 set of servers. Near-realtime cross property report writing is performed on the second set of servers. Business Intelligence runs on a third set of servers and benchmarking across millions of units is run on a fourth set of servers. This isolation of functions virtually eliminates the variations in performance that most systems see when they combine short-term -- or short-running transaction processing with long-running report or business intelligence processing.

This architecture is horizontally scalable to several times our current size and will support the next generation of front office OneSite applications that introduce a more contemporary look and feel, operate faster and perform across all browsers on workstations, mobile devices and tablets.

In addition, we expect our newer products like Windsor Compliance, senior community manager and senior care manager to continue to gain traction to drive overall OneSite performance.

With respect to the contact center, we expect this product to continue to experience solid growth due to more robust integration and sell-through opportunities with our LeaseStar senior and vacation rental products. Contact center has consistently shown the ability to significantly increase lead conversion rates when applied to a particular lead channel. We believe the market will continue to find this compelling over the long term.

With LeasingDesk Screening, we will continue to leverage one of the largest databases of rental payment history. In addition to this compelling data, which can be highly correlated with the future rental payment behavior of a prospect, we just launched a new version of Credit Optimizer. This solution calculates the cost of risk and dynamically adjust credit thresholds to proactively address upcoming unit exposure, which ultimately helps clients reduce vacancy loss and maintain pricing power. Credit Optimizer also reduces their housing risk created by common site-level manual overrides.

YieldStar is expected to release next generation of products, including revenue forecasting, performance analytics and 3D optimization.

In Payments, we're introducing a new method of credit card processing, including a method that enables us to charge residents a convenience fee. There are simply a lot of pent-up demand for LeaseStar organic lead generation tools, as well as our Portal family of products, as customers continue to shift marketing dollars towards organic lead generation and improving their resident experience.

Finally, we expect LeasingDesk renters insurance to continue to drive strong organic growth due to a richer insurance product suite that captures mobile traffic and as property owners continue to drive the trend towards mandated insurance coverage for prospective renters.

Before I hand the call over to Bryan Hill, our Chief Financial Officer and Treasurer effective the 15th of May, I'd first like to thank Tim Barker for his service and dedication to RealPage. Tim was instrumental in helping take the company public and establishing critical finance functions and processes. We wish him well in his future endeavors.

With that, I will now hand the call over to Bryan.

Bryan Hill

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 first quarter was $101.9 million, an increase of 15% compared to the first quarter last year. The details on the components of revenue are as follows: on-demand revenue for the first quarter was $98.3 million, an increase of 15% compared to last year; ACV, or annual customer value, grew to $399 million or 14% compared to the prior year; our top 100 ACV clients posses an average RPU of $57 and have averaged 28% annual ACV growth since our IPO in August 2010.

We ended the quarter with 9.3 million units, representing an increase of 9% compared to the same quarter last year. Based on average units of 9.2 million, RPU was $42.97, an increase of 5% compared to the prior-year quarter. Our top 50 RPU clients possess an RPU range of $112 to $225, with an average RPU of $137. Since our IPO, we have averaged 20% annual RPU growth from this client group.

On-premise revenue for the first quarter was $0.9 million, a decrease of approximately $85,000 from the same period last year. Professional and other revenue for the first quarter was $2.7 million, a decrease 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 first quarter was $67.2 million, representing a gross margin of 66%. This compares to gross profit and gross margin for the first quarter last year of $58.2 million and 65.4%, respectively. We expanded our gross margin 60 basis points while investing in our implementations group.

Total operating expense for the first quarter was $45.1 million compared to $39.6 million last year. As a percentage of revenue, operating expenses were 44.3%, a decrease of 20 basis points when compared to the prior year. The details on the expense components are as follows: product development expense for the first quarter was $12.9 million, up 19% compared to the prior-year period; product development expense as a percent of revenue increased 40 basis points to 12.7%; higher product development was driven by incremental costs associated with our acquisitions, continued investment in initiatives, such as mobile, further enabling our solutions; and general headcount growth.

Sales and marketing expense for the first quarter was $20 million, an increase of 14% compared to last year. The increase is primarily related to higher sales compensation and marketing investments. Compared to prior-year quarter, we added 39 sales FTEs, aggregating to a total of 252 sales reps. Sales and marketing expense as a percent of revenue was 19.6% compared to 19.7% last year, contributing 10 basis points of operating leverage.

General and administrative expense for the first quarter was $12.2 million, an increase of 9% compared to the prior-year period. General and administrative expense as a percent of revenue was 12%, down 50 points compared to last year. We were able to achieve operating leverage while investing in our MIS, HR, legal and finance functions. These investments are necessary as we expand offshore operations and to support the growth of our company.

Operating income for the first quarter increased 21% to $20.3 million or 19.9% of revenue. This compares to the first quarter last year of $16.7 million or 18.8% of revenue.

Net income for the first quarter was $12.1 million or $0.16 per diluted share compared to $10 million or $0.13 per diluted share last year. This reflects 21% and 23% growth, respectively.

Adjusted EBITDA for the first quarter was $24.5 million or 24.1% of revenue, reflecting 90 basis points of margin expansions.

Last year's Q1 adjusted EBITDA was $20.7 million or 23.2% of revenue.

Now turning to the balance sheet and cash flow metrics. Cash and cash equivalents were $42.1 million at March 31, 2014 compared to $34.5 million at December 31, 2013.

Cash flow from operations for the first quarter was $23.6 million, up 37% compared to the prior year. The major drivers were higher cash earnings combined with improved collections. We ended the quarter with accounts receivable of $62.6 million. DSO for the quarter was 57 days. Capital expenditures were $7.3 million for the quarter.

Now I'd like to give our outlook for the second quarter and for the full year ended December 31, 2014.

For the second quarter of 2014, we expect the following: non-GAAP total revenue in the range of $106 million to $108 million, reflecting total revenue growth of 12% to 14%. This also suggests on-demand revenue growth of 13% to 15%. Adjusted EBITDA in the range of $25 million to $25.5 million and non-GAAP net income in the range of $12.1 million to $12.4 million or $0.16 per diluted share.

For the full year 2014, we expect the following: non-GAAP total revenue in the range of $440 million to $450 million, reflecting total revenue growth of 16% to 19%. This also suggests on-demand revenue growth of 16% to 19%. Adjusted EBITDA in the range of $105 million to $110 million, and non-GAAP net income in the range of $51.1 million to $54.1 million or $0.65 to $0.69 per diluted share.

I will now turn the call over to Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Brandon Dobell from William Blair.

Brandon Burke Dobell - William Blair & Company L.L.C., Research Division

Wanted to focus on the sales force for a second. First, just a numbers question. I think, Steve, you referenced 26 reps and I think, Bryan, you referenced 30, maybe just rounding. But I want to make sure I got the right numbers for how many you hired maybe on a net and a gross basis in the first quarter and where we should expect the sales force to be at year-end '14, kind of, the first question there.

Stephen T. Winn

What we expect to do in 2014 is to increase our sales reps between 20% and 25%, so that would be a net increase of 45 to 55. But in the quarter, we actually increased our sales reps 26 on a net basis. The 39 was compared to prior year.

Brandon Burke Dobell - William Blair & Company L.L.C., Research Division

Okay, got it. Sorry about that. Okay. And I was hoping you guys have talked a little bit about the different product families in terms of relative growth rates or contributions to growth. And I want to make sure I also -- within that commentary, touch on the ILS, which was obviously a challenge last quarter. Is it performing to your expectations? Do you guys still think it's going to be kind of bottomed out in the second quarter? Maybe just some commentary there as well.

Stephen T. Winn

Okay. I'll take the first half of your question. During the quarter, from an absolute dollar perspective, we had some of the same product families contribute more significantly than others. That was OneSite, LeasingDesk Insurance, LeasingDesk Screening, as well as Propertyware and Velocity. Payments was also a nice contributor in the quarter. But from just a percentage perspective, we still see continued traction within our LeaseStar software. It was a very large contributor in the quarter, as well as Propertyware, Payments and online leasing.

Bryan Hill

At the ILS, it continued to be a headwind in the quarter. It was effectively down $1.4 million year-over-year, and it was a headwind to our growth of about 1.5 percentage points.

Operator

Our next question comes from Jeff Houston with Barrington Research.

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

Following up upon Brandon's about the ILS. How much revenue came into the quarter from that product, and how much does your guidance assume that ILS will generate for the rest of the year?

Stephen T. Winn

Jeff, the ILS still continues to be less than 2% of revenue, and we expect that to continue throughout the year. If you recall, the ILS has been a headwind to revenue since starting in Q2 2013. So we hope that we get that behind us as we proceed through Q2 of 2014.

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

Okay. Then keeping with the theme of the full year guidance, I was just wondering if you could give us some color around what gives you comfort that growth will accelerate throughout the year? And should we expect unit growth to remain at roughly 9% year-over-year growth and maybe more improved growth within RPU, I think, it was 5% year-over-year growth for the quarter.

Bryan Hill

Well, we continue to compete in an under-penetrated market. Most of our products and services are very under penetrated into the market. And so, we view the increase in our sales headcount will continue to provide bookings acceleration, as we exceed through the back half of the year. So that's what provides us the best visibility into the full year. And then, also, as it relates to the revenue growth acceleration, revenue percentage, that is, as we get through Q2, we have the ILS behind us, we expect there to be a continued pickup.

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

So it sounds like more improved growth within the RPU mix of total ACV?

Stephen T. Winn

In Q1, we saw most of our ACV growth or a higher percentage of it come through unit expansion. But we generally have found that our bookings and our ACV growth has come through deeper penetration into our product base. So you're right as it relates to the RPU expansion.

Operator

Our next question comes from Brendan Barnicle from Pacific Crest Securities.

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

Bryan, was there any difference between the growth rate and the organic growth rate at ACV units or RPU. I know, in the past, you've broken that out for us if there was a distinction.

Bryan Hill

Acquisitions contributed about 1 point to our ACV growth year-over-year and 2 points to our revenue growth.

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

Okay, great. And, Steve, on the competitive front, last quarter, with the move into vacation rentals, we talked about some HomeAway and potentially Zillow as bigger competitors in addition to the legacy competitors like Yardi. Any change in the competitive landscape of this most recent quarter?

Stephen T. Winn

Well, I wouldn't characterize HomeAway or Zillow as competitors. Those are lead-generation channels that we syndicate to and partner with, and that hasn't changed. We do like the vacation rental space and are expanding in that area through partnerships with HomeAway and Bookings.com (sic) [Booking.com] and TripAdvisor and many other lead-generation channels. Overall, competition remains strong. I think, everywhere, we've not experienced any change in our churn rates, and we believe we compete effectively in all of the product categories that we market.

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

Great. And then, Steve, you mentioned a few newer products that you'd be coming to market with this next quarter and certainly this year. Is the go-to-market strategy and distribution for those going to be any different? And as you bring on these new sales reps, are you going to start to assign portions of that product portfolio to some reps versus others?

Stephen T. Winn

The go-to-market strategy is the same. We sell into multifamily with the sales force that covers all of our products. We do have a separate group for single-family, vacation and senior. But none of that is changing, so we're just going to have a larger bag.

Operator

Our next question comes from Peter Lowry from JMP Securities.

Patrick D. Walravens - JMP Securities LLC, Research Division

It's actually Pat from JMP. Maybe now that we have the benefit of a little bit more time going by, it would be helpful if you could just summarize what you've learned about what went wrong in Q4 and how you think the efforts to fix those things are going.

Stephen T. Winn

Well, what we've -- we are addressing the sales expansion. I think that is very important. And so, we've got to spigot wide open on hiring sales reps, and it does take a while for them to become productive, but that's happening and we plan to continue to hire more reps. We are improving the implementation teams. They've now had another quarter of operating under the new organizational leadership that was put in place in July of last year. And so, we're seeing increased -- or improved execution in the implementation area. We still see continued higher renewal rates in this industry than have traditionally been the case. And that hasn't changed in the first quarter. So we're hesitant to predict that it's going to change. It hasn't gotten worse. And then, I guess, the ILS is deteriorated the way we expected it to. And we're migrating away from the traditional way of lead generation to newer organic channels. And those products are performing very well, and we're optimistic that LeaseStar will perform well for us going forward.

Operator

Our next question comes from Nandan Amladi from Deutsche Bank.

Nandan Amladi - Deutsche Bank AG, Research Division

Steve, you talked about a lot of new products that you're launching this year. Are these essentially all ready to go, or is there more work left as we progress through the year?

Stephen T. Winn

Most of the products that I mentioned are either in beta or moving into beta. I do not expect a significant revenue contribution in 2014, but they are important and significant products for us and will help continue to differentiate RealPage from competition.

Nandan Amladi - Deutsche Bank AG, Research Division

Okay. And then related question to that. You talked a lot about hiring -- continuing to hire new sales people. What is your, sort of, approach to OpEx between R&D and sales for this year?

Bryan Hill

Well, we expect the sales and marketing line to move similar to the increase in headcount, so a 20% to 25% increase product development. In G&A, we would expect to leverage those as a percent of revenue and have operating leverage as we progress through the year.

Operator

[Operator Instructions] Our next question comes from Michael Nemeroff.

Michael J. Anderson - Crédit Suisse AG, Research Division

This is Mike Anderson on behalf of Michael. First one, Steve, can you remind us -- I think you said, with the new hires, you're expecting them to start contributing to bookings by the third quarter of this year. How long should they take your new classes to become fully productive in your system?

Stephen T. Winn

Well, we -- it takes about 6 months to get a rep on boarded and through our training classes and through our mentorship programs and productive. So 6 months is the rule of thumb that you use. Some take longer than that. Some takes less. But I think 6 months is a good rule of thumb.

Michael J. Anderson - Crédit Suisse AG, Research Division

Great, and that's helpful. And then, with respect to -- I think you said the acquired revenue, it was added 2 percentage points to total revenue and 1 percentage point to ACV growth. How would -- I think in the past you guys have also given the total organic units added on a trailing 12-month basis. Can you give us an idea of what that number was for this quarter?

Bryan Hill

Acquisitions added 1 point of growth to unit growth as well.

Michael J. Anderson - Crédit Suisse AG, Research Division

And then, with respect to the full year, I think you said the implied on-demand revenue growth would be between 16% and 19% for -- so for forward modeling, how should we be thinking about the organic growth in on-demand? And with that, would you expect that to accelerate going into the second half of this year?

Bryan Hill

Acquisitions -- the acquisitions that we've completed today will contribute between 1 and 2 percentage points to that.

Michael J. Anderson - Crédit Suisse AG, Research Division

Got it. And then, lastly, I noticed there was a litigation expense in your reconciliation. Was that -- is that just a one-time charge this quarter? And just out of curiosity, what's that related to? Are there going to be any more of those going forward?

Stephen T. Winn

This matter has been disclosed in our SEC disclosures for the last several periods, but it's related to Yardi litigation. And this is not expected to be ongoing. This closes out the final chapter of the Yardi litigation.

Operator

Our next question comes from Pat Lowry of JMP Securities.

Patrick D. Walravens - JMP Securities LLC, Research Division

So it's Pat Walravens. My follow-up is as we get through all this, Steve, is this still a 20% to 25% organic growth story for on-demand revenue?

Stephen T. Winn

We believe the market supports our target growth objectives, which is 20% to 25%. We're way under penetrated. And this is about execution, not lack of demand for the products and services that we offer.

Operator

And that concludes our Q&A session. Ladies and gentlemen, that does conclude today's conference. Thank you for your attendance. You may all disconnect. Everyone have a great day.

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