AppFolio (APPF) Q3 2018 Earnings Conference Call Transcript

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AppFolio (APPF -0.76%)
Q3 2018 Earnings Conference Call
Oct. 29, 2018 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator 

Hello, ladies and gentlemen, and thanks for joining us today for the AppFolio third-quarter financial results conference call. I am joined on the call by Erica Abrams. [Operator instructions] Thank you. Erica Abrams, you may begin your conference.

Erica Abrams -- Investor Relations

Thank you, Emily. Good afternoon, ladies and gentlemen. Thank you for joining us today as we report AppFolio's third quarter of fiscal year 2018 financial results. I'm joined today by Jason Randall and Ida Kane of AppFolio to discuss these results.

This call is simultaneously being webcast on the Investor Relations section of our website at www.appfolioinc.com. Before we get started, I would like to call everyone's attention to our safe harbor policy. Please note that certain statements made on this call will be forward-looking statements, which are subject to considerable risks and uncertainties. These forward-looking statements may relate to future plans and financial conditions, results of operations, business forecasts and plans, strategic plans and objectives, and product development plans.

Forward-looking statements involve numerous risks and uncertainties that may cause actual results or performance to be materially different from any results or performance expressed or implied by the forward-looking statements. We discuss risks and uncertainty in greater detail in the Risk Factors section of our filings with the SEC. Forward-looking statements are based on assumptions as of today and we assume no obligation to update any forward-looking statements after today, even if new information becomes available in the future. With that, I'll turn the call over to Ida.

Please, go ahead.

Ida Kane -- Chief Financial Officer

Thank you, Erica, and welcome to everyone joining us on the call today for AppFolio's third-quarter 2018 financial results. Today, we reported third-quarter revenue of $50.1 million, a 32% increase year over year and GAAP net income of $5.5 million or $0.16 per diluted share, a 50% increase year over year. Included in our third-quarter 2018 results are $1.8 million of noncash charges related to stock-based compensation. For those of you who track non-GAAP results, our Form 10-Q was filed today and includes more detailed financial data points that you may find helpful in calculating non-GAAP results on your own.

In addition, as previously disclosed, we adopted ASC 606 using the modified retrospective method on January 1, 2018. Our Form 10-Q also provides the reconciliation of the impact of the adoption of ASC 606 on our third quarter and year-to-date financial results. Core solutions revenue was $17.9 million in the third quarter, up 22% from one year ago, primarily due to a 20% increase in property manager units under management related to a 12% increase in the number of property manager customers. We ended the third quarter with 12,640 property manager customers managing an aggregate 3.7 million units in their portfolios, compared to approximately 11,250 customers and 3.08 million units under management reported one year ago.

The increase year over year in average size of net new customers acquired during the quarter is a result of our efforts to acquire higher-value customers with more units under management. In the legal vertical, customer count increased 11% year over year to approximately 10,170. Customer-related metrics are also included in our 10-Q filing for your reference. Third-quarter Value+ services revenue was $30.8 million, up 42% year over year.

Each of the Value+services increased year over year, with the majority of our increase driven by electronic payment services, screening services, and the uptake of our insurance services by a larger base property manager customers and a higher number of units under management. Our financials for the third quarter also include the results of operations of WegoWise since August 31, 2018, the date we acquired substantially all of its assets, which Jason will discuss in more detail in a moment. In the quarter, WegoWise-related revenue was $79,000 and total operating expenses are $408,000. In addition, total acquisition costs included in the third-quarter results were $210,000.

As a reminder, we define our property manager customer base as the number of customers subscribing to our core solutions. Legacy WegoWise customers and their related units are, therefore, not included in our customer end unit counts. Turning to expenses, total costs and operating expenses for the third quarter increased 30% year over year on a GAAP basis, compared to an overall 32% increase in total revenue. Our year-over-year increase in costs is primarily related to incremental third-party costs associated with the delivery of our Value+ services, additional hiring in key areas such as product and engineering to support our growing product offering, and increased rent and other costs to support our overall headcount growth.

Headcount increases were more moderate than revenue increases, thereby driving improved operating leverage. That improvement was partially offset by incremental costs associated with the WegoWise acquisition and the impact of a legal settlement, which was recorded in cost of revenues. We expect that our costs and operating expenses will fluctuate from period to period as we evaluate and invest in new Value+ services, expanded product offerings, adjacent markets or new vertical markets. Moving to the balance sheet, we closed the third quarter with $65.4 million in cash, cash equivalents and investment securities, and no debt.

During the quarter, we generated $9.5 million from operating activities. We used $14.4 million for the WegoWise acquisition, $1.2 million for capital expenditures and invested $3.5 million in additional product innovation via capitalized software, which included investment in AppFolio Property Manager Plus. To recap the quarter, total revenue increased 32% year over year to $50.1 million and GAAP net income was $5.5 million or $0.16 per diluted share. Given our performance in the first nine months of 2018, we are raising our outlook for the full year of '18.

We now expect revenue to be in the range of $187 million to $188 million, which represents year-over-year revenue growth of 30% at the midpoint of the range. We continue to expect our weighted average diluted shares for the full year to be approximately 36 million. As a reminder, investors are invited to submit questions via the investor Q&A form located on the Investor Overview section of our website. With that, I'll turn the call over to Jason for additional comments.

Jason Randall -- President and Chief Executive Officer

Thank you, Ida. Hello and thank you for joining us today. We continue to execute against our mission of revolutionizing vertical industry businesses by providing great cloud-based business management software and services to our customers. During the third quarter, we continued to deliver value to our customers via our rapid pace of innovation and by developing products and services that enable customer success in an ever-changing technology landscape.

We are proud of our healthy culture and growing employee base and the recognition we received during the quarter.In our real estate vertical, we announced the acquisition of substantially all of the assets of WegoWise, a cloud-based utility analytics software company, serving building owners and third-party property managers to help them better manage operating and capital expenditures related to utilities. We expect that the acquisition will provide enhanced functionality to AppFolio real estate customers over time. We also released AppFolio Property Manager Plus, a new tier of AppFolio Property Manager designed to empower larger organizations to gain key insights and make strategic decisions to drive the performance of their businesses at scale. Building on the ease of use, mobility, and functionality of our award-winning AppFolio Property Manager software, this expanded suite of capabilities includes a performance insights dashboard, configurable workflows, and revenue management and optimization.

To further support larger or more complex organizations, we enhanced user role functionality to add increased granular controls for each user definition and enable customers to better manage sensitive information and accommodate more roles within the organization at scale. We also continued to expand our functionality for community associations with capabilities that streamline and digitize communications, allowing association managers to track customers who consent to electronic delivery of official documents. In September, we hosted our sixth annual AppFolio Property Manager Customer Conference here in Santa Barbara. It was our largest conference to date, with more than 850 attendees, including those from residential, commercial, student housing, and community association segments of our market.

The conference offered customers a chance to get even more from their AppFolio Property Manager software investment through three days of industry and technology workshops, educational sessions, hands-on experiences, one-on-one time with our team, and plenty of networking. It is our goal to be our customers' trusted partner in innovation for their business. At the conference, we celebrated customers who have been using AppFolio Property Manager software to scale their business for 10 years. These customers have been with us since the launch of AppFolio Property Manager, and we enjoy celebrating their 10-year anniversary as their businesses continue to thrive with our technology.

In our legal vertical, we added new functionality to help MyCase customers improve efficiency in business performance, including lead management, case stages, and document management. We also remained focused on helping MyCase customers solve the challenge of managing their complete billing cycle. To this end, we added new functionality to help MyCase customers process and send invoices more efficiently. During the quarter, AppFolio was named Fortune's Best Companies to Work For list.

We are proud to be recognized for our employee culture and believe that engaged and happy employees are motivated to deliver outstanding customer experiences. In summary, we remain focused on executing against our mission of revolutionizing vertical industry businesses by providing great cloud-based business management software and services to our customers. Thank you all for joining us today. I will now turn the call back to the operator.

Please, go ahead.

Operator 

[Operator signoff]

Duration: 13 minutes

Call Participants:

Erica Abrams -- Investor Relations

Ida Kane -- Chief Financial Officer

Jason Randall -- President and Chief Executive Officer

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