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AppFolio Inc  (NASDAQ:APPF)
Q4 2018 Earnings Conference Call
Feb. 28, 2019, 4:30 p.m. ET

Contents:

Prepared Remarks:

Operator

Good afternoon. My name is Chris, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Appfolio Inc Announces Fourth Quarter and Fiscal Year 2018 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. (Operator Instructions) Thank you.

Erica Abrams, you may begin your conference.

Erica Abrams -- Investor Relations

Thank you, Chris. Good afternoon, ladies and gentlemen. Thank you for joining us today as we report Appfolio's fourth quarter and fiscal year 2018 financial results. I'm joined today by Jason Randall, CEO and Ida Kane of AppFolio, to discuss these results. This call is being simultaneously 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 and 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 discussed 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. 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 fourth quarter and fiscal year 2018 financial results. We had a strong fiscal year 2018 with full-year total revenue of $190.1 million, a 32% increase year-over-year and full year GAAP net income of $20 million or $0.56 per diluted share compared to $9.7 million and $0.28 per diluted share in fiscal 2017.

Included in our 2018 results, is revenue of $400,000 and net loss of $1.4 million attributed to the acquisition of WegoWise. Also included in our fiscal year 2018 results is $6.3 million of non-cash charges related to stock-based compensation. For those of you who track non-GAAP results, our Form 10-K 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 and our Form 10-K provides the reconciliation of the impact of the adoption on our current year results, which may be helpful. When comparing to prior year results. We ended the year with approximately 13,050 real estate property manager customers, managing an aggregate of 3.91 million units in their portfolios, compared to approximately 11,700 customers and 3.25 million units under management reported a year ago.

The year-over-year increase in the average size of net new customers acquired is the result of our continued efforts and success acquiring higher unit count customers. As a reminder, we define our real estate property manager customer base as the number of customers subscribing to our core solution. Legacy legalized customers and the related units are not included in our customer and unit count.

In the legal vertical, customer count increased 10% year-over-year to approximately 10,300. As of December 31, 2018 our annual dollar based net expansion was 116% for our property manager customers and 113% for our law firm customers. This compares to 112% and 113% respectively in fiscal 2017. I encourage you to visit our 8-K filing today for more information on how we calculate annual dollar based net expansion.

Turning to the fourth quarter, we reported total revenue of $50.4 million, which represents a 33% increase year-over-year and GAAP net income of $2.6 million or $0.07 per diluted share. Included in these fourth quarter results is $1.9 million of non-cash charges related to stock-based compensation and approximately $800,000 of net loss related to the WegoWise legacy business. As a reminder, we expect the acquisition of WegoWise, will serve as the building blocks for a utility analytics and management Value+ service that will be offered to Appfolio real estate customers in the future.

Core Solutions revenue was $19.4 million in the fourth quarter, a 26% increase year-over-year primarily due to a 20% increase in property manager units under management related to 11% increase in the number of property manager customers. Fourth quarter Value+ services revenue was $28.8 million, a 38% increase year-over-year. Revenue from each of our Value+ services increased year-over-year with the majority of growth derived from increased usage of electronic payments, screening and insurance services by a larger base of property manager customers and a higher number of units under management.

Turning to expenses, total costs and operating expenses for the fourth quarter increased 34% year-over-year on a GAAP basis compared to an overall 33% increase in total revenue. Our year-over-year increasing cost is primarily related to incremental third-party costs associated with the delivery of our Value+ services, additional headcount growth in support of our growing product offering and customer base, performance-based incentive compensation recorded during the period, increased professional service fees associated with expanded audit services due diligence and acquisition-related activities and increased facilities expenses and other costs to support our overall 36% increase in headcount year-over-year, which includes employees that joined the Appfolio team via acquisition.

We continue to expect that cost and operating expenses will fluctuate from period to period, as we evaluate and invest in growth opportunities including expanded product offering, new Value+ services, adjacent markets or new vertical markets.

Moving to the balance sheet, we close the fiscal year with approximately $102 million in cash, cash equivalents and investment securities and $48.6 million of long-term debt. During the fourth quarter, we generated a $11.7 million from operating activities drew $15 million from a term loan issued late in the quarter and used $21.6 million to repurchase shares of our Class A common stock.

We also use $400,000 to purchase property and equipment and invested $3.3 million in additional product innovation via capitalized software. Following the close of the year, we used approximately $54 million in cash for the acquisition of Dynasty Marketplace is a leading provider of our advanced artificial intelligence solutions for the real estate market. We believe the acquisition of Dynasty strengthens our system of intelligence capabilities and lays the foundation for AI based Value+ services over time.

Like WegoWise, Dynasty related revenue will be included in other revenue unless our customer is using our AppFolio Property Manager or AppFolio Property Manager Plus as their system of record at which time we would include the related revenue as part of our Value+ services revenue. On February 28, of this year, our Board of Directors authorized a $100 million share repurchase program. The program allows for repurchases at prices that are below intrinsic value conservatively determine but does not obligate the company to repurchase any specific dollar amount or number of shares and may be modified or suspended at any time.

We have not initiated any repurchases under this program as of today. The $100 million repurchase program includes any remaining amounts available under our prior repurchase program. To recap our results for the fiscal year, total revenue increased 32% year-over-year to $190.1 million and GAAP net income of $20 million or $0.56 per diluted share. We are pleased with our results and continue to focus on delivering great software and services that meet the needs of our growing base of customers.

As we look to 2019, we expect full-year revenue in the range of $250 million to $255 million which represents year-over-year revenue growth of 33% at the midpoint of the range. We expect our weighted average diluted shares for the full year to be approximately $36 million.

We expect to continue to invest in growth opportunities that we believe will positively impact long term stockholder value including APM plus utility management and real estate related artificial intelligence services. In addition, in support of our growing employee base, we expect an increase in facilities related capital expenditures. 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 will turn the call over to Jason for additional comments.

Jason Randall -- President and Chief Executive Officer

Thanks Ida. Thank you for joining us today, as we report our fourth quarter and fiscal year 2018 financial results. In 2018, we continued on our mission to revolutionize vertical industry businesses by providing great software and service to our customers. We did this through our dedication to delivering outstanding customer experiences, supporting a thriving corporate culture and delivering next generation technologies to the verticals we serve today.

In our real estate vertical, we advanced our technology platform and service offerings with the release of new products, Value+ service capabilities and the acquisition of new technologies, which will further enable our customers to digitally transform their business. Increased revenue and efficiency, stay competitive and attract to retain quality owners, investors and residents.

To that end, we developed and released APM plus, for tier of our award-winning software design for managing larger businesses with more complex needs. APM plus builds upon the ease of use, functionality and mobility of Appfolio Property Manager and offers our customers the ability to perform data analytics, including real time insights and customizable dashboards, established configurable workflows and complete revenue management and optimization, thereby providing greater visibility to property and employee performance.

Chris Inghram, Controller at Chamberlain and Associates, a customer with more than 8,500 units managed, who uses APM plus recently said Appfolio's innovation and improvements and technology have been the most significant differentiators for us as a growing business. We have peace of mind knowing we will always be on the cutting-edge of technology because Appfolio is continually improving and delivering the next big thing in property management.

The combination of innovative technology and excellent service is key in our customers' ongoing success with this new offering. In addition to APM plus, we also maintained our fast pace of development and make continuous improvements to our APM solution. We've released features and functionality designed for larger community association, management portfolios, providing additional automation to improve efficiency, risk mitigation and Board communication for our customers.

We continue to arm our customers with mobile solutions that enable them to better engaged the renters and owners. In 2018, we released our mobile app for residents, making it even easier for renters to pay rent, submit requests, purchase renters insurance and review documents from their mobile device, helping property managers reach and serve the residents seamlessly. During the most recent quarter we added to the pre-leasing experience for property managers and perspective renters with self-scheduled showings, allowing perspective renters to easily schedule and confirm of showing online without the need for back and forth communication with the property manager.

With showings linked directly to the calendar property managers and leasing agents save time and fill vacancies faster while providing an on-demand experience to their customers. Our rapid pace of innovation continues to be an area of focus as we grow. We acquired WegoWise in September 2018, which will serve as the foundation for us to extend our Value+ offerings in the utility management space. Utility Management is a priority for larger portfolio owners and managers and Utility Management software provides them with the information they need to help manage water, energy, gas and oil use.

Most recently in 2019 we acquired a real estate focused artificial intelligence technology from Dynasty marketplace. This acquisition strengthens Appfolio's system intelligent capabilities and the lease-up product automates leasing communications replaces manual tasks and helps customers grow their portfolios. In addition, because the lease of technology converts leads at a more constant rate and manual entry, the stable performance allows for more accurate data for forecasting move-ins and revenue across portfolios.

We believe artificial intelligence, is an important technology that will impact our customers and revolutionize the future of the real estate industry. We look forward to partnering with our customers to continue to unlock the power of AI technology to better serve them and keep them at the forefront of the industry. In our legal vertical 2018 was about furthering our mission to help growing law firms automate their day-to-day and improve their business performance.

We expanded our offering to increase customers' efficiency and reduce manual tasks by automating invoice reminders and releasing features like automatic time entries and quick invoices. We also focused on adding features that deliver increased flexibility for customers to send and receive payments for their services, which resulted in an increased adoption of our Value+ payments offering.

During the year, we continue to gain industry recognition for company culture growth in our innovative technology. In the fourth quarter, we received several awards honoring us for our strong culture from Fortune and great place to work including best workplaces for women and best workplaces for diversity. And Appfolio closed customer relationships and great culture go hand in hand, and happy employees deliver the best customer experiences.

Looking ahead, we remain focused on delivering great customer experiences fueled by next generation technology, innovation and our commitment to providing exceptional service to our customers. We believe our consistency in these areas enables long-term sustainable growth.

Thank you for joining us and that concludes our call.

Operator

Thank you for participating in today's conference call. This call will be available for replay beginning and 9:30 PM Eastern Time today through 11:59 PM on March 4. The conference ID number for the replay is 5763969. Again the conference ID number for the replay is 5763969. The number to dial for the replay is 800-585-8367. This concludes today's conference call and you may now disconnect.

Duration: 18 minutes

Call participants:

Erica Abrams -- Investor Relations

Ida Kane -- Chief Financial Officer

Jason Randall -- President and Chief Executive Officer

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