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AppFolio Inc (NASDAQ:APPF)
Q3 2019 Earnings Call
Oct 28, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for joining us today. Welcome to the AppFolio Third Quarter 2019 Financial Results Conference Call.

I would now like to turn the call over to Erica Abrams. Thank you.

Erica Abrams -- Investor Relations Officer

Thank you, Christine. Good afternoon, ladies and gentlemen. Thank you for joining us today as we report AppFolio's third quarter 2019 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. Actual results performance, may be materially different from any results performance, expressed or implied by the forward-looking statements. 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. Please see our filings with the SEC for greater detail about risks and uncertainties. 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 will 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 third quarter 2019 financial results. Total revenue for the quarter increased by 36% over the same period one year ago to $67.9 million. GAAP net income was $5 million or $0.14 per diluted share, which includes a $1.3 million income tax benefit related to research and development tax credits.

For those of you who track non-GAAP results, our Form 10-Q that was filed today includes more detailed information that you might find helpful in calculating non-GAAP results, including stock-based compensation expense.

The third quarter of 2019 continues to reflect our investments ahead of potential revenue in several growth areas that we believe will positively impact long-term shareholder value including, AppFolio Property Manager Plus or offering that serves larger more complex real estate property manager customers, AppFolio Investment Management, which serves Real Estate Investment Managers. Lisa, AppFolio AI leasing Assistant which we developed from the technology acquired through the Dynasty acquisition and is now offered as a value plus service, and AppFolio Utility Management, which we developed from technology acquired through the WeGoWise acquisition and is also now offered as a value plus service.

Core solutions revenue in the third quarter was $22.5 million, a 26% increase year-over-year primarily due to a 19% increase in Property Manager units under management and an 11% increase in the number of Property Manager customers. We closed the third quarter with 14,034 Property Manager customers, managing 4.41 million units. Growth in net new units under management per customer reflects our ongoing focus and success serving property managers with larger and more complex portfolios. As a reminder, customers that are not subscribing to our core solutions, including for example stand-alone Dynasty and WeGoWise customers are not included in our customer and unit count.

In our legal vertical, customer count increased 6% year-over-year to 10,781. Third quarter value plus services revenue was $41.6 million, a 35% increase year-over-year. Revenue from each of our value plus services increased year-over-year. The majority of growth in this area continues to be driven by increased usage of our electronic payments, screening and insurance services by a larger base of Property Manager customers and a higher number of units under management. Other revenue, was $3.8 million in the third quarter, primarily related to an increase in revenue generated from customer subscriptions for the stand-alone WeGoWise platform and Dynasty technology services. In addition, we experienced an increase in website setup fees associated with our Property Manager customers upgrading to a new website hosting platform.

Turning to expenses. Total costs and operating expenses for the third quarter increased 43% year-over-year compared to an overall 36% increase in total revenue. Our year-over-year increase in cost is primarily related to a 41% growth in headcount to support our growth areas and an expanding base of both new and existing customers.

Moving to our balance sheet. We closed the third quarter with approximately $45.2 million in cash, cash equivalents and investment securities and $49.1 million of debt. We generated $11.6 million from operating activities, used $1.7 million to purchase property and equipment and invested $6.2 million in additional product innovation via capitalized software. We did not initiate any stock repurchases during the third quarter.

I would like to remind investors that we experienced some seasonality in our property management business during the fourth quarter of the calendar year. In prior years we have noted that there is a tenancy for fewer people to move during the quarter resulting in less screening and payment services revenue attributable to rental applications for new tenants. We expect the seasonality to continue to exist in 2019.

Given our performance in the quarter, we are raising our outlook for the full year 2019. We now expect revenue to be in the range of $254.5 million to $255.5 million, which represents year-over-year revenue growth of over 34% at the midpoint. We continue to expect our weighted average diluted share count for the year to be approximately $36 million.

That concludes my prepared remarks. As a reminder, investors are invited to support -- to submit questions via Investor Q&A form located on the Investor Overview section of our website.

With that, I'll turn the call over to Jason for some additional comments.

Jason Randall -- President and Chief Executive Officer

Thanks, Ida. And thanks to everyone for joining us today as we report our third quarter 2019 financial results. In the third quarter, we furthered our mission of revolutionizing vertical industry businesses in both the real estate and legal verticals that we serve today. We remain focused on our long-term strategy of providing innovative software solutions for our customers and their stakeholders, delivering outstanding customer experiences and supporting a thriving corporate culture. We believe that this focus results in sustainable growth over the long-term.

In our real estate vertical, we continued our investment in innovation, notably in connection with the expansion of our core functionality and the development of new opportunities in our value plus service offerings. Our technology platforms form the foundation for systems of record, engagement and intelligence that continue to evolve and deepen our customer relationships.

We are our customers' trusted partner innovation and look for opportunities to further strengthen our partnership through connection points. From on-site property visits to attendance at industry events, and most recently our seventh annual AppFolio Property Manager Customer conference held here in Santa Barbara. At this year's conference, we hosted over 800 attendees from a variety of market segments, including residential, commercial, student housing, community association and real estate investment management. The conference offer customers a chance to get even more from their investments in AppFolio Property Manager, AppFolio Property Manager Plus and AppFolio Investment Management through three days of industry and technology workshops, educational sessions, hands on experiences, one-on-one time with our team and plenty of networking.

The sessions included topics such as how we are using our tools and technologies, including artificial intelligence, to further automate processes and increase efficiency across our customers' businesses.

Turning to our technology, we expanded the capabilities of AppFolio Property Manager Plus in the third quarter as we added audit functionality with user action logs for better management oversight across the platform. Our configurable workflows functionality grew to include additional levels of configuration and automation for customers that manage complex repeatable processes across distributed portfolios. Automation, artificial intelligence and data driven insights help maximize our properties' performance bringing staff members to deliver a high touch customer experiences.

We continue to leverage artificial intelligence as a transformational technology for the real estate industry. Today, we're incorporating AI to automate routine tasks and deliver business efficiencies for our customers. AppFolio's AI leasing assistant Lisa, which is built on technology acquired in the Dynasty acquisition earlier this year, automates the leasing experience by leveraging conversational AI to schedule appointments, streamline communication and deliver performance insights. Tony Curi, Director of Bear Property Management in the Bear Real Estate Group, an AppFolio Property Manager Plus customer who recently started using our AI leasing assistant says, we have doubled the volume of leads that we are getting and have increased applications and showings for our leasing agents. Now instead of our team performing administrative work at their desk, they are at the point of sale, shaking hands, building relationships, getting signatures, which is where their talent should be used.

Using AppFolio AI leasing assistant in conjunction with AppFolio's property management software enables our customers to provide a streamlined high touch and high-tech leasing experience. We also released in the third quarter AI powered smart bill entry to automatically process invoices with ease and speed. Smart Bill entry reads PDF invoices and identifies key information. Then automatically interest that information into AppFolio property managers accounts payables workflow. Instead of manually transcribing every field of every bill, user simply review and approve saving our customers accounts payable teams, a significant amount of time processing invoices.

Additionally, we extended our features and functionality designed for larger community association management portfolios. With enhancements to board member tracking and management we enable community association managers to further streamline their processes and boost efficiencies by providing additional automation and enhanced board communication for our customers.

Our recently launched AppFolio investment management software solution, expand the reach of our offerings in the real estate vertical and we continue to add to its capabilities in the third quarter. AppFolio Investment Management is designed to empower real estate Investment Managers with a modern solution that streamlines fund and syndication management. We built functionality that allows general partners to share investment performance with their investors in seconds via the AppFolio Investor portal. We also expanded distribution functionality to include waterfall calculations, a task that was previously complex and labor intensive.

Turning now to our legal vertical. We continue to deliver new functionality designed to help law firms improve business performance and provide in modern client experience. We recently released e-signature to streamline the client signature collection workflow and automate the payment plans to enable law firms to collect more of their outstanding balances.

At AppFolio, we know that a strong culture attracts talented team members, which in turn allows us to bring the best technology, innovation and service to our customers. During the quarter, AppFolio was recognized with several awards highlighting our commitment to these principles from both a product and culture standpoint. For the second year in a row, we received certification as a great place to work by great place to work and leading authority on workplace culture. AppFolio was also ranked number 14 on the Fortune Best Workplaces for women list in the small and medium workplace category. And AppFolio Property Manager Plus was recognized as a finalist for 2019 best SaaS newcomer.

In summary, we remain focused on the long-term strategy to delight our customers, build a happy and engaged team and deliver innovative technology solutions that drive long-term growth in our business.

Thank you all for joining us today. I will now turn the call back to the operator. Please go ahead.

Operator

Thank you for participating in today's AppFolio third quarter 2019 financial results conference call. This call will be available for replay beginning at 7:45 Eastern today, through 11:59 PM Eastern on November 2, 2019. The conference ID number for replay is 8056038. Again the conference ID number for replay is 8056038. The number to dial for the replay is 800-585-8367.

[Operator Closing Remarks]

Questions and Answers:

Duration: 15 minutes

Call participants:

Erica Abrams -- Investor Relations Officer

Ida Kane -- Chief Financial Officer

Jason Randall -- President and Chief Executive Officer

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