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AppFolio Inc (NASDAQ:APPF)
Q3 2020 Earnings Call
Nov 9, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. And welcome to AppFolio Inc. announces Third Quarter 2020 Financial Results. [Operator Instructions]

I would now like to hand the conference over to you, Erica Abrams. Thank you. Please go ahead.

Erica Abrams -- Investor Relations

Thank you, Chris. Good afternoon, ladies and gentlemen, and thank you for joining us today as we report AppFolio's third quarter 2020 financial results.

With me on the call today are Jason Randall, AppFolio's President and CEO; and Ida Kane, AppFolio's Chief Financial Officer. 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 maybe forward-looking statements within the meaning of the federal securities laws that are subject to considerable risks and uncertainties. Actual results and performance may be materially different from any results, or performance expressed or implied by the forward-looking statements.

Forward-looking statements including any such statements referring to the potential effects or impact of the COVID-19 pandemic on AppFolio's business, may relate to future plans and financial condition, results of operations, business forecasts and plans, strategic plans and objectives, product development plans, trends affecting our business and industry, and the economy as a whole, capital needs and financing plans, and various commitments and contingencies, including with respect to the outcome of legal proceedings or regulatory matters. Please see our filings with the SEC, including our Form 10-Q which was filed earlier today for greater detail about risks and uncertainty.

Forward-looking statements are based on reasonable 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, unless required by law.

With that, I will turn the call over to Ida Kane, CFO. 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 of fiscal year 2020 financial results.

First, I want to thank all AppFolians for their continued dedication to our business and customers success during this challenging time. We believe our people and culture are the heart of our success and the current environment has only amplified that belief. And commitment of our workforce to developing and supporting our product and service offerings is reflected in the numbers, and morale and focus of our team remains high even while working remotely.

Turning to the numbers. We reported total revenue of $84.1 million for the third quarter, a 24% increase year-over-year. GAAP net income for the quarter was $137.7 million or $3.86 per diluted share. This includes a pre-tax gain of $187.6 million related to the sale of MyCase offset by a net tax expense of $48.9 million. Also included in GAAP net income is $3.1 million of non-cash 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 details that you may find helpful in calculating non-GAAP results on your own.

Total third-quarter revenue from core solutions increased 21% to $27.1 million, primarily driven by 16% growth in the average number of property management units under management, resulting from a 9% increase in the average number of property management customers. Third quarter Value Plus services revenue was $53.4 million, a 28% increase year-over-year, also driven by the increase in property management customers and units. The majority of our Value Plus services comes directly and indirectly from our customers' usage of our electronic payment services, tenant screening services and insurance services.

Our electronic payment services continue to experience increased demand as residents, property managers, owners and customers transacted more business online. We closed the third quarter with 15,352 real estate property management customers, managing an aggregate of 5.12 million units in their portfolios. This compares to 14,034 customers and 4.41 million units under management reported one year ago.

Turning to expenses, total costs and operating expenses for the third quarter increased 27% year-over-year on a GAAP basis, comparing to overall 24% increase in total revenue. This year-over-year increase in cost is primarily related to our 17% year-over-year growth in headcount. Furthermore, included in general and administrative expenses are one-time professional fees and other costs related to the MyCase transaction of $2.3 million.

During the third quarter, we continued to operate as a remote workplace and expect to continue to do so at least through the end of the first quarter of 2021. As a result, we have experienced reduced cost associated with running our facilities, lack of travel and in-person events and other downstream effects of remote work environment. As a reminder, on September 30, 2020, we completed the divestiture of MyCase, our former fully owned subsidiary, that provided legal practice and case management software solutions to our legal customers. The transaction was executed for $193 million. For more information about MyCase transaction, please refer to Note 3 divestitures and business combination of our condensed consolidated financial statements.

For the three-months period ended September 30, 2020, MyCase total revenue was $9.5 million, of which $5.2 million was core revenue, and $4.3 million related to Value Plus services. In addition, our total headcount as of September 30, 2020 included 118 MyCase employees that left AppFolio in connection with the transaction.

Moving to the balance sheet. As of September 30, our principal sources of liquidity or cash and cash equivalents and investment securities, which had an aggregate balance of $181.9 million. Our cash and cash equivalents increased during the quarter, primarily as a result of the proceeds from the MyCase transaction. We also repaid a total of $97.2 million under our then existing credit agreement, leaving us debt free today. We generated $17.8 million from operating activities in the third quarter. Our primary uses of cash in the quarter were capital expenditures of $2.2 million. We also realized capitalized software development costs of $7 million in connection with continued investment in our technology and service offering.

We are pleased with our performance in the third quarter and year-to-date and continue to look ahead with caution given the uncertainty related to COVID-19. The potential impact of the pandemic are only amplified by the length of time they affect our customers in the broader economy. As a result, we're not communicating revenue guidance for the remainder of the fiscal year. We continue to expect our diluted weighted share count for the year to be approximately 36 million shares.

With that, I will turn the call over to Jason for additional comments.

Jason Randall -- President and Chief Executive Officer

Thank you, Ida, and thanks to everyone for joining us today. Throughout the year, one of our most important goals has been to continue to find new and innovative ways to stay connected to and engage with our customers in the current environment.

In the third quarter, we hosted our 8th Annual AppFolio Customer Conference with over 5,400 customers registered, for the first time completely virtually online. The conference was available at no charge to all AppFolio Property Manager, AppFolio Property Manager Plus and Investment Management customers, providing a digital space for inspiring keynotes, networking and training sessions ranging in scope from industry best practices to trends and technology. We received positive messages from customers who appreciated the opportunity to learn and network, and we heard important feedback that will drive continued product and service innovation going forward.

As COVID-19 accelerated the need for digital transformation across the real estate industry, AppFolio customers have been well equipped to navigate these challenging times with our software as the foundation of their business. Brad Cleage, Senior Vice President of Red Rock Realty Group recently said AppFolio has completely revolutionized our processes and moved all operations digital. COVID-19 has been a positive for us because we went completely digital with invoice approvals and especially with leasing where 99% of residents apply online, pay online and sign digital lease. Online leasing was huge and COVID-19 helped push us to do it.

Our technology helps ensure that customers can successfully operate in this new normal of working remotely by serving their customers virtually and maximizing the use of technology. On our last call, I discussed we released a virtual showings and 3D tours, that enabled our customers to show units and fill vacancies without in-person contact, which not only has a positive impact on property managers, but renters as well. We recently conducted a survey of renters across the US to gain their perspective on the virtual leasing experience.

Based on the survey, 80% of respondents who signed a new lease during the pandemic and viewed a unit virtually said that virtual viewing option was high quality with a comprehensive view of everything they wanted to see in the unit. Additionally, 40% of owners said they would still like virtual options for viewing units post-pandemic.

To that end, in the third quarter, we added resident screening and renewal functionality to AppFolio's virtual leasing experiences. We also released on a limited basis income verification screening and expanded option for our tenant screening service, which validates applicant's income online, saving time and minimizing the need for in-person contact. We continue to expand capability designed for resident retention and lease renewals by giving property managers the ability to automatically update lease deeds, recurring rent charges and resident status at lease expiration, all completely online through AppFolio Property Manager.

Remote work and dispersed teams require even more visibility and oversight of business operations for our customers. This is especially true for our larger AppFolio Property Manager Plus customers, managing more complex portfolios across multiple regions. APM Plus includes configurable workflows functionality, allowing customers to implement and manage consistent processes and services across their entire portfolio. In the third quarter, we expanded the workflow dashboards and reporting capabilities to allow for increased management insight and oversight of efficiency metrics and opportunities for improvement.

Additionally, we updated user roles and permissions to allow customers to further tailor their access and permission settings for increased control and operational efficiency. We further expanded functionality related to the automation of manual and repetitive tasks to drive increased productivity and allow teams to focus on higher value work. Accounting is a key area that can be transformed to intuitive automation and in the third quarter, we launched new functionality designed to enable a more streamlined accounts payable process. The automated accounts payable Value Added Service collection pays invoices on our customers behalf. So, we don't have to manually print, scan and mail invoices from the office, saving time and freeing up teams.

Turning to AppFolio Investment Management. We continue to prioritize functionality, that enables Investment Management customers to grow their portfolios, drive efficiency and engage their investors. During the quarter, we released new capabilities to manage capital and grow investment portfolios, including tracking us any capital calls for investment funds, a single asset summary view and dividend distribution reinvestment plans to allow investors to reinvest distributions.

Additionally, the release about portfolio investor website, the first AppFolio Investment Management value added service provides customers with an AppFolio built website that integrates with the AppFolio investor portal, providing investors marketing opportunities and customer insights.

Before I wrap up, I'd like to express my appreciation for our team and its hard work and dedication to providing excellent experience for our customers in a challenging year. I'm proud that AppFolio was recently recognized with several awards, highlighting our commitment to delivering innovative technology solutions to our customers and building at thriving culture. The AI Tech Awards focusing on technical innovation and adoption in the AI machine learning industry, AppFolio AI Leasing Assistant Lisa best in industry vertical applications. Great Place to Work, a recognized authority on global work place culture, listed AppFolio as a best workplace for women for the third consecutive year.

Adding to the culture is Agnes Bundy Scanlon, who was appointed to the AppFolio Board of Directors effective November 1, 2020. Agnes is a global leader in the governance, regulatory and compliance risk and data information security fields. She is also an experienced attorney and an advisor to industry and government. Agnes will serve on the Boards of risk and compliance oversight committee and audit committee.

In summary, we remain focused on our long-term growth strategy, as we work to deliver innovative technology solutions, delight our customers, and build on our strong company culture. We will continue to partner closely with our customers during this time to help ensure they are well equipped for the challenges, not only today, but tomorrow too.

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

Operator

Thank you. The recording of this call will be available two hours after the call has ended. To listen, please dial 800-585-8367 or 855-859-2056 and enter conference ID number 6087563 to listen.

[Operator Closing Remarks]

Questions and Answers:

Duration: 16 minutes

Call participants:

Erica Abrams -- Investor Relations

Ida Kane -- Chief Financial Officer

Jason Randall -- President and Chief Executive Officer

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