Appfolio Inc Q1 FY2023 Earnings Call

Good afternoon. Thank you for standing by, and welcome to AppFolio, Inc.’s Conference Call. Please be advised that today’s conference is being recorded and a replay will be available on AppFolio’s Investor Relations website. I would now like to hand the conference over to Lori Barker, Investor Relations.

Thank you. Good afternoon, everyone. I’m Lori Barker, Investor Relations for AppFolio and I'd like to thank you for joining us today as we report AppFolio's First Quarter 2023 financial results. With me on the call today are Shane Trigg, AppFolio's President and CEO; and Fay Sien Goon, AppFolio's Chief Financial Officer. This call is being simultaneously webcast on the Investor Relations section of our website at www.appfolioinc.com. Before we get started, I’d like to remind everyone of AppFolio's Safe Harbor policy. Comments made during this conference call and webcast contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties. Any statement that refers to expectations, projections, or other characterizations of future events, including financial projections, future market conditions or future product enhancements or development is a forward-looking statement. AppFolio's actual future results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in our SEC filings. AppFolio assumes no obligation to update any such forward-looking statements, except as required by law. For greater detail about risks and uncertainties, please see our SEC filings, including our Form 10-K for the fiscal year ended December 31, 2022, which was filed with the SEC on February 9, 2023. In addition, this call includes non-GAAP financial measures. Reconciliations of these non-GAAP financial measures with the most directly comparable GAAP measures are included in our first quarter earnings release posted on our Investor Relations section of our website. With that, I will turn the call over to Shane Trigg. Shane, please go ahead.

Thanks, Lori, and welcome everyone to our first quarter 2023 earnings call, and my first as President and CEO of AppFolio. Before we move through our discussion on the quarter and our strategy, I'd like to take a moment to acknowledge Jason Randall's accomplishments and wish him the very best. I have immense gratitude for Jason and all past and present AppFolio team members who have helped grow the company, and I'm honored to have this opportunity to lead AppFolio into what I'm confident is a bright future for our customers, employees, and shareholders. I joined this organization three years ago to guide our real estate business with a mission to make AppFolio the leading property management platform. Today, we're making rapid progress towards that goal through a differentiated product vision and a go-to-market strategy that inspires customers to choose and grow with AppFolio. Results from the first quarter of 2023 demonstrate that we're right on track. I'm pleased to say first quarter revenue grew 29% year-over-year to $136 million. We now have more than 7.5 million units on platform and our total number of customers has expanded to nearly 19,000. We continue to see strong growth in our payments business, contributing to growing ARPU, and we're pleased with the continued adoption of AppFolio Property Manager Plus. One of the first things I did stepping into the CEO role was to reflect on the strength of our strategy. I believe the real estate industry needs AppFolio today more than ever. I also believe that our strategy, built on three key pillars, uniquely positions us and our customers for success. The first pillar of our strategy is creating truly differentiated experiences that solve the challenges our customers are facing and help them better achieve their goals. Continuously listening to our customers helps us understand their challenges, and highlight areas in which they're seeking AppFolio’s investment and innovation. Today, our customers' highest priority is streamlining and automating their business processes. One solution to this challenge we frequently talk about is AI-based innovation. We invested in AI early and in recent quarters have told you about our successes with products like smart maintenance, bank feed, and our AI leasing assistant, Lisa, the last of which was recently awarded a patent for its powerful technology designed to optimize the leasing process by matching tenants with available units. Our ongoing AI investments are paying off for our customers, increasing their productivity and bringing them closer to their customers. We've had time to build the right team, thoroughly integrate AI into our technology platform, and create repeatable processes and frameworks to rapidly turn AI advancements into immediate customer benefits. A major transformation is happening right now with the emergence of large language models. Our product and engineering teams have started piloting new capabilities, such as introducing AI-generated real estate listing descriptions into our leasing workflow. I'm excited to see where this will lead, and I'm confident that AppFolio will continue to be an AI leader, building market differentiation well into the future. There is another important way in which we solve the challenge of increasing productivity; one that ties directly into why our customers choose AppFolio. The ease of use of our entire AppFolio platform. I hear this all the time in my conversations with customers. Let me give you a simple example of how focused investment in our team and platform is generating highly impactful improvements to our customers' productivity. We've recently released a series of search-related enhancements including filtering search results by category, expanding search capabilities to additional documents, seamlessly accessing recent queries, and many more, all of which are designed to make our product even easier to use than it already is today. Helping customers achieve their outcomes through constant innovation has a measurable positive impact on customer satisfaction. In a recent strategic relationship survey, customers rated AppFolio number one among our competitive set for continually innovating the product. The second pillar in our strategy is acquiring new customers upmarket. These sophisticated businesses frequently rely on a broad range of point solutions to complement their property management software and need the capability to power their mixed portfolios with multiple property types. Last year, we launched AppFolio Stack, our marketplace for integration partners to address these customer needs and we continue to gain momentum. The number of units connected to Stack is growing and we're proud to be adding even more leading prop tech partners to the marketplace. We're now at 26. The most recent addition is Mezzo and we expect to soon integrate with Rent Dynamics, Latch, and PointCentral. AppFolio Stack is a good example of an upmarket capability we built that is also benefiting SMB customers who are adopting at a high rate. Our nine-year partnership with Real Property Management, a franchise corporation with 60,000 residential units, is an excellent example of how AppFolio is evolving to meet our customers' complex and growing needs using Stack. RPM chooses one property management service provider for all of its franchise locations, and AppFolio continues to earn their business year after year. They cite Stack as a key reason they continue to grow their business with AppFolio. According to Aaron Bracken, Director of Systems, 'with the advent of AppFolio's Stack marketplace, RPM has the capability to elevate our operational efficiencies through data aggregation and automation fueling our goal of delivering best-in-class client experiences.' A portfolio characteristic of upmarket customers are often a mix of conventional residential and other property types like affordable housing; expanding our coverage of additional property types contributes to our ability to win and retain these types of customers. In 2022, we worked with charter customers to develop meaningful enhancements to our affordable housing capabilities. In the first quarter of 2023, we added functionality designed to enable these customers to seamlessly manage complex compliance obligations to fulfill state reporting requirements and monitor property compliance for affordable units. The third pillar of our strategy is to expand customer adoption of AppFolio Property Manager Plus and our value-added services. We found that comprehensive adoption is often linked to successful customer onboarding. To that end, one of our service goals this year is empowering customers to confidently adopt the core workflows of accounting, leasing, and maintenance within the first 90 days of onboarding. One of the ways we're doing that is by enabling new customers to import their basic AppFolio data on their own, including, for example, bank, owner, property, and tenant information. Across the industry, onboarding is often a time-intensive manual process that can bog property managers down and take important time from their customers. By integrating self-service onboarding into AppFolio's platform and automating steps, we significantly reduce the time it takes new customers to get up and running. In Q1, 75% of SMB customers completed their data submissions in 10 days or less. Not only do time-to-value improvements like this result in faster adoption of our value-added services and higher customer satisfaction, but they also improve the productivity of our support team, which now spends less time on data migration and more time helping customers expand on our platform. It's an example of when our customers are winning, we win as well. We've demonstrated that our rapid pace of innovation drives increasing value for customers of all sizes. We'll continue to focus on aligning the value we deliver with the value we capture as we scale to meet the unique needs of our customers across all segments. Meeting and exceeding our customers' dynamic needs doesn't happen without AppFolio's great team of people. We remain committed to building a diverse and inclusive company where each AppFolio team member has the opportunity to thrive. We'll continue to invest in our team in ways that deliver products and services that make our customers' lives easier. To that end, I'm happy to announce that Elizabeth Barat has been promoted to be our new Chief People Officer. Elizabeth has been instrumental in building our culture during her six plus years at AppFolio, and I'm excited to see her continue to grow in this new role. To close, by focusing on our three strategic pillars, we have an incredible opportunity to deliver extraordinary customer value and drive efficient growth. I'm honored to lead AppFolio into our next phase, rooted in our values, inspired by our customers, and fueled by our people and world-class innovation. I'll now turn the call over to Fay Sien for more detail on AppFolio’s first quarter financial results.

Thank you, and welcome, Shane. I look forward to partnering with you during AppFolio's next phase. We are pleased with our continued strong revenue growth rate this quarter, achieving a 29% year-over-year increase to $136.1 million. Core Solutions revenue reached $37.2 million in Q1, marking another strong quarter with a 21% year-over-year increase driven by new customers and additional units on our platforms, alongside the continued adoption of AppFolio Property Manager Plus, especially as we move upmarket. By the end of the first quarter, we managed around 7.5 million property management units from 18,834 property management customers, compared to 6.6 million property management units from 17,550 customers previously. This reflects a 7% increase in customers and a 14% increase in property management units. In terms of value-added services, Q1 revenue rose by 35% year-over-year to $96.8 million. Although the growth rate for our payments business was more moderate compared to previous quarters, we previously communicated that our 2023 guidance anticipates a normalization in the high adoption rate of cards for payments. We also noted increased adoption and utilization of our risk mitigation product and screening services, benefiting from the rise in property management units under our management. Regarding spending, our headcount grew 6% compared to Q1 of 2022, totaling 1,759 by the end of the first quarter of 2023. However, headcount saw a 1.5% decrease from the first quarter due to normal attrition and a slower hiring pace. For both Q1 2023 and 2022, the non-GAAP cost of revenue, excluding depreciation and amortization, remained at 41% of revenue. Our product mix has shifted towards a higher proportion of value-added services revenue. The associated rise in expenses for third-party services was mostly balanced by improved headcount efficiency. Looking at other non-GAAP operating expenses, the dollar increase in operating expenses year-over-year for Q1 mainly stemmed from employee costs related to talent retention in specialized areas, such as R&D, and from headcount growth. On a percentage basis, combined sales and marketing, R&D, and G&A expenses fall to 56% of revenue in the first quarter of 2023 from 58% in the first quarter of 2022. Sales and marketing expenses as a percentage of revenue decreased from 22% last year to 20% this year, while R&D expenses increased from 20% in Q1 last year to 24% this year. We continued to invest in expanding our product offerings, innovations in AI, and capabilities which help us move upmarket, including affordable housing enhancements and user-friendly product features. Our G&A expenses as a percentage of revenue dropped from 15% last year to 13% in Q1 2023. Overall, our non-GAAP operating margin improved to 1.6% in Q1 this year compared to 5.3% in the same quarter last year. This quarter's free cash flow approximated breakeven, compared to negative 7.2% in the same quarter last year. On the balance sheet, we concluded the first quarter with $182 million in cash, cash equivalents, and investment securities. We are raising our full-year 2023 revenue guidance to a range of $570 million to $580 million, with the midpoint indicating a full-year growth rate of 22%. We remain confident in our growth strategy, and our guidance reflects an expectation of a gradual moderation in high growth from card payments during 2023. In light of the current economic climate, we are adopting a careful outlook. In terms of seasonality within our value-added services, as seen in prior years, we anticipate an increase in tenant applications in the second quarter, leading to more new tenants in the third quarter, which will drive demand for our risk mitigation and screening services. The fourth quarter typically sees lower business volume, and we expect this pattern to persist into 2023. Additionally, we project a slight decrease in the 2023 cost of revenue, excluding depreciation and amortization, as a percentage of revenue due to the changing product mix with value-added services growing at a more normalized pace. Our projected headcount increase for 2023 will be modest, and we are focused on enhancing efficiency and lowering operating expenses as a percentage of revenue. We are raising our expectations for the full-year non-GAAP operating margin to between 1% and 2% of revenue, while free cash flow is anticipated to grow to between 2.5% and 3.5% of revenue. I expect the basic weighted average shares outstanding to be around 36 million for the full year. The first quarter set a positive tone for 2023, as we welcomed new customers, expanded our residential units, and increased our average revenue per user, all while pursuing efficiencies to enhance our free cash flow growth. Our long-term strategy and history of delivering real estate innovations put us in a strong position for ongoing success. Thank you all for joining us. This concludes the call today.

This concludes the program. You may now disconnect. Everyone, have a great day.