AppFolio Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 4 speakers on the call.

Operator

Afternoon. Thank you for standing by, and welcome to AppFolio Inc. 2nd Quarter 2023 Financial Results Conference Call. Please be advised 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 Laurie Barker, Investor Relations.

Speaker 1

Recorded. Thank you. Good afternoon, everyone. I'm Laurie Barker, Investor Relations for AppFolio, and I'd like to thank you for joining us today recorded as we report AppFolio's Q2 2023 financial results. With me on the call today are Shane Trigg, AppFolio's President and CEO recorded.

Speaker 1

I'm Faye Hsin Goon, Appfolio's Chief Financial Officer. This call is simultaneously being webcast on the Investor Relations section of our website recorded at apppolioinc.com. Before I get started, we would like to remind everyone of AppFolio's Safe Harbor policy. Recorded. Comments made during this conference call and webcast contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 recorded and are subject to risks and uncertainties.

Speaker 1

Any statement that refers to expectations, projections or other characterizations of future events, recorded, including financial projections, future market conditions or future product enhancements or developments, is a forward looking statement. Recorded. AppFolio's actual future results could differ materially from those expressed in such forward looking statements recorded for any reason, including those listed in our SEC filings. AppFolio assumes no obligation to update any such forward looking statements, recorded except as required by law. For greater detail about risks and uncertainties, please see our SEC filings, recorded, including our Form 10 ks for the fiscal year ended December 31, 2022, which was filed with the SEC recorded on February 9, 2023.

Speaker 1

In addition, this call includes non GAAP financial measures. Recorded. Reconciliation of these non GAAP financial measures with the most directly comparable GAAP measures are included recorded in our Q2 earnings release posted on the Investor Relations section of our website. With that, I will turn the call over to Shane Trigg. Shane, please go ahead.

Speaker 1

Recorded.

Speaker 2

Thanks, Laurie, and welcome to our Q2 2023 earnings call. This quarter, we continued to execute our strategy, recorded while continuing to make progress toward increasingly profitable growth. Revenue saw a healthy 25% year over year increase recorded ending at $147,100,000 Units on platform grew to approximately 7,700,000 recorded. And at quarter end, we had 19,145 customers. Our non GAAP operating margin recorded.

Speaker 2

We continue to move further into positive territory, growing from 1% this time last year to 6.4% in Q2 this year. Recorded. Free cash flow also improved to approximately 4.2%, up from negative 1.2% in the same quarter last year. Recorded. Our results this quarter primarily stem from 2 interrelated drivers.

Speaker 2

First is our pace of innovation. Recorded. We believe business is undergoing a new wave of digital transformation, thanks to the rapid advancement in generative AI ushered in by large language models. The promise this holds for property management companies is clear. In a recent AppFolio survey of more than 2,000 recorded.

Speaker 2

Property managers, we heard that employees are spending more than a third of their time on repetitive tasks they consider busy work. Recorded. By automating those tasks with generative AI solutions AppFolio is able to give customers time back to deliver a better resident experience recorded and improved overall job satisfaction. We're in our 5th year of making meaningful R and D investments in AI through products like smart maintenance, recorded. Our AI Leasing Assistant, Lisa, Bank Feed, Smart Bill Entry, FolioGuard Smart Insure and more.

Speaker 2

Recorded. And now we have AppFolio Realm, which unites all of our AI powered capabilities and better positions us to deliver on our product vision recorded to create a world we're choosing, living in, investing in, owning and managing communities feels magical and effortless, freeing people to thrive. Recorded. As a part of AppFolioRealm, we're piloting a new conversational interface powered by large language models recorded that allows customers to ask, tell and teach the software to complete tasks, draft and send communications, initiate actions recorded and automate processes on their behalf, all without having to navigate a traditional graphical user interface. Recorded.

Speaker 2

Last month, we had the opportunity to showcase our AI capabilities, including AppFolio Realm to more than 500 customers and prospects recorded at NAA Apartmentalize, the largest multifamily industry event. In the words of Simon Wong, CEO of HoganInvest recorded. And AppFolier Property Manager Plus customer since 2019 with more than 1800 units on platform and I quote, recorded. The innovation in AppFolio realm is going to propel our productivity. These AI capabilities won't just fuel our competitive edge, recorded.

Speaker 2

The second driver behind this quarter's results recorded. Our continued commitment to increasing operational efficiency. We sharpened our focus on the closest to home initiative recorded that drives efficient growth and deliver extraordinary customer value. We've taken steps to optimize headcount, prioritizing critical hires who fuel innovation for our customers. We've also begun driving meaningful improvement in infrastructure spend in our support, recorded.

Speaker 2

These improvements allow us to reinvest in our platform and accelerate our industry leading innovation. Recorded. The relentless execution of our strategy continues to propel the success of our business. Recorded. The first pillar of that strategy is building engaged and lasting customer relationships by delivering differentiated customer experiences.

Speaker 2

Recorded. The ability to quickly understand changes in business performance is a critical need of our customers. Recorded. One, we've recently addressed with a series of improvements to our reporting infrastructure, allowing customers to filter recorded. In addition, customers using AppFolio Property Manager Plus recorded.

Speaker 2

We also continue to find ways to deliver service excellence recorded. We recently released recorded. A new self-service capability that allows customers to engage with help and support resources at the point of need. Recorded. The results have been outstanding.

Speaker 2

The number of customer issues we resolved within the 1st 24 hours has increased by 17%. We recorded. We've also increased the number of cases customers can solve immediately on their own through self help resources. Recorded. Case resolution not requiring human assistance now accounts for just under a third of our total case volume.

Speaker 2

Recorded. Customer satisfaction has improved and our support team is better able to focus on high value interactions with our customers. Recorded. Another pillar of AppFolio's strategy is unlocking residential unit growth by acquiring new customers up market. Recorded.

Speaker 2

We continue to expand our adjustable market through innovation like affordable housing management introduced last month to all AppFolio recorded. Managing affordable housing comes with a unique set of challenges for property managers. Recorded. In fact, in a recent survey, 75% of affordable housing operators ranked operational efficiency as their number one challenge. Recorded.

Speaker 2

Qualifying and recertifying residents of affordable housing requires a vast amount of reporting, often on disjointed systems. Recorded. Affordable operators also have to meet much higher compliance standards than their counterparts in conventional housing. Recorded. AppFolio's product allows property managers to manage their affordable housing and market rate units all on one platform, recorded.

Speaker 2

Managing compliance, streamlining processes and consolidating accounting operations. Recorded. Over the last year, we collaborated with a group of Charter customers to build a product that embodies our customer centric innovation, recorded for our ease of use and critical compliance capabilities. One of those customers, Dan McCoy, Executive Vice President of Operations recorded. Of GSF Properties serving the Fresno, California area through a mixed portfolio of more than 10,000 recorded.

Speaker 2

Affordable and multifamily units on AppFolio had this to say and I quote, When AppFolio started pursuing affordable housing capabilities, recorded. We were fortunate to be able to have our compliance team work with them. It's good to know how we do business is reflected in the way that the platform was built. Recorded. Customers upmarket require a broad range of point solutions to complement their property management software empower their mixed portfolios.

Speaker 2

In the Q2 alone, we announced 7 new partnerships on AppFolio Stack, recorded. Our B2B marketplace, bringing our total to 33 partners. Since launching last year, we've seen tremendous adoption of Stack within our customer base. In fact, we closed the quarter with 1,200,000 connected units. By growing our partner ecosystem, recorded.

Speaker 2

We've been able to expand our footprint without having to build native capabilities, accelerating the value we deliver to our growing customer base, recorded while improving our focus. Let me give you an example. 1 of our new integration partners is Latch. Recorded. They provide a terrific solution for smart lock technology in Class A and new developments.

Speaker 2

Recorded. The integration allows AppFolio customers to automatically sync resident information and provision access through Latch recorded. Recorded. The 3rd pillar of our strategy is to expand customer adoption of AppFolio Property Manager Plus and our value added services. Recorded.

Speaker 2

Payments continues to be the fastest growing of our value added services and we're rapidly expanding our payments platform to help businesses recorded. We previously talked about Apple Pay, recorded, which is now available in the AppFolio online portal for all residents. Since then, we've made additional exciting enhancements. Recorded. One example is our flexible rent partnership with financial platform Best Egg, which recorded.

Speaker 2

When available to all customers later this year, we'll give renters the flexibility to divide their payments into smaller, more manageable amounts recorded that better align with our lifestyle and income schedule. Another example is the enhancements we've made Tapfullio's accounts payable solution designed to reduce the manual burden of property managers to pay their vendors. Soon, vendors recorded. We'll be able to securely submit payment information through the vendor portal and choose their payment preference, resulting in more transparency recorded and flexibility for vendors with significantly fewer steps in the payment process for property managers. Recorded.

Speaker 2

As a part of this new experience AppFoli will also be adding instant payments, new functionality powered by ingomoney recorded that eliminates bank processing time and allows vendors to receive payment instantly post payment approval. Recorded. Vendors who choose to use this service will pay a percentage of the total transaction amounts. Recorded. Adoption of our payments platform continues to grow as we deliver increasing value on our platform over time.

Speaker 2

Recorded. As this happens, aligning the value we provide with the value we receive is critical to delivering a safe and sustainable payments platform recorded that our customers can trust. Accordingly, we're implementing a change to our resident e check payments. Recorded. Beginning July 31, we're no longer waiving the resident eCheck transaction fee.

Speaker 2

This change also applies recorded to Property Management customers using our Community Association product. We recognize this is a change for our customers recorded and are working closely to support them during this transition. Updates like this help us continue recorded to meet our responsibility to provide a secure, reliable and compliant platform, while reinvesting to innovate at a rapid pace. Recorded. Wrapping up, we're quickly becoming the technology partner of choice for leading real estate businesses.

Speaker 2

Recorded. From AI powered innovation, including AppFolio Realm to our entry into the Affordable Housing segment, recorded. The addition of new AppFolio Stack Partners and the expansion of our payments platform, we're focused on executing our strategy and delivering increasingly recorded. We look forward to sharing more innovation at our annual customer conference in September recorded and to hosting a virtual and in person investor meeting later this year. I'll now hand it over to Fei Siyan.

Speaker 3

Recorded. Thank you, Shane. We are pleased with our revenue growth rate and increasing profitability in the 2nd quarter. Recorded. As you heard from Shane, we delivered revenue growth of 25% year over year to $147,100,000 recorded and grew our free cash flow to 4.2 percent of revenue.

Speaker 3

Core Solutions revenue was $38,500,000 in Q2, recorded. The 19% year over year increase driven by new customers, additional total units on platform and continued adoption of Epfolio Property Management recorded on APM Plus, particularly as we move out market. At the end of the second quarter, we managed approximately recorded. 7,700,000 Property Management Units from 19,145 Property Management Customers recorded compared to 6,800,000 Property Management Units from 17,878 Property Management Customers a year earlier. Recorded.

Speaker 3

This represents a 7% increase in customers and a 13% increase in our ending property management units. Recorded. Value added services revenue in Q2 grew 30% year over year to $106,100,000 recorded. While still attractive, the payments business growth rate was more moderate than in the previous few quarters. Recorded.

Speaker 3

As we indicated in the last quarter's call, our 2023 guidance assumes that the high adoption rate of cards for payments over the past few years will normalize in 2023. Also, we saw increased adoption and utilization of our risk mitigation product recorded. And screening services as well as a continued benefit from the rise in property management units under management. Recorded. Turning to spending.

Speaker 3

Headcount decreased 3% year over year to 1720 recorded at the end of this quarter due to normal attrition and a slower hiring rate as we strategically replace recorded and enhanced key positions with an eye towards operational efficiency and our pace of innovation. Recorded. In Q2 of 2023, the non GAAP cost of revenue, exclusive of depreciation and amortization, recorded. Was 39% of revenue compared to 40% in the Q2 of 2022. Our product mix has continued to shift due to an increasing mix of value added services revenue.

Speaker 3

However, additional headcount efficiencies recorded outside the related expenses for 3rd party service providers. Now turning to non GAAP operating expenses. Recorded. Our year over year dollar increase in operating expenses for Q2 is primarily due to employee costs associated with retaining talent, recorded, particularly in specialized areas such as R and D. These costs were partially offset by a modest decline in recorded.

Speaker 3

As Shane indicated, recorded. We have taken steps to optimize headcount, while maintaining or increasing our pace of innovation. Recorded. On a percent of revenue basis, combined sales and marketing, R and D and G and A fell to 51% in the Q2 of 2023 recorded from 54% in the Q2 of 2022. As a percent of revenue, sales and marketing expenses decreased from recorded.

Speaker 3

R and D expenses as a percent of revenue recorded. As Shane said, we continue to invest recorded in expanding our product offerings, including innovations in AI with AppFolut realm and capabilities that help us recorded. Our G and A expenses as a percentage of revenue recorded from 13% in the prior year to 11% in the Q2 of 2023. Recorded. Our stock based compensation expenses as a percentage of revenue were lower than usual at 7.3% in the Q2 of 2023 recorded to 8.5% in the prior year due to fall features associated with changes in our leadership team.

Speaker 3

Recorded. Overall, I am pleased that our non GAAP operating margin in the Q2 of this year improved to 6.4% compared to 1% recorded in the Q2 of last year. Free cash flow this quarter was approximately 4.2% compared to negative 1.2% recorded in the same quarter last year. Turning to the balance sheet. We ended the 2nd quarter with $164,000,000 recorded.

Speaker 3

As you heard from Shane, on July 31, we no longer recorded. Please be advised today's conference is being recorded. Please note that this update will enable us to continue to invest in a platform that our customers can continue to trust. Recorded. As a result, we are increasing our projected full year 2023 revenue guidance range to $592,000,000 to $598,000,000 The midpoint of this range represents a full year growth rate of 26%.

Speaker 3

Recorded. Our change in guidance is primarily due to the new pricing on eCheck transaction and as I said earlier, recorded. Recorded. Regarding the seasonality in our value added services, consistent with prior years, our property managers experienced an expansion recorded. This typically results in higher demand for our risk mitigation and screening services in the 3rd quarter.

Speaker 3

Recorded. Then in the Q4, these value added services are seasonally slower. We expect such recorded. We expect the 2023 cost of revenue, recorded. Please note that the presentation is being recorded in the quarter, but the recorded slightly as a percentage of revenue due to changing product mix with value added services revenue.

Speaker 3

Recorded. As a result of our increase in revenue guidance and operating efficiencies from moderation in hiring, recorded. We're pleased to increase our full year non GAAP operating margin guidance to 5.5% to 6.5% of revenue recorded. Free cash flow is projected to grow from 6% to 7% of revenue. Basic weighted average share out recorded.

Speaker 3

Our guidance and second quarter results show that our recorded. And we are improving profitability for a sustainable business. This is an exciting time to be at FFO, recorded. Thank you. Thank you.

Speaker 3

Thank you. Recorded. Thank you for joining us on this journey and for participating in our call today. Operator, this concludes the call today. Recorded.

Operator

Thank you. Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

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