AppFolio Q4 2023 Earnings Call Transcript

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January 25, 2024

There are 4 speakers on the call.

Operator

Good afternoon. Thank you for standing by, And welcome to AppFolios Inc. 4th Quarter 2023 Financial Results Conference Call. Please be advised today's conference is being recorded and the replay will be available on AppFolio's Investor Relations website. I would now like to hand the conference over to Lori Barker, Investor Relations.

Operator

You may begin.

Speaker 1

Thank you. Good afternoon, everyone. I'm Laurie Barker, Investor Relations for AppFolio, and I'd like to thank you for joining us today as we report AppFolio's AppFolio's 4th Quarter 2023 Financial Results. With me on the call today are Shane Trigg, AppFolio's President and CEO M. Faye Hsien Goon, AppFolio's Chief Financial Officer.

Speaker 1

This call is simultaneously being webcast on the Investor Relations section of our website at appfolioinc.com. Before we get started, I would like to remind everyone of App Portfolio'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 is forward looking. 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.

Speaker 1

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 Q for the quarter ended September 30, 2020 3 and the section entitled Risk Factors in AppFolio's forthcoming Annual Report on Form 10 ks for the fiscal year ended December 31, 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 4th quarter earnings release posted on the Investor Relations section of our website. With that, I will turn the call over to Shane Trick.

Speaker 1

Shane, please go ahead.

Speaker 2

Thanks, Laurie, and welcome to everyone joining us for AppFolio's 4th quarter fiscal year 2023 financial results. I am pleased to announce a successful 4th quarter that caps off a year in which AppFolio increased the pace of innovation while prioritizing profitable growth. 4th quarter revenue grew 39% year over year to $172,000,000 contributing to an annual 31% increase to $620,000,000 Units grew 13% for the year to 8,200,000. Our customer count expanded, ARPU increased and payments continue to grow. At the same time, we improved our margins, driving non GAAP operating margin to 24% during the Q4 and non GAAP free cash flow margin to 20%.

Speaker 2

AppFolio's strategy is all about delivering exceptional value for our customers, employees and shareholders. Our strategy has 5 components and starts with our commitment to differentiate to win. There is no better example of how rapidly we are differentiating ourselves than AppFolio realm. It unites all of our AI innovation under a common umbrella and touches every single one of our customers' workflows from leasing to maintenance and accounting. Some of these AI features and services are included in the core product, while others are sold separately or included in our premium product tiers.

Speaker 2

93% of our customers Now use 1 or more AI enabled features or services through AppFolio Realm. That's twice the adoption of just 1 year ago, demonstrating the value our customers are realizing from Realm. We announced AppFolio RealmX, The industry's first ever generative AI conversational interface at NAA last year, and we're piloting it with customers right now. Through Romex, customers will be able to interact with AppFolio in plain language. It has 3 components.

Speaker 2

First, customers can ask RealmX to explain how something works. They can ask for information or they can ask for reports. 2nd, customers can also tell Realmx to complete a task on their behalf like drafting a communication. The third component is that customers can teach RealmX to automate processes and workflows. This is crucial Because our customers continue to tell us their number one challenge is operational efficiency.

Speaker 2

They have talent and resource constraints And yet they're still doing manual repetitive tasks. In the past, we designed products to help customers do the work. What we're building today will do the work for them. That's what differentiating to win means. The second component of our strategy is to unlock upmarket customers.

Speaker 2

We are winning larger customers by expanding our coverage of property types, which we accomplished in 2023 through the launch of affordable housing and by extending the value of our platform to scale with our customers' complex operations, whether built natively or delivered by our integration partners Via AppFolio Stack. As of the end of 2023, we've grown the number of units connected to AppFolio Stack Partners to $1,500,000 Thanks to initiatives like these, more and more large residential portfolios made the switch to appfolio in 2023. 1 of those customers was AMC, which maintains and operates Over 11,000 multifamily units in Southern California. Since going live late last year on AppFolio Property Manager Plus, They're leveraging not just our core system functionality, but also AI leasing assistant Lisa, smart maintenance, websites, bill pay and so much more. AMC's President, Daniel McCarthy had this to say and I quote, We see great potential in AppFolio's current offerings as well as in their constant commitment to innovation and view this partnership as a real investment in our future.

Speaker 2

In the Q4, we introduced a 3rd tier In our product lineup at NMHC's OpTech Conference, AppFolia Property Manager Max is designed for large operators with complex and diversified property portfolios. This new plan provides everything in Plus as well as Leasing CRM that puts all lead data in one place for actionable insights. Leasing signals that enable property managers to make thoughtful pricing decisions using their own unique pricing strategy and public data, custom fields that allow property managers to capture, track and report on any information with user defined fields. A database API that gives property managers full access to their AppFolio database to build analytics, integrations and data processes and Max comes with dedicated customer success management. Max has been well received and adopted by new customers as well as existing ones.

Speaker 2

Through our product tiers, we create upgrade paths. So as our customers grow, we have offerings that grow with them. The 3rd component of our strategy is to elevate the customer by driving their adoption and success on our platform. Next month, we'll publish the 2nd edition of our annual research benchmarking more than 5,000 property management employees. The report will show that maintaining high occupancy rates has become top of mind As rental markets become more competitive and with operational efficiency continuing to be a challenge, reducing costs is key.

Speaker 2

Property managers tell us they're finding savings by leveraging data to fill vacant units faster, centralizing their teams and resources and adopting AI. These are areas where AppFolio will continue to innovate in order to deliver an exceptional customer experience. We also heard that despite broader economic challenges, there's a reason for optimism. According to the report, 66% of property managers expect their portfolios to grow in 2024 compared to 52% last year. Last quarter, we talked about our new bulk actions functionality available to users of AppFolio Property Manager Plus and Max that supports customer needs around managing move ins and move outs at scale.

Speaker 2

It's valuable to our upmarket customers, particularly those with student housing in their portfolio given the seasonal patterns of the residential lifecycle. This past quarter, we expanded this functionality to bulk lease renewals. We recently heard from one customer, Gozan Hartman, CEO of Champaign, Illinois based Fairlawn Real Estate, which manages more than 5,000 units on AppFolier Property Manager Plus that our bulk lease renewal tool has reduced the time her team spends sending out lease renewals by 75%. According to Kozen, and I quote, it turned something that was looming and difficult into being easier and that ultimately enabled most of our team to continue leasing apartments and providing great customer service. That's the kind of improvement that makes a difference to people every day.

Speaker 2

That's how we elevate our customers. The 4th component of our strategy is to scale the business. Our pursuit of profitable growth is in service of our customers Because to be the innovative long term partner they can rely on to power their businesses, we must be a healthy, resilient business ourselves. In 2023, we made a commitment to operational efficiency. We sharpened our focus on the closest to home initiatives that drive efficient growth and deliver extraordinary customer value.

Speaker 2

We right sized our team in real estate footprint and we drove meaningful improvement in our infrastructure spend. Ongoing discipline and our execution will allow us to reinvest in our platform, reach new customers and drive efficient growth. At the same time, we will continue to add and enhance our capabilities to grow ARPU, particularly in the upmarket segment. The final component of our strategy is great people and culture. I'm inspired by our team's ability to rise to every challenge and deliver customer innovation and value at an exceptional pace.

Speaker 2

Earlier this month, we presented AppFolio's strategic priorities To our employees at AppFolio Kickoff 2024. During the event, we had a chance to meet several customers who are using AppFolio in meaningful ways. Hearing how our innovations are sparking productivity and helping communities thrive are powerful reminders of the impact we're making. 1 of those customers, Neil Cadman, President of El Segundo California Based Cadman Group Managing 1100 units on AppFolio Property Manager Plus had this to say, and I quote, I'm way past understanding a lot of the Xs and Os of AppFolio. I just know when I turn on my computer, When I look at my phone, tenants can pay rent, we can lease units, it all works.

Speaker 2

We view AppFolio as Cadman Group and Cadman Group as AppFolio is why we keep coming back. Everything our team does is in service of customers like Neil and our great people and culture are creating these experiences. I'm grateful to every one of our customers, proud of our accomplishments and deeply believe in the direction of our company. Through our relentless focus on our customers, our disciplined investments, our passion To deliver industry leading innovation and our great people and culture, we are truly building the platform where the real estate industry comes to do business. I'll now turn the call over to Fei Siyan for more details on AppFolio's 4th quarter financial results.

Speaker 3

Thank you, Shane. The 4th quarter marked an excellent end to a successful year where we achieved strong revenue growth and accelerated profitability. Our 2023 results lay the foundation for financial flexibility to help us achieve our goals in 2024. In the 4th quarter, we delivered revenue of $172,000,000 growing 39% year over year and we generated free cash flow of 19.9% of revenue compared to 1% in the same period of last year. Core solutions revenue was $41,000,000 in the 4th quarter, A 17% year over year increase driven by new customers, additional units on platform and continued adoption of At Folio Property Manager Plus.

Speaker 3

At the end of the year, we managed approximately 8,200,000 units from 19,737 customers compared to 7,300,000 units from 18,441 customers a year earlier. This represents a 7% increase in customers and a 13% increase in ending units. Growth in units was primarily driven by the timing of units added by new customers, and existing customers expanded their portfolios At a higher rate than prior quarters during 2023, for the full year, core solutions revenue grew 18% year over year. 4th quarter value added services revenue grew 48% year over year to $128,000,000 resulting in full year revenue growth of 39%. Annual growth was fueled by unit growth, continued strength in card adoption for rent payments and our decision to stop waiving the e check fee.

Speaker 3

Card adoption for rent payments continued to exceed our expectations. Turning to spending. We exited the quarter with 1504 employees, which is a decline of 16% compared to the Q4 of 2022 as the result of our efforts to align structure to strategy. Non GAAP cost of revenue, exclusive of depreciation and amortization, was 35% of total revenue compared to 40% in the Q4 of last year. The full year was 37% compared to 40% in the prior year.

Speaker 3

The gross margin increase was primarily due to stop waiving the e check fee and operational improvements. As a percent of revenue, combined sales and marketing, R and D and G and A fell to 37% in the Q4 of 2023 from 58% in the Q4 of 2022 due to growth in revenue and our collective focus on operational efficiency. For the full year, operating as a percentage of revenue declined to 46% from 55% in 2022. Sales and marketing expenses as a percentage of revenue decreased from 21% in Q4 2022 to 12% this quarter. For the full year, sales and marketing decreased from 21% to 16%.

Speaker 3

By optimizing operations and maintaining discipline in our investments, we improved R and D expenses as a percentage of revenue from 21% in the Q4 of the prior year to 17% this quarter. For the full year, R and D increased from 20% to 21%. Our G and A expenses as a percentage of revenue decreased from 15% in the Q4 of the prior year to 8% this quarter. For the full year, G and A decreased from 14% to 10%, reflecting a sustained focus on streamlining operations for greater efficiency. Overall, our non GAAP operating margin in the Q4 of this year grew to 24.3% compared to a loss of 2.7% in the same quarter of last year.

Speaker 3

Through disciplined execution of our planned strategies, We delivered a non GAAP operating margin of 12.2 percent for the full year, which was a significant improvement from the operating loss of 0.6% in 2022. Free cash flow margin this quarter was 19.9% compared to 1% in the same quarter last year. Full year free cash flow margin was 11.9% compared to a loss of 0.9% in 2022. In 2024, we expect growth in card usage for rent payments to normalize And total payments revenue to moderate in the second half of the year with the anniversary of our decision to stop waiving e check fees. Additionally, beginning in the Q2, we plan to reduce certain transaction fees associated with card based rent payments, which will further impact revenue growth.

Speaker 3

For all other value added services, we expect seasonality to remain consistent with historical Our 2024 guidance for annual revenue is $755,000,000 to $765,000,000 which implies a full year growth rate of 23% based on the midpoint of this range. We expect full year Cost of revenue as a percentage of revenue to be slightly lower than 2023 as we continue to drive additional efficiencies. Our 2024 ending headcount is projected to grow as we continue to invest in high priority initiatives that enable us to achieve our strategic objectives. However, we expect the rate of headcount growth to be less than revenue growth As we maintain our focus on operational excellence. In 2024, we expect to deliver non GAAP operating margin between 21% 23% of revenue, while generating free cash flow between 17% 19% of revenue.

Speaker 3

Diluted weighted average shares outstanding are expected to be approximately 37,000,000 shares for the full year. Our 4th quarter and full year results demonstrates our continued commitment to being a healthier, more focused business, fueling our ability to serve customers and power the future of the real estate industry. Thank you all for joining us today. We look forward to seeing you soon. Operator, this concludes today's call.

Operator

Ladies and gentlemen, this concludes today's conference call.

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AppFolio Q4 2023
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