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spk02: Good afternoon. Thank you for standing by and welcome to AppFolio, Inc.' 's second quarter 2022 financial results conference call. Please be advised that today's conference is being recorded and a replay will be available on AppFolio Investors Relations website. I would now like to hand the conference over to Lori Barker, Investor Relations. Ms. Barker, please go ahead.
spk01: 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 second quarter 2022 financial results. With me on the call today are Jason Randall, AppFolio's president and CEO, and Fei-Hsien Nguyen, 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 would 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 reasons, including those listed on our SEC filings. AppFolio assumes no obligation to update any such forward-looking statements except as required by law. For greater detail about risk, and uncertainties, please see our filings with the SEC, including our form 10-K for the year ended December 31st, 2021, which was filed with the SEC on February 28th, 2022, as well as the company's other filings with the SEC. With that, I will turn the call over to Jason Randall, Appfolio's President and CEO. Jason, please go ahead.
spk04: thank you laurie and welcome to everyone joining us for app folio's second quarter 2022 financial results i'm pleased to report that revenue is up 32 percent to 117 million dollars in the second quarter and we now serve more than 6.8 million units this is the first time we've added more than one million million units on a year-over-year basis and these results reflect our continued focus on delivering a powerful property management solution and exceptional experiences to our growing base of real estate industry customers. Our long-term investments, customer focus, innovative products, and dedicated team have delivered sustained revenue growth and resilience even during times of constant change in the rental market. I'll highlight two specific second quarter execution highlights. I'll start with our June announcement about FolioStack, our new integration marketplace, and how it reinforces our strategy to move upmarket. Then I'll dig deeper into workflows and how we've recently developed new and innovative ways to make it easier for property managers to automate their workflows and increase productivity. Increasing productivity is an ongoing challenge for all our customers. As we continue to extend beyond our residential SMB routes by adding new upmarket customers, we continue to focus carefully on their unique needs. The rise of SaaS providers like AppFolio accelerated the centralization of workflows onto a single platform. Now we are offering customers the choice and the ability to integrate into a single system of record, which is especially important to larger property management customers. To address getting the best of both, at the National Apartment Association's annual conference in June, Apartmentalize, we announced AppFolio Stack, our new integration marketplace designed to seamlessly integrate our customers' preferred software applications with AppFolio Property Manager. AppfolioStack allows our certified partners to design and build their integrations around a variety of API endpoints using our modern architecture to provide our customers with a reliable experience. Integrations are particularly important to the mid-market and corporate segments to enable users to manage complex portfolios and run their entire business from a centralized hub. And AppfolioStack gives our customers more choices as they focus on boosting productivity and improving resident experiences. New stack partnerships include ButterflyMX, Conservice, HappyCo, NOC, Lowe's, and PropertyMeld. Last quarter, we talked about how customers can streamline maintenance tasks and how Appolio's new partner, Lowe's, helps solve this challenge. Now we have many more examples of integrations. Our new partnership with Conservice provides residents with the ability to pay the utilities and automates the utility billing process. freeing up property management teams to handle utility management, reduce costs, and meet sustainability goals, all while focusing on regulatory compliance. Happy Fill provides AppFolio Property Manager customers access to property, unit, and resident data to simplify and improve the average turn time and inspection process and create a better staff and resident experience. Data is automatically synced, so move-in and move-out inspections and make-ready workflows are triggered based on those moving dates in AppFolio Property Manager. Another integration example is Appfolio's partnership with Knox User-Friendly CRM. This integration helps our customers facilitate a bi-directional record for each of their prospective residents. The intuitive workflow helps prospective residents submit inquiries, then it generates a lead, and once the prospect is ready, the system provides a link to the online application in Appfolio Property Manager. All of these trusted partner integration choices use Appfolio's API to enable streamlined and simplified The partners are required to pass a readiness certification check, and all integrations are tested and validated to deliver a seamless experience for our customers. We are just getting started with integration partnerships, and AtfolioStack gives our customers a choice to continue using familiar tools. Here's what customer Michael Krause, partner at Atrium Management Company in Orlando, with approximately 3,000 units on Atfolio Property Manager says, quote, we have always used best-in-class software for specific functions, And we are so excited that Appfolio is integrating with more partners. This is truly a sign that Appfolio is dedicated to partnering with property managers and best-in-class software vendors to provide the end user with the best experience possible. Michael is correct. The primary goal of these new Appfolio stack integrations is to provide our customers with access to best-in-class point solutions, while Appfolio Property Manager remains their system of record. Customers using the base Appfolio Property Manager products may upgrade to Appfolio Property Manager Plus, or they can pay an incremental 50 cents per connected unit per month for Appolio Stack. Appolio Stack is one way that we are investing to differentiate ourselves. It's easy for customers to add partner connections with certified integrations backed by our dedicated customer support. We believe Stack is one of, if not the best, integrated customer experiences in real estate property management, and we see strong early interest from customers and other potential partnerships. Look for more announcements. In addition to rolling out Appolio's stack, we took important steps in the second quarter on our mission to make our products easier to use. One recent example is our new capability for property managers to return renters' security deposits via e-check. By reducing manual check writing, we've simplified the move-out process and improved the property manager's ability to be efficient. Residents can get their funds faster and track the status of the return in their tenant portal thereby reducing time-consuming back-and-forth communications for our property manager customers. Another example of our progress here is our modernized automated bank reconciliation functionality. Reconciling bank accounts is a core accounting task for property managers, and completing the task manually each month is time-consuming and error-prone, particularly for large companies with complex banking structures. Our goal is to make it easy for property managers to securely connect their bank accounts to AppFolio and automate their bank reconciliations, enabling them to eliminate the manual work and associated risk of error inherent in manually completing bank reconciliations. We are now integrated with Plaid, a leading fintech known for helping people securely connect consumer bank accounts to financial applications, supporting more than 12,000 financial institutions. This new integration with Plaid allows customers to link bank accounts to AppFolio with a higher success rate so they can go on to use our auto bank reconciliation functionality. Another new ease of use enhancement I want to highlight is our liabilities landlord insurance program. In the future, our customers can set it and forget it as a system automatically verifies tenant provided insurance documents to ensure they are properly approved and that there is adequate liability coverage. This task was previously a manual burden for property managers. Our AI power technology while still giving them access to this critical workflow. This program will be included with AppFolio Property Manager and is another milestone in the area of automated workflows. Customer support is a crucial part of making our products easier to use. We continue to grow and refine our wealth of on-demand, self-service resources to help customers more quickly receive and access customer support when needed. One area of recent focus is evolving our chat support request intake strategy from ticket-based to live interactions. This allows us to resolve simple issues in the moment, which reserves the follow-up queue for more advanced issues that require research and troubleshooting. This capability is designed to decrease our response times and improve customer sentiment. As we head into the second half of 2022 and beyond, I'm grateful for our employees' dedication to serving our customers' evolving needs. We are committed to creating a diverse, inclusive, feedback from our own people in summary in addition to moving up market with differentiated solutions such as that polio stack we continue to invest in developing innovative ways to streamline customer workflows like e-check for renter security deposits and additional automation of bank statements and renter's insurance these are the types of strategies that have resulted in our revenue growth and more than 1 million year-over-year unit increase This is what has propelled the Appolio team and our growth through constantly changing economic conditions. I will now turn the call over to Becien for more detail on Appolio's second quarter financial results.
spk03: Thank you, Jason. We are pleased with our continued strong revenue growth rate. At $117.4 million, we grew revenue 32% year-over-year in the second quarter. This is another quarter with strong growth in core solutions, and our usage-based value-added services, such as the electronic payment services. Streamlining workflows to improve productivity has never been more critical to property management customers who are now dealing with staffing shortages and inflation. Additionally, as Jason mentioned, we are steadily increasing unit counts and the number of property management customers we serve. Core solution revenue derived from subscriptions to customers based on units on our platform was $32.4 million in Q2, another strong quarter and a 28% year-over-year increase. At the end of the second quarter, we managed 6.8 million property management units from 17,878 property management customers, compared to 5.8 million property management units from 16,532 property management customers a year earlier. This represents a 17% increase in our ending annual property management units under management, demonstrating success as we move up market. Residential units continue to be the most significant part of our business, and community associations have also contributed nicely to our unit count during the first half of this year. In addition to the number of units we serve, it is important to note that core revenue also grew as we continue to focus on customers with larger unit portfolios that drive higher adoption rates of Adfolio Property Manager Plus. Adfolio's tech integration marketplace is an excellent example of the types of initiatives that over time we believe will continue to propel our growth in larger customers and our revenue per unit. Regarding value-added services revenue in Q2, we experienced a strong 35% year-over-year growth to $81.4 million. This continued year-over-year increase is due primarily to the rise in property management units under management. The expansion of our offerings and increased adoption and utilization of our value-added services, especially our electronic payment services. as is typically the case in the second quarter, we saw a solid sequential quarterly increase in our screening business as tenants begin filling out applications before they move. Before addressing expenses, I would like to refer you to the gap to non-gap reconciliations in our press release earlier today. Going forward, all cost and operating expense commentary will refer to non-gap cost and operating expenses. In Q2, the cost of revenue, exclusive of depreciation and amortization, was 40% of revenue compared with last year's second quarter of 36%. About half of this variance is due to a prior year non-recurring $2.1 million benefit from a payment service provider for their annual incentives related to online payment programs. Most of the other half of that variance is associated with a higher mix of our value-added services as a percent of our overall revenue and the related expenses for third-party service providers. Turning now to operating expenses. Our year-over-year increase in operating expenses for Q2 is primarily related to additional headcount growth of 17% to 1,771 employees. As a percent of revenue, sales and marketing expenses grew from 19% in Q2 2021 to 21% in Q2 2022, primarily due to personnel-related costs necessary to support growth. R&D expenses as a percentage of revenue increased from 16% in Q2 last year to 19% this year, primarily due to expanding of product capabilities for the larger customer segments, including projects like stack, making products easier to use, and continuing to strengthen our product security. Meanwhile, our G&A expenses as a percentage of revenue decreased from 15% in the same quarter last year to 13% this year, as we continue to scale and find efficiencies. In our gap to non-gap reconciliation, you will see a $19.4 million G&A impairment charge. As we move to be more flexible in the way we work, we reassessed our real estate needs and we will be exiting certain lease office spaces. Our non-GAAP income from operations in the second quarter was 1% compared to 7% in the second quarter of 2021. Free cash flow was negative $1 million on negative 1% of revenue in Q2 compared to $10 million or 11% in the same quarter last year. Turning to the balance sheet, we ended the second quarter with $168 million in cash, cash equivalents, and investment securities. We are increasing our projected full-year 2022 revenue guidance range to $455 to $461 million. The midpoint of the range represents a full-year growth rate of 27%. Let me remind you about our value-added services and this typical seasonality in the back half of the year, which impacts both revenue and cost of revenue. Starting in the third quarter, we have historically seen sequential declines in revenue due to seasonally lower tenant screening and leasing activities. Payments become a higher percent of value added services revenue mix, and this becomes slightly more pronounced in the fourth quarter. As we mentioned in our last call, We continue to expect the cost of revenue, exclusive of depreciation and amortization, for 2022 to increase slightly as a percentage of revenue due to changing product mix partially offset by some cost efficiencies and a recent modest price increase for credit card payments. While our year-over-year percentage increase in take-out will be a little more moderate this year compared to last year. The cost of attracting and retaining talent are expected to continue increasing. As a percent of revenues, our total operating expenses for the full year are now expected to remain broadly in line with past guidance and higher than the prior year. We continue to evaluate efficiencies and increase scale to reduce the growth of expenditures, but it will take more time before we see material changes to our trends. Full year non-GAAP operating margins are expected to be in line with prior guidance and lower than in 2021 as we move through the year, and value-added services grow as a percentage of our revenue mix. Rated average shares outstanding are expected to be approximately 35 million shares for the full year. Units served and revenues are growing nicely, and we are pleased to be increasing our full year revenue guidance. 2022 is a year of continued investment in our pillars of growth as we focus on our land and expense strategy, make our products even more available to our customers, and continue our journey to scale our business. Thank you all for joining us today.
spk02: This concludes today's conference call. Thank you all for participating. You may now disconnect and have a pleasant day.
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