Erica Abrams - Investor Relations Brian Donahoo - President and Chief Executive Officer Ida Kane - Chief Financial Officer.

Bhavan Suri - William Blair Chao Chin - Credit Suisse Trevor Upton - Pacific Crest Securities.

Good day, ladies and gentlemen and welcome to the AppFolio Inc. Second Quarter 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Ms. Erica Abrams. Ma’am, you may begin..

Thank you, Operator. Good afternoon ladies and gentlemen. Thank you for joining us today as we report AppFolio’s second quarter 2016 financial results. I’m joined today by Brian Donahoo, CEO and Ida Kane, CFO of AppFolio to discuss results.

This call is being simultaneously webcast on the Investor Relations section of our Web site at www.appfolioinc.com. Before we get started, I would like to call everyone’s attention to our Safe Harbor policies. Please note that certain statements made on this call will be forward-looking statements.

These forward-looking statements may relate to future plans and financial conditions, results of operations, business forecasts and plans, strategic plans and objectives and product development plans.

Forward-looking statements involve numerous risks and uncertainties that may cause actual results or performance to be materially different from any results or performance expressed or implied by the forward-looking statements. We discuss risks and uncertainties in greater detail in the Risk Factors section of our filings with the SEC.

Forward looking statements are based on 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.

Finally, during the course of our call today we will be discussing both GAAP and non-GAAP financial measures a reconciliation of the GAAP financial measures to the non-GAAP financial measures is included in the press release we issued today. With that I’ll turn the call over to Brian. Brian, please go ahead..

Hello. And thanks for joining us today as we report our second quarter results. I’m happy with another quarter of strong financial performance where revenue increased 42% year-over-year to $26.2 million and non-GAAP net loss improved to $0.03 per share. As a result of our strong year-to-date performance, we are raising our revenue outlook for the year.

We remain focused on our top strategic priorities and keeping our customers happy and successful, expanding our customer base, supporting our customer’s growth through the adoption of value plus services and broadening our product offerings in total addressable markets.

We continue to make progress in realizing operating leverage from our business which is expected to give us flexibility for the future and to that end we realize positive adjusted EBITDA of $1.1 million during the quarter. This is an important milestone for AppFolio demonstrating the operating leverage in our business.

In our property management vertical, our customer account increased by 32% year-over-year in the second quarter. In addition, our sales and marketing funnel continues to deliver higher average net units per new customer in the first half of 2016 versus 2015 reflecting our early success in serving larger F&B customers.

During the second quarter, we released accounting specific features designed for property manages with Home Owners Association as part of their portfolio. The enhancements better support mixed use property managers an increasingly important segment of our customer base.

In addition, we developed features that enable our customers to better serve and communicate with their renters adding two way texting, email enhancements and challenger feature that deepen our role as a system of engagement for our customers.

We also expanded existing functionality to enable customers to identify their best performing marketing channels during the leasing process.

Because we have built a system of record and the system of engagement AppFolio is uniquely positioned to provide powerful data that allow customers to track their lease-to-lease investments helping to provide the industry best of set of closely marketing performance information available today.

In addition to product enhancements, we focused on innovating to further drive adoption and revenue with existing customers by our land and expand strategy.

As you recall, in Q1 we released premium leads and in Q2 we expanded on our payments platform with owner vendor e-check, which is as simple to use, hassle free way for property managers to pay owners and vendors some of them our core solutions.

Our customers are delighted with these Value+ offerings and we expect them to expand revenue for us overtime as customer adoption grows. One of our customers who adopted owner vendor e-check recently stated, we have had the product for just four months we are now paying 95% of our owners via ACH and all my staff is already pleased.

And now turning to the legal vertical, MyCase customers increased 50% year-over-year in the quarter further expanding our footprint in the S&B market. We enhanced our Value+ payments offering in the second quarter enabling law firms to now accept credit card payments directly from within the client portal in MyCase.

Our early customers are delighted with the extended Value+ offering as it enables seamless revenue cycle management for their product. We believe that maintaining a strong commitment to customer service and customer centric decision making pays off with customer loyalty and growth.

And I'm proud to share that we recently several awards for customer service across our businesses, including the Stevie American Business Award for sales and customer service as well as the Annual Customer Sales and Service World Award.

And in September we will host our fourth Annual AppFolio Property Management Customer Conference here in Santa Barbara. This is a three-day conference. This three-day conference is a place where customers come to learn, socialize and maximize their investment in AppFolio.

We all look forward to the opportunity to connect in person with our customer and I especially enjoy seeing our great team of employees shine at this event. This event is always the highlight for our entire company.

And our playbook remains the same for the coming quarters, acquiring new customers, broadening our product offerings, driving adaption of Value+ services and continuing our high level of customer service. Over time we are positioned to scale our technology platform, business processes and expand to adjacent markets and new verticals.

We will continue to focus on areas that we believe will result in long-term sustainable growth and shareholder returns. And now I'll turn the call over to Ida for a more detailed financial review of the quarter..

Thanks, Brian. We are happy with our financial performance this quarter reporting total revenue of $26.2 million, up 42% from $18.4 million reported one year ago. Second quarter GAAP net loss was $2.3 million or a net loss of $0.07 per share, an improvement over our year ago loss of $3.4 million and $0.36 per share.

Non-GAAP net loss was $1.2 million or $0.03 per share. Non-GAAP adjusted EBITDA was positive $1.1 million during the second quarter of 2016 as compared to a $1.6 million loss in the second quarter a year ago and a loss of $1 million in the most recent quarter.

Breaking down revenues further, core solution revenue was $10.6 million in the second quarter, up 37% from the same quarter of last year. Growth in this core subscription revenue is driven by the increase in new customers and increase in average size of our new customers as well as strong customer retention.

We ended the quarter with 9,275 property manager customers, an increase of 32% from one-year ago and 7,349 law firm customers repulsing an increase of 50% year-over-year. Our property manager customers were managing 2.41 million units in their portfolio, up from 1.92 million units one year ago, reflecting a 26% increase year-over-year.

The increase in units drives additional core solution revenue as well as incremental Value+ revenue over time. The average net new unit per customer added this quarter and year-to-date have increased to the mid-200 as we continue our focus on the larger SMB customers.

Value+ services revenue was $14.4 million in the second quarter, up 53% from one year ago. Growth in Value+ services revenue was primarily driven by new and existing customers continuing to adopt standard usage of our Value+ services.

Each of our Value+ services offerings experienced revenue growth year-over-year, although the majority of the growth came from increases in revenues earned through our electronic payment and revenue stream services platform again this quarter.

My discussion of non-GAAP results today excludes the impact the of stock based compensation expense that flowed through the P&L in the quarter of $1.1 million compared to $200,000 in year ago period.

A reconciliation for the corresponding GAAP results can be found at the end of the press release issued today linked to our investor relations site at www.appfolioinc.com. At June 30we had 634 AppFolion’s serving our customers and stockholders up 20% from 528 one year ago and up 5% from 601 in the prior quarter.

Cost of revenue excluding depreciation and amortization, was $11.1 million or 42% of revenue in the second quarter as compared to $10.5 million or 45% of revenue in the prior quarter. The same metric one year ago was 44% of revenue.

Sales and marketing expenses were $7.4 million or 28% of revenue in the second quarter as compared to $7.5 million or 32% of revenue in the prior quarter. The same metric one year ago was 34% of revenue. We are pleased with the operating leverage we are gaining in our sales and marketing expenses as a percent of revenue.

Research and development expenses were $2.9 million or 11% of revenue in the second quarter as compared to 13% of revenue in the prior quarter and improved from 12% in the year-ago period. We expect to continue to invest in R&D to expand our product offerings and market opportunities in the vertical markets we serve.

General and administrative expenses were $3.7 million or 14% of revenue in the second quarter as compared to $3.2 million or 14% of revenue in the prior quarter. The same metric one year ago was 19% of revenue.

The sequential quarter dollar increase is mostly due to increased headcount in G&A functions and costs associated with the implementations of a long-term incentive program subscribed in SEC filings earlier this year. Weighted average common shares outstanding, used to calculate loss per share in the second quarter was 33.5 million shares.

Moving to the balance sheet, we closed the quarter with approximately $52.1 million in cash, cash equivalents and investment securities and no debt. We generated $3.1 million in cash from operations, $1.3 million for capital expenditures mainly related to the expansion of our facilitates and $3 million for addition to our capitalized software.

In summary, we had a strong first half of the year and are encouraged with the operating leverage we continue to gain. As we look to the back half of the year, we are raising our revenue outlook for the year to a range of $103 million to $105 million, which at mid-point represents year-over-year growth of 39%.

In addition, to obtaining positive adjusted EBITDA margin the current quarter, we also reiterate our outlook for sustained positive adjusted EBITDA margins by early 2017 from our current business.

We remain confident in our strategy and business plan to deliver long-term stockholder value, we will continue to manage our business towards the achievement of long-term growth that we believe will positively impact long-term stock holder value. And with that, I would like to turn the call back over to the operator for questions..

[Operator Instructions] And our first question comes from Bhavan Suri from William Blair. Your line is open..

Thank you. Hey Brian, hey Ida congratulations really nice job, obviously top line but obviously [indiscernible]. Yes, before we get into the details of some of the leverage there.

If I was to look at the business and say how much of the growth do you think in the quarter would be attributable to price increases, I mean, as you think about sort of price division, just a quarter, some color really [indiscernible]..

Hey, but Brian you are cutting in and out, do you mind repeating the question, apologies, but we are having a hard time hearing here..

Sure, yes, [indiscernible] How much of the upside increased on the top-line sort of [Technical Difficulty]..

So, we still can't hear you Bhavan. I considered part of your question is how much of the revenue increase related to the price increase that we had earlier this year? I couldn't touch any of the other part of your question. So maybe you can come back to that.

But if you look at the performance that we have had year-over-year, I would say that we are minimally impacted by the price increase. It has been a nice improvement but it is only for our new customers that we have acquired this year.

so the vast majority of our customers is still on our legacy pricing, more happy with the new customer revenue that has come in but again the majority of the increase year-over-year relates to our existing base of revenue and customers..

And then just when you look at the Value+ services, obviously it's such a core part of the stickiness in the growth, just which ones witnessed the most growth in the quarter? And then specifically uptick around liability insurance and maintenance?.

Yes, so, I'm happy to take that. If you look at on an year-to-date basis year-over-year from the dollars perspective, payment revenue from our payments platform in tenant screening platform have contributed the largest increase on a dollars perspective.

But having said that, we are gaining great traction in some of our newer product offerings like contact centers, insurance and premium leads. And so, some of those have the percentage basis year-over-year are growing at a faster rate than payments in screening given they are earlier in their lifecycle.

But, again, across the Board increases in revenue that we are really happy with and focused on continuing to improve the attach rates and adoptions of our Value+ services for our customers..

Clearly that’s working.

And then one quick last one from me, just in terms of marketing, pretty big improvement I think 400 bps is my calculation there, is that just because of the move up market and so the efficiency there or its just sort of more strategic sort of approach as you think about lowering S&M to get to profitability and drive profitability which fairly saw existing growth of the business?.

That's a Bhavan, the answer to that one is both. We are certainly constantly looking at how to find the debt leverage with our sales and marketing investments and some of that is doing more with what we have and some of that is bringing the right customers to the table. So, I think you are seeing improvements because of both of those efforts..

Thanks Bhavan..

Great guys. Thank you for taking my questions. Bye..

Thank you. And our next question comes from Chao Chin from Credit Suisse. Your line is open..

Hey guys, thanks so much for taking the question and congratulations on the results. Really very nice job on the profitability very nice surprise here.

But it seems like you saw a really nice gross margin expansion in Q2 may be can you walk us through what were the big drivers of leverage here was it Value+ extra premium lease reduction in third parties feed and COGS and also how sustainable are margins at these levels?.

Sure Chao, I’ll take that. Yes, we are really happy with the performance in the second quarter and the leverage that we gained in the cost of revenue line items specifically as you know some of our Value+ services have third party costs associated with them.

So as our business grows we continue to look to leverage points our areas within that that we can gain more leverage in our margin models. So some of that we have been able to do and we have been working on overtime, we are seeing the benefits of that this quarter and we have in our last couple of quarters goes well.

But the revenue mix obviously maters a lot with the Value+ gross margin our cost of revenue numbers and so with the growth in the streaming and payments revenue that we had during the quarter, we had a nice uptick here in the margin and or a decline in the cost of revenue.

So from a sustainability overtime, I would say it match the mix of revenue in Value+ matters you will remember that in Q4 we have historically experienced lower seasonality or more seasonality in our screening business as fewer tenants seem to move in the fourth quarter.

and have historically seen some compression in the margin in fourth quarter because of that. I would anticipate that would happen again this year but we are really happy about where we are right now going into the back half of the year..

Got it. That’s really helpful. And related to units on their management I guess to the number of net additions this quarter meet your internal expectations and then given your focus on the mid-market S&P mid-market do you expect to see a step up in average unit size per customer from now on.

And also would you be disappointed if you do not see the gross number of net additions increased sequentially every quarter from going forward?.

Hey Chao, I’ll take that one. We are really pleased with the unit added for the quarter but more importantly we are really pleased with the growing average portfolio size of the customers that we are bringing to the table.

As you know, we have made some shifts and focuses in our marketing and our sales efforts to really put a priority on customers that are going to have the longest and the largest lifetime value with the company.

And yes, the trailing indicators are still in great progress in that area the leading indicators as well as showing great progress in that area and we expect to continue to demonstrate some of that data for trend as we make more-and-more progress in bringing larger, small and mini customers to the table..

Got it. That’s helpful. And I guess just one more real quick. As the increase in mix of mid-market or larger SMB customers based on the early data are you seeing a higher attach rate of Value+ services within this customer base may be they are attaching through the four services versus one to two on the low end.

I know it’s early, but may be you can wrap some numbers around there?.

Yes, what I would say to that Chao is that these customers are running more substantial businesses and more experienced business professional and heir needs are broader than very early or younger property managers.

I can’t comment on the attach rate growth, its relatively early in that cycle, but what I would say is we are working with more sophisticated customers who come to the table with more sophisticated demand and a lot of those demand surround our suite of Value+ services..

Okay, got it. Thanks very much..

Thanks Chao..

Thanks..

Thank you. [Operator Instructions] And our next question comes from Brendan Barnicle from Pacific Crest Securities. Your line is open..

Hi, this is Trevor Upton on for Brendan. Thanks for taking my questions.

On the cost stability side, can you talk about what role [lab] (Ph) expand played in increasing stability in the quarter?.

Sure I'll take that. So you know our Value+ service offering is definitely an important part of our strategy as we acquire customers, we are able to continue to monetize and extend the monetization of those customers with our Value+ services.

I would say that improvement in bottom line results this quarter was driven by operating leverage that we were able to achieve across the business, most notably in the cost to revenue and sales and marketing areas of our business.

And so the incremental margin dollars that we get from our Value+ services are definitely a key strategic importance to us as we grow over time..

And then can you talk about the operating margin profile of Value+ services, I know they were gross margin but how do that, the Value+ services that were strongest in the quarter, how do they look like from the sales and marketing perspective?.

So, maybe I'll touch on part of this and Brian can talk what we are doing more for new Value+ services down the line. But our Value+ services don't have as much incremental sales and marketing expenses associated with them. The majority of our sales and marketing expenses are incurred upfront in acquiring customers.

We do have some of our Value+ services that have incremental third-party cost associated with them that goes for a cost of revenue but from an incremental sales and marketing we believe that there's a lot of leverage across the board in sales and marketing..

And to add on to that, we have made substantial investments in research and development in allowing our customers to adopt new Value+ services from within the app without the need to interact with our service store sales professional. New Value+ offerings like other than the e-check and premium leads, which I talked about in my remarks.

Both of those are in-app enabled meaning we market to our customers while they're using our app and allow them to actually adopt or sign up for and enable those from within the application without having to interact with the service or sales pro..

Okay, that’s very helpful.

One last one on the cost attainment, is there anything specific on the cost attainment that have happened in Q2?.

No, there is nothing special that happen during Q2 on the cost attainment side..

Okay, thanks.

I have just one final question kind of high level on the data side may be talk about what demand you are seeing after increased data service from a reporting or analytics perspective?.

I think that is that is one, certainly that larger customers are always wanting more access to data and more ways to visually represented data. We are doing a lot of product research in those areas today and that shows up in firmed up things like more-and-more robust reporting.

Although I would say we have the most robust reporting in the industry there is really a huge appetite for that. And our larger-and-larger customers are wanting more-and-more ways to slide and dice and visually represent that data.

So a scenario that I think that no one in this industry or any industry has ever really done with, it’s one that you are always working to kind of meet the needs of the customers..

Great, that’s really helpful. Thank you very much for taking my questions..

Thanks Trevor..

Thanks Trev..

Ladies and gentlemen, the replay information for this call is available today after 8:00 PM Eastern Standard Time. The conference ID for the call is 54075354 with dial in number at 855-859-2056 and international callers is 404-537-3406. Thank you for your participation in today's conference. This does conclude the program.

You may all disconnect and everyone have a great day..