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

Brian Essex - Morgan Stanley Kyle Chen - Credit Suisse.

Good day, ladies and gentlemen and welcome to the AppFolio Third Quarter 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, please begin..

Thank you, Dan. Good afternoon ladies and gentlemen. Thank you for joining us today as we report AppFolio’s third 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 which are subject to considerable risks and uncertainties.

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 and is available on our website. With that I’ll turn the call over to Brian. Please go ahead..

Hello. And thanks to all of you for joining us today. We’re pleased to report another strong quarter of financial and strategic execution across our business. Revenue for the third quarter increased 39% to $28.2 million.

We generated $2.7 million in positive adjusted EBITDA, indicating our potential for continued leverage in the business and consistent with our long-term strategies to reinvest in our business. We executed well on our key business priorities in the quarter.

These include, keeping our customers successful and happy, expanding our customer, enhancing our product offerings and supporting our growth through the adoption and expansion of Value+ services. I’m also pleased to report that overall demand for our property management solutions remain strong, supported by robust U.S. rental economy.

In our property management vertical, customer count increased 27% year-over-year and units under management increased as well to 2.5 million. Notably, net units added per new customer group meaningfully demonstrating our progress with serving larger SMB customers which has been a focus in 2016.

Our innovation engine remains active in the third quarter and we announced the planned launch of two new Value+ offerings, collections and revenue management software integration. Our collections offering will enable customers to quickly and easily turn over positive balances to a collections agency.

Surviving the management software integration will customers the opportunity to competitively price vacancies based on the recommendations provided directly from Rainmaker revenue optimization software. We expect both of these new Value+ offerings to be available to customers over the coming months, further extending our land and expand strategy.

In addition, we focus on adding features and enhancements to make AppFolio more indispensable at the system of record and system of engagement. Since property managers are highly mobile and do much of their work outside of the office, being the most mobile friendly solution in the industry continues to be a top priority.

And to that end, we greatly improved the customer experience on dealing reports on a mobile device. In addition we expanded our texting features, so that property managers can now, not only send and receive text, but they can also map text important announcements.

During the third quarter alone customers sent more than 2 million texts within our solution. In the end our products help streamline communications and better track the performance of business while on the go.

Turning to our progress in the legal vertical, MyCase customers increased to 40% in the third quarter, this growth remains strong and also reflects our focus on an efficient customer acquisition.

With a base of approximately 7,800 local customers to date, each quarter we’ve continued to be better positioned to add more Value+ services and begin to leverage our land expand strategy. We demonstrated progress on MyCase Payments in the third quarter releasing several user interface improvements to increase an optimized payments usage.

We continue to receive positive feedback from our customers about our MyCase Payments service. We know that customers can get a lot of leverage from using our payments solution and we’re happy to report strong initial success with legal customers adopting MyCase Payments.

Across the business, we continue to demonstrate the value and priority we placed on staying close and connected to our customers. In September, we held our fourth annual customer conference in Santa Barbara for property management customers.

This was another great event with more than 700 attendees who joined us with a goal of maximizing their investments in AppFolio property management software. The agenda included more than 30 educational sessions, product workshops, one-on-one help sessions and networking opportunities.

This was another major success for our company, our customers and our employees. It also demonstrated how much we value customer relationships and the vital role AppFolio plays in our customers’ digital transformation. Our property management conference is one of my favorite events.

In this year, I was reminded how integral AppFolio software is to our customers’ success and it was clear that customer engagement and satisfaction remains extremely high.

Our customers rely on us for industry education and innovation and I left the conference excited about the opportunities we have to continue to serve them and to drive even greater adoption of our Value+ services overtime.

In closing, we executed well in the third quarter and I’m proud of the progress we’re making towards achieving our strategic priority in finding sustainable business leverage.

From here, AppFolio is well positioned to further extend our product offerings and our technology platform and to expand to adjacent markets and meet our goals [ph] as the opportunities arise. And now I'll turn the call over to Ida for a more detailed financial review of the quarter..

Thanks, Brian. We are pleased with our financial performance this quarter reporting total revenue of $28.2 million, up 39% from $20.3 million reported one year ago. Third quarter GAAP net loss was $1.1 million or a net loss of $0.03 per share, an improvement over our year ago loss of $4.8 million and $0.14 per share.

Non-GAAP net income was $164,000 or breakeven per share, compared to our non-GAAP net loss of $4.5 million and $0.13 per share in our year ago period. Non-GAAP adjusted EBITDA was positive $2.7 million for the third quarter, compared to a negative non-GAAP adjusted EBITDA of $2.4 million in the third quarter a year ago.

Breaking down revenues further, core solution revenue was $11.3 million in the third quarter, up 36% from one year ago. Growth in this core subscription revenue is driven by the acquisition of new customers, increase in average size of our new customers as well as strong customer retention.

We ended the quarter with approximately 9,600 property manager customers, an increase of 27% from one-year ago and 7,800 law firm customers reflecting an increase of 40% year-over-year.

Our property manager customers were managing 2.53 million units in their portfolios, up from 2.01 million units one year ago, reflecting a 26% increase year-over-year. The increase in units in our management drives additional core solution revenue as well as incremental Value+ revenue over time.

As Brian mentioned, the average net new unit per customer added this quarter increased to the mid-300. Year-to-date, net new units per customer is in the high-200 as we continue to focus on the larger SMB customers. We expect our average net new units per customer to rise overall this year, while this metric may vary somewhat quarter-to-quarter.

Value+ services revenue was $15.7 million in the third quarter, up 45% from one year ago. Growth in Value+ services revenue was primarily driven by the adoption and expansion of 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 in dollars came from increases in revenues earned through our electronic payment and Resident Screening Service platform, consistent with prior quarters.

The non-GAAP results I’ll review today, excludes the impact of stock based compensation expense which was $1.3 million in the third quarter of ‘16, compared to$ 278,000 in the year ago period.

A reconciliation to the corresponding GAAP results can be found at the end of our press release issued today linked to our investor relations site at www.appfolioinc.com.

At September 30we had 610 employees serving our customers and stockholders up 10% from 556 one year ago and down slightly from 634 in the prior quarter, reflecting the net outflow of interns following our summer program.

Cost of revenue excluding depreciation and amortization, was $11.5 million or 41% of revenue, compared to $11.1 million or 42% of revenue in the prior quarter. The same metric one year ago was 45% of revenue. Sales and marketing expenses were $6.9 million or 24% of revenue, as compared to $7.4 million or 28% of revenue in the prior quarter.

The same metric one year ago was 35% of revenue. We are pleased with the operating leverage we continue to gain in both cost of revenue and sales and marketing expenses as a percent of revenue. Research and development expenses were $3.4 million or 12% of revenue, as compared to $2.9 million or 11% of revenue in the prior quarter.

The same metric one year ago was 14%. We continue to invest in R&D to expand our product offerings and market opportunities in the vertical markets we serve. General and administrative expenses, excluding cash based compensations were $3.7 million or 13% of revenue, compared to $3.7 million or 14% of revenue in the prior quarter.

The same metric one year ago was 18% of revenue. Weighted average common shares outstanding is to calculate per share amounts in the third quarter was 33.6 million shares. Moving to the balance sheet, we closed the quarter with $49.6 million in cash, cash equivalents and investment securities and no debt.

We generated $2.3 million in cash from operations, used $400,000 for capital expenditures and $3.4 million for additions to capitalized software. In summary, we posted another solid quarter of financial progress and are encouraged with the operating leverage and cash generation in our current business.

As a remainder, we experienced seasonality in the property management business during the fourth quarter of the calendar year. In prior years’ we’ve noted that there is a tendency for fewer people to move during the holiday season, resulting in less screening revenue and less payments revenue attributable to the rental applications of new tenants.

We expect the seasonality to continue to exist this year as well in our business. With that remainder, we’re updating our revenue outlook for fiscal year 2016, to a range of $104 million to $105 million, which at the midpoint is revenue of $104.5 million. This represents year-over-year revenue growth of 39%.

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..

Thank you [Operator Instructions]. And our first question comes from Brian Essex with Morgan Stanley. Your line is open..

Hi, good afternoon and thank you for taking the questions. First of all, nice results and I guess I wanted to dig into some of the OpEx and margin improvement in the quarter.

Sales and marketing in particular on a non-GAAP basis is down sequentially and down year-on-year and I guess I just wanted to get my arms around the key drivers of that decline and how you might expect us to view that that’s been going forward, particularly given the decline in where efficiency might be coming from..

Hi, Brian, thanks for the question. From an overall business perspective, we reflected the last couple of quarters on efficiencies that we’ve gained in cost of revenue and sales and marketing. And so as we continue to focus on merger customers in our SMB space, we concurrently look at opportunities where we have efficiencies on our expense side.

So the fact is that percent is going to fluctuate quarter-to-quarter just depending on what’s going on in our business from a buying season perspective or an efficiency in spend perspective, but we’re definitely focused on the leverage that we are able to gain in some of these operating expenses..

I mean, would you have any kind of examples of what the tenor of your spend was last year versus this year and how it’s much different, given that you’re going up and focusing on larger customers..

So I guess what I would say there Brian is, from a customer unit profile perspective, obviously the total revenue potential from smaller customers is different than those of larger customers, given our economics mostly surrounds the number of units a customer has.

So as the average units per customer that we acquire increases, we have the benefit of that operating leverage throughout our business and I think that’s part of what you’re seeing on the sales and marketing side..

Is it more kind of channel focused effort or maybe it’s just more efficiency per direct rep?.

Yeah, so the marketing channels that we use as you know are mostly online marketing, so I wouldn’t say that we’ve changed anything from a marketing focuses through the channels through which we acquire customers. Our sales people respond to in bound leads and leads generated from our marketing most of which is online.

So there isn’t anything that is just as significantly there from a business perspective. We’re still acquiring prospects and customers the same way..

Got it. Very helpful, thank you..

Thank you. And our next question comes from Kyle Chen of Credit Suisse. Your line is open..

Hey, thanks for the question and congratulations on the solid results. Just quickly on the unit acquisition this quarter, it’s good to see the step up in average units per customer, I think it’s up nearly 50% sequentially, looks like the urban market share is really gaining some traction I guess.

Can you deconstruct the momentum for us a little bit? Was the increase in average portfolio size fairly broad based or concentrated within a few customer wins and also were the new customer wins against legacy competitors were there more green field?.

Hey, Kyle. First, I’ll start by saying kind of that average isn’t concentrated across a couple of large wins. I can tell that was actually retailer strength to real average and the majority of deals that are coming through.

And I think it’s indicative of some of the priority and focus that we are having and our sales reps are having on the potential customers that are going to feed the most value from our all-in-one solution and in turn to be the most valuable to our business.

The second part of your question is, with these larger deals are we seeing a bigger mix of displacements and maybe displacing larger customers and I’d say that the greater percent is displacement wins, that percentage really isn’t changing radically.

We’re still operating primarily a green filed market where our customers are buying their first professional solution or in some cases displacing a very old and out dated one. So we haven’t seen much change in that dynamic..

Great, that’s helpful.

And then with the two new Value+ offerings, the revenue management and collections, couple that with premium leads last year I guess, what does that equate to in terms of our ARPU potential when you add up all these new services and how close does that get you in terms of the $110 dollar target ARPU that was set at the time of the IPO?.

Yeah, I’ll take that one as well Kyle. Each one of our Value+ services, you have to think of them as a platform and when we launch them there’s a beginning of something and they often take some time to get attraction and adoption from our dates. Well, I’ll start AppFolio premium leads, which came from the acquisition of RentLinx.

It’s part of a larger Value+ platform of marketing services, we’ve been really pleased with where that services is. I’d still say, it’s in its beginning and it’s also launched in a market where property managers don’t have to work that hard to fill a vacancy. There’s a strong occupancy metric out there today.

So we’re really pleased with that and overtime I think it’ll turn into a very significant Value+ area for us.

Also well on ARPU Value+ service offerings which will come to market next year, I think we’ll see a slow and steady adoption of those similar to all of our Value+ services and that’ll become more important overtime as market conditions change and as customer adoption changes.

That said, obviously our ARPU for us is gaining in momentum quarter-over-quarter and rising. We expect that rise to include new Value+ services overtime as well as deeper penetration of the prior Value+ platforms. Yeah, getting closer to our target every quarter, we get more - we’ll get closer and closer to realizing kind of that long-term target..

Okay, that’s very helpful. I appreciate the color..

Thanks, Kyle..

Thank you. [Operator Instructions] Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect..