Erica Abrams - IR Ida Kane - CFO Jason Randall - President and CEO.

Analysts:.

Good afternoon. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to the AppFolio’s Second Quarter Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. [Operator Instructions].

Please be advised that today’s call is being recorded on Monday July 30, 2018. I would now like to turn the conference over to your host, Ms. Erica Abrams. Please go ahead..

Thank you, Sarah. Good afternoon, ladies and gentlemen. Thank you for joining us today as we report AppFolio’s second quarter of fiscal year 2018 financial results. I’m joined today by Jason Randall and Ida Kane of AppFolio to discuss these results.

This call is simultaneously being webcast on the Investor Relations section of our website at www.appfolioinc.com. Before we get started, I would like to call everyone’s attention to our Safe Harbor policy.

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 Factor’s sections 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. With that, I’ll turn the call over to Ida. Ida, please go ahead..

Thank you, Erica. And welcome to everyone joining us on the call today for AppFolio’s second quarter 2018 financial results.

Today we reported a strong second quarter with revenue of $47.2 million, a 32% increase year-over-year and GAAP net income of $7.5 million or $0.21 per diluted share compared to GAAP net income of approximately $2.8 million or $0.08 per diluted share one year ago.

Included in second quarter 2018 results is $1.3 million of non-cash charges related to stock-based compensation. For those of you who track non-GAAP results, our Form 10-Q was filed today and includes more detailed financial data points that you may find helpful in calculating non-GAAP results on your own.

As previously discussed, we adopted the new revenue recognition standard ASC 606 using the modified retrospective method. Our Form 10-Q also provides a reconciliation of the impact of the adoption of ASC 606 on our second quarter and year-to-date financial results.

Core Solutions revenue was $17 million in the second quarter, up 22% from one year ago; primarily due to a 21% increase in Property Manager units under management from the 14% increase in the number of Property Manager customers.

We ended the second quarter with approximately 12,300 Property Manager customers, managing an aggregate 3.55 million units in their portfolios compared to approximately 10,800 customers and 2.93 million units under management one year ago.

The increase year-over-year in average size of net new customers acquired during the quarter reflects the success we are having with higher value customers with more units under management. In the legal vertical, customer count increased 12% year-over-year to approximately 10,000.

Customer-related metrics are also included in our 10-Q filing for your reference. Second quarter Value+ services revenue was $28.8 million, up 40% year-over-year.

Although each of the Value+ services increased year-over-year, the majority of our growth was derived from increased usage of our electronic payment services, screening services and legal liability to landlord insurance by larger Property Manager customers and a higher unit base.

Turning to expenses, total cost and operating expenses for the second quarter increased 21% year-over-year on a GAAP basis compared to an overall 32% increase in total revenue.

Our increase in cost is primarily related to incremental third-party costs associated with the delivery of our Value+ services and additional hiring in key areas such as product and engineering as we invest in our business to drive strategic long-term growth.

Headcount increases were more moderate than revenue increases, thereby driving improved operating leverage. Also, as discussed with you last quarter, our gross margin benefited from improved pricing from various third-party service providers related to Value+ services.

As we continued to grow and introduce new or enhanced Value+ services, we expect that our costs and operating expenses will fluctuate from period-to-period, especially as we evaluate additional investments to expand into adjacent markets or new vertical markets over time.

Moving to the balance sheet, we closed the second quarter with $75.3 million in cash, cash equivalents and investment securities and no debt.

During the second quarter, we generated $11.7 million in cash from operating activities, we used approximately $300,000 for capital expenditures during the quarter and invested $2.6 million in additional product innovations via capitalized software.

To recap the quarter, total revenue increased 32% year-over-year to $47.2 million and GAAP net income improved to $7.5 million or $0.21 per diluted share. Given our strong performance in the first half of the year, we are raising our outlook for the full year 2018.

We now expect revenue to be in the range of $183 million to $185 million, which represents year-over-year revenue growth of 28% at the midpoint of the range. We expect our weighted average diluted shares for the full year to be approximately 36 million.

As a reminder, investors are invited to submit questions via the investor Q&A forum, located on the Investor Overview section of our website. With that, I’ll turn the call over to Jason for additional comments..

Thanks, Ida. Hello, and thank you for joining us today. We continue on our mission to revolutionize vertical industry businesses by providing great cloud-based business management software and services to our customers.

Our efforts in the most recent quarter built on our success to-date as we continue to deliver value to our customers, maintain a rapid pace of product and technology innovation and furthered our healthy company culture. We remained committed to our long-term strategy of sustainable scalable growth.

Turning to our real estate vertical, which represents a significant majority of our revenue, we experienced growth in net new units under management per customer during the quarter.

This is the result of our focus on delivering value to our customers, including those with larger portfolios in the Residential, Commercial, Student Housing and Community Association segments. This will remain a priority for our business.

We also expanded our Value+ payments platform offering to include Bill Pay and enhanced the functionality and user experience for larger Community Association customers. With Bill Pay, our Value+ payments platform now allows property managers to pay vendors and owners from within AppFolio Property Manager with the click of a button.

With checks automatically printed and mailed, customers can spend less time manually processing checks and have greater accuracy in the management of their expenses and vendors, all from within our platform.

Our Community Association customers can now enjoy additional automation around board invoice approvals, dues payments and the ability to enforce violation-based on pre-established community-specific rules. This new functionality improves efficiency, risk mitigation and board communication for our customers.

Our customer experience team continues to spend time working closely with our customers to understand their specific workflows and business needs and identify meaningful areas for product development and service improvements.

This customer intimacy increases our ability to deliver important product and services that improve workflow efficiency, communication and the experience between multiple parties in our ecosystem. We are looking forward to our sixth annual AppFolio Property Manager Conference to be held September 17 through 19 here in Santa Barbara.

This annual conference reinforces our close connection and commitment to customers. The conference agenda offers customers a chance to get even more from the AppFolio Property Manager software as they participate in over 20 educational sessions, ends on training and workshops, as well as connecting with peers.

During the quarter in our legal vertical, we added functionality to help MyCase customers improve efficiency and reduce manual tasks, including automated invoice reminders, automatic time entries and quick invoices.

I’m happy to also report that we received several awards recognizing achievement across our business including excellence in customer service, leadership and commitment to our team members. We remained focused on executing against our long-term strategy.

We look forward to spending time with our Property Manager customers and investors in Santa Barbara at our customer conference in September. Thank you all for joining us today. I will now turn the call back to the operator. Please go ahead..

Thank you. Ladies and gentlemen that does conclude our conference call today. To reach a replay of today’s conference, please call, 855-859-2056 or 404-537-3406 and reference ID number 1199261. Thank you. You may now disconnect..

End of Q&A:.