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REALPAGE INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.
(Edgar Glimpses Via Acquire Media NewsEdge)
This Quarterly Report on Form 10-Q contains "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (which Sections
were adopted as part of the Private Securities Litigation Reform Act of 1995).
Statements preceded by, followed by or that otherwise include the words
"anticipates," "believes," "could," "seeks," "estimates," "expects," "intends,"
"may," "plans," "potential," "predicts," "projects," "should," "will," "would"
or similar expressions and the negatives of those terms are generally
forward-looking in nature and not historical facts. These forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause our actual results, performance or achievements to be materially
different from any anticipated results, performance or achievements. Factors
that might cause or contribute to such differences include, but are not limited
to those discussed in the section entitled "Risk Factors" in Part II, Item 1A of
this report. You should carefully review the risks described herein and in the
other documents we file from time to time with the Securities and Exchange
Commission ("SEC"), including our Annual Report on Form 10-K for fiscal year
2011. You should not place undue reliance on forward-looking statements herein,
which speak only as of the date of this report. Except as required by law, we
disclaim any intention, and undertake no obligation, to revise any
forward-looking statements, whether as a result of new information, a future
event or otherwise.
Overview
RealPage, Inc., a Delaware corporation, and its subsidiaries, (the "Company" or
"we" or "us") is a leading provider of on demand software solutions for the
rental housing industry. Our broad range of property management solutions
enables owners and managers of single-family and a wide variety of multi-family
rental property types to manage their marketing, pricing, screening, leasing,
accounting, purchasing and other property operations. Our on demand software
solutions are delivered through an integrated software platform that provides a
single point of access and a shared repository of prospect, resident and
property data. By integrating and streamlining a wide range of complex processes
and interactions among the rental housing ecosystem of owners, managers,
prospects, residents and service providers, our platform helps optimize the
property management process and improves the experience for all of these
constituents.
Our solutions enable property owners and managers to increase revenues and
reduce operating costs through higher occupancy, improved pricing methodologies,
new sources of revenue from ancillary services, improved collections and more
integrated and centralized processes. As of September 30, 2012, over 8,300
customers used one or more of our on demand software solutions to help manage
the operations of approximately 7.8 million rental housing units. Our customers
include each of the ten largest multi-family property management companies in
the United States, ranked as of January 1, 2011 by the National Multi Housing
Council, based on number of units managed.
We sell our solutions through our direct sales organization. Our total revenues
were approximately $83.2 million and $67.7 million for the three months ended,
and $236.4 million and $186.8 million for the nine months ended, September 30,
2012 and 2011, respectively. In the same periods, we had operating income (loss)
of approximately $3.7 million, $(0.7) million, $3.8 million and $0.5 million,
respectively, and net income (loss) of approximately $2.1 million, $(1.1)
million, $1.5 million and $(1.5) million, respectively.
Our company was formed in 1998 to acquire Rent Roll, Inc., which marketed and
sold on premise property management systems for the conventional and affordable
multi-family rental housing markets. In June 2001, we released OneSite, our
first on demand property management system. Since 2002, we have expanded our on
demand software solutions to include a number of software-enabled value-added
services that provide complementary sales and marketing, asset optimization,
risk mitigation, billing and utility management and spend management
capabilities. In connection with this expansion, we have allocated greater
resources to the development and infrastructure needs of developing and
increasing sales of our suite of on demand software solutions. In addition,
since July 2002, we have completed 19 acquisitions of complementary technologies
to supplement our internal product development and sales and marketing efforts
and expand the scope of our solutions, the types of rental housing properties
served by our solutions and our customer base.
New Product Families
In August 2011, we announced our new product family, LeaseStar, which will
consolidate and integrate products and services related to our acquisitions of
eREI, LevelOne, SeniorLiving.net, MTS, RMO and our suite of products and
services historically branded as Crossfire. We believe the LeaseStar product
family will unify major organic and paid lead channels into a single marketplace
where consumers can find a rental unit and transact business by viewing real
time availability, pricing, pre-qualify and lease online.
In February 2012, we announced our new product family, RealPage Senior Living.
We believe RealPage Senior Living will help owners and managers attract more
residents and improve the living and care experience enjoyed by those residents.
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Recent Acquisitions
In May 2011, we acquired substantially all of the assets of Compliance Depot LLC
("Compliance Depot") for approximately $22.5 million which included a cash
payment of $19.2 million and three deferred payments of $1.1 million each
payable six, twelve and eighteen months after the acquisition date. The
acquisition of Compliance Depot expands our ability to provide vendor risk
management and compliance software for the rental housing industry. Interfacing
with vendors through a branded platform, Compliance Depot allows property
managers and owners to: track compliance with vendor obligations to carry
workers compensation and general liability insurance, identify vendor bankruptcy
filings, liens, criminal records, collections and professional license
verification, confirm federal regulation compliance, such as The Patriot Act; as
well as manage contractual agreements and federal and state tax documents.
In July 2011, we acquired Senior-Living.com, Inc., operating under the name
SeniorLiving.net ("SLN"), for a purchase price consisting of a cash payment of
$4.0 million at closing, additional cash payments of $0.5 million, half of which
is due on each of the first and second anniversaries of the acquisition date,
and a deferred earn out payment of up to $0.5 million in cash and up to 400,000
shares of our common stock, in each case payable based on the achievement of
specified milestones on or before June 30, 2014. The acquisition of SLN expands
our lead generation capabilities into the senior living rental housing market.
In August 2011, we acquired Multifamily Technology Solutions, Inc. ("MTS"),
which owns the Internet listing service for rental properties called MyNewPlace,
pursuant to an Agreement and Plan of Merger. MTS continued as the surviving
corporation of the Merger and a wholly owned subsidiary of RealPage. We acquired
MTS for a purchase price of $74.9 million, net of cash acquired, comprised of
approximately $64.0 million in cash, 294,770 shares of RealPage restricted
common stock and the assumption of MTS stock options exercisable for 349,693
shares of RealPage common stock. The acquisition of MTS adds a
pay-for-performance Internet listing service, expands our suite of SAAS lead
generation and management tools and service delivery capabilities.
In January 2012, we acquired substantially all of the operating assets of
Vigilan, Incorporated ("Vigilan"). A provider of assisted living
software-as-a-service, Vigilan products allow assisted living communities to
monitor and schedule detailed care, manage labor costs, provide accurate billing
as well as compliance tools through its comprehensive compliance module. We
acquired Vigilan for a purchase price of $5.0 million consisting of a cash
payment of $4.0 million and two additional cash payments of up to $0.5 million
each due 12 months and 24 months after the acquisition date.
In July 2012, we acquired all of the issued and outstanding shares of Rent Mine
Online, Inc. ("RMO") for a purchase price which consists of a cash payment of
$5.5 million at closing, a deferred payment of up to $3.5 million and a
contingent deferred earn out payment of up to 300,000 shares of our common
stock, payable based on the achievement of specified milestones on or before
December 31, 2014. The acquisition of RMO expands our resident referral
capabilities into the multifamily residential rental housing market.
Critical Accounting Policies and Estimates
The preparation of our condensed consolidated financial statements requires us
to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue, costs and expenses and related disclosures. We base these
estimates and assumptions on historical experience or on various other factors
that we believe to be reasonable and appropriate under the circumstances. We
reconsider and evaluate our estimates and assumptions on an on-going basis.
Accordingly, actual results may differ significantly from these estimates
We believe that the following critical accounting policies involve our more
significant judgments, assumptions and estimates, and therefore, could have the
greatest potential impact on our condensed consolidated financial statements:
• Revenue recognition;
• Accounts receivable;
• Business combinations;
• Goodwill and other intangible assets with indefinite lives;
• Impairment of long-lived assets;
• Fair value measurements;
• Intangible assets;
• Stock-based compensation;
• Income taxes; and
• Capitalized product development costs.
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A full discussion of our critical accounting policies, which involve significant
management judgment, appears in our Form 10-K under "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Critical Accounting
Policies and Estimates." For further information regarding our business,
industry trends, accounting policies and estimates, and risks and uncertainties,
refer to our Form 10-K.
Key Components of Our Results of Operations
Revenue
We derive our revenue from three primary sources: our on demand software
solutions; our on premise software solutions; and our professional and other
services.
On demand revenue. Revenue from our on demand software solutions is comprised of
license and subscription fees relating to our on demand software solutions,
typically licensed for one year terms, commission income from sales of renter's
insurance policies, and transaction fees for certain on demand software
solutions, such as payment processing, spend management and billing services.
Typically, we price our on demand software solutions based primarily on the
number of units or beds the customer manages with our solutions. For our
insurance based solutions, our agreement provides for a fixed commission on
earned premiums related to the policies sold by us. The agreement also provides
for a contingent commission to be paid to us in accordance with the agreement.
This agreement provides for a calculation that considers, on the policies sold
by us, earned premiums less i) earned agent commissions; ii) a percent of
premium retained by our underwriting partner; iii) incurred losses; and iv)
profit retained by our underwriting partner during the time period. Our estimate
of our contingent commission revenue considers historical loss experience on the
policies sold by us. For our transaction-based solutions, we price based on a
fixed rate per transaction.
On premise revenue. Our on premise software solutions are distributed to our
customers and maintained locally on the customers' hardware. Revenue from our on
premise software solutions is comprised of license fees under term and perpetual
license agreements. Typically, we have licensed our on premise software
solutions pursuant to term license agreements with an initial term of one year
that include maintenance and support. Customers can renew their term license
agreement for additional one-year terms at renewal price levels. In February
2010, we completed a strategic acquisition of assets that included on premise
software solutions that were historically marketed and sold pursuant to
perpetual license agreements and related maintenance agreements.
We no longer actively market our legacy on premise software solutions to new
customers, and only license our on premise software solutions to a small portion
of our existing on premise customers as they expand their portfolio of rental
housing properties. While we intend to support our recently acquired on premise
software solutions, we expect that many of the customers who license these
solutions will transition to our on demand software solutions over time.
Professional and other revenue. Revenue from professional and other services
consists of consulting and implementation services, training, and other
ancillary services. Professional and other services engagements are typically
time and material based.
Cost of Revenue
Cost of revenue consists primarily of personnel costs related to our operations,
support services, training and implementation services, expenses related to the
operation of our data center and fees paid to third-party service providers.
Personnel costs include salaries, bonuses, stock-based compensation and employee
benefits. Cost of revenue also includes an allocation of facilities costs,
overhead costs and depreciation, as well as amortization of acquired technology
related to strategic acquisitions and amortization of capitalized development
costs. We allocate facilities, overhead costs and depreciation based on
headcount.
Operating Expenses
We classify our operating expenses into three categories: product development,
sales and marketing, and general and administrative. Our operating expenses
primarily consist of personnel costs, costs for third-party contracted
development, marketing, legal, accounting and consulting services and other
professional service fees. Personnel costs for each category of operating
expenses include salaries, bonuses, stock-based compensation and employee
benefits for employees in that category. In addition, our operating expenses
include an allocation of our facilities costs, overhead costs and depreciation
based on headcount for that category, as well as amortization of purchased
intangible assets resulting from our acquisitions.
Product development.Product development expense consists primarily of personnel
costs for our product development employees and executives and fees to contract
development vendors. Our product development efforts are focused primarily on
increasing the functionality and enhancing the ease of use of our on demand
software solutions and expanding our suite of on demand software solutions. In
2008 and 2011, we established a product development and service center in
Hyderabad, India and Manila, Philippines, respectively, to take advantage of
strong technical talent at lower personnel costs compared to the United States.
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Sales and marketing. Sales and marketing expense consists primarily of personnel
costs for our sales, marketing and business development employees and
executives, travel and entertainment and marketing programs. Marketing programs
consist of amounts paid for online advertising, including search engine
optimization ("SEO") and search engine marketing ("SEM"), renter's insurance and
other advertising, tradeshows, user conferences, public relations, industry
sponsorships and affiliations and product marketing. In addition, sales and
marketing expense includes amortization of certain purchased intangible assets,
including customer relationships and key vendor and supplier relationships
obtained in connection with our acquisitions.
General and administrative. General and administrative expense consists of
personnel costs for our executive, finance and accounting, human resources,
management information systems and legal personnel, as well as legal, accounting
and other professional service fees and other corporate expenses.
Key Business Metrics
In addition to traditional financial measures, we monitor our operating
performance using a number of financially and non-financially derived metrics
that are not included in our condensed consolidated financial statements. We
monitor the key performance indicators as follows:
On demand revenue. This metric represents the license and subscription fees
relating to our on demand software solutions, typically licensed for one year
terms, commission income from sales of renter's insurance policies and
transaction fees for certain of our on demand software solutions. We consider on
demand revenue to be a key business metric because we believe the market for our
on demand software solutions represents the largest growth opportunity for our
business.
On demand revenue as a percentage of total revenue. This metric represents on
demand revenue for the period presented divided by total revenue for the same
period. We use on demand revenue as a percentage of total revenue to measure our
success in executing our strategy to increase the penetration of our on demand
software solutions and expand our recurring revenue streams attributable to
these solutions. We expect our on demand revenue to remain a significant
percentage of our total revenue although the actual percentage may vary from
period to period due to a number of factors, including the timing of
acquisitions, professional and other revenue and on premise perpetual license
sales and maintenance fees resulting from our February 2010 acquisition.
Ending on demand units. This metric represents the number of rental housing
units managed by our customers with one or more of our on demand software
solutions at the end of the period. We use ending on demand units to measure the
success of our strategy of increasing the number of rental housing units managed
with our on demand software solutions. Property unit counts are provided to us
by our customers as new sales orders are processed. Property unit counts may be
adjusted periodically as information related to our customers' properties is
updated or supplemented, which could result in adjusting the number of units
previously reported.
Non-GAAP on demand revenue. This metric represents on demand revenue adjusted to
reverse the effect of the write down of deferred revenue associated with
purchase accounting for strategic acquisitions. We use this metric to evaluate
our on demand revenue as we believe its inclusion provides a more accurate
depiction of on demand revenue arising from our strategic acquisitions.
The following provides a reconciliation of non-GAAP on demand revenue:
Three Months Ended Nine Months Ended
September 30, September 30,
2012 2011 2012 2011
On demand revenue $ 78,973 $ 62,765 $ 224,629 $ 172,741
Acquisition-related deferred revenue adjustment 3 276 86 520
Non-GAAP on demand revenue $ 78,976 $ 63,041 $ 224,715 $ 173,261
Non-GAAP on demand revenue per average on demand unit. This metric represents
non-GAAP on demand revenue for the period presented divided by average on demand
units for the same period. For interim periods, the calculation is performed on
an annualized basis. We calculate average on demand units as the average of the
beginning and ending on demand units for each quarter in the period presented.
We monitor this metric to measure our success in increasing the number of on
demand software solutions utilized by our customers to manage their rental
housing units, our overall revenue and profitability.
Adjusted EBITDA. We define this metric as net (loss) income plus depreciation
and asset impairment; amortization of intangible assets; interest expense, net;
income tax expense (benefit); stock-based compensation expense and
acquisition-related expense. Beginning in 2011, Adjusted EBITDA excludes
litigation-related expenses pertaining to Yardi and related insurance litigation
as discussed in Part II, Item 1, "Legal Proceedings." Beginning in the second
quarter of 2011, Adjusted EBITDA includes acquisition-related deferred revenue
adjustments. Beginning in the third quarter of 2012, Adjusted EBITDA excludes
stock registration costs. We believe that the use of Adjusted EBITDA is useful
in evaluating our operating performance because it excludes certain non-cash
expenses, including depreciation, amortization and stock-based compensation.
Adjusted EBITDA is not determined in accordance with accounting principles
generally accepted in the United States, or GAAP, and
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should not be considered as a substitute for or superior to financial measures
determined in accordance with GAAP. For further discussion regarding Adjusted
EBITDA and a reconciliation of Adjusted EBITDA to net income, refer to
"Reconciliation of Non-GAAP Financial Measures" herein. Our Adjusted EBITDA grew
from approximately $15.0 million and $40.9 million for the three and nine months
ended September 30, 2011 to approximately $18.8 million and $52.5 million for
the three and nine months ended September 30, 2012 as a result of our efforts to
expand market share and increase revenue.
Results of Operations
The following tables set forth our results of operations for the specified
periods. The period-to-period comparison of financial results is not necessarily
indicative of future results.
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