REALPAGE, INC. The following discussion and analysis of our financial condition and results of operations should be read together with "Selected Financial Data" and our audited Consolidated Financial Statements and accompanying notes included elsewhere in this filing. This discussion contains forward-looking statements, based on current expectations and related to our plans, estimates, beliefs, and anticipated future financial performance. These statements involve risks and uncertainties, and our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under "Risk Factors," "Special Note Regarding Forward-Looking Statements," and elsewhere in this filing.
Overview
We are a leading global provider of software and data analytics to the real estate industry. Clients use our platform of solutions to improve operating performance and increase capital returns. By leveraging data as well as integrating and streamlining a wide range of complex processes and interactions among the rental real estate ecosystem, our platform helps our clients improve financial and operational performance and prudently place and harvest capital. The substantial majority of our revenue is derived from sales of our on demand software solutions, representing 96.5%, 95.9%, and 95.8% of our total revenue during 2019, 2018, and 2017, respectively. We also derive revenue from our professional and other services, and a small percentage of our revenue is derived from sales of our on premise software solutions. Our on demand software solutions are sold pursuant to subscription license agreements, and our on premise software solutions are sold pursuant to term or perpetual licenses and associated maintenance agreements. For our insurance-based solutions, we earn revenue based on a commission rate that considers earned premiums, agent commission, incurred losses, and profit retained by our underwriting partner. Our transaction-based solutions are priced based on a fixed rate per transaction. We sell our solutions through our direct sales organization and derive substantially all of our revenue from sales inthe United States . Our revenue has increased from$869.5 million in 2018 to$988.1 million in 2019. The increase in revenue was driven by growth in the sales of our on demand software solutions and incremental revenue from our recent acquisitions. We believe there is increasing demand for solutions that bring efficiency and precision to the rental real estate industry, which has historically lacked the tools available to many other investment classes. While the use of, and transition to, data analytics and on demand software solutions in the rental real estate industry is growing rapidly, we believe it remains at a relatively early stage of adoption. Additionally, there is a modest level of penetration of our on demand software solutions in our existing client base. These factors present us with significant opportunities to generate revenue through sales of additional data analytics and on demand software solutions. Our company was formed in 1998 to acquireRent Roll, Inc. , which marketed and sold on premise property management systems for the conventional and affordable multifamily rental housing markets. InJune 2001 , we released OneSite, our first on demand property management system. Since 2002, we have expanded our platform of solutions to include property management, leasing and marketing, resident services, and asset optimization capabilities. In addition to the multifamily markets, we now serve the single family, senior living, student living, military housing, commercial, hospitality, homeowner association, short-term rental and vacation rental markets. SinceJuly 2002 , we have completed over 45 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 and vacation rental properties served by our solutions, and our client base. In connection with this expansion and these acquisitions, we have committed greater resources to developing and increasing sales of our platform of data analytics and on demand solutions. As ofDecember 31, 2019 , we had approximately 7,000 employees. Recent Developments Credit Facility InSeptember 2019 , we entered into an Amended and Restated Credit Agreement (the "Amended Credit Facility") to amend and restate our prior credit facility. The Amended Credit Facility provides for$600.0 million in aggregate commitments for secured revolving loans and up to$600.0 million in term loans. The Amended Credit Facility extends the maturity date of the prior credit facility fromFebruary 27, 2022 toSeptember 5, 2024 (subject to early maturity provisions in certain circumstances), reduces our borrowing costs, provides additional borrowing capacity, and increases covenant flexibility. The Amended Credit Facility also allows us, subject to certain conditions, to request additional term loan commitments and/or additional revolving commitments in an aggregate principal amount of up to the greater of$250.0 million or 100% of consolidated EBITDA (as defined within the agreement) for the most recent four fiscal quarters, plus an amount that would not cause our consolidated senior secured net leverage ratio to exceed 3.50 to 1.00. 41
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Table of Contents Refer to Note 9 of the accompanying Consolidated Financial Statements for applicable definitions, further discussion of this amendment, and other terms and conditions of the Credit Facility. Acquisition Activity InNovember 2019 , we entered into an Agreement and Plan of Merger and Stock Purchase Agreement (the "Merger Agreement"), by and amongRealPage ,Buildium, LLC ("Buildium"), and certain other parties named therein. We closed the transaction onDecember 18, 2019 .Buildium is a SaaS real estate property management solution provider that targets the smaller multifamily, single-family, associations (homeowner and condominium) and commercial real estate market segments. Aggregate purchase consideration was$569.4 million , including deferred cash obligations of up to$3.4 million that will be released on the one year anniversary following the closing date, subject to any indemnification claims. The purchase agreement provides for up to$11.7 million of deferred compensation for key employees for which post-acquisition employment service is required. The deferred compensation was paid into escrow at closing and recorded as a prepaid asset that will amortize into compensation expense ratably over the two-year term of the arrangement. The funds will be released 50% on each of the first and second year anniversary dates of the acquisition. In addition, the purchase agreement provides for up to$15.0 million of restricted stock awards, which may be settled in stock or cash at our choosing, to be issued or settled at a future date and for which post-acquisition employment service is required. The$15.0 million of restricted stock awards are comprised of 1) up to$7.5 million of restricted stock with service requirements that will be issued on the first anniversary date and vest ratably beginning the subsequent quarter over the following twelve quarters, and 2) up to$7.5 million of restricted stock awards contingent on the achievement of performance targets in 2022. As these awards also require continued employment services, we will record this amount as stock-based compensation expense over the requisite service period, recognizing a corresponding fair value liability that will be reclassified to additional paid-in-capital upon issuance or settled in cash. OnDecember 11, 2019 , we entered into an Agreement and Plan of Merger whereby we acquired 100% of the ownership interests ofInvestor Management Services, LLC ("IMS"). IMS provides an investor relationship management platform. Aggregate purchase consideration was$55.6 million , including deferred cash obligations of up to$5.7 million that will be released over an eighteen-month period following the closing date, subject to any indemnification claims. OnJuly 26, 2019 , we acquired substantially all of the assets ofSimple Bills Corporation ("Simple Bills"), a provider of utility management services for the multi-family student housing market. Aggregate purchase consideration was$18.1 million , including deferred cash obligations of up to$3.4 million that will be released over a two-year period following the closing date, subject to indemnification claims, and contingent equity grants of up to$10.0 million based on the achievement of certain financial objectives during 2020 and 2021, and continued employment of certain Simple Bills employees. OnJuly 10, 2019 , we acquired substantially all of the assets ofCRE Global Enterprises LLC ("CRE"), and certain of its subsidiaries, including 100% of the shares outstanding in its subsidiaries in theUK ,Canada andColombia (collectively "Hipercept"). Hipercept is a provider of data services and data analytics solutions to institutional commercial real estate owners. Aggregate purchase consideration was$28.3 million , including deferred cash obligations of up to$4.0 million , subject to any indemnification claims, to be released on the first and second anniversary dates of the closing date, and contingent consideration of up to$28.0 million based on the achievement of certain financial objectives during the six months endedJune 30, 2022 . OnApril 11, 2019 , we acquired substantially all of the assets ofLeaseTerm Insurance Group, LLC ("LeaseTerm Solutions"). Aggregate purchase consideration was$26.5 million , including deferred cash obligations of up to$2.7 million that will be released on the first and second anniversary dates of the closing date, subject to any indemnification claims. Refer to Note 3 of the accompanying Consolidated Financial Statements for further discussion of these acquisitions. 42
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Key Business Metrics
In addition to financial measures, we monitor our operating performance using a
number of financially and non-financially derived metrics that are not included
in our consolidated financial statements. We monitor the key performance
indicators reflected in the following table:
Year Ended December 31,
2019 2018 2017
(in thousands, except dollar per unit data)
Revenue:
Total revenue $ 988,136 $ 869,480 $ 670,963
On demand revenue $ 953,576 $ 833,709 $ 642,622
On demand revenue as a percentage of total
revenue 96.5 % 95.9 % 95.8 %
Non-GAAP total revenue $ 989,004 $ 871,370 $ 674,021
Non-GAAP on demand revenue $ 954,444 $ 835,599 $ 645,680
Adjusted EBITDA $ 281,685 $ 231,176 $ 163,445
Ending on demand units 18,475 16,219 13,003
Average on demand units 16,758 14,847 11,711
On demand annual client value $ 1,039,588 $ 876,637 $ 751,183
On demand revenue per ending on demand unit $ 56.27 $
54.05
On demand revenue: This metric represents the GAAP revenue derived from license
and subscription fees relating to our on demand software solutions, typically
licensed over 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 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 revenues, and on premise perpetual license
sales and maintenance fees.
Non-GAAP total revenue: This metric is calculated by adding acquisition-related
deferred revenue to total revenue. We believe it is useful to include deferred
revenue written down for GAAP purposes under purchase accounting rules in order
to appropriately measure the underlying performance of our business operations
in the period of activity and associated expense. Further, we believe this
measure is useful to investors as a way to evaluate our ongoing performance
because it provides a more accurate depiction of revenue arising from our
strategic acquisitions.
The following provides a reconciliation of GAAP to non-GAAP total revenue:
Year Ended December 31,
2019 2018 2017
(in thousands)
Total revenue $ 988,136 $ 869,480 $ 670,963 Acquisition-related deferred revenue 868 1,890 3,058 Non-GAAP total revenue
$ 989,004 $ 871,370 $ 674,021 Non-GAAP on demand revenue: This metric reflects total on demand revenue plus acquisition-related deferred revenue, as described above. We believe inclusion of these items provides a useful measure of the underlying performance of our on demand business operations in the period of activity and associated expense. Further, we believe that investors and financial analysts find this measure to be useful in evaluating our ongoing performance because it provides a more accurate depiction of on demand revenue arising from our strategic acquisitions. 43
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The following provides a reconciliation of GAAP to non-GAAP on demand revenue:
Year Ended December 31,
2019 2018 2017
(in thousands)
On demand revenue $ 953,576 $ 833,709 $ 642,622 Acquisition-related deferred revenue 868 1,890 3,058 Non-GAAP on demand revenue
$ 954,444 $ 835,599 $ 645,680 Adjusted EBITDA: We define Adjusted EBITDA as net income, plus (1) acquisition-related deferred revenue, (2) depreciation, asset impairment, and the loss on disposal of assets, (3) amortization of product technologies and intangible assets, (4) change in fair value of equity investment, (5) loss due to cyber incident, net of recoveries, (6) acquisition-related expense, (7) organizational realignment costs, (8) regulatory and legal matters, (9) stock-based expense, (10) interest expense, net, and (11) income tax expense (benefit). We believe that investors and financial analysts find this non-GAAP financial measure to be useful in analyzing our financial and operational performance, comparing this performance to our peers and competitors, and understanding our ability to generate income from ongoing business operations. The following provides a reconciliation of net income to Adjusted EBITDA: Year Ended December 31, 2019 2018 2017 (in thousands) Net income$ 58,208 $ 34,725 $ 377 Acquisition-related deferred revenue 868 1,890
3,058
Depreciation, asset impairment, and loss on disposal of assets 36,724 35,211
27,752
Amortization of product technologies and intangible assets 80,764 71,708
39,918
Change in fair value of equity investment (2,600 ) - - Loss due to cyber incident, net of recoveries - 4,952 - Acquisition-related expense 4,754 2,437 5,557 Organizational realignment 1,533 - - Regulatory and legal matters 1,465 78 11,012 Stock-based expense 62,563 50,641 45,835 Interest expense, net 35,056 29,959 15,072 Income tax expense (benefit) 2,350 (425 ) 14,864 Adjusted EBITDA$ 281,685 $ 231,176 $ 163,445 Ending on demand units: This metric represents the number of units managed by our clients 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 units managed with our on demand software solutions. Property unit counts are provided to us by our clients as new sales orders are processed. Property unit counts may be adjusted periodically as information related to our clients' properties is updated or supplemented, which could result in adjustments to the number of units previously reported. Average on demand units: We calculate average on demand units as the average of the beginning and ending on demand units for each quarter in the period presented. This metric is a measure of our success increasing the number of on demand software solutions utilized by our clients to manage their property units, our overall revenue, and profitability. On demand annual client value ("ACV"): ACV represents our estimate of the annual value of our on demand revenue contracts at a point in time. We monitor this metric to measure our success in increasing the number of on demand units, and the amount of software solutions utilized by our clients to manage their property units. On demand revenue per ending on demand unit ("RPU"): We define RPU as ACV divided by ending on demand units. We monitor this metric to measure our success in increasing the penetration of on demand software solutions utilized by our clients to manage their property units. 44
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Table of Contents Non-GAAP Financial Measures We report our financial results in accordance with GAAP; however, we believe that, in order to properly understand our short-term and long-term financial, operational, and strategic trends, it may be helpful for investors to exclude certain non-cash or non-recurring items when used as a supplement to financial performance measures in accordance with GAAP. These items result from facts and circumstances that vary in both frequency and impact on continuing operations. We also use results of operations excluding such items to evaluate our operating performance compared against prior periods, make operating decisions, determine executive compensation, and serve as a basis for long-term strategic planning. These non-GAAP financial measures provide us with additional means to understand and evaluate the operating results and trends in our ongoing business by eliminating certain non-cash expenses and other items that we believe might otherwise make comparisons of our ongoing business with prior periods more difficult, obscure trends in ongoing operations, reduce our ability to make useful forecasts, or obscure the ability to evaluate the effectiveness of certain business strategies and management incentive structures. In addition, we also believe that investors and financial analysts find this information helpful in analyzing our financial and operational performance and comparing this performance to our peers and competitors. These non-GAAP financial measures are used in conjunction with traditional GAAP financial measures as part of our overall assessment of our performance. We do not place undue reliance on non-GAAP financial measures as measures of operating performance. Non-GAAP financial measures should not be considered substitutes for other measures of financial performance or liquidity reported in accordance with GAAP. There are limitations to using non-GAAP financial measures, including that other companies may calculate these measures differently than we do; that they do not reflect changes in, or cash requirements for, our working capital; and that they do not reflect our capital expenditures or future requirements for capital expenditures. We compensate for the inherent limitations associated with using non-GAAP financial measures through disclosure of these limitations, presentation of our financial statements in accordance with GAAP, and reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures. We exclude or adjust each of the items identified below from the applicable non-GAAP financial measure referenced above for the reasons set forth with respect to each excluded item: Acquisition-related deferred revenue: These items are included to reflect deferred revenue written down for GAAP purposes under purchase accounting rules in order to appropriately measure the underlying performance of our business operations in the period of activity and associated expense. Asset impairment and loss on disposal of assets: These items comprise losses on the disposal and impairment of long-lived assets, and impairment of indefinite-lived intangible assets, which are not reflective of our ongoing operations. We believe exclusion of these items facilitates a more accurate comparison of our results of operations between periods. Depreciation of long-lived assets: Long-lived assets are depreciated over their estimated useful lives in a manner reflecting the pattern in which the economic benefit is consumed. Management is limited in its ability to change or influence these charges after the asset has been acquired and placed in service. We do not believe that depreciation expense accurately reflects the performance of our ongoing operations for the period in which the charges are incurred, and is therefore not considered by management in making operating decisions. Amortization of product technologies and intangible assets: These items are amortized over their estimated useful lives and generally cannot be changed or influenced by management after acquisition. Accordingly, these items are not considered by us in making operating decisions. We do not believe such charges accurately reflect the performance of our ongoing operations for the period in which such charges are incurred. Change in fair value of equity investment: This item represents changes in fair value of our equity investment based on observable price changes in orderly transactions for an identical or similar investment of the same issuer. We believe exclusion of these items facilitates a more accurate comparison of our results of operations between periods as this item is not reflective of our ongoing operations. Loss due to cyber incident, net of recoveries: This item relates to losses, net of recoveries, arising from theMay 2018 incident in which we were the subject of a targeted email phishing campaign. We believe this loss is not reflective of our ongoing operations and that exclusion of this item facilitates a more accurate comparison of our results of operations between periods. Acquisition-related expense: These items consist of direct costs incurred in our business acquisition transactions and expenses related to integration activities, and the impact of changes in the fair value of acquisition-related contingent consideration obligations. Examples of these direct costs include transaction fees, due diligence costs, acquisition retention bonuses and severance, and third-party consultants to assist with integration. We believe exclusion of these items facilitates a more accurate comparison of the results of our ongoing operations across periods and eliminates volatility related to changes in the fair value of acquisition-related contingent consideration obligations. 45
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Table of Contents Organizational realignment: These items consist of direct costs associated with the alignment of our business strategies. In connection with these actions, we recognize costs related to termination benefits, exit costs associated with closure of facilities, certain asset impairments, cancellation of certain contracts, and other professional and consulting fees associated with these initiatives. We believe exclusion of these items facilitates a more accurate comparison of our ongoing results of operations between periods. Regulatory and legal matters: These items are comprised of certain regulatory and similar costs and certain legal settlement costs, such as costs related to the company's Hart-Scott-Rodino Antitrust Improvements Act review process incurred in connection with our acquisitions or the settlement of certain legal matters. These items are excluded as they are irregular in timing and scope, and may not be indicative of our past and future performance. We believe exclusion of these items facilitates a more accurate comparison of the company's results of operations between periods. Stock-based expense: This item is excluded because these are non-cash expenditures that we do not consider part of ongoing operating results when assessing the performance of our business, and also because the total amount of the expenditure is partially outside of management's control because it is based on factors such as stock price, volatility, and interest rates, which may be unrelated to our performance during the period in which the expenses are incurred. Key Components of Our Results of Operations Revenue We derive our revenue from two primary sources: our on demand 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. 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. Our transaction-based solutions are priced based on a fixed rate per transaction. Professional and other revenue: Revenue from professional and other services consists of consulting and implementation services; training; and other ancillary services. We complement our solutions with professional and other services for our clients willing to invest in enhancing the value or decreasing the implementation time of our solutions. Our professional and other services are typically priced as time and materials engagements. Professional and other revenue also includes revenues generated from sub-meter installation services under our resident utility management solutions, and our on premise solutions. 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 centers; transaction processing fees; and fees paid to third-party service providers. Personnel costs include salaries, bonuses, stock-based expense, and employee benefits. Cost of revenue also includes an allocation of facilities costs, overhead costs, and depreciation, which are allocated based on headcount. Amortization of Product Technologies Amortization of product technologies includes amortization of developed product technologies related to strategic acquisitions and amortization of capitalized development costs. Operating Expenses We classify our operating expenses into four primary categories: product development, sales and marketing, general and administrative, and amortization of intangible assets. 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 expense, and employee benefits for employees in that category. Our operating expenses also include an allocation of facilities costs, overhead costs, and depreciation based on headcount for the category. Product development: Product development expense consists primarily of personnel costs for our product development employees and executives, information technology and facilities, 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 platform of solutions and expanding our suite of data analytics and on demand software solutions. In addition to our locations inthe United States , we maintain product development and service centers inHyderabad, India ;Manila, Philippines ;Medellin, Colombia ; and Cebu City,Philippines . 46
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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; information technology; travel and entertainment; and marketing
programs. Marketing programs consist of amounts paid for product marketing,
renter's insurance; other advertising; trade shows; user conferences; public
relations; and industry sponsorships and affiliations.
General and administrative: General and administrative expense consists of
personnel costs for our executives, finance and accounting, human resources,
management information systems, and legal personnel. In addition, general and
administrative expense includes fees for professional services, including legal,
accounting, and other consulting services; information technology and facilities
costs; and acquisition-related costs, including direct costs incurred to
complete our acquisitions and changes in the fair value of our
acquisition-related contingent consideration obligations.
Amortization of intangible assets: Amortization of intangible assets consist of
amortization of purchased intangible assets, including client relationships, key
vendor and supplier relationships, finite-lived trade names, and non-compete
agreements, obtained in connection with our acquisitions.
Interest Expense and Other, Net
Interest expense, net, consists primarily of interest income, interest expense,
and impairments on investments. Interest income represents earnings from our
cash and cash equivalents. Interest expense is associated with amounts borrowed
under the Amended Credit Facility, Convertible Notes, finance lease obligations,
and certain acquisition-related liabilities, and includes expense from the
amortization of related discounts and debt issuance costs. We participate in
interest rate swap agreements, the purpose of which is to eliminate variability
in interest rate payments on a portion of the Term Loans. For that portion, the
swap agreements replace the Term Loan's variable rate with a fixed rate.
Critical Accounting Policies and Estimates
Our Consolidated Financial Statements are prepared in accordance with GAAP. In
many cases, the accounting treatment of a particular transaction is specifically
dictated by GAAP and does not require management's judgment in its application,
while in other cases, management's significant judgment is required to make
estimates, assumptions, and judgments that affect the reported amount of assets,
liabilities, revenue, expenses, and related disclosures. We base our estimates
and assumptions on historical experience and other factors that we believe to be
reasonable under the circumstances. In some instances, we could reasonably use
different accounting estimates, and in other instances, results could differ
significantly from our estimates. We evaluate our estimates and assumptions on
an ongoing basis. To the extent that there are differences between our estimates
and actual results, our future financial statement presentation, financial
condition, results of operations, and cash flows will be affected.
While our significant accounting policies are more fully described in Note 2
"Summary of Significant Accounting Policies" to our Consolidated Financial
Statements included in Part II, Item 8 of this Annual Report on Form 10-K, we
believe that the following accounting policies are critical to understanding our
historical and future performance, as these policies relate to the more
significant areas involving our management's judgments, assumptions and
estimates.
Revenue Recognition
Revenues are derived from on demand software solutions, and professional
services and other goods and services. We recognize revenue as we satisfy one or
more service obligations under the terms of a contract, generally as control of
goods and services are transferred to our clients. Revenue is measured as the
amount of consideration we expect to receive in exchange for transferring goods
or providing services. We include estimates of variable consideration in revenue
to the extent that it is probable that a significant reversal of cumulative
revenue will not occur. We estimate and accrue a reserve for credits and other
adjustments as a reduction to revenue based on several factors, including past
history.
On Demand Revenue
Our on demand revenue consists of license and subscription fees, transaction and
payment processing fees related to certain of our software-enabled value-added
services, and commissions derived from our selling certain risk mitigation
services.
We generally recognize revenue from subscription fees on a straight-line basis
over the access period beginning on the date that we make our service available
to the client. Our subscription agreements generally are non-cancellable, have
an initial term of one year or longer and are billed either monthly, quarterly
or annually in advance. Non-refundable upfront fees billed at the initial order
date that are not associated with an upfront service obligation are recognized
as revenue on a straight-line basis over the period in which the client is
expected to benefit, which we consider to be three years.
We recognize revenue from transaction fees in the month the related services are
performed based on the amount we have the right to invoice.
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Table of Contents We offer risk mitigation services to our clients by acting as an insurance agent and derive commission revenue from the sale of insurance products to our clients' residents. The commissions are based upon a percentage of the premium that the insurance company charges to the policyholder and are subject to forfeiture in instances where a policyholder cancels prior to the end of the policy. Our contract with our underwriting partner provides for contingent commissions to be paid to us in accordance with the agreement. Our estimate of contingent commission revenue considers the variable factors identified in the terms of the applicable agreement. We recognize commissions related to these services as earned ratably over the policy term and insurance commission receivable in "Accounts receivable, less allowances" in the accompanying Consolidated Balance Sheets. Professional and Other Revenue Professional services and other revenues generally consist of the fees we receive for providing implementation and consulting services, submeter equipment and ongoing maintenance of our existing on premise licenses. Professional services are billed either on a time and materials basis or on a fixed price basis, and revenue is recognized over time as we perform the obligation. Professional services are typically sold bundled in a contract with other on demand solutions but may be sold separately. Professional service contracts sold separately generally have terms of one year or less. For bundled arrangements, where we account for individual services as a separate performance obligation, the transaction price is allocated between separate services in the bundle based on their relative standalone selling prices. Other revenues consist primarily of submeter equipment sales that include related installation services. Such sales are considered bundled, and revenue from these bundled sales is recognized in proportion to the number of installed units completed to date as compared to the total contracted number of units to be provided and installed. For all other equipment sales, we generally recognize revenue when control of the hardware has transferred to our client. Revenue recognized for on premise software sales generally consists of annual maintenance renewals on existing term or perpetual license, which is recognized ratably over the service period. Contract with Multiple Performance Obligations The majority of the contracts we enter into with clients, including multiple contracts entered into at or near the same time with the same client, require us to provide one or more on demand software solutions, professional services and may include equipment. For these contracts, we account for individual performance obligations separately: i) if they are distinct or ii) if the promised obligation represents a series of distinct services that are substantially the same and have the same pattern of transfer to the client. Once we determine the performance obligations, we determine the transaction price, which includes estimating the amount of variable consideration, if any, to be included in the transaction price. For contracts with multiple performance obligations, we allocate the transaction price to the separate performance obligations on a relative standalone selling price basis. The standalone selling prices of our service are estimated using a market assessment approach based on our overall pricing objectives taking into consideration market conditions and other factors including the number off solutions sold, client demographics and the number and types of users with our contracts. Sales, value add, and other taxes we collect from clients and remit to governmental authorities are excluded from revenues. Deferred Commissions We capitalize certain commissions as incremental costs of obtaining a contract with a client if we expect to recover those costs. The commissions are capitalized and amortized over a period of benefit determined to be three years. Deferred commissions were capitalized for open contracts at the adoption date of the new revenue standard and were capitalized for new contracts beginning in 2018. As a result, there was a net benefit to "Operating income" in our Consolidated Statements of Operations during 2018 as capitalization of costs exceeded amortization. This accretive benefit was reduced in 2019 and will normalize in 2020. As ofDecember 31, 2019 , the current and noncurrent balance of capitalized commissions costs recorded in the lines "Other current assets" and "Other assets" in the accompanying Consolidated Balance Sheets was$9.9 million and$8.5 million , respectively. As ofDecember 31, 2018 , the current and noncurrent balance of capitalized commissions costs was$6.7 million and$7.8 million , respectively. During the years endedDecember 31, 2019 and 2018, we amortized commission costs totaling$8.7 million and$5.4 million , respectively, which are included in "Sales and marketing" expense in the accompanying Consolidated Statements of Operations. No impairment loss was recognized in relation to these capitalized costs. 48
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Table of Contents Stock-Based Expense We recognize compensation expense related to awards of stock options and restricted stock granted to employees, non-employee directors, and other service providers based on the estimated fair value of the awards on the date of grant. We recognize expense for stock options and restricted stock awards on a straight-line basis over the requisite service period of the awards. For market-based awards, expense is recognized over the requisite service period using the graded-vesting attribution method. Compensation expense is reduced for forfeitures once they occur. The fair value of our time-based restricted stock awards is based on the closing price of our common stock on the date of grant. The fair value of our market-based restricted stock awards is estimated using a discrete model based on multiple stock price-paths developed through the use of Monte Carlo simulation. The fair value of our deferred restricted stock awards is based on obligations denominated in fixed dollar amounts and our expectation of future operating results and the specific performance criteria within each agreement. Changes to the assumptions underlying our valuation model may have a significant impact on the underlying value of the market-based restricted stock awards, which could have a material impact on our Consolidated Financial Statements. Income Taxes Income taxes are recorded based on the liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. We recognize the effect of tax rate changes on current and accumulated deferred income taxes in the period in which the rate changes are enacted. Valuation allowances are provided when it is more likely than not that all or a portion of the deferred tax asset will not be realized. The factors used to assess the need for a valuation allowance include historical earnings, our latest forecast of taxable income, and available tax planning strategies that could be implemented to realize the net deferred tax assets. In projecting future taxable income, we begin with historical results and incorporate assumptions including the amount of future state, federal and foreign pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies, if any. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses. We may recognize a tax benefit from uncertain tax positions only if it is at least more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon settlement with the taxing authorities. Business Combinations We allocate the fair value of the purchase consideration of our acquisitions to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. The allocation of the purchase price requires management to make significant estimates in determining the fair values of assets acquired and liabilities assumed, especially with respect to intangible assets. These estimates can include, but are not limited to, the cash flows that an asset is expected to generate in the future, the appropriate weighted average cost of capital, and the estimated useful lives. These estimates are inherently uncertain and unpredictable. In addition, unanticipated events and circumstances may occur in future periods which may affect the realizability of these estimated asset values. Additionally, at times we provide for the payment of additional purchase consideration to the extent certain targets are achieved in the future. The fair value of this contingent consideration is based on significant estimates and is initially recorded as part of the fair value of the purchase consideration. Changes to the fair value are reflected in the Consolidated Statements of Operations.Goodwill and Indefinite-Lived Intangible Assets We have recorded goodwill and indefinite-lived intangible assets in conjunction with our business acquisitions. We test goodwill and indefinite-lived intangible assets for impairment separately on an annual basis in the fourth quarter of each year, or more frequently if circumstances indicate that the assets may not be recoverable. We evaluate impairment of goodwill either by assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or by performing a quantitative assessment. Qualitative factors include industry and market considerations, overall financial performance, and other relevant events and circumstances affecting the reporting unit. If we choose to perform a qualitative assessment and after considering the totality of events or circumstances, we determine it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we would perform a quantitative fair value test. Our quantitative impairment assessment utilizes a weighted combination of a discounted cash flow model (known as the income approach) and comparisons to publicly traded companies engaged in similar 49
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Table of Contents businesses (known as the market approach). These approaches involve judgmental assumptions, including forecasted future cash flows expected to be generated by the business over an extended period of time, long-term growth rates, the identification of comparable companies, and our discount rate based on our weighted average cost of capital. These assumptions are predominately unobservable inputs and considered Level 3 measurements. To calculate any potential impairment, we compare the fair value of a reporting unit with its carrying amount, including goodwill. Any excess of the carrying amount of the reporting unit's goodwill over its fair value is recognized as an impairment loss, and the carrying value of goodwill is written down. For purposes of goodwill impairment testing, we have one reporting unit. We quantitatively evaluate indefinite-lived intangible assets by estimating the fair value of those assets based on estimated future earnings derived from the assets using the income approach. Key assumptions for this assessment include forecasted future cash flows from estimated royalty rates and our discount rate based on our weighted average cost of capital. These assumptions are unobservable Level 3 measurements, as described in Note 14 of our Consolidated Financial Statements. Assets with indefinite lives that have been determined to be inseparable due to their interchangeable use are grouped into single units of accounting for purposes of testing for impairment. If the carrying amount of an identified intangible asset with an indefinite life exceeds its fair value, we would recognize an impairment loss equal to the excess of carrying value over fair value.Internally Developed Software Costs incurred to develop software intended for our internal use are capitalized during the application development stage. Capitalization of such costs ceases once the project is substantially complete and ready for its intended use. We also capitalize costs related to specific upgrades and enhancements when it is probable the expenditure will result in additional functionality. Costs related to preliminary project activities and post-implementation operating activities are expensed as incurred. Amortization of internally developed software is included in "Amortization of product technologies" in the accompanying Consolidated Statements of Operations. Recent Accounting Pronouncements We adopted ASU 2016-02, Leases (Topic 842), onJanuary 1, 2019 using the optional transition method provided for in ASU 2018-11 Leases - Targeted Improvements which eliminated the requirement to restate amounts presented prior toJanuary 1, 2019 . The adoption of ASC 842 resulted in the recognition of ROU assets and lease liabilities for operating leases of$73.9 million and$101.5 million , respectively at the Transition Date which included reclassifying deferred rent as a component of the ROU asset. As of the Transition Date, we had insignificant finance leases. We determine if an arrangement contains a lease and the classification of that lease, if applicable, at inception. Our ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. For our real estate contracts with lease and non-lease components, we have elected to combine the lease and non-lease components as a single lease component. The implicit rate within our leases are generally not determinable and we use our incremental borrowing rate at the lease commencement date to determine the present value of lease payments. The determination of our incremental borrowing rate requires judgment. We determine our incremental borrowing rate for each lease using our current borrowing rate, adjusted for various factors including collateralization and term to align with the terms of the lease. Certain of our leases include options to extend the lease. An option to extend the lease is considered in connection with determining the ROU asset and lease liability when it is reasonably certain we will exercise that option. During the first quarter of 2019, we determined we were reasonably certain to renew the building lease for our corporate headquarters, and as a result, we reassessed the classification of the lease and determined the building lease met the criteria of a finance lease under ASC 842. As a result, an operating ROU asset and lease liability of$36.4 million and$58.6 million , respectively, were reclassified and remeasured to a finance ROU asset and lease liability of$58.2 million and$80.4 million , respectively. As a result, the costs associated with this lease are now recognized in depreciation and interest expense in 2019. Such costs were included in rent expense in 2018. See Note 2 "Summary of Significant Accounting Policies" to our Consolidated Financial Statements for additional discussion about new accounting pronouncements adopted and those pending. 50
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Table of Contents Results of Operations The following tables set forth our results of operations for the specified periods. The following generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. The discussion of historical items and year-to-year comparisons between 2018 and 2017 can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2018 , filed with theSEC onFebruary 27, 2019 and amended onNovember 5, 2019 , and incorporated by reference herein. The period-to-period comparison of financial results is not necessarily indicative of future results. Consolidated Statements of Operations Data Year Ended December 31, 2019 2018 2017 (in thousands) Revenue: On demand$ 953,576 $ 833,709 $ 642,622 Professional and other 34,560 35,771 28,341 Total revenue 988,136 869,480 670,963 Cost of revenue (1) 385,712 328,382 258,135 Amortization of product technologies 40,461 35,797 22,163 Gross profit 561,963 505,301 390,665 Operating expenses: Product development (1) 112,222 118,525 89,452 Sales and marketing (1) 193,962 166,607 140,473 General and administrative (1) 123,056 118,208
112,975
Amortization of intangible assets 40,303 35,911 17,755 Total operating expenses 469,543 439,251 360,655 Operating income 92,420 66,050 30,010 Interest expense and other, net (31,862 ) (31,750 ) (14,769 ) Income before income taxes 60,558 34,300 15,241 Income tax expense (benefit) 2,350 (425 ) 14,864 Net income$ 58,208 $ 34,725 $ 377
(1) Includes stock-based expense as follows:
Year Ended December 31,
2019 2018 2017
(in thousands)
Cost of revenue $ 5,604 $ 4,403 $ 3,842
Product development 8,159 9,923 8,423
Sales and marketing 23,978 16,573 14,592
General and administrative 24,822 19,742 18,978
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Table of Contents
The following table sets forth our results of operations for the specified
periods as a percentage of our revenue for those periods. The period-to-period
comparison of financial results is not necessarily indicative of future results.
Year Ended December 31,
2019 2018 2017
(as a percentage of total revenue)
Revenue:
On demand 96.5 % 95.9 % 95.8 %
Professional and other 3.5 4.1 4.2
Total revenue 100.0 100.0 100.0
Cost of revenue 39.0 37.8 38.5
Amortization of product technologies 4.1 4.1 3.3
Gross profit 56.9 58.1 58.2
Operating expenses:
Product development 11.4 13.6 13.3
Sales and marketing 19.6 19.2 20.9
General and administrative 12.5 13.6 16.8
Amortization of intangible assets 4.1 4.1 2.6
Total operating expenses 47.5 50.5 53.7
Operating income 9.4 7.6 4.5
Interest expense and other, net (3.2 ) (3.7 ) (2.2 )
Income before income taxes 6.2 3.9 2.3
Income tax expense (benefit) 0.2 0.0 2.2 Net income 5.9 % 4.0 % 0.1 % Comparison of the years endedDecember 31, 2019 and 2018 Revenue Year Ended December 31, 2019 2018 Change % Change (in thousands, except dollar per average on demand unit data) Revenue: On demand$ 953,576 $ 833,709 $ 119,867 14.4 % Professional and other 34,560 35,771 (1,211 ) (3.4 ) Total revenue$ 988,136 $ 869,480 $ 118,656 13.6 Non-GAAP on demand revenue$ 954,444 $ 835,599 $ 118,845 14.2 Ending on demand units 18,475 16,219 2,256 13.9 Average on demand units 16,758 14,847 1,911 12.9
On demand annual client value
18.6
On demand revenue per ending on
demand unit $ 56.27 $ 54.05 $ 2.22 4.1 %
On demand revenue: During the year ended December 31, 2019 , on demand revenue
increased $119.9 million , or 14.4%, as compared to the same period in 2018. This
increase was attributable to growth across our platform, primarily in resident
services. This includes organic growth and acquired revenue from our 2018 and
2019 acquisitions. On demand revenue per ending on demand unit increased from
$54.05 to $56.27 during the year ended December 31, 2019 , primarily due to the
organic growth of our solutions.
On demand revenue generated by our property management solutions grew $18.9
million , or 10.1%, during the twelve months ended December 31, 2019 , as compared
to the same period in 2018. This increase was primarily driven by the growth of
our spend management solutions, adoption of our OneSite property management and
Kigo Marketplace solutions, and growth of our accounting solutions.
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Table of Contents On demand revenue from our resident services solutions continued to experience significant growth, increasing by$70.6 million , or 20.2%, year-over-year. Resident services increased primarily from continued strong growth of our payments solutions, as well as incremental revenue from our acquisitions of LeaseTerm Solutions and Simple Bills in 2019, and organic growth in our renter's insurance solutions. On demand revenue from our leasing and marketing solutions increased$13.3 million , or 8.0%, during the year endedDecember 31, 2019 , as compared to the same period in 2018. This increase was attributable to incremental revenue from our acquisition of LeaseLabs in the third quarter of 2018. On demand revenue from our asset optimization solutions increased year-over-year by$17.1 million , or 13.1%. We continue to experience organic growth across our asset optimization platform, evidencing continued market acceptance of data-driven solutions. The increase was also attributable to incremental revenue from our acquisitions of Rentlytics in 2018 and Hipercept in 2019. On demand unit metrics: As ofDecember 31, 2019 , one or more of our on demand solutions was utilized in the management of approximately 18.5 million rental property units. On demand units increased year-over-year by 2.3 million units, or 13.9%. This growth is primarily attributable to our 2019 acquisitions, which accounted for approximately 9.6% of total ending on demand units, and organic unit growth. On demand units managed by our clients renewed at an average rate of 96.5% over a trailing twelve-month period endedDecember 31, 2019 . Cost of Revenue Year Ended December 31, 2019 2018 Change % Change (in thousands) Cost of revenue$ 364,443 $ 311,907 $ 52,536 16.8 % Stock-based expense 5,604 4,403 1,201 27.3 Depreciation expense 15,665 12,072 3,593 29.8 Total cost of revenue$ 385,712 $ 328,382 $ 57,330 17.5 % During the year endedDecember 31, 2019 , cost of revenue, excluding stock-based expense and depreciation expense, increased$52.5 million , as compared to the same period in 2018. Direct costs increased$26.4 million , primarily driven by incremental costs from our recent acquisitions and higher transaction volume from our payment processing solutions. Personnel expense increased year-over-year by$24.2 million , primarily attributable to investments to support our ongoing organic growth and, to a lesser extent, new employees from our recent acquisitions. Additionally, in the fourth quarter of 2019, we recorded an impairment charge of$1.6 million related to intangible assets associated with certain international operations. Amortization of Product Technologies Year Ended December 31, 2019 2018 Change %
Change
(in thousands)
Amortization of product technologies
13.0 %
During the year endedDecember 31, 2019 , amortization of product technologies increased$4.7 million compared to the prior year. Higher amortization expense was driven by the addition of developed product technologies in connection with our recent acquisitions and an increase in amortization of developed software related to investment in innovation and product solutions. During the year endedDecember 31, 2019 , our gross margin decreased year-over-year from 58.1% to 56.9%. This margin compression was driven primarily by revenue growth from lower margin products and investments to accelerate implementation of our solutions. 53
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Table of Contents
Operating Expenses
Product development
Year Ended December 31,
2019 2018 Change % Change
(in thousands)
Product development expense $ 97,713 $ 102,935 $ (5,222 ) (5.1 )%
Stock-based expense 8,159 9,923 (1,764 ) (17.8 )
Depreciation expense 6,350 5,667 683 12.1
Total product development expense
(5.3 )%
Product development expense, excluding stock-based expense and depreciation expense, decreased year-over-year by$5.2 million . This decrease was primarily driven by our internal initiative to centralize our product development efforts, increase productivity, and direct a greater portion of work effort towards major new development projects. Personnel expense, net of capitalized software development costs, decreased$4.3 million during the year endedDecember 31, 2019 , due primarily to more efficient leveraging of our personnel in connection with this initiative. Total product development expense as a percentage of total revenue was 11.4% in 2019, down from 13.6% in 2018, primarily due to organizational initiatives to centralize product development activities and focus our efforts towards major new development projects. Sales and marketing Year Ended December 31, 2019 2018 Change % Change (in thousands) Sales and marketing expense$ 163,767 $ 145,081 $ 18,686 12.9 % Stock-based expense 23,978 16,573 7,405 44.7 Depreciation expense 6,217 4,953 1,264 25.5
Total sales and marketing expense
16.4 %
Sales and marketing expense for the year endedDecember 31, 2019 , excluding stock-based expense and depreciation expense, increased$18.7 million , as compared to the same period in 2018. Personnel expense increased$14.8 million year-over-year, driven by our continued investments in our sales force and product marketing team, and incremental headcount from recent acquisitions. Marketing program and travel expenses increased year-over-year during the year endedDecember 31, 2019 by$5.6 million , reflecting investments to accelerate client demand across our portfolio of solutions, as well as additional costs for our annual RealWorld user conference during the third quarter of 2019. These increases are slightly offset by a decrease in impairment charges related to our intangible assets. In 2018, we recorded an impairment charge of$2.7 million related to the indefinite-lived trade name of our 2010 acquisition of Level One. In the fourth quarter of 2019, we recorded an impairment charge of$0.4 million related to intangible assets associated with certain international operations. Total sales and marketing expense as a percentage of total revenue increased from 19.2% for the year endedDecember 31, 2018 , to 19.6% for the year endedDecember 31, 2019 . This increase was primarily driven by personnel-related investments in our sales force. General and administrative Year Ended December 31, 2019 2018 Change % Change (in thousands) General and administrative expense$ 92,278 $ 92,680 $ (402 ) (0.4 )% Stock-based expense 24,822 19,742 5,080 25.7 Depreciation expense 5,956 5,786
170 2.9
Total general and administrative expense
General and administrative expense, excluding stock-based expense and depreciation expense, decreased year-over-year by$0.4 million . This net change resulted from a combination of factors. Losses on impairments and disposal of assets during the year endedDecember 31, 2019 decreased$6.4 million , primarily related to the fiscal year 2018 loss of$5.4 million in connection with a targeted email phishing campaign and the early retirement of assets and upgrades in our data center infrastructure. These decreases were partially offset by an increase of$2.3 million in personnel expense, primarily due to 54
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Table of Contents incremental headcount from our recent acquisitions. Fair value adjustments of acquisition-related liabilities increased$1.7 million primarily related to favorable adjustments in 2018. Legal and professional fees increased$1.5 million compared to prior year, principally related to 2019 acquisition-related expenses, partially offset by our 2018 settlement with theFTC . General and administrative expense as a percentage of total revenue decreased from 13.6% to 12.5% during the year endedDecember 31, 2019 , as compared to the same period in 2018, primarily due to the decrease in losses on impairments and disposal of assets in 2019 as compared to 2018, and our ability to leverage existing general and administrative resources to support our ongoing growth. Amortization of intangible assets Year Ended December 31, 2019 2018 Change %
Change
(in thousands)
Amortization of intangible assets
During the year endedDecember 31, 2019 , amortization expense of intangible assets increased$4.4 million compared to the prior year, primarily driven by the addition of finite-lived client relationship and trade name assets in connection with our recent acquisitions. Stock-based expense Year Ended December 31, 2019 2018 Change % Change (in thousands)
Stock-based expense
During the year endedDecember 31, 2019 , stock-based expense increased$11.9 million compared to the prior year, primarily driven by incremental awards in connection with our 2019 and 2018 acquisitions. Stock-based expense as a percent of total revenue was 6.3% and 5.8% for the years endedDecember 31, 2019 and 2018, respectively. Depreciation expense Year Ended December 31, 2019 2018 Change % Change (in thousands)
Depreciation expense
During the year endedDecember 31, 2019 , depreciation expense increased$5.7 million compared to the prior year, primarily due to depreciation expense on our corporate headquarters that is classified as a finance lease subsequent to the adoption of the new lease standard. Interest Expense and Other, Net Year Ended December 31, 2019 2018 Change % Change (in thousands) Interest expense$ (37,129 ) $ (32,402 ) $ (4,727 ) 14.6 % Interest income 2,073 2,443 (370 ) (15.1 ) Impairment loss on investment - (2,000 ) 2,000 (100.0 ) Change in fair value of equity investment 2,600 - 2,600 100.0 Other income 594 209
385 184.2
Total interest expense and other, net
Interest expense and other for the year endedDecember 31, 2019 , increased$0.1 million as compared to the same period in 2018. Interest expense increased$4.7 million primarily due to$4.2 million of interest expense recognized on our finance lease liabilities following our adoption of ASC 842. This was offset by a$2.6 million increase in fair value of our investment in CompStak during 2019, and a decrease in impairment loss on investment of$2.0 million related to our investment in WayBlazer that was recognized in 2018. 55
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Table of Contents Provision for Income Taxes Our effective tax rate was 3.9% and (1.2)% for the years endedDecember 31, 2019 and 2018, respectively. For the year endedDecember 31, 2019 , we recognized consolidated tax expense of$2.4 million on income before income taxes of$60.6 million . Our effective tax rate was lower than the statutory rate of 21% in 2019 and 2018 primarily as a result of research and development credits we recognized during the fourth quarter of 2019 and excess stock compensation deductions recognized in connection with the vesting of certain restricted stock grants and the exercise of certain stock options. For further discussion, including a reconciliation of our effective tax rate from the statutory federal rate, see Note 13 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. Quarterly Results of Operations The following table presents our unaudited consolidated quarterly results of operations for the eight fiscal quarters endedDecember 31, 2019 . This information is derived from our unaudited condensed consolidated financial statements, and includes all adjustments that we consider necessary for the fair statement of our financial position and operating results for the quarters presented. Operating results for individual periods are not necessarily indicative of the operating results for a full year. Historical results are not necessarily indicative of the results to be expected in future periods. You should read this data together with our Consolidated Financial Statements and the related notes to those financial statements included elsewhere in this filing.
Three Months Ended,
December 31, September 30, June 30, March
31,
2019 2019 2019 2019 2018 2018 2018 2018
(in thousands, except per share amounts)
Revenue:
On demand $ 246,235 $ 245,637 $ 235,185 $ 226,519 $ 218,051 $ 215,413 $ 206,945 $ 193,300
Professional and
other 8,532 9,565 8,676 7,787 8,923 9,540 9,307 8,001
Total revenue 254,767 255,202 243,861 234,306 226,974 224,953 216,252 201,301
Cost of revenue 101,027 98,783 95,708 90,194 88,063 85,540 81,942 72,837
Amortization of
product
technologies 10,732 10,315 9,900 9,514 9,429 8,946 9,127 8,295
Gross profit 143,008 146,104 138,253 134,598 129,482 130,467 125,183 120,169
Operating
expenses:
Product
development 26,308 27,866 28,151 29,897 29,772 28,942 30,771 29,040 Sales and marketing 48,113 51,906 49,120 44,823 45,084 43,179 40,664 37,680 General and administrative 35,354 31,249 28,310 28,143 32,638 30,036 28,444 27,090 Amortization of intangible assets 9,621 10,444 10,402 9,836 9,588 9,738 8,496 8,089 Total operating expenses 119,396 121,465 115,983 112,699 117,082 111,895 108,375 101,899 Operating income 23,612 24,639 22,270 21,899 12,400 18,572 16,808 18,270 Interest expense and other, net (9,089 ) (8,764 ) (8,029 ) (5,980 ) (6,746 ) (8,816 ) (8,518 ) (7,670 ) Income before income taxes 14,523 15,875 14,241 15,919 5,654 9,756 8,290 10,600 Income tax (benefit) expense (5,646 ) 4,171 (822 ) 4,647 (618 ) 683 (189 ) (301 ) Net income$ 20,169 $ 11,704 $ 15,063 $ 11,272 $ 6,272 $ 9,073 $ 8,479 $ 10,901 Net income per share attributable to common stockholders: Basic$ 0.22 $ 0.13$ 0.16 $ 0.12 $ 0.07 $ 0.10$ 0.10 $ 0.13 Diluted$ 0.21 $ 0.12$ 0.16 $ 0.12 $ 0.07 $ 0.09$ 0.09 $ 0.13 56
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Table of Contents
The following table sets forth our results of operations for the specified
periods as a percentage of our revenue for those periods. The period-to-period
comparison of financial results is not necessarily indicative of future results.
Three Months Ended,
December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31,
2019 2019 2019 2019 2018 2018 2018 2018
(as a percentage of total revenue)
Revenue:
On demand 96.7 % 96.3 % 96.4 % 96.7 % 96.1 % 95.8 % 95.7 % 96.0 %
Professional
and other 3.3 3.7 3.6 3.3 3.9 4.2 4.3 4.0
Total revenue 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenue 39.7 38.7 39.2 38.5 38.8 38.0 37.9 36.2
Amortization of
product
technologies 4.2 4.0 4.1 4.1 4.2 4.0 4.2 4.1
Gross profit 56.1 57.3 56.7 57.4 57.0 58.0 57.9 59.7
Operating
expenses:
Product
development 10.3 10.9 11.5 12.8 13.1 12.9 14.2 14.4
Sales and
marketing 18.9 20.3 20.1 19.1 19.9 19.2 18.8 18.7
General and
administrative 13.9 12.2 11.6 12.0 14.4 13.4 13.2 13.5
Amortization of
intangible
assets 3.8 4.1 4.3 4.2 4.2 4.3 3.9 4.0
Total operating
expenses 46.9 47.6 47.6 48.1 51.6 49.7 50.1 50.6
Operating
income 9.3 9.7 9.1 9.3 5.5 8.3 7.8 9.1
Interest
expense and
other, net (3.6 ) (3.4 ) (3.3 ) (2.6 ) (3.0 ) (3.9 ) (3.9 ) (3.8 )
Income before
income taxes 5.7 6.2 5.8 6.8 2.5 4.3 3.8 5.3
Income tax
(benefit)
expense (2.2 ) 1.6 (0.3 ) 2.0 (0.3 ) 0.3 (0.1 ) (0.1 )
Net income 7.9 % 4.6 % 6.2 % 4.8 % 2.8 % 4.0 % 3.9 % 5.4 %
Reconciliation of Quarterly Non-GAAP Financial Measures
The following table presents a reconciliation of net income to Adjusted EBITDA
for the eight fiscal quarters ended
Three Months Ended,
December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31,
2019 2019 2019 2019 2018 2018 2018 2018
(in thousands)
Net income $ 20,169 $ 11,704 $ 15,063 $ 11,272 $ 6,272 $ 9,073 $ 8,479 $ 10,901 Acquisition-related deferred revenue 449 38 157 224 1,056 418 103 313 Depreciation, asset impairment, and loss on disposal of assets 10,769 8,498 8,697 8,760 10,445 9,286 7,662 7,818 Amortization of product technologies and intangible assets 20,353 20,759 20,302 19,350 19,017 18,684 17,623 16,384 Change in fair value of equity investment - - - (2,600 ) - - - - Loss due to cyber incident, net of recoveries - - - - 4,952 - - - Acquisition-related expense (income) 3,594 755 376 29 (257 ) 519 1,168 1,007 Organizational realignment 849 684 - - - - - - Regulatory and legal matters 898 215 352 - - 78 - - Stock-based expense 15,287 16,498 15,865 14,913 13,149 13,479 13,695 10,318 Interest expense, net 9,443 8,791 8,241 8,581 6,780 6,874 8,584 7,721 Income tax (benefit) expense (5,646 ) 4,171 (822 ) 4,647 (618 ) 683 (189 ) (301 ) Adjusted EBITDA$ 76,165 $ 72,113 $ 68,231 $ 65,176 $ 60,796 $ 59,094 $ 57,125 $ 54,161 57
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Table of Contents Liquidity and Capital Resources Our primary sources of liquidity as ofDecember 31, 2019 , consisted of$197.2 million of unrestricted cash and cash equivalents,$370.0 million available under our Revolving Facility, amounts available under the Amended Credit Facility's Accordion Feature, and$47.2 million of working capital (excluding$197.2 million of unrestricted cash and cash equivalents and$134.1 million of deferred revenue). Our principal uses of liquidity have been to fund our working capital requirements, capital expenditures and acquisitions, to service our debt obligations, and to repurchase shares of our common stock. We expect that working capital requirements, capital expenditures, acquisitions, debt service, and share repurchases will continue to be our principal needs for liquidity over the near term. We made capital expenditures of$51.5 million , approximately 5% of total revenues, during the year endedDecember 31, 2019 . We expect capital expenditures to remain at 5% of total revenue during the next few years. In addition, we have made several acquisitions in which a portion of the cash purchase price is payable at various times through 2023, with a majority of the deferred cash obligations payable during 2020 and 2021. We expect to fund these obligations totaling approximately$35.5 million from cash provided by operating activities or funds available under our Amended Credit Facility. InMay 2018 , we filed a shelf registration statement on Form S-3 with theSEC , which became effective upon filing. The shelf registration allows us to periodically offer and sell, in one or more future offerings, an indeterminate amount of our common stock, preferred stock, debt securities, and other securities specified therein. OnMay 29, 2018 , we consummated an underwritten public offering of 8.05 million shares of our common stock, which included 1.05 million shares sold pursuant to the underwriters' full exercise of their option to purchase additional shares. The offering was priced at$57.00 per share for total gross proceeds of$458.9 million . The aggregate net proceeds to us were$441.9 million , after deducting underwriting discounts and offering expenses in the aggregate amount of$16.9 million . Net proceeds from this offering were used for repayment of indebtedness outstanding under our revolving facility and for general corporate purposes, including; acquisitions; sales and marketing activities; research and development activities; general and administrative matters; and capital expenditures. We believe that our existing cash and cash equivalents, working capital (excluding deferred revenue and cash and cash equivalents), and our cash flows from operations are sufficient to fund our working capital requirements, and planned capital expenditures; and to service our debt obligations for at least the next twelve months. Our future working capital requirements will depend on many factors, including our rate of revenue growth, the timing and size of future acquisitions, the expansion of our sales and marketing activities, the timing and extent of spending to support product development efforts, the timing of introductions of new solutions and enhancements to existing solutions, and the continuing market acceptance of our solutions. We expect to enter into acquisitions of complementary businesses, applications, or technologies in the future that could require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us, or at all. As ofDecember 31, 2019 , our federal and state net operating loss ("NOL") carryforwards are$237.7 million and$97.7 million , respectively. Our federal and state NOL carryforwards may be available to offset potential payments of future income tax liabilities. If unused, the federal NOLs will begin to expire in 2026, and the state NOLs will begin to expire in 2020. Total state NOLs expiring in the next five years is approximately$1.1 million . The following table sets forth cash flow data for the periods indicated therein: Year Ended December 31, 2019 2018 2017 (in thousands) Net cash provided by operating activities$ 316,973 $ 244,807 $ 140,263 Net cash used in investing activities$ (719,094 ) $ (331,296 ) $ (699,862 ) Net cash provided by financing activities$ 460,011 $ 304,085 $ 536,349 Changes in Cash and Cash Equivalents during the year endedDecember 31, 2019 : Net Cash Provided by Operating Activities During 2019, net cash provided by operating activities consisted of net income of$58.2 million , net non-cash adjustments to net income of$205.9 million , and a net inflow of cash from changes in assets and liabilities of$52.9 million . Non-cash adjustments to net income primarily consisted of depreciation and amortization expense of$115.0 million , stock-based expense of$62.6 million , amortization of debt discount and issuance costs of$13.7 million , and amortization of our right-of-use assets of$11.4 million . Changes in working capital during 2019 included net cash inflows from customer deposits of$82.6 million , which was primarily attributable to the timing of cash settlements for previously initiated resident transactions related to our payments solutions. Net cash inflows also included changes in accounts payable of$9.3 million due to the timing of vendor invoice receipts and payments, and changes in deferred revenue of$7.7 million . These items were partially offset by net cash outflows for accounts receivable of$14.7 million , which is reflective of our revenue growth; outflows for prepaid expenses and other 58
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Table of Contents current assets of$13.8 million , primarily attributable to the$11.7 million of deferred compensation paid into escrow in connection with our acquisition ofBuildium ; and outflows for other current and long-term liabilities of$12.0 million , primarily attributable to rental payments for our operating leases.Net Cash Used in Investing Activities In 2019, we used$719.1 million for our investing activities, which primarily included$665.8 million , net of cash and restricted cash acquired, for our strategic acquisitions;$51.5 million for capital expenditures during the period; and$1.8 million for our additional investment in CompStak. Capital expenditures during the period primarily included capitalized software development costs and expenditures to support our information technology infrastructure. Net Cash Provided by Financing Activities The net cash provided by our financing activities during 2019 primarily consisted of aggregate borrowings under our Amended Credit Facility of$830.0 million . These borrowings were partially offset by payments on our term loans of$308.7 million ; payments of acquisition-related consideration of$30.4 million ; activity under our stock-based expense plans of$15.0 million , primarily attributable to shares repurchased from employees to cover their cost of taxes upon vesting of restricted stock; and treasury stock purchases of$8.5 million under our share repurchase program. Changes in Cash and Cash Equivalents during the year endedDecember 31, 2018 : Net Cash Provided by Operating Activities During 2018, net cash provided by operating activities consisted of net income of$34.7 million , net non-cash adjustments to net income of$168.1 million , and a net inflow of cash from changes in assets and liabilities of$42.0 million . Non-cash adjustments to net income primarily consisted of depreciation and amortization expense of$100.2 million , stock-based expense of$50.6 million , and amortization of debt discount and issuance costs of$12.5 million , Changes in working capital during 2018 included net cash inflows from customer deposits of$57.2 million , which was primarily attributable to the timing of cash settlements for previously initiated resident transactions related to our payments solutions. This item was partially offset by net cash outflows for prepaid expenses and other current assets of$11.9 million , which was primarily due to the capitalization of sales commissions earned during 2018 and purchases of annual software licenses.Net Cash Used in Investing Activities In 2018, our investing activities resulted in a net cash outflow of$331.3 million . We used$278.6 million , net of cash and restricted cash acquired, to acquire ClickPay, BluTrend, LeaseLabs, and Rentlytics. We also used$50.9 million for capital expenditures during the period, which primarily included capitalized software development costs and expenditures to support our information technology infrastructure. Net Cash Provided by Financing Activities The net cash provided by our financing activities during 2018 primarily consisted of aggregate net proceeds from our common stock offering of$441.9 million , net of underwriting discounts and expenses directly attributable to the offering. This was partially offset by payments on our Revolving Facility of$50.0 million , net of proceeds, payments on our term loans of$14.1 million , payments of acquisition-related consideration of$28.4 million , treasury stock purchases of$28.1 million under our share repurchase program, and activity under our stock-based expense plans of$15.8 million , primarily attributable to shares repurchased from employees to cover their cost of taxes upon vesting of restricted stock. 59
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Table of Contents
Contractual Obligations, Commitments, and Contingencies
The following table summarizes our contractual cash obligations as of
Payments Due by Period
Less Than More Than
Total 1 year 1-3 years 3-5 years 5 years
(in thousands)
Convertible Notes (1) $ 359,878 $ 5,175 $ 354,703 $ - $ -
Term Loans (2) 677,273 35,680 94,920 546,673 -
Revolving Facility (2) 263,511 7,612 13,893 242,006 -
Operating and finance
lease obligations 193,965 21,546 44,277 37,439 90,703
Acquisition-related
liabilities (3) 35,450 26,325 8,700 425 -
$ 1,530,077 $ 96,338 $ 516,493 $ 826,543 $ 90,703 (1) Represents the aggregate principal amount of
coupon interest payments related to our Convertible Notes and excludes the
unamortized discount and debt issuance costs reflected in our Consolidated
Balance Sheets.
(2) Represents the contractually required principal payments for our Term Loan
and Delayed Draw Term Loan and
outstanding under the Revolving Facility. These amounts excludes unamortized
debt issuance costs reflected in our Consolidated Balance Sheets. These
amounts also include the anticipated interest obligations under our Amended
Credit Facility, which were estimated using a LIBOR forward rate curve and
include the related effects of our interest rate swap agreements.
(3) Represents obligations in connection with our acquisitions comprised of
undiscounted amounts payable for our deferred cash obligations. Theseamounts exclude deferred stock obligations, contingent consideration of up
to
related to the sellers' indemnification obligations.
Credit Facility The Amended Credit Facility matures onSeptember 5, 2024 (subject to early maturity provisions in certain circumstances, as described below), and includes the following: Revolving Facility: The Amended Credit Facility provides$600.0 million in aggregate commitments for secured revolving loans, with sublimits of$10.0 million for the issuance of letters of credit and$20.0 million for swingline loans ("Revolving Facility"). During the fourth quarter of 2019, we borrowed$230.0 million of revolving loans, the proceeds of which were used to fund acquisition activity. Initial Term Loan: An initial term loan of$300.0 million was borrowed on the closing date for the Amended Credit Facility (the "Term Loan"). The proceeds of the Term Loan were used to repay the term loan balances outstanding under the 2014 Credit Facility. Delayed Draw Term Loan: InDecember 2019 , we drew funds of$300.0 million available under the delayed draw term loan ("Delayed Draw Term Loan"), the proceeds of which were used to fund acquisition activity. Revolving loans under the Amended Credit Facility may be voluntarily prepaid and re-borrowed. Principal payments on the Term Loan and Delayed Draw Term Loan (collectively, the "Term Loans") are due in quarterly installments equal to an initial amount of$3.8 million , which increases to$7.5 million beginning onDecember 31, 2020 , increases to$11.3 million beginning onDecember 31, 2022 , and increases to$15.0 million beginning onDecember 31, 2023 . Once repaid or prepaid, the Term Loans may not be re-borrowed. All outstanding principal and accrued but unpaid interest is due, and the commitments for the Revolving Facility terminate, on the maturity date. The Term Loans are subject to mandatory repayment requirements in the event of certain asset sales or if certain insurance or condemnation events occur, subject to customary reinvestment provisions. We may prepay the Term Loans in whole or in part at any time without premium or penalty. Accordion Feature: The Amended Credit Facility also allows us, subject to certain conditions, to request additional term loan commitments and/or additional revolving commitments in an aggregate principal amount of up to the greater of$250.0 million or 100% of consolidated EBITDA (as defined within the agreement) for the most recent four fiscal quarters, plus an amount that would not cause our consolidated senior secured net leverage ratio to exceed 3.50 to 1.00. All outstanding revolving loans and term loans under the Amended Credit Facility mature onSeptember 5, 2024 . If on or prior toAugust 16, 2022 , we have failed to demonstrate to the Agent (as defined in Note 9 to the Consolidated Financial Statements) that we would be in compliance with each financial covenant after giving pro forma effect to the repayment in full of the Convertible Notes which mature onNovember 15, 2022 , then the Amended Credit Facility will mature onAugust 16 , 60
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Table of Contents 2022. In addition, if on any business day during the period beginning onAugust 16, 2022 until the Convertible Notes are paid in full, our available liquidity is less than an amount equal to 125% of the outstanding principal amount of the Convertible Notes, then amounts outstanding under the Amended Credit Facility are due the next business day. Refer to Note 9 of the accompanying Consolidated Financial Statements for further discussion of the Amended Credit Facility, including its terms and conditions. Convertible Notes InMay 2017 , we completed a private offering of Convertible Notes with an aggregate principal amount of$345.0 million . The net proceeds from this offering were$304.2 million , after adjusting for debt issue costs, including the underwriting discount and the net cash used to purchase the Note Hedges and sell the Warrants. The Convertible Notes accrue interest at an annual rate of 1.50%, which is payable semi-annually onMay 15 andNovember 15 of each year. The Convertible Notes mature onNovember 15, 2022 , and may not be redeemed by us prior to their maturity. The holders may convert their notes to shares of our common stock, at their option, on or afterMay 15, 2022 . Prior toMay 15, 2022 , holders may only convert their notes under certain circumstances specified in the Indenture. The Convertible Notes are convertible at an initial rate of 23.84 shares per$1,000 of principal (equivalent to an initial conversion price of approximately$41.95 per share of our common stock). Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock, or a combination of cash and shares of our common stock, at our election. It is our stated intention to settle the principal balance of the Convertible Notes in cash and any conversion obligation in excess of the principal portion in shares of our common stock. During the third quarter of 2019, we received conversion notices from certain holders with respect to an immaterial amount in aggregate principal of Convertible Notes requesting conversion as a result of the sales price condition having been met during the second quarter of 2019. In accordance with the terms of the Convertible Notes, we made cash payments of the aggregate principal amount and delivered newly issued shares of our common stock for the remainder of the conversion obligation in excess of the aggregate principal amount of the Convertible Notes being converted, in full satisfaction of such converted notes. We received shares of our common stock under the Note Hedges (as defined in Note 9 to the Consolidated Financial Statements), that offset the issuance of shares of common stock upon conversion of the Convertible Notes. In conjunction with the Convertible Notes offering, we purchased Note Hedges and issued Warrants for approximately 8.2 million shares of our common stock. We paid$62.5 million to purchase the Note Hedges and received proceeds of$31.5 million from the issuance of the Warrants. The Note Hedges have an exercise price of$41.95 per share, consistent with the conversion price of the Convertible Notes, and expire inNovember 2022 . The Note Hedges are generally expected to reduce the potential dilution to our common stock (or, in the event the conversion is settled in cash, to reduce our cash payment obligation) in the event that at the time of conversion our stock price exceeds the conversion price under the Convertible Notes. The Warrants have a strike price of$57.58 per share and expire in ratable portions on a series of expiration dates commencing onFebruary 15, 2023 . Refer to Note 9 of the accompanying Consolidated Financial Statements for a complete discussion of these transactions and their accounting implications. Stock Repurchase Program InOctober 2018 , our board of directors approved a share repurchase program authorizing the repurchase of up to$100.0 million of our outstanding common stock. The share repurchase program expired onOctober 25, 2019 . InNovember 2019 , our board of directors approved a new share repurchase program authorizing the repurchase of up to$100.0 million of our outstanding common stock. The share repurchase program is effective throughNovember 7, 2020 . Shares repurchased under the stock repurchase program are retired. Repurchase activity during the years endedDecember 31, 2019 , 2018 and 2017 was as follows: Year Ended December 31, 2019 2018 2017 Number of shares repurchased 158,971 599,664 - Weighted-average cost per share$ 53.41 $ 46.83 $ - Total cost of shares repurchased, in thousands$ 8,491 $ 28,082 $ - 61
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Table of Contents Off-Balance Sheet Arrangements We do not have any off-balance sheet financing arrangements, and we do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
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