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Edited Transcript of RP.OQ earnings conference call or presentation 5-Nov-20 10:00pm GMT

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Q3 2020 RealPage Inc Earnings Call CARROLLTON Nov 17, 2020 (Thomson StreetEvents) -- Edited Transcript of RealPage Inc earnings conference call or presentation Thursday, November 5, 2020 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Ashley Glover * Brian Shelton RealPage, Inc. - Interim CFO, Senior VP, CAO & Treasurer * Stephen T. Winn RealPage, Inc. - Chairman & CEO * Steve Calk ================================================================================ Conference Call Participants ================================================================================ * Jackson Edmund Ader JPMorgan Chase & Co, Research Division - Analyst * Jason Vincent Celino KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst * John Robert Campbell Stephens Inc., Research Division - MD * Joseph D. Vruwink Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst * Michael James Turrin Wells Fargo Securities, LLC, Research Division - Senior Analyst * Ryan John Tomasello Keefe, Bruyette, & Woods, Inc., Research Division - Analyst * Stephen Hardy Sheldon William Blair & Company L.L.C., Research Division - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, ladies and gentlemen, and welcome to your RealPage earnings conference call. (Operator Instructions) At this time, it is my pleasure to turn the floor over to Mr. Steve Calk. Sir, the floor is yours. -------------------------------------------------------------------------------- Steve Calk, [2] -------------------------------------------------------------------------------- Thank you, operator. Good afternoon, and welcome to the RealPage financial results conference call for the third quarter ended September 30, 2020. With me on the call today are Steve Winn, our Chairman and Chief Executive Officer; Brian Shelton, our Chief Financial Officer. During today's call, we may make statements that are considered forward-looking within the meaning of the federal securities laws. Forward-looking statements are based on management's current knowledge and expectations as of the date of this call and are subject to certain risks and uncertainties that could cause actual results to differ materially from those forward-looking statements. We may also use non-GAAP financial measures as defined Regulation G. Definitions of these non-GAAP financial measures and reconciliations to the most directly comparable GAAP financial measures are included in today's earnings release and in our filings with the SEC. For more information on these topics, please refer to the sections titled Cautionary Statement regarding forward-looking statements and explanation of non-GAAP financial measures in today's earnings press release. With that, I will turn the call over to Steve. -------------------------------------------------------------------------------- Stephen T. Winn, RealPage, Inc. - Chairman & CEO [3] -------------------------------------------------------------------------------- Thanks, Steve. For those of you who have not met Steve Calk yet, he is our new Vice President of Investor Relations. He has hit the ground running with some exceptionally good work, gauging investor sentiment and helping us better understand how we, as a company, can be more responsive to our shareholders. This includes better information that will help you understand the extraordinary opportunities ahead of us. Steve has already expanded our quarterly IR fact sheet disclosures, and I'm excited about the work he's been doing. I'm also pleased to announce that Brian Shelton has been unanimously and enthusiastically endorsed by the Board to become our permanent Chief Financial Officer. Brian has been our acting CFO for the last quarter, in addition to his role as our Chief Accounting Officer. As many of you know, we conducted a thorough search for a new CFO, evaluating over a dozen candidates. During this search, Brian stepped up and with the help of a team that rallied around him, proved that he could perform the job at the highest level, and in so doing, won the support of the leadership team and the Board. I could not be more delighted with this decision. Before we get started, I wanted to thank our employees for responding with such amazing work ethic and professionalism during these challenging times. You have taken great care of our customers, and you have continued to make RealPage the kind of place where people want to work and where customers want to do business. As a result, we delivered the best quarter in our company's history, growing quarterly revenue 17% to $299 million and adjusted EBITDA, 19% to just over $86 million. This is well above our guidance, in large part due to the good execution by our teammates as well as the industry's agility in dealing with the pandemic. The resilient demand for our products and services underscores the strength of our model, the importance of the solutions we are providing to customers and the excellence of our sales and technology teams. This is further evidence that technology transformation remains a top priority for owners and operators throughout the country and demand is healthy for our portfolio of solutions. The third quarter was our first full quarter with the economy in full pandemic response, and I believe we are seeing our industry come to a significant realization. After initial short-term adjustments, companies are finding that they can be just as productive and cost-effective with a portion of their employees working from home as long as they invest in virtual solutions, and the impact on RealPage could not be more profound. To elaborate on the impact of COVID, we are seeing geographic and demographic shifts in the marketplace with many markets not meaningfully impacted by the pandemic, mostly in the Sunbelt, Midwest and South. However, we are seeing soft occupancy and lower rents in certain urban core markets and on the West Coast, New York and Boston. You can review the detail on our website or if you want extreme detail, you can subscribe to our Market Analytics product. You see from these reports that national metrics remain relatively healthy with strong national occupancy, improving leasing velocity and delinquency rates that are only 1% to 2% degraded year-over-year. As RealPage shareholders, you should understand that our customers' diversity largely insulates us from specific market fluctuations. We are much more focused on the work-from-home implications that drive customers to better technology, a better experience for their residents and, therefore, a more salient need for the services that RealPage can offer. To win in this new model, owners and operators must adapt. Paper checks and physical rent payment deliveries are fading fast and the competition for the sophisticated digital renter is growing rapidly. Our customers have to offer better services more consistently and with less friction than ever before. This is the opportunity that RealPage was built to enable. It is the trend that we anticipated years ago and COVID certainly has accelerated these developments. Looking at Payments alone, we are the only payment processor in the market today that can offer a truly paperless platform at scale. We are now entrusted with processing approximately $90 billion in payments, and we are the only processor in our market that is a licensed money services business or MSB, allowing the best possible protection for our customers. In addition, early in the second quarter, we introduced technology to enable electronic vendor payments, a proactive innovation that is yielding very positive feedback from our clients. Breaking down the revenue growth by customer category, we were especially pleased with the progress made in the SMB market since the acquisition of Buildium about 1 year ago. As a reminder, the SMB market represents owners and operators managing multifamily properties under 5,000 units and includes single-family HOA and vacation. We compete with Yardi Breeze, AppFolio, ResMan and several other software providers in this space. In the third quarter, total SMB annual contract value was $445 million, up $82 million over year-end 2019 and up $21 million sequentially. RealPage is the largest provider in this space and is growing on an absolute dollar basis at over double the rate of our nearest competitor. We're very excited to see SMB customers beginning to adopt the value-added services that RealPage is integrating with Buildium. In September, we held our annual user conference, where we had the largest attendance in history, both in terms of number of companies and the number of representatives per company. The virtual format allowed more companies to participate and the feedback we received was fantastic. We announced many new innovations at RealWorld, including a live virtual touring platform. If you've not heard about it, this is an amazing new virtual leasing feature that enables leasing agents that work for our clients or RealPage to jump into a virtual tour whenever the prospect has a question or when the agent wants to highlight a property amenity. This is not Zoom. It is tightly integrated and does not require a second app to work. Live virtual tours improved leasing agent utilization and productivity, thereby driving down labor costs. And it allows owners to increase hours of coverage to talk to prospects up to 16 hours per day, 7 days a week. Live tours goes into beta next month and is expected to be widely adopted in 2021 because it can help owners reduce leasing agent labor costs by as much as $150 to $200 per unit per year, while driving a higher quality experience to the prospect and expanding coverage beyond normal working hours. The most highly attended session this year was our AI Revenue Management Virtual breakout session. This is the next-generation of revenue management that combines the best features of Yieldstar and LRO. It delivers more accurate supply demand forecasting, generating as much as 100 basis points of incremental yield over Yieldstar or LRO stand-alone. AI revenue management also optimizes the price of amenity and rentable items, a first in our industry. Given the incremental yield that AI revenue management can generate, we think this product can support ARPU expansion of $10 to $12 per unit per year. We were also excited to launch 2 additional RealPage innovations in conjunction with RealWorld. First, I bet you didn't know that apartments spent $100 to $150 per unit per year in trash pickups and associated fines for dumpster contamination. Yes, trash may physically stink, but it can also stink up your P&L. At RealPage, we launched our AI-based waste management solution to help our customers reduce the cost of waste disposal. The solution employs camera-based IoT, AI and our utility management platform to help operators monitor and manage dumpster capacity and recycling. It also detects up to 11 kinds of contamination that create fines and penalties. In our initial trials, the solution reduced waste management costs by 40%. It also automated mandated sustainability reporting and improved resident satisfaction. AI waste management is expected to generate $20 to $25 of annual ARPU per unit in those units that adopted. With RealPage, sustainability can actually be profitable. Probably the hit of RealWorld was the announcement that RealPage is expanding our presence in the Smart Building market. RealPage Smart Building is intended for community-wide smart access to gates, building and corridor doors, all the way to the unit that costs well below competing solutions. We call this Sidewalk to Sofa access. Our Smart Building offering also includes smart IoT devices that allow residents to manage thermostats, lighting and monitoring of water and energy consumption in near real time. Armed with this usage data, residents can drop their water and energy bills by as much as 20%. This makes it possible for owners to share in the value they create for their residents, by increasing rents, $10 to $15 per unit per month or more. Finally, the RealPage Smart Building will enable high-speed WiFi and other digital services to work across the entire community, not just in the unit. So residents that want to work from home can now access up to 1 gigabit WiFi from their unit, conference center or the pool, actually from anywhere on the property. This will become more of a necessity as resident shift work schedules to work more at home. With high-speed bulk Wifi, owners can fund retrofits simply from the revenue share they generate for bulk Wifi. The RealPage Smart Building operates from a single resident app called Community Connect that controls the apartment and building as well as all the amenities that are available in the ActiveBuilding resident portal. No more fumbling around with multiple sign-ins and disparate user experiences. It's all there in 1 resident app. This rollout is enhanced by our recent acquisitions of STRATIS IoT and Chirp, which we announced in August, and we've already seen excellent traction with several customers, including a 50,000 unit order from Camden Property Trust, one of our largest customers. In our view, Smart Buildings will become a necessity in the future, not a luxury, as residents demand the same quality and convenience at home that they enjoy at work. We anticipate that thousands of apartment communities will retrofit Smart Building over the next 5 years to compete for the renter of the future. Initial CapEx costs have declined to a point where it is now economical to deploy Smart Buildings. Our role in this ecosystem will be to provide the system integration platform and bring all the disparate systems together into 1 seamless resident app. While we may sell portions of the Smart Building ecosystem that have high margins, we do not intend to sell low margin hardware. Our goal is that Smart Building be accretive to adjusted EBITDA as we achieve scale. So I've talked about several new innovations that have been under development for some time and are entering the market by the end of this year. These innovations represent substantial ARPU expansion opportunities intended to help us accelerate organic revenue growth. At the beginning of the year, we projected 11% organic growth at the midpoint of our guidance for 2020. The pandemic caused us to significantly expand the range of guidance. And then subsequently narrow it when we learned more. It now appears that the pandemic has not had the impact that we feared, and overall organic growth for 2020 will likely come in at approximately 9%, only 2% less than we originally projected. So I guess the big question is, what does this portend for our ability to hit our 2022 target of $1.5 billion of revenue and $500 million of run rate adjusted EBITDA. The answer is we are on track to hit it with no increase in M&A activity over 2020 levels. To achieve $1.5 billion in revenue, total revenue growth must be 14% or better per year. M&A at current levels should add 3% to 5% to total growth. Which means we need annual organic growth of, say, 9% to 11% to hit our target. We believe that adoption of the new solutions we've introduced this year will easily drive the required organic growth. So we reiterate that we believe $1.5 billion in revenue by 2022 is realistic and achievable. On the adjusted EBITDA side, we need about 400 basis points improvement in adjusted EBITDA margin to reach a run rate of $500 million by Q4 2022. We expect that this will come from normal scaling of the business since incremental revenue is added with margins above 40% and through productivity improvements and cost of sales, G&A and product development. At the same time, we plan to keep our foot on the accelerator, funding sales and marketing expansion at roughly the same rate as revenue growth. Our strategic plan is to expand our total addressable market, and expand our overall penetration within that TAM. And the market is more prime than ever for digital transformation. This bodes well for the long-term business and gives us confidence in the financial targets we have set. On the acquisition front, we originally expected that M&A activity would accelerate with the COVID environment and we opportunistically raised capital to position ourselves to take advantage of attractive assets in the marketplace. Over the ensuing months, we did not see opportunities of substantial size that were particularly exciting. So acquisition activity will be notably lower in 2020 than in the last few years. As of today, we believe we've filled most of the major product categories that are needed to penetrate the existing TAM and execute growth. But we will still consider opportunistic acquisitions and opportunities in adjacent markets especially international, where this makes sense. As you can tell, we're very pleased with our performance and the opportunities in front of us. And we look forward to a successful and exciting year in 2021. I'd now like to hand off the call to Brian, who will walk you through the numbers. Brian? -------------------------------------------------------------------------------- Brian Shelton, RealPage, Inc. - Interim CFO, Senior VP, CAO & Treasurer [4] -------------------------------------------------------------------------------- Thanks, Steve, and good afternoon, everyone. Before we get into the numbers, I would like to express my appreciation to Steve, our Board of Directors and the management team here at RealPage for having the confidence in me to execute our strong financial strategy. After being at RealPage for a bit over 6 years, the opportunities in this dynamically changing environment are as robust as I've ever seen them. I'm excited about the new products we're launching at a time when the market is being primed for technology expansion. Now for the numbers. During the third quarter, we continue to focus on financial discipline while also proactively helping our customers respond to one of the most profound challenges in our history as millions of people began to work from home. This focus helped us drive non-GAAP revenue of $299 million, up 17% versus the year ago quarter, including 9% organic growth. Adjusted EBITDA was $86 million, up 19% versus the year ago quarter. Adjusted EBITDA margins improved to 28.9% compared to 28.3% in the year ago quarter. Both our revenue and adjusted EBITDA performance were all-time records for RealPage, underscoring the growing demand for our solutions and the strength of our business model. Total ACV growth was 19% compared to the year ago quarter, consisting of 16% new unit growth and 2% ARPU growth. Organically, our ACV grew 10%, driven by 3% unit organic growth and 8% ARPU organic growth. We ended the quarter with 19.5 million units consisting of 10.2 million multifamily units from owners and managers with over 5,000 units and over 9.3 million SMB units. Total bookings regained the ground after the March through May dip, but remained below 2019 levels, though we were encouraged by pockets of strength in September. Virtual leasing and living products are picking up booking momentum and demand for our new AI revenue management is starting to prove out in the bookings. We finished the quarter with 646 sales team members, reflecting 27% growth compared to the year ago quarter. We believe that the demand for digital services among our potential customer base is very high, and we expect to continue to invest here, but with a strong commitment to productivity from our existing sales force. Product family growth was led by Payments, Buildium, Renters Insurance, IMS and Modern Message. Adjusted EBITDA margins were up roughly 60 basis points compared to the year ago quarter. Margin expansion was driven primarily by productivity and reduced COVID-related costs, such as travel, entertainment, trade shows and facility costs and was partially offset by increases in acquisition-related expenses. Looking at the drivers in more detail on a non-GAAP basis. Product development costs as a percentage of revenue increased 40 basis points versus the year ago quarter and were attributable to incremental personnel costs from our recent acquisitions. Sales and marketing costs as a percentage of revenue decreased 110 basis points versus the year ago quarter and was driven primarily by a more efficient marketing spend and decreases in travel. We continue to see good results from virtual selling and feedback from our annual virtual user conference has been very positive. General and administrative costs as a percentage of revenue increased 110 basis points versus the year ago quarter and was driven primarily by incremental acquisition costs as well as infrastructure and personnel investments to drive efficiency and scale over the long term. That said, G&A as a percentage of revenue was down 50 basis points sequentially, and we continue to believe we will see meaningful G&A leverage in 2021 as we integrate recent acquisitions and realize top line growth. During the quarter, we generated over $81 million of operating cash, excluding the impact from changes in restricted cash relating to accounting treatment changes. In our May concurrent equity and convertible notes offering, we raised $632 million in proceeds, net of fees and capped call instruments. We used $230 million of the proceeds to fully reset our $600 million revolver. Currently, we have $612 million in cash on the balance sheet. Our leverage ratio is now 2.3x. This remains at the low end of our target range of 2 to 4x, which we believe is a great place to be given our growth and operating strategy. On a third quarter run rate adjusted EBITDA basis, the leverage ratio would be 1.7x. We believe this provides significant flexibility to execute on our growth strategy. Turning now to guidance. Given that we exceed our expectations for the third quarter, we are raising our fourth quarter and full year guidance. For the full year, we are increasing our outlook for non-GAAP revenue to $1.154 to $1.158 billion, representing 17% total growth or 9% organic growth. Adjusted EBITDA is expected to be $360 million to $320 million (sic -- see press release "$316 million to $320 million"), representing an adjusted EBITDA margin of 27.4% to 27.6%. Non-GAAP diluted earnings is expected to be $1.90 to $1.94 per share. This implies fourth quarter non-GAAP revenue of $292.4 million to $296.4 million, which represents year-over-year growth of 15% to 16% and reflecting organic growth of 8% to 9%. The fourth quarter adjusted EBITDA is expected to be $78.5 to $82.5 million, which represents margins of 26.8% to 27.8%. Fourth quarter non-GAAP diluted earnings is expected to be $0.46 to $0.50 per share. This guidance assumes a continued and gradual return to normal market conditions, leasing activity in line with historic trends and our customers' willingness to engage in new projects. The higher end of the range assumes stable rent collections and progressive work recovery. And the lower end of the range assumes downward pressure on rent collection and slower work recovery. In addition, adjusted EBITDA will be impacted by the lower margins associated with recent acquisitions, continued investment in product development and sales and marketing and upticks in expenses as we begin to open up travel and return to the office. Finally, we provide certain industry data for the benefit of our various constituents. And with our extensive data set, we frequently speak as industry experts regarding the health of the multifamily market related to collections, leasing velocity, occupancy and several other metrics. We have begun to add industry data back into our IR fact sheet posted on our website. While this data is not necessarily an indicator for measuring the operating performance of RealPage as a company, we believe the information is useful for those seeking to better understand the market we serve. We are also adding our quarterly ACV broken down by enterprise, corporate and SMB customers. As Steve Winn mentioned, Steve Calk and I have been listening to our investors and we are committed to developing and enhancing relevant disclosures for you to better understand the RealPage story. As evidenced by our strong results this quarter, we believe that RealPage has an exceptional model and we continue to push ourselves to deliver even more value for our customers every day. We remain very excited about the opportunities in front of us, and we look forward to updating you on our fourth quarter call. Operator, we will now open the call for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from Ryan Tomasello of KBW. -------------------------------------------------------------------------------- Ryan John Tomasello, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [2] -------------------------------------------------------------------------------- Congrats on the strong quarter. I appreciate the prepared remarks on bookings, but I was hoping to maybe put a finer point on that in terms of the trajectory through the quarter. You mentioned bookings were still down year-over-year in 3Q, despite gaining ground. So can you say how bookings maybe compared sequentially to the second quarter? And if bookings ended 3Q in September up year-over-year? And lastly, overall, how would you characterize the willingness of clients, particularly your larger clients, the willingness on their part to take on new projects with RealPage? Have you seen any noticeable improvements on that front? -------------------------------------------------------------------------------- Stephen T. Winn, RealPage, Inc. - Chairman & CEO [3] -------------------------------------------------------------------------------- This is Steve. Ashley, our President, has joined us, and I think this question is perfect for her to take. So Ashley. -------------------------------------------------------------------------------- Ashley Glover, [4] -------------------------------------------------------------------------------- Ryan, it's Ashley. Yes, we -- as we reported, bookings are -- grew in the mid-single digits in total, but we're obviously a little bit down year-over-year. We don't think this has an impact on Q4. We have a strong backlog going into the quarter. And we actually feel very good about our pipeline. What we've seen is a little bit of a hesitance in taking on some larger or more substantial projects on the part of our clients, but overall, we feel like actually bookings didn't lose as much momentum, I think, as we initially feared, which has led to pretty strong results year-to-date. And we are actually seeing clients taking on more initiative as we enter the fall. So we actually feel very good about our momentum. -------------------------------------------------------------------------------- Stephen T. Winn, RealPage, Inc. - Chairman & CEO [5] -------------------------------------------------------------------------------- Yes, Ryan, I would probably add to that, that as you can see in the numbers we disclosed, we've been adding to the sales force recently. Some of that came a little bit through the acquisitions, but primarily, that has been targeted in strategic sales reps, adds that we've been making. We feel well positioned with the products that we're launching in the back half of this year. And as I think you've heard us say before, it takes several months to ramp the reps up. So our goal is to have a fully staffed, ramped up sales team to sell new products in the new year when hopefully, more normal times are about us. -------------------------------------------------------------------------------- Ashley Glover, [6] -------------------------------------------------------------------------------- Yes. The only thing I'd add that I forgot to mention earlier is that another chunk of our bookings that we see in a normal year that we didn't see as much of this year is what we would call add-on sales. Transactions are down in the industry. We're not seeing as many sites being sold as we normally see. As a result, what we -- a function of our bookings, which we call add-on bookings, they're actually down substantially year-over-year. Which is something that we're kind of watching. But -- so add-on momentum is a little bit down, but overall bookings, we think, are pretty good. -------------------------------------------------------------------------------- Ryan John Tomasello, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [7] -------------------------------------------------------------------------------- Great. I appreciate all that commentary. And good to hear the reiteration of the 2022 targets. Thinking about the 9% to 11% organic revenue growth you spoke about, can you provide some color on what you see as the major drivers of sustaining that in terms of product type and perhaps customer base? For example, SMB is clearly one of the faster-growing areas of the business that you seem to be making investments in. So just wondering what type of momentum you're expecting there over the next 2 years? -------------------------------------------------------------------------------- Stephen T. Winn, RealPage, Inc. - Chairman & CEO [8] -------------------------------------------------------------------------------- SMB, we expect to continue to grow nicely. We're candidly in the early innings of integrating and bringing the sales teams up to speed on all of the value-added services that RealPage has attached to Buildium. So I think there's ample opportunity there for growth. Probably larger than that is the implications of people living at home, everybody is going virtual and a large number of the products that we announced at a RealWorld relate to how you more effectively deal with residents that are spending more time in your apartment. That includes the Smart Building initiative, which I'm very excited about because this is going to unlock some revenue opportunities especially in the smart access control area, where we can start to get deliveries right to the door. We can support short-term rentals more effectively. So you should see the resident service side of our business grow well. And finally, AI revenue management is a big deal. For the first time, we're now optimizing the pricing of amenities and rentables, and that can become a fairly significant incremental growth opportunity for our clients. AI revenue management also is just using much more effective and more precise supply/demand models that are showing that we can increase the results by as much as 100 basis points of incremental yield. The price per AI management -- revenue management is going to be somewhere around $10 to $12 per unit per year higher than current products. And we are getting really some pretty significant interest from our customer base on this product, especially in these times. -------------------------------------------------------------------------------- Operator [9] -------------------------------------------------------------------------------- Our next question comes from Joe Vruwink of Baird. -------------------------------------------------------------------------------- Joseph D. Vruwink, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [10] -------------------------------------------------------------------------------- Great. Brian, congrats on your appointment. One of the things paging through the new fact sheet, I thought to that was the ARPU with your current largest clients. The existing top 100 had a pretty nice acceleration year-on-year. So I guess my question is, if you're a well-established already savvy RealPage customer, what are you buying incrementally at this point to drive that type of acceleration? And does that give you any line of sight to maybe ARPU expansion across the other segments of your customer audience thinking into 2021? -------------------------------------------------------------------------------- Stephen T. Winn, RealPage, Inc. - Chairman & CEO [11] -------------------------------------------------------------------------------- Yes, I'll take that. Thank you, Joe. I appreciate it. If you look at how we have our TAM built, in the multifamily space, we're targeting across 21 million units that, that would average to about $418 of ARPU to drive an $8.7 billion TAM. So our top 25 -- I'm sorry, our top 100 ARPU is at $76.41. So you can see the expansion capability that we have there and that goes hand-in-hand with the land and expand strategy that we've been talking about for some time now. The ACV opportunity is fairly robust when you also think about it from our highest penetrated product across our 19.5 million units is only 20% penetrated. So if you look across the product offering, we have a long ways to go in this existing space in a long -- very long runway. -------------------------------------------------------------------------------- Joseph D. Vruwink, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [12] -------------------------------------------------------------------------------- Okay. Great. That's helpful. And then maybe just a bit of an update, particularly since Ashley is on the call. I know this was an area of focus, particularly last year. But in terms of the Unity platform, the progress there in terms of adoption? And then any maybe preview on the roadmap going forward and maybe the next steps of integrating more of the solution sets on to the platform or feedback from customers who have kind of undertaken the journey already. -------------------------------------------------------------------------------- Ashley Glover, [13] -------------------------------------------------------------------------------- Yes. No, I'd love to give that update. I think we've had amazing progress on the Unified platform in a couple of different dimensions. In terms of migrating our customers, especially our larger customers to the platform who use multiple solutions. They see a ton of value in moving to the Unified platform, not just because of the integrated log in functionality, but because we've now migrated quite a bit of kind of proactive learning and on-demand services into the platform. And then this year, we've launched part of the onboarding capability. So from an implementation perspective, we're actually starting to drive that through the Unified platform. And our customers that are using that functionality are actually pretty pleased by it because it creates a much simpler way to come in and take on RealPage products and services. In terms of what's coming, we're going to finish the journey in terms of the onboarding process, all of the RealPage solutions for our multifamily customers will be integrated into the Unified platform by the end of the first quarter. Most of them actually by the end of this year. And that will become actually a substantial initiative in terms of, a, making it easier to implement and use our products quickly. And b, actually, long term, drive our cost of implementation down because it's going to drive a lot more automation and speed into the process. So that's kind of our next focus area on Unity what we've been working on this year and we're kind of aiming to complete next year. And so the feedback has been really good. Other initiatives that we're teeing up for next year have been around more Unified kind of workflows that might cut between our solutions. We're actually kind of starting to drive those workflows into the Unified platform. And then the last big thing that we completed this year was, as we upgraded our legacy property management solution, we actually did it into the Unified platform. So most of the 1 site leasing and rent functionality now appears in the platform and is very integrated there too. So it's been a really good couple of years for Unity. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- Our next question comes from John Campbell of Stephens. -------------------------------------------------------------------------------- John Robert Campbell, Stephens Inc., Research Division - MD [15] -------------------------------------------------------------------------------- And Brian, congrats on being named the permanent CFO. Congrats to you. As rates -- we're getting -- I think some of the concerns from investors right now are a little bit more on the macro side, on the multifamily side. But Steve, as rates start to roll over a little bit here, how does that change property managers just high-level strategy and how they kind of make up for that lost yield? You guys clearly have a lot of different options there. But Steve, you mentioned the AI revenue management, that's something that's really starting to pick up some interest. But what are some of the other main things you guys have that can kind of help recover that yield? Maybe some of the things being underutilized today that might be a little bit more countercyclical? -------------------------------------------------------------------------------- Brian Shelton, RealPage, Inc. - Interim CFO, Senior VP, CAO & Treasurer [16] -------------------------------------------------------------------------------- Well, yield growth is down some or rent growth, it's down about 130 basis points in Q3. It was down 20 basis points in Q2. But that's a national average. So you are seeing a hit to rates. Occupancy surprisingly has not really changed much. It's still 95.7% in Q3. Now there are areas of the country that are more impacted by this environment. So these are national averages. We were fortunate to be very diversified in our customer base. So it insulates us from issues that can impact customers in one market. Now the way to help our customers is to allow them to optimize the base rent decision to perfection wherever they can, analyzing supply and demand imbalances, so they get the right price. The second way to do it is to start to monetize amenities and rentables. And by that, I mean, charge for guest suites, charge for self-storage on the property, charge for parking. There's so many opportunities to generate incremental yield that the -- most of our industry has not yet adopted. We see the opportunity to generate as much as 300 or 400 basis points of incremental yield simply through the monetization of the services that they have historically offered for free. The last way I'd say we can help our customers is managing their sales pipeline more effectively. If you are capturing every lead and converting it effectively, you're going to generate higher yield. If there's leakage in leads where they just don't convert because you don't answer the phone or you don't handle the lead properly, then you're going to suffer the consequence of that. So all of the marketing suite of products that we offer, especially the new -- this new touring -- live touring product that we're introducing are going to make it a lot easier for customers to convert leads into leases. So the industry is dying for this technology. They absolutely know they need it. And the good news is they can actually cut some cost because working from home turns out is much more efficient than bringing people into the office. So we actually see some opportunity on the cost side to help the industry. -------------------------------------------------------------------------------- John Robert Campbell, Stephens Inc., Research Division - MD [17] -------------------------------------------------------------------------------- Yes, that's very helpful. That's good color. And then last question for me. On the SMB opportunity, I mean you guys are standing that up pretty quickly. Clearly, that's a big opportunity for you guys over time. As we think about it just kind of nearer term, I mean, you guys -- it looks like your units were kind of ahead of schedule, at least relative to us. Your ARPU is a little bit lower, which I think that's probably just mix shift of better lower ARPU SMB revenue. So I guess, first, is that right on the ARPU side? And then if you could maybe just decouple or just kind of unpack the growth, if it's been more driven by ARPU on the SMB side? Or is it more units at this stage? -------------------------------------------------------------------------------- Stephen T. Winn, RealPage, Inc. - Chairman & CEO [18] -------------------------------------------------------------------------------- Yes, that's a very astute question there, John. What we're seeing is the accelerated growth on the Buildium units are at a little bit lower price point than the rest of the category that we comprise in SMB. So our growth in Buildium is actually causing a little bit of headwind in the expansion of the RPU in that area. But overall, Buildium is growing at multiples of our organic rate. We couldn't be more happy with the acquisition and how it's performing thus far. -------------------------------------------------------------------------------- John Robert Campbell, Stephens Inc., Research Division - MD [19] -------------------------------------------------------------------------------- Okay. That's helpful. And then I guess, the unit -- the rate of growth from units, that's picking up probably faster? Then I was just talking about the breakout between the unit and ARPU just within SMB. Because I know with ARPU, you guys have a really big potential to kind of get better attach rates and kind of overlay your ancillary services. I was curious which one is driving kind of the growth at this stage? -------------------------------------------------------------------------------- Stephen T. Winn, RealPage, Inc. - Chairman & CEO [20] -------------------------------------------------------------------------------- Yes. At the current moment in SMB, it's primarily based on the units. But we have quite a bit of potential of ARPU in SMB. As I think you know, the penetration into BaaS that Buildium had was small in comparison to where RealPage is at. It's also small in comparison to where AppFolio is at. So there's quite a bit of room within the Buildium unit base to expand ARPU. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- Our next question comes from Sterling Auty of JPMorgan. -------------------------------------------------------------------------------- Jackson Edmund Ader, JPMorgan Chase & Co, Research Division - Analyst [22] -------------------------------------------------------------------------------- Great. This is Jackson Ader on for Sterling tonight. The first one is just on the organic growth rates. I know that you mentioned that it might be towards the higher end of the range given some stable rent payments or lower end, otherwise. Is this -- I mean, is a lot of this dependent maybe on the passage or size of the stimulus bill here in the fourth quarter? -------------------------------------------------------------------------------- Stephen T. Winn, RealPage, Inc. - Chairman & CEO [23] -------------------------------------------------------------------------------- I don't -- I think the stimulus build clearly is going to help, particularly in the area of unemployment subsidies. We were candidly very surprised that the lack of stimulus going into the third quarter really didn't have much impact on the overall market. I think it did have some impact on the West Coast and the New York, Boston areas. I do think the country needs a stimulus package, especially in these areas of high unemployment. On the other hand, so far, the industry has weathered this rough water fairly well. -------------------------------------------------------------------------------- Jackson Edmund Ader, JPMorgan Chase & Co, Research Division - Analyst [24] -------------------------------------------------------------------------------- Okay. Great. And Steve, actually, the comment on the West Coast and New York, Boston is a good segue into the next question, which is on, any commentary you can provide maybe on the demand or behavior of your mostly urban owners and operators versus suburban or rural owners and operators as we head into '21? -------------------------------------------------------------------------------- Stephen T. Winn, RealPage, Inc. - Chairman & CEO [25] -------------------------------------------------------------------------------- Urban has been impacted somewhat by COVID, what happens is when all of the amenities of urban living go away, people question why they want to pay a higher rent to live in an urban area. So we did see some flight away from the urban core into the suburban markets. I don't know if that's going to be permanent. I think the reason people live in the urban setting are not going to change once there's a vaccine, and we get back to normal living. So I don't think the urban shift is one that you would consider long term. There's a lot of issues on the Coast with rent payments or collections have actually been impacted some in those markets. And we do think a subsidy there would be very helpful. It seems that the Midwest, the South and the Southwest have been doing great. -------------------------------------------------------------------------------- Brian Shelton, RealPage, Inc. - Interim CFO, Senior VP, CAO & Treasurer [26] -------------------------------------------------------------------------------- I'd like to add a little bit of more color to that. From RealPage's perspective, we're fortunate that our customer base is diverse in terms of size, geography and percentage of revenue. This insulates us from wide swings in demand in individual markets. So some areas struggle, other areas improve, and we continue to grow. A feature that that's still not fully appreciated in the story of RealPage is that when occupancy is under pressure, the demand for RealPage solutions historically increases. And that's something that I think those that are looking into the story need to understand. -------------------------------------------------------------------------------- Operator [27] -------------------------------------------------------------------------------- Our next question comes from Michael Turrin of Wells Fargo Securities. -------------------------------------------------------------------------------- Michael James Turrin, Wells Fargo Securities, LLC, Research Division - Senior Analyst [28] -------------------------------------------------------------------------------- The leasing and marketing segment saw a nice rebound here in Q3. Can you expand on what drove that uptick? Is there some way to think about how much might be due to broader stabilization versus the bigger shift towards virtual you're referencing here as well? -------------------------------------------------------------------------------- Stephen T. Winn, RealPage, Inc. - Chairman & CEO [29] -------------------------------------------------------------------------------- Yes. Good question. It's a combination of both, really. Our online leasing portfolio benefited from some leasing transactional recovery, expanding both year-over-year and sequentially. Our online living suite is also experiencing exceptional demand. Modern Message is having its best rewards incentive year ever. So COVID doesn't really seem to be slowing down their revenue. Our marketing suite is still being impacted by COVID as PMCs have slowed investments in digital marketing and some major new websites. Of course, we also have the contacts that are in this category, which has been a headwind for quite some time. But perhaps the largest driver of the growth has been the recovery in the screening business. In Q2, that was a 7% contraction as leasing velocity dropped. In Q3, we saw leasing velocity pick up and screening slightly increased year-over-year. We're still not back to 100% of where the screening was, but we did see a nice bounce back in Q3. -------------------------------------------------------------------------------- Michael James Turrin, Wells Fargo Securities, LLC, Research Division - Senior Analyst [30] -------------------------------------------------------------------------------- Really helpful color. Brian, congrats on formally taking on the new role. The bottom line came through with EBITDA performance as well. Anything we should be thinking about just related to lighter overall expense given the move towards remote or how should we think about the potential for margin expansion from here, especially if the world does trend back towards an office? -------------------------------------------------------------------------------- Stephen T. Winn, RealPage, Inc. - Chairman & CEO [31] -------------------------------------------------------------------------------- Yes. I think in the quarter, to be candid, we had about $7 million of what we would kind of coin COVID-related costs that were saved, primarily through travel, trade shows, even the facility costs. So about $4 million of that was actually planned in our guide. So we slightly beat it a little bit just versus what we were thinking. But I think all of us would love to get back into the office, but I'm not quite sure that's going to happen in Q4. I really hope so. But -- so we are definitely planning on continuing to have a little bit of cost benefit associated with COVID in Q4. But it's not completely in there because, like we said in the prepared remarks, we are hopeful to get back traveling and back into the buildings. -------------------------------------------------------------------------------- Operator [32] -------------------------------------------------------------------------------- Our next question comes from Jason Celino of KeyBanc Capital Markets. -------------------------------------------------------------------------------- Jason Vincent Celino, KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst [33] -------------------------------------------------------------------------------- Brian, welcome to the call, and congrats. One question actually on the SMB, and I appreciate the breakout disclosure here. But how much of the strength do you think SMB is seeing just from these being more nimbler organizations without the same type of budget approvals that you've seen maybe at the enterprise level? -------------------------------------------------------------------------------- Ashley Glover, [34] -------------------------------------------------------------------------------- [Mic?] -------------------------------------------------------------------------------- Stephen T. Winn, RealPage, Inc. - Chairman & CEO [35] -------------------------------------------------------------------------------- I'm not sure there's a correlation there. It is true. SMB doesn't have to go through the approval process that the enterprise or corporate clients must bear. So from that perspective, the sales cycle is more accelerated in SMB, which is good. SMB also doesn't really rely on field salesmen. It's all telesales and digital marketing. So there's a lot of benefit. There's a lot of positive things about SMB in the speed of the selling cycle and the speed of implementation. Buildium, in particular, does not require an order form. You can self-provision it. So it's really fast. I'm not sure that's responsive to the question, but if you want to elaborate... -------------------------------------------------------------------------------- Ashley Glover, [36] -------------------------------------------------------------------------------- What I would say I see is -- oh, go ahead. Yes. I've got a couple of thoughts. But if you want to be more specific, I can probably respond. -------------------------------------------------------------------------------- Jason Vincent Celino, KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst [37] -------------------------------------------------------------------------------- Sure. I can get more in terms of finance. I guess how does the willingness to spend kind of compare and contrast with at the SMB level that you're seeing today versus maybe some of your enterprise customers? -------------------------------------------------------------------------------- Ashley Glover, [38] -------------------------------------------------------------------------------- So I would say that we're -- when I look at SMB versus enterprise, I mean, we can just state the obvious as Steve kind of said, our sales cycles in SMB are faster. And our deal sizes are smaller, not just on a total dollar value, but generally on a sort of dollar per unit value. What I mean by that is they tend to buy in smaller chunks versus a larger company who might buy more of an enterprise-type solution. So while the enterprise sales cycles are a bit longer, they tend to buy more complete solution, if that makes sense. So in light of COVID, though, I did take a look at whether we saw a difference in sales productivity by segment, whether it was really different by SMB, what we call midsize or corporate versus enterprise. And interestingly, we didn't see a big delta between those 3 segments. So we're not seeing a difference in -- a market difference in performance by sort of type or size of customer. So I think that's not what's propelling the growth is COVID, if that's what you're to say, is COVID making an SMB more nimble and an enterprise more slow. No, I think you have to get more specific and look at specific customers and the dynamics that they're facing. -------------------------------------------------------------------------------- Stephen T. Winn, RealPage, Inc. - Chairman & CEO [39] -------------------------------------------------------------------------------- Right. And Jason, don't forget that in the SMB world, especially in the multifamily neck of it plus the single-family neck of it, those customers, those owners, those operators are dealing with the same problems that the enterprise and corporate-level owners and operators of real estate are dealing with. And traditionally, they've been underpenetrated on adopting technology. And our technology is built to improve their efficiency and to improve their NOI. So if they're ready for the technology investment, they can improve their returns with us. So it's a very underpenetrated market, and it's quite a large opportunity. -------------------------------------------------------------------------------- Operator [40] -------------------------------------------------------------------------------- Our final question comes from Stephen Sheldon of William Blair. -------------------------------------------------------------------------------- Stephen Hardy Sheldon, William Blair & Company L.L.C., Research Division - Analyst [41] -------------------------------------------------------------------------------- I'll add to the congrats on the new role, Brian, and really appreciate all the great detail across the board here. It already sounds like you've seen some traction with Community Connect, including the Camden announcement. I guess, how much material do you think these solutions could be from a financial perspective over the next few years? And for clients that have already signed up, what have been the initial key selling points that gets them kind of over the hurdle to sign up for? It seems like there would be many different yield improvement opportunities with it. -------------------------------------------------------------------------------- Stephen T. Winn, RealPage, Inc. - Chairman & CEO [42] -------------------------------------------------------------------------------- Well, the compelling reason to consider this is the cost of deploying a Smart Building has declined substantially in the last 12 to 24 months. You can now implement smart access, smart IoT devices and bulk WiFi for -- in the range of $1,200 to $1,300 per unit. Now our model does not contemplate that we sell that CapEx. We're more -- you should think of us as a Smart Building provider of service. We are the managed service. And we're trying to drive margins in that business that are accretive to adjusted EBITDA. So we don't want to be in the hardware business. That's not the goal here. But we do want to facilitate the integration of Smart Buildings with smart living so that a resident only has to use 1 application to open their door, access their internet, look at their thermostat, look at their water, energy consumption, pay their bills, enter a service request. In other words, everything that the resident touches is in 1 simple handheld device. That's the holy grail in our view, and it's one of the reasons why we think Smart Building is so important. -------------------------------------------------------------------------------- Stephen Hardy Sheldon, William Blair & Company L.L.C., Research Division - Analyst [43] -------------------------------------------------------------------------------- Got it. It sounds like you remain confident on the 2022 target, some of which would depend on continued M&A. So just curious how the pipeline is looking there, especially in 2021, knowing that you've been very disciplined. And then Steve, you also briefly mentioned the international potential in the prepared comments. So just wanted to get an update about how you're thinking about the international opportunity at this point. -------------------------------------------------------------------------------- Stephen T. Winn, RealPage, Inc. - Chairman & CEO [44] -------------------------------------------------------------------------------- The M&A activity will be substantially lower in 2021 than it has been historically. I do believe we've filled in most holes that we felt we needed to acquire companies to fill with the last area being the Smart Building acquisitions that we've made. So I don't -- if you think about the base business and the type of product extension, acquisitions, we've traditionally been making, I don't see us continue -- I don't see us expanding that. If anything, it will go down. Now that doesn't mean we won't look at an opportunistic competitor that wants to exit for whatever reason or look at adjacent markets that might be attractive for RealPage to enter in the real estate area, including some international markets. It's very difficult to launch into another country from the ground up. It's much better in our view to enter foreign markets through an acquisition and then grow that. So we are clearly interested in expanding our footprint. Our clients are expanding overseas. We want to follow them. So generally -- I wish I could give you more guidance, but that's it. -------------------------------------------------------------------------------- Steve Calk, [45] -------------------------------------------------------------------------------- And listen, we know a lot of you have to jump now on to other calls. So on behalf of the RealPage team, thanks for joining us on a very busy earnings day. We're excited to connect with a bunch of you in the coming weeks, and we look forward to updating you on our progress next quarter. Have a good day. -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.