Notes to the Condensed Consolidated Financial Statements
(unaudited)
1. The Company
RealPage, Inc., a Delaware corporation, together with its subsidiaries, (the “Company” or “we” or “us”) is a provider of property management solutions that enable owners and managers of a wide variety of single family, multifamily, and vacation rental property types to manage their marketing, pricing, screening, leasing, accounting, purchasing, and other property operations. Our on demand software solutions are delivered through an integrated software platform that provides a single point of access and a shared repository of prospect, renter, and property data. By integrating and streamlining a wide range of complex processes and interactions among the rental housing ecosystem of owners, managers, prospects, renters, and service providers, our platform optimizes the property management process and improves the experience for all of these constituents. Our solutions enable property owners and managers to optimize revenues and reduce operating costs through higher occupancy, improved pricing methodologies, new sources of revenue from ancillary services, improved collections, and more integrated and centralized processes.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements and footnotes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. We believe that the disclosures made are appropriate, conform to those rules and regulations, and that the condensed or omitted information is not misleading.
The unaudited condensed consolidated financial statements included herein reflect all adjustments (consisting of normal, recurring adjustments) which are, in the opinion of management, necessary to state fairly the results for the interim periods presented. All intercompany balances and transactions have been eliminated in consolidation. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the fiscal year.
These financial statements should be read in conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K filed with the SEC on
February 29, 2016
(“Form 10-K”).
Reclassification
Certain amounts included in cost of revenue in the accompanying Condensed Consolidated Statements of Operations for the
three and nine
months ended
September 30, 2015
have been reclassified as sales and marketing expense to conform to current period presentation. This reclassification resulted in an increase in gross profit of
$1.1 million
and
$2.4 million
for the
three and nine
months ended
September 30, 2015
, respectively.
Segment and Geographic Information
Our chief operating decision maker is our Chief Executive Officer, who reviews financial information presented on a company-wide basis. As a result, we determined that the Company has a single reporting segment and operating unit structure.
Principally, all of our revenue for the
three and nine
months ended
September 30, 2016
and
2015
was earned in the United States. Net property, equipment, and software held consisted of
$116.9 million
and
$77.4 million
located in the United States, and
$5.2 million
and
$4.8 million
in our international subsidiaries at
September 30, 2016
and
December 31, 2015
, respectively. Substantially all of the net property, equipment, and software held in our international subsidiaries was located in the Philippines, Spain, and India at both
September 30, 2016
and
December 31, 2015
.
Accounting Policies and Use of Estimate
s
The preparation of financial statements in conformity with GAAP requires our management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities, at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Significant estimates include the allowance for doubtful accounts; the useful lives of intangible assets and the recoverability or impairment of tangible and intangible asset values; fair value measurements; contingent commissions related to the sale of insurance products; purchase accounting allocations and contingent consideration; revenue and deferred revenue and related reserves; stock-based expense; and our effective income tax rate and the recoverability of deferred tax assets, which are based upon our expectations of future taxable income and allowable deductions. Actual results could differ from these estimates. For greater detail regarding these accounting policies and estimates, refer to our Form 10-K.
Revenue Recognition
We derive our revenue from
three
primary sources: on demand software solutions, on premise software solutions, and professional services. We commence revenue recognition when all of the following conditions are met:
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there is persuasive evidence of an arrangement;
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the solution and/or service has been provided to the client;
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the collection of the fees is probable; and
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the amount of fees to be paid by the client is fixed or determinable.
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If the fees are not fixed or determinable, we recognize revenues as payments become due from clients or when amounts owed are collected, provided all other conditions for revenue recognition have been met. Accordingly, this may materially affect the timing of our revenue recognition and results of operations.
When arrangements with clients include multiple software solutions and/or services, we allocate arrangement consideration to each deliverable based on its relative selling price. In such circumstances, we determine the relative selling price for each deliverable based on vendor specific objective evidence of selling price (“VSOE”), if available, or our best estimate of selling price (“BESP”). We have determined that third-party evidence of selling price is not available as our solutions and services are not largely interchangeable with those of other vendors. Our process for determining BESP considers multiple factors, including prices charged by us for similar offerings when sold separately, pricing and discount strategies, and other business objectives.
Taxes collected from clients and remitted to governmental authorities are presented on a net basis.
On Demand Revenue
Our on demand revenue consists of license and subscription fees, transaction fees related to certain of our software-enabled value-added services, and commissions derived from our selling certain risk mitigation services.
License and subscription fees are composed of a charge billed at the initial order date and monthly or annual subscription fees for accessing our on demand software solutions. The license fee billed at the initial order date is recognized as revenue on a straight-line basis over the longer of the contractual term or the period in which the client is expected to benefit, which we consider to be
three
years. Recognition starts once the product has been activated. Revenue from monthly and annual subscription fees is recognized on a straight-line basis over the access period.
We recognize revenue from transaction fees derived from certain of our software-enabled value-added services as the related services are performed.
As part of our risk mitigation services to the rental housing industry, we act as an insurance agent and derive commission revenue from the sale of insurance products to individuals. 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. This agreement provides for a calculation that considers, on the policies sold by us, earned premiums less i) earned agent commissions; ii) a percent of premium retained by our underwriting partner; iii) incurred losses; and iv) profit retained by our underwriting partner during the time period. Our estimate of contingent commission revenue considers historical loss experience on the policies sold by us. If the policy is cancelled, our commissions are forfeited as a percent of the unearned premium. As a result, we recognize commissions related to these services as earned ratably over the policy term.
On Premise Revenue
Sales of our on premise software solutions consist of an annual term license, which includes maintenance and support. Clients can renew their annual term license for additional
one
-year terms at renewal price levels. We recognize revenue for the annual term license and support services on a straight-line basis over the contract term.
We also derive on premise revenue from multiple element arrangements that include perpetual licenses with maintenance and other services to be provided over a fixed term. Revenue is recognized for delivered items using the residual method when we have VSOE of fair value for the undelivered items and all other criteria for revenue recognition have been met.
When VSOE has not been asserted for the undelivered items, we recognize the arrangement fees ratably over the longer of the client support period or the period during which professional services are rendered.
Professional and Other Revenue
Professional services and other revenue are recognized as the services are rendered for time and material contracts. Training revenues are recognized after the services are performed.
Fair Value Measurements
Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. See additional discussion of our fair value measurements and methodology at Note
11
.
Concentrations of Credit Risk
Our cash accounts are maintained at various financial institutions and may, from time to time, exceed federally insured limits. The Company has not experienced any losses in such accounts.
Concentrations of credit risk with respect to accounts receivable result from substantially all of our clients being in the multifamily rental housing market. Our clients, however, are dispersed across different geographic areas. We do not require collateral from clients. We maintain an allowance for doubtful accounts based upon the expected collectability of accounts receivable.
No single client accounted for
10%
or more of our revenue or accounts receivable for the
three or nine
months ended
September 30, 2016
or
2015
.
Legal Contingencies
We review the status of each matter and record a provision for a liability when we consider that it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We review these provisions quarterly and make adjustments where needed as additional information becomes available. If either or both of the criteria are not met, we assess whether there is at least a reasonable possibility that a loss, or additional losses beyond those already accrued, may be incurred. If there is a reasonable possibility that a material loss (or additional material loss in excess of any accrual) may be incurred, we disclose an estimate of the amount of loss or range of losses, either individually or in the aggregate, as appropriate, if such an estimate can be made, or disclose that an estimate of loss cannot be made.
Derivative Financial Instruments
The Company is exposed to interest rate risk related to our variable rate debt. The Company manages this risk through a program that may include the use of interest rate derivatives, the counterparties to which are major financial institutions. Our objective in using interest rate derivatives is to add stability to interest cost by reducing our exposure to interest rate movements. We do not use derivative instruments for trading or speculative purposes.
Our interest rate derivatives are designated as cash flow hedges and are carried in the Condensed Consolidated Balance Sheets at their fair value. Unrealized gains and losses resulting from changes in the fair value of these instruments are classified as either effective or ineffective. The effective portion of such gains or losses is recorded as a component of accumulated other comprehensive income (“AOCI”), while the ineffective portion is recorded as a component of interest expense in the period of change. Amounts reported in AOCI related to interest rate derivatives are reclassified into interest expense as interest payments are made on our variable-rate debt. If an interest rate derivative agreement is terminated prior to its maturity, the amounts previously recorded in AOCI are recognized into earnings over the period that the forecasted transactions impact earnings. If the hedging relationship is discontinued because it is probable that the forecasted transactions will not occur according to our original strategy, any related amounts previously recorded in AOCI are recognized in earnings immediately. See Note
13
for additional information.
Business Combinations
When we acquire businesses, we allocate the total consideration paid to the fair value of the tangible assets, liabilities, and identifiable intangible assets acquired. Any residual purchase consideration is recorded as goodwill. The allocation of the purchase price requires our management to make significant estimates in determining the fair values of assets acquired and liabilities assumed, in particular with respect to identified intangible assets. These estimates are based on the application of valuation models using historical experience and information obtained from the management of the acquired businesses. Such 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 cost savings expected to be derived from acquiring an asset. These estimates are inherently uncertain and unpredictable. Unanticipated events and circumstances may occur that would affect the accuracy or validity of these estimates.
Our business combination agreements may provide for the payment of additional cash 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 purchase price. Changes in the fair value of contingent consideration are reflected in the Condensed Consolidated Statements of Operations. Acquisition-related costs are expensed as incurred.
Inventory
Inventories are stated at the lower of cost, determined on a first-in, first-out basis, or net realizable value. The Company establishes inventory allowances for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated realizable values based on assumptions about forecasted demand, open purchase commitments, and market conditions. Inventories consist primarily of meters, including subcontract labor costs on contracts in progress.
Other Current Assets
Other current assets consisted of the following at
September 30, 2016
and
December 31, 2015
:
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September 30, 2016
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December 31, 2015
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(in thousands)
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Lease-related receivables
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$
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1,914
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$
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20,683
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Inventory
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1,774
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548
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Indemnification asset
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1,220
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—
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Other current assets
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2,958
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1,854
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Total other current assets
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$
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7,866
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$
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23,085
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Lease-related receivables consisted primarily of incentives related to the lease executed in 2015 for our new corporate headquarters and data center in Richardson, Texas. The decrease in the lease-related receivable between the periods is attributable to reimbursement payments received from the landlord related to completed leasehold improvements. See additional discussion of this lease at Note
8
. The indemnification asset arose from our acquisition of NWP Services Corporation, which was completed in the first quarter of 2016. See additional discussion of this asset in Note
3
.
Cost Method Investments
Investments in privately-held entities that are less than 20% owned by the Company are accounted for using the cost method, unless the Company can exercise significant influence or the investee is economically dependent upon the Company. Under the cost method, investments are carried at cost and other income is recorded when dividends are received from the cost-method investee. Cost method investments are included in Other Assets in the accompanying Condensed Consolidated Balance Sheets.
We periodically assess the need to record impairment losses on investments and record such losses when the impairment of an investment is determined to be other-than-temporary in nature. A variety of factors are considered when determining if a decline in fair value below book value is other-than-temporary, including, among others, the financial condition and prospects of the investee. No events or circumstances indicating a potential impairment were identified as of
September 30, 2016
.
Recently Adopted Accounting Standards
We adopted Accounting Standards Update (“ASU”) 2015-03,
Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
and ASU 2015-15,
Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line of Credit Agreements
in the first quarter of 2016. As a result of our retrospective adoption of these standards, we present term loans payable net of unamortized debt issuance costs in the Condensed Consolidated Balance Sheets. Prior to adoption of this ASU, such issuance costs were included in other assets. Our adoption of this standard did not result in a reclassification of previously reported amounts, as we did not have outstanding term loans at
December 31, 2015
. As required, debt issuance costs related to our secured revolving credit facility continue to be presented in other assets in the Condensed Consolidated Balance Sheets.
In November 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-16,
Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments
, which eliminates the requirement to restate prior period financial statements for measurement-period adjustments. This ASU requires that the cumulative impact of a measurement period adjustment, including the impact on prior periods, be recognized in the reporting period in which the adjustment is identified. We adopted ASU 2015-16 in the first quarter of 2016.
In April 2015, the FASB issued ASU 2015-05,
Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.
This ASU provides guidance to clarify the customer’s accounting for fees paid in a cloud computing arrangement and whether such an arrangement contains a software license or is solely a service contract. We adopted this standard in the first quarter of 2016 and will prospectively apply the guidance to all arrangements entered into or materially modified after January 1, 2016.
Recently Issued Accounting Standards
In October 2016, the FASB issued ASU 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other Than Inventory,
in an effort to reduce the cost and complexity, as well as improve the accounting for income tax consequences of intra-entity transfers of assets. Under current U.S. GAAP, the recognition of current and deferred income taxes for an intra-entity asset transfer is prohibited until the asset has been sold to an outside party. The ASU eliminates the requirement to delay recognition and allows an entity to recognize the income tax consequences when the transfer of an intra-entity asset other than inventory occurs. The new guidance is applicable for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein; however, early application for public entities is permitted. The amendments in this ASU are to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We have not yet selected an adoption date and are currently evaluating the impact of this ASU on our financial statements.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
. ASU 2016-15 addresses several specific cash flow issues in an effort to reduce diversity in practice. Among the issues addressed, the ASU clarifies that payments of related contingent consideration related to business combinations made soon after the date of acquisition should be classified as cash outflows for investing activities. Payments made thereafter should be classified as cash outflows for financing activities up to the amount of the original contingent consideration liability. Payments made in excess of the amount of the original contingent consideration liability should be classified as cash outflows for operating activities. The amendments in this ASU are applicable for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein; however, early application for public entities is permitted. We have not yet selected an adoption date and are currently evaluating the impact of this ASU on our financial statements.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
. The amendments in this ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted in fiscal years beginning after December 15, 2018. The amendments in this ASU are to be applied through a cumulative-effect adjustment to retained earnings as of the first reporting period in which the ASU is effective. We have not yet selected a transition date and are currently evaluating the impact of adopting ASU 2016-13 on our financial statements.
On March 30, 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation (Topic 718).
Current GAAP requires tax benefits in excess of compensation cost to be recorded in additional paid-in capital and tax deficiencies to be recorded in equity to the extent of previous accumulated excess tax benefit, and then to the income statement. Under the new guidance, all excess tax benefits and tax deficiencies will be recognized as income tax expense or benefit in the income statement. Additionally, this ASU requires an entity to recognize excess tax benefits, regardless of whether the benefit reduces taxes payable in the current period and changes the classification of the excess tax benefits in the statement of cash flows.
ASU 2016-09 is effective for interim and annual periods beginning after December 15, 2016. Early adoption is permitted in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption. An entity that elects early adoption must adopt all of the amendments in the same period. We expect to adopt this ASU effective January 1, 2017 and are currently evaluating the impact of adoption on our financial statements.
On February 25, 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. Current GAAP requires lessees to classify their leases as either capital leases, for which the lessee recognizes a lease liability and a related leased asset, or operating leases, which are not reflected in the lessee’s balance sheet. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with a term of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease will depend primarily on its classification as a finance or an operating lease. However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, ASU 2016-02 will require both operating and finance leases to be recognized on the balance sheet. Additionally, the ASU will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases, including qualitative and quantitative requirements.
ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance to the beginning of the earliest comparative period presented. We have not yet selected a transition date and are currently evaluating the impact of adopting ASU 2016-02 on our financial statements.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
. ASU 2014-09, as amended by certain supplementary ASU’s released in 2016, will replace all current GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how
revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services.
In August 2015, the FASB issued ASU 2015-14,
Topic 606 - Deferral of Effective Date
. ASU 2015-14 permits public business entities to defer the adoption of ASU 2014-09 until interim and annual reporting periods beginning after December 15, 2017. Earlier application is permitted, but not before interim and annual reporting periods beginning after December 15, 2016. Our assessment of the impact of the standard on our consolidated financial statements is currently underway. We have determined that we will adopt the standard in our interim reporting period beginning January 1, 2018. We have not yet selected an adoption method and are currently assessing the impact of the adoption of this ASU on our financial statements.
3
. Acquisitions
We apply the guidance contained in ASC Topic 805,
Business Combinations
(“ASC 805”) in determining whether an acquisition transaction constitutes a business combination. ASC 805 defines a business as consisting of inputs and processes applied to those inputs that have the ability to create outputs. The acquisition transactions below were determined to constitute business combinations and were accounted for under ASC 805.
Purchase consideration includes assets transferred, liabilities incurred, and/or equity interests issued by us, all of which are measured at their fair value as of the date of acquisition. Our business combination transactions may be structured to include an up-front cash payment and deferred and/or contingent cash payments to be made at specified dates subsequent to the date of acquisition. Deferred cash payments are included in the acquisition consideration based on their fair value as of the acquisition date. The fair value of these obligations is estimated based on the present value, as of the date of acquisition, of the anticipated future payments. The future payments are discounted using a rate that considers an estimate of the return expected by a market-participant and a measurement of the risk inherent in the cash flows, among other inputs. Deferred cash payments are generally subject to adjustments specified in the underlying purchase agreement related to the seller’s indemnification obligations. Contingent cash payments are obligations to make future cash payments to the seller, the payment of which is contingent upon the acquired business achieving stipulated operational or financial targets in the post-acquisition period. Contingent cash payments are included in the purchase consideration at their fair value as of the acquisition date. The fair value of these payments is estimated by management using a probability weighted discount model based on the achievement of the specified targets. The fair value of these liabilities is re-evaluated on a quarterly basis, and any change is reflected in the line “General and administrative” in the accompanying Condensed Consolidated Statements of Operations.
The total purchase consideration is allocated to the assets acquired and liabilities assumed based on their estimated fair values. Any excess consideration is classified as goodwill. Acquired intangibles are recorded at their estimated fair value based on the income approach using market-based estimates. Acquired intangibles generally include developed product technologies, which are amortized over their useful life on a straight-line basis, and client relationships, which are amortized over their useful life proportionately to the expected discounted cash flows derived from the asset. When trade names acquired are not classified as indefinite-lived, they are amortized on a straight-line basis over their expected useful life.
Acquisition costs are expensed as incurred and are included in the line “General and administrative” in the accompanying Condensed Consolidated Statements of Operations. We include the results of operations from acquired businesses in our condensed consolidated financial statements from the effective date of the acquisition.
2016 Acquisitions
eSupply Systems, LLC
In June 2016, we acquired substantially all of the assets of eSupply Systems, LLC (“eSupply”) and those of certain entities related to eSupply. eSupply is an e-procurement software and group purchasing service and augmented our Spend Management solutions.
We acquired eSupply for a purchase price of
$7.0 million
, consisting of a cash payment of
$5.5 million
at closing and a deferred cash obligation of up to
$1.6 million
, payable over
18 months
after the acquisition date. The deferred cash obligation is subject to adjustments specified in the merger agreement related to the sellers’ indemnification obligations. The fair value of the deferred cash obligation on the date of acquisition was
$1.5 million
. This acquisition was financed using proceeds from our term loan that was issued in February 2016. Direct acquisition costs were immaterial.
The acquired identified intangible assets consisted of developed technology and client relationships. These intangible assets were assigned estimated useful lives of
three
and
ten years
, respectively. We recognized goodwill in the amount of
$3.2 million
related to this acquisition, which is primarily comprised of anticipated synergies with our existing Spend Management solutions. Goodwill and the acquired identified intangible assets are deductible for tax purposes.
AssetEye, Inc.
In May 2016, we acquired all of the issued and outstanding stock of AssetEye, Inc. (“AssetEye”). AssetEye is a data aggregation, reporting, and collaboration platform for institutions holding multiple real estate asset classes. This solution provides asset and portfolio managers with a solution to evaluate performance, trends, and operations across a portfolio with transparency into property-level data. The acquisition of AssetEye expanded the Company’s on demand solutions to serve all asset classes, including commercial, hospitality, multifamily, single family, senior living and student housing.
We acquired AssetEye’s issued and outstanding stock for a purchase price of
$4.9 million
. The purchase price consisted of a cash payment of
$3.6 million
at closing, net of cash acquired of
$0.8 million
; deferred cash obligations of
$1.0 million
, payable over a period of
two years
following the date of acquisition; contingent cash payments of up to
$1.0 million
if certain revenue targets are achieved during the three-month period ended September 30, 2017; and additional cash payments of
$0.2 million
due to former shareholders of AssetEye which are expected to be remitted over a short-term period. The deferred cash obligation is subject to adjustments specified in the merger agreement related to the sellers’ indemnification obligations. The fair value of the deferred and contingent cash obligations was
$0.9 million
and
$0.2 million
, respectively, at the date of acquisition. This acquisition was financed with proceeds from our term loan that was issued in February 2016. Direct acquisition costs were immaterial.
The acquired identified intangible assets comprised developed technology and client relationships having useful lives of
five
and
ten years
, respectively. We recognized goodwill in the amount of
$3.2 million
related to this acquisition, which is primarily comprised of anticipated synergies between the AssetEye solution and our existing complementary solutions as well as our sales and marketing infrastructure. Goodwill and identified intangible assets recognized in connection with this transaction are not deductible for tax purposes.
NWP Services Corporation
In March 2016, we acquired all of the issued and outstanding stock of NWP Services Corporation (“NWP”). NWP provides a full range of utility management services, including resident billing; payment processing; utility expense management; analytics and reporting; sub-metering and maintenance; and regulatory compliance. The primary products offered by NWP include Utility Logic, Utility Smart, Utility Genius, SmartSource, and NWP Sub-meter. We are integrating NWP into our resident services product family. The integrated platform will enable property owners and managers to increase the collection of rent utilities and energy recovery. Goodwill arising from this acquisition consists of anticipated synergies from the integration of NWP into our existing structure.
We acquired NWP’s issued and outstanding stock for a purchase price of
$69.0 million
. The purchase price consisted of a cash payment of
$59.0 million
at closing, net of cash acquired of
$0.1 million
; deferred cash obligations of
$7.2 million
, payable over a period of
three years
following the date of acquisition; and other amounts totaling
$3.2 million
, consisting of payments to certain employees and former shareholders of NWP that are expected to be remitted over a short-term period. The deferred cash obligation is subject to adjustments specified in the merger agreement related to the sellers’ indemnification obligations. The acquisition-date fair value of the deferred cash obligation was
$6.8 million
. This acquisition was financed with proceeds from our term loan that was issued in February 2016. Acquisition costs associated with this transaction totaled
$0.3 million
and were expensed as incurred.
The acquired identified intangible assets are comprised of developed technologies, trade name, and client relationships having useful lives of
five
,
three
, and
ten years
, respectively. Goodwill and identified intangible assets acquired in this business combination, valued at
$35.3 million
and
$16.3 million
, have carryover tax bases of
$0.7 million
and
$11.0 million
, respectively, which are deductible for tax purposes. Goodwill and identified intangible assets recognized in excess of those carryover tax basis amounts are not deductible for tax purposes. Accounts receivable acquired have a gross contractual value of
$11.3 million
, of which
$3.4 million
was estimated to be uncollectable.
We assigned approximately
$10.2 million
of value to deferred tax assets in our purchase price allocation, consisting primarily of
$9.9 million
of federal and state net operating losses (“NOL”). This NOL amount reflects the tax benefit from approximately
$27.3 million
of NOLs we expect to realize after considering various limitations and restrictions on NWP’s pre-acquisition NOLs.
In connection with the acquisition of NWP, we recorded an indemnification asset of
$1.2 million
, which represents the selling security holders’ obligation under the purchase agreement to indemnify RealPage, Inc. for the outcome of certain accrued obligations. The indemnification asset was recognized on the same basis as the corresponding liability, which is based on its estimated fair value as of the date of acquisition.
Purchase Price Allocation
The estimated fair values of assets acquired and liabilities assumed presented below are provisional and are based on the information available as of the acquisition date. We believe that this information provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed, but the Company is awaiting additional information necessary to finalize
those values. Therefore, the provisional measurements of fair value are subject to change, and such changes could be significant. We expect to finalize the valuation of these assets and liabilities as soon as practicable, but no later than one year from the respective acquisition dates. The preliminary allocation of the purchase price was as follows:
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NWP
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AssetEye
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eSupply
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(in thousands)
|
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Restricted cash
|
$
|
4,960
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|
$
|
—
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$
|
—
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|
Accounts receivable
|
7,902
|
|
|
90
|
|
|
259
|
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|
Property, equipment, and software
|
3,194
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|
—
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—
|
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Intangible assets
|
16,349
|
|
|
2,685
|
|
|
3,585
|
|
|
Goodwill
|
35,292
|
|
|
3,154
|
|
|
3,216
|
|
|
Deferred tax assets, net
|
10,154
|
|
|
—
|
|
|
—
|
|
|
Other assets, net of other liabilities
|
3,065
|
|
|
8
|
|
|
71
|
|
|
Accounts payable and accrued liabilities
|
(6,865
|
)
|
|
—
|
|
|
(147
|
)
|
|
Client deposits held in restricted accounts
|
(5,018
|
)
|
|
—
|
|
|
—
|
|
|
Deferred revenue
|
—
|
|
|
(16
|
)
|
|
(29
|
)
|
|
Deferred tax liabilities, net
|
—
|
|
|
(1,010
|
)
|
|
—
|
|
|
Total purchase price
|
$
|
69,033
|
|
|
$
|
4,911
|
|
|
$
|
6,955
|
|
At
September 30, 2016
, deferred cash obligations related to acquisitions completed in 2016 totaled
$9.8 million
, and carried net of a discount of
$0.9 million
. The aggregate fair value of contingent cash obligations related to these acquisitions was
$0.3 million
at
September 30, 2016
. During the
three and nine
months ended
September 30, 2016
, we recognized a loss of
$0.1 million
due to changes in the fair value of contingent cash obligations related to these acquisitions.
No
payments of deferred or contingent cash obligations related to acquisitions completed in 2016 were made during the
nine months ended
September 30, 2016
. During the same period, we made payments totaling
$3.3 million
related to amounts due to certain employees and former shareholders of the acquired businesses described above.
2015 Acquisitions
Indatus
In June 2015, we acquired certain assets from ICIM Corporation, including the Answer Automation, Call Tracker, and Zip Digital products, marketed under the name Indatus. The Indatus offerings are software-as-a-service products that provide automated answering services, marketing spend analysis tools, and other features which enhance the ability of managers of multifamily properties to communicate with their residents.
We are currently integrating the Indatus assets with our existing contact center and maintenance products, which will increase the features of these existing solutions.
We acquired the Indatus assets for a purchase price of
$49.4 million
, consisting of a cash payment of
$43.8 million
at closing; deferred cash payments of up to
$5.0 million
, payable over
nineteen months
after the acquisition date; and contingent cash payments of up to
$2.0 million
, in the aggregate, if certain revenue targets are met for the twelve-month periods ending
June 30, 2016
and
2017
. The revenue targets for the twelve-month period ended
June 30, 2016
were not achieved and no payment of contingent consideration for that period was made. The fair value of the deferred and contingent cash payments was
$4.7 million
and
$0.9 million
, respectively, as of the acquisition date. Direct acquisition costs were
$0.3 million
. This acquisition was financed using proceeds from our revolving credit facility.
The acquired developed product technologies and client relationships have useful lives of
three
and
ten years
, respectively. The trade name acquired was amortized over a useful life of
one year
, based on our anticipated use of the asset. Goodwill and identified intangible assets associated with the acquisition are deductible for tax purposes. Goodwill arising from the acquisition consists largely of anticipated synergies resulting from the integration of Indatus with our pre-existing products and from leveraging our existing client base and sales staff.
VRX
In June 2015, we acquired certain assets from RJ Vacations, LLC and Switch Development Corporation, including the VRX product (“VRX”). VRX is a software-as-a-service application which allows vacation rental management companies to manage the cleaning and turning of units, accounting, and document management. VRX was integrated with our Kigo solution.
We acquired the VRX assets for a purchase price of
$2.0 million
, consisting of a cash payment of
$1.5 million
at closing and a contingent cash payment of up to
$0.5 million
. Payment of the contingent cash obligation is dependent upon the achievement of certain subscription or booking activity targets and is subject to adjustments specified in the acquisition
agreement related to the sellers’ indemnification obligations. The contingent cash obligation had a fair value of
$0.5 million
, as of the acquisition date, and is due fifteen months after the date of acquisition.
The acquisition agreement also provides for the sellers to receive additional contingent cash payments of up to
$3.0 million
. Payment of the additional contingent cash obligations is dependent upon the achievement of certain revenue targets during the twelve month periods ending December 31, 2016, 2017, and 2018, and the sellers providing certain services during a specified period following the acquisition date. Due to this post-acquisition service requirement, the Company concluded that the additional contingent cash obligations represent post-acquisition compensation; therefore, these amounts were excluded from the purchase consideration. One of the sellers separated from the Company prior to completing the required service periods. As a result, the maximum potential payout of the additional contingent cash payments at
September 30, 2016
was
$1.5 million
. No amounts under the additional contingent cash payments have been earned or paid as of
September 30, 2016
. This acquisition was financed using cash flows from operations. Direct acquisition costs were immaterial.
The acquired developed product technologies have an estimated useful life of
three years
. The estimated fair value of the client relationships acquired was immaterial and these intangible assets were expensed as of the acquisition date. Goodwill arising from the acquisition consists largely of anticipated synergies resulting from the integration of VRX with Kigo. Goodwill and identified intangible assets associated with the acquisition are deductible for tax purposes.
Purchase Price Allocation
We allocated the purchase price of Indatus and VRX as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indatus
|
|
VRX
|
|
|
|
(in thousands)
|
|
Accounts receivable
|
|
$
|
646
|
|
|
$
|
—
|
|
|
Intangible assets:
|
|
|
|
|
|
Developed product technologies
|
|
13,400
|
|
|
794
|
|
|
Client relationships
|
|
9,770
|
|
|
11
|
|
|
Trade names
|
|
83
|
|
|
—
|
|
|
Goodwill
|
|
25,575
|
|
|
1,186
|
|
|
Net other liabilities
|
|
(57
|
)
|
|
—
|
|
|
Total purchase price
|
|
$
|
49,417
|
|
|
$
|
1,991
|
|
At
September 30, 2016
and
December 31, 2015
, total deferred cash obligations related to acquisitions completed in 2015 were
$2.7 million
and
$5.1 million
, respectively. These obligations were carried net of a discount of less than
$0.1 million
and
$0.2 million
at
September 30, 2016
and
December 31, 2015
, respectively. During the
nine months ended
September 30, 2016
we paid amounts totaling
$2.2 million
related to these obligations.
No
payments were made during the same period in
2015
.
The aggregate fair value of contingent cash obligations related to acquisitions completed in
2015
was less than
$0.1 million
at
September 30, 2016
and was
$0.8 million
at
December 31, 2015
. During the
three and nine
months ended
September 30, 2016
, we recognized net gains of
$0.4 million
and
$0.8 million
, respectively, related to changes in the fair value of these obligations. During the same periods of
2015
we recognized a net gain in the amount of
$0.3 million
.
No
payments of contingent cash obligations related to acquisitions completed in 2015 were made during the
nine months ended
September 30, 2016
and
2015
.
Acquisition Activity Prior to 2015
At
September 30, 2016
and
December 31, 2015
, deferred cash obligations related to acquisitions completed prior to
2015
totaled
$4.5 million
and
$7.2 million
, respectively. During the
nine months ended
September 30, 2016
and
2015
, we paid deferred cash obligations related to these acquisitions in the amount of
$2.9 million
and
$1.0 million
, respectively.
The aggregate fair value of contingent cash obligations related to acquisitions completed prior to
2015
was estimated to be
zero
at both
September 30, 2016
and
December 31, 2015
. During the
nine months ended
September 30, 2015
, we paid contingent cash obligations totaling
$1.2 million
related to these acquisitions.
No
payments were made during the same period of
2016
. A net gain of
$2.9 million
was recognized during the
nine months ended
September 30, 2015
, related to the change in fair value of these contingent cash obligations.
No
gain or loss was recognized during the same periods of
2016
.
Pro Forma Results of Acquisitions
The following table presents pro forma results of operations for the
three and nine
months ended
September 30, 2016
and
2015
, as if the aforementioned acquisitions had occurred at the beginning of each period presented. The pro forma information includes the business combination accounting effects resulting from these acquisitions, including interest expense, tax benefit,
and additional amortization resulting from the valuation of amortizable intangible assets. We prepared the pro forma financial information for the combined entities for comparative purposes only, and it is not indicative of what actual results would have been if the acquisitions had occurred at the beginning of the presented period, or of future periods. Pro forma results are presented in thousands, except per share amounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2016
Pro Forma
|
|
2015
Pro Forma
|
|
2016
Pro Forma
|
|
2015
Pro Forma
|
|
|
(in thousands, except per share amounts)
|
|
Total revenue
|
$
|
147,955
|
|
|
$
|
137,440
|
|
|
$
|
429,914
|
|
|
$
|
397,252
|
|
|
Net income (loss)
|
4,210
|
|
|
(8,111
|
)
|
|
8,886
|
|
|
(14,562
|
)
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.05
|
|
|
$
|
(0.11
|
)
|
|
$
|
0.12
|
|
|
$
|
(0.19
|
)
|
|
Diluted
|
$
|
0.05
|
|
|
$
|
(0.11
|
)
|
|
$
|
0.11
|
|
|
$
|
(0.19
|
)
|
4. Property, Equipment, and Software
Property, equipment, and software consisted of the following at
September 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
|
(in thousands)
|
|
Leasehold improvements
|
$
|
45,288
|
|
|
$
|
26,138
|
|
|
Data processing and communications equipment
|
75,510
|
|
|
67,871
|
|
|
Furniture, fixtures, and other equipment
|
23,061
|
|
|
18,253
|
|
|
Software
|
82,059
|
|
|
68,972
|
|
|
|
225,918
|
|
|
181,234
|
|
|
Less: Accumulated depreciation and amortization
|
(103,799
|
)
|
|
(99,036
|
)
|
|
Property, equipment, and software, net
|
$
|
122,119
|
|
|
$
|
82,198
|
|
Depreciation and amortization expense for property, equipment, and purchased software was
$6.2 million
and
$5.0 million
for the
three months ended
, and
$18.2 million
and
$15.2 million
for the
nine months ended
September 30, 2016
and
2015
, respectively. This includes amortization related to assets acquired through capital leases.
The carrying amount of capitalized software development costs was
$51.2 million
and
$41.2 million
at
September 30, 2016
and
December 31, 2015
, respectively. Total accumulated amortization related to these assets was
$18.1 million
and
$14.0 million
at the respective dates. Amortization expense related to capitalized software development costs totaled
$1.6 million
and
$0.9 million
for the
three months ended
and
$4.2 million
and
$2.3 million
for the
nine months ended
September 30, 2016
and
2015
, respectively.
We review in-progress software development projects on a periodic basis to ensure completion is assured and the development work will be placed into service as a new product or significant product enhancement. During the
three and nine
months ended
September 30, 2015
, we identified certain projects for which software development work had ceased and it was determined the projects would be discontinued. Our analysis of the capitalized costs resulted in the conclusion that they had no value outside of the respective projects for which they were originally incurred. As a result, we recognized an impairment loss of
$0.5 million
and
$1.3 million
during the
three and nine
months ended
September 30, 2015
, respectively. The impairment charges are included in “Product development” in the accompanying Condensed Consolidated Statements of Operations.
No
impairments of software development projects were identified during the
three and nine
months ended
September 30, 2016
.
During the
nine months ended
September 30, 2015
, we modified or terminated certain operating lease agreements for office space prior to the end of the applicable lease term. We recognized an impairment charge of
zero
and
$1.5 million
during the
three and nine
months ended
September 30, 2015
, respectively, related to leasehold improvements associated with a modified lease. The impairment charge is included in the line "General and administrative" in the accompanying Condensed Consolidated Statements of Operations. During the
three and nine
months ended
September 30, 2015
, we also disposed of fixed assets with a net carrying value of
$0.2 million
and
$0.5 million
, respectively. We recognized a net loss of
$0.2 million
during the
three and nine
months ended
September 30, 2015
, related to these disposals. See additional discussion of these lease related changes in Note
8
.
5
. Goodwill and Identified Intangible Assets
Changes in the carrying amount of goodwill during the
nine months ended
September 30, 2016
were as follows, in thousands:
|
|
|
|
|
|
|
|
Balance as of December 31, 2015
|
$
|
220,097
|
|
|
Goodwill acquired
|
41,662
|
|
|
Other
|
9
|
|
|
Balance as of September 30, 2016
|
$
|
261,768
|
|
Identified intangible assets consisted of the following at
September 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Amortization Period
(in years)
|
|
September 30, 2016
|
|
December 31, 2015
|
|
|
|
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
|
|
(in thousands)
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed technologies
|
3.6
|
|
$
|
75,926
|
|
|
$
|
(59,611
|
)
|
|
$
|
16,315
|
|
|
$
|
69,379
|
|
|
$
|
(50,509
|
)
|
|
$
|
18,870
|
|
|
Client relationships
|
9.2
|
|
111,853
|
|
|
(63,225
|
)
|
|
48,628
|
|
|
96,523
|
|
|
(54,267
|
)
|
|
42,256
|
|
|
Trade names
|
6.4
|
|
5,899
|
|
|
(982
|
)
|
|
4,917
|
|
|
5,149
|
|
|
(456
|
)
|
|
4,693
|
|
|
Total finite-lived intangible assets
|
7.0
|
|
193,678
|
|
|
(123,818
|
)
|
|
69,860
|
|
|
171,051
|
|
|
(105,232
|
)
|
|
65,819
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
|
14,719
|
|
|
—
|
|
|
14,719
|
|
|
15,461
|
|
|
—
|
|
|
15,461
|
|
|
Total identified intangible assets
|
|
|
$
|
208,397
|
|
|
$
|
(123,818
|
)
|
|
$
|
84,579
|
|
|
$
|
186,512
|
|
|
$
|
(105,232
|
)
|
|
$
|
81,280
|
|
Amortization expense related to finite-lived intangible assets was
$6.3 million
and
$6.1 million
for the
three months ended
, and
$18.5 million
and
$16.3 million
for the
nine months ended
September 30, 2016
and
2015
, respectively.
In March 2015, the Company completed the integration of the InstaManager and Kigo platforms into a single solution marketed under the Kigo name. Subsequent to this integration, the Company discontinued the use of the InstaManager trade name to market or identify the software. Due to this change in circumstance, the Company evaluated the InstaManager trade name for impairment and concluded an impairment in the amount of
$0.5 million
existed at
March 31, 2015
.
In connection with the preparation of the third quarter 2015 financial statements, the Company identified indicators requiring the assessment of certain indefinite-lived trade names for impairment, primarily associated with the Company's 2011 acquisition of MyNewPlace. Identified indicators included declines in actual and anticipated lead-generation revenues and a change in the Company's long-term marketing strategy. As a result, the Company analyzed these intangible assets and recorded a
$20.3 million
impairment charge during the third quarter of 2015, representing the amount by which the carrying value of the indefinite-lived trade names exceeded their estimated fair value. Given the change in the Company's long-term marketing strategy and anticipated use of the trade names, the remaining balance was reclassified to finite-lived intangible assets as of
September 30, 2015
, which is being amortized on a straight-line basis over an estimated useful life of
seven years
.
As further discussed in Note
17
, in October 2016 we entered into an agreement with A Place for Mom, Inc. (“A Place for Mom”), whereby we sold certain assets associated with our senior living referral services, including certain indefinite-lived trade names, and agreed with A Place for Mom to collaborate to improve lead transparency utilizing A Place for Mom’s and the Company’s senior living customer relationship management platforms. Based on the status of the sale negotiations, we concluded there was a possibility that the negotiated assets could be impaired and performed an impairment analysis as of
September 30, 2016
. As a result of this analysis we recorded an impairment of the associated trade names of
$0.8 million
, the amount by which the carrying value of the trade names exceeded their estimated fair value on the date of analysis, in the third quarter of 2016. See Note
11
for discussion of the methodology and inputs utilized by the Company to estimate the fair value of these indefinite-lived trade names.
The above impairment charges are included in "Impairment of identified intangible assets" in the accompanying Condensed Consolidated Statements of Operations.
6
.
Debt
On September 30, 2014, we entered into an agreement for a secured revolving credit facility (as amended by the Amendment discussed below, the “Credit Facility”) to refinance our outstanding revolving loans. The Credit Facility provides an aggregate principal amount of up to
$200.0 million
of revolving loans, with sublimits of
$10.0 million
for the issuance of letters of credit and
$20.0 million
for swingline loans. The Credit Facility also allowed us, subject to certain conditions, to request additional term loans or revolving commitments up to an aggregate principal amount of
$150.0 million
, plus an amount that would not cause our consolidated net leverage ratio, which is a ratio of the Company’s consolidated funded indebtedness to its consolidated EBITDA, as defined in the agreement, to exceed
3.25
to
1.00
. In
February 2016
, we entered into an amendment to the Credit Facility (the “Amendment”). The Amendment provides for an incremental term loan in the amount of
$125.0 million
(“Term Loan”) that is coterminous with the existing Credit Facility, reducing the amount of additional term loans or revolving commitments available under the Credit Facility to
$25.0 million
plus an amount that would not cause us to exceed the net leverage ratio limitation. The Amendment permits the Company to elect to increase the maximum permitted consolidated net leverage ratio on a one-time basis to
4.00
to
1.00
following the issuance of convertible notes or high yield notes in an initial principal amount of at least
$150.0 million
. We incurred debt issuance costs in the amount of
$0.7 million
in conjunction with the execution of the Amendment.
Revolving loans under the Credit Facility may be voluntarily prepaid and re-borrowed. At our option, the revolving loans accrue interest at a per annum rate equal to either LIBOR, plus a margin ranging from
1.25%
to
2.00%
, or the Base Rate, plus a margin ranging from
0.25%
to
1.00%
(“Applicable Margin”). The base LIBOR rate is, at our discretion, equal to either one, two, three, or six month LIBOR. The Base Rate is defined as the greater of Wells Fargo’s prime rate, the Federal Funds Rate plus
0.50%
, or one month LIBOR plus
1.00%
. In each case, the Applicable Margin is determined based upon our consolidated net leverage ratio. Accumulated interest is due and payable quarterly, in arrears, for loans bearing interest at the Base Rate and at the end of the applicable interest period in the case of loans bearing interest at the adjusted LIBOR.
Principal payments on the Term Loan are due in quarterly installments that began in
June 2016
. Amounts paid under the Term Loan may not be re-borrowed. The Term Loan is 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. The Company may prepay the Term Loan in whole or in part at any time, without premium or penalty, with prepayment amounts to be applied to remaining scheduled principal amortization payments as specified by the Company. The Term Loan is subject to the same interest rate terms and payment dates as the revolving loans. Under the terms of the Amendment, an additional tier was added such that the Applicable Margin now ranges from
1.25%
to
2.00%
for LIBOR loans, and
0.25%
to
1.00%
for Base Rate loans.
The Credit Facility is secured by substantially all of our assets, and certain of our existing and future material domestic subsidiaries are required to guarantee our obligations under the Credit Facility. We are also required to comply with customary affirmative and negative covenants, as well as a consolidated net leverage ratio and an interest coverage ratio. All outstanding principal and accrued and unpaid interest are due upon the Credit Facility’s maturity on
September 30, 2019
.
We had
$123.4 million
outstanding under our Term Loan at
September 30, 2016
. At
December 31, 2015
, we had
$40.0 million
in revolving loans outstanding under the Credit Facility. There were
no
outstanding revolving loans at
September 30, 2016
. As of
September 30, 2016
,
$200.0 million
was available under our Credit Facility, of which
$10.0 million
was available for the issuance of letters of credit and
$20.0 million
for swingline loans. We had unamortized debt issuance costs of
$1.4 million
and
$1.0 million
at
September 30, 2016
and
December 31, 2015
, respectively. At
September 30, 2016
, the Term Loan was carried net of unamortized debt issuance costs of
$0.5 million
in the accompanying Condensed Consolidated Balance Sheets. As of
September 30, 2016
, we were in compliance with the covenants under our Credit Facility.
Future maturities of principal under the Term Loan will be as follows for the years ending December 31, in thousands:
|
|
|
|
|
|
|
|
2016
|
$
|
781
|
|
|
2017
|
5,469
|
|
|
2018
|
6,250
|
|
|
2019
|
110,938
|
|
|
|
$
|
123,438
|
|
7. Stock-based Expense
All stock options and restricted stock awards granted during 2016 were granted under the Amended and Restated 2010 Equity Incentive Plan, as amended.
During the
three and nine
months ended
September 30, 2016
, the Company made the following grants of restricted stock:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
|
Nine Months Ended September 30, 2016
|
|
Condition to Become Eligible to Vest
|
|
108,965
|
|
|
1,674,092
|
|
|
Shares vest ratably over a period of twelve quarters beginning on the first day of the second calendar quarter immediately following the grant date.
|
|
—
|
|
|
55,783
|
|
|
Shares vest ratably over a period of four quarters beginning on the first day of the calendar quarter immediately following the grant date.
|
|
7,650
|
|
|
7,650
|
|
|
Shares fully vested on the date of grant.
|
During the
three and nine
months ended
September 30, 2016
, we granted
64,725
and
794,025
shares of restricted stock, respectively, which require the achievement of certain market-based conditions to become eligible to vest. The shares become eligible to vest based on the achievement of the following conditions:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
|
Nine Months Ended September 30, 2016
|
|
Condition to Become Eligible to Vest
|
|
—
|
|
|
364,651
|
|
|
After the grant date and prior to July 1, 2019, the average closing price per share of the Company’s common stock equals or exceeds $27.28 for twenty consecutive trading days.
|
|
—
|
|
|
364,649
|
|
|
After the grant date and prior to July 1, 2019, the average closing price per share of the Company’s common stock equals or exceeds $32.15 for twenty consecutive trading days.
|
|
32,362
|
|
|
32,362
|
|
|
After the grant date and prior to January 1, 2020, the average closing price per share of the Company’s common stock equals or exceeds $31.48 for twenty consecutive trading days.
|
|
32,363
|
|
|
32,363
|
|
|
After the grant date and prior to January 1, 2020, the average closing price per share of the Company’s common stock equals or exceeds $36.33 for twenty consecutive trading days.
|
Shares that become eligible to vest, if any, become Eligible Shares. These awards vest ratably over four calendar quarters beginning on the first day of the next calendar quarter immediately following the date on which they become Eligible Shares. Vesting is conditional upon the recipient remaining a service provider, as defined in the plan document, to the Company through each applicable vesting date.
During the second quarter of
2016
, we issued
17,416
shares of restricted stock to certain non-employees as payment for consulting services to be provided over the subsequent four quarterly periods. The shares vest as the consulting services are performed.
8
. Commitments and Contingencies
Lease Commitments
The Company leases office facilities and equipment for various terms under long-term, non-cancellable operating lease agreements. The leases expire at various dates through
2028
and provide for renewal options. The agreements generally require the Company to pay for executory costs such as real estate taxes, insurance, and repairs.
In connection with the acquisition of NWP, the Company assumed non-cancellable operating leases for equipment and office space. Office leases assumed include locations in Costa Mesa, California; Tampa, Florida; Ann Arbor, Michigan; and Bloomington, Minnesota. The office leases expire at various dates through
2020
and have terms substantially similar to our other office leasing arrangements. Some of the lease agreements assumed contain provisions for future rent increases. For these leases, the total amount of rental payments due over the lease term is charged to rent expense on the straight-line method over the term of the lease. The difference between rent expense recorded and the amount paid is credited or charged to “Accrued lease liability,” which is included in “Accrued expenses and other current liabilities” or “Other long-term liabilities” in the accompanying Condensed Consolidated Balance Sheets, depending upon when the liability is expected to be relieved.
Equipment leases assumed by the Company include leases for equipment used in the general operation of the business and have lease terms expiring throughout
2020
. These agreements have terms substantially similar to our other equipment leasing arrangements.
In May 2015, the Company entered into a lease agreement for office space located in Richardson, Texas to serve as our new corporate headquarters and data center. In July 2015, the Company entered into an amendment to the lease agreement which increased the amount of leased space. At December 31, 2015, we had a receivable for incentives under this lease of
$19.4 million
. In July 2016, the Company entered into a second amendment of the lease agreement, which resulted in the recognition of an additional receivable for lease incentives of
$1.0 million
. We completed the move of our corporate headquarters and data center in the third quarter of 2016. The receivable for incentives under this lease was
$1.4 million
at
September 30, 2016
. The decrease in the lease incentives receivable balance between the periods is attributable to reimbursements received from the landlord for completed leasehold improvements. The lease receivable is included in other current assets in the accompanying Consolidated Balance Sheets. Our lease for the majority of our previous corporate headquarters expired in August 2016, our lease for the remainder of the space will expire in December 2016.
In September 2016, we entered into a lease in South Burlington, Vermont to replace an existing lease for our product office contact center. This lease has terms substantially similar to our other leasing agreements and has lease terms expiring in 2022.
During the nine months ended
September 30, 2015
, the Company vacated or modified certain of our office space lease agreements. These modifications were made to consolidate our operations and reduce operating costs. As a result of these changes we recognized a reduction of our deferred rent liability in the amount of
$0.9 million
. This adjustment is reflected in the "General and administrative" line in the accompanying Condensed Consolidated Statements of Operations.
Minimum annual rental commitments under non-cancellable operating leases and total minimum rentals to be received under non-cancellable subleases, including leases assumed in business combinations, were as follows at
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Lease Payments
|
|
Minimum Rentals to be Received Under Subleases
|
|
Net Lease Payments
|
|
|
(in thousands)
|
|
2016
|
$
|
2,912
|
|
|
$
|
84
|
|
|
$
|
2,828
|
|
|
2017
|
11,263
|
|
|
140
|
|
|
11,123
|
|
|
2018
|
11,218
|
|
|
—
|
|
|
11,218
|
|
|
2019
|
9,881
|
|
|
—
|
|
|
9,881
|
|
|
2020
|
7,906
|
|
|
—
|
|
|
7,906
|
|
|
Thereafter
|
55,911
|
|
|
—
|
|
|
55,911
|
|
|
|
$
|
99,091
|
|
|
$
|
224
|
|
|
$
|
98,867
|
|
Guarantor Arrangements
We have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is or was serving at our request in such capacity. The term of the indemnification period is for the officer or director’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have a director and officer insurance policy that limits our exposure and enables us to recover a portion of any future amounts paid. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal. Accordingly, we had no liabilities recorded for these agreements as of
September 30, 2016
or
December 31, 2015
.
In the ordinary course of our business, we include standard indemnification provisions in our agreements with clients. Pursuant to these provisions, we indemnify our clients for losses suffered or incurred in connection with third-party claims that our products infringed upon any U.S. patent, copyright, trademark or other intellectual property right. Where applicable, we generally limit such infringement indemnities to those claims directed solely to our products and not in combination with other software or products. With respect to our products, we also generally reserve the right to resolve any such claims by designing a non-infringing alternative, by obtaining a license on reasonable terms or by terminating our relationship with the client and refunding the client’s fees.
The potential amount of future payments to defend lawsuits or settle indemnified claims under these indemnification provisions is unlimited in certain agreements; however, we believe the estimated fair value of these indemnification provisions is minimal, and, accordingly, we had no liabilities recorded for these agreements as of
September 30, 2016
or
December 31, 2015
.
Litigation
From time to time, in the normal course of our business, we are a party to litigation matters and claims. Litigation can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict and our view of these matters may change in the future as the litigation and events related thereto unfold. We expense legal fees as incurred. Insurance recoveries associated with legal costs incurred are recorded when they are deemed probable of recovery.
In March 2015, we were named in a purported class action lawsuit in the United States District Court for the Eastern District of Pennsylvania, styled
Stokes v. RealPage, Inc.
, Case No. 2:15-cv-01520. The claims in this purported class action relate to alleged violations of the Fair Credit Reporting Act (“FCRA”) in connection with background screens of prospective tenants of our clients. On January 25, 2016, the court entered an order placing the case on hold until the United States Supreme Court issued its decision in
Spokeo, Inc. v. Robins,
which case addressed issues related to standing to bring claims related to the FCRA. On May 16, 2016, the U.S. Supreme Court issued its opinion in the
Spokeo
litigation, vacating the decision of the United States Court of Appeals for the Ninth Circuit, and remanding the case for further consideration by the U.S. Court of Appeals. Following the Supreme Court’s decision in
Spokeo,
the judge in the
Stokes
case lifted the stay. On June 24, 2016, we filed a motion to dismiss certain claims made in the case based upon the
Spokeo
decision. On October 19, 2016, the U.S. District Court denied the motion to dismiss. We intend to defend this case vigorously.
In November 2014, we were named in a purported class action lawsuit in the United States District Court for the Eastern District of Virginia, styled
Jenkins v. RealPage, Inc.
, Case No. 3:14cv758. The claims in this purported class action relate to alleged violations of the FCRA in connection with background screens of prospective tenants of our clients. This case has since been transferred to the United States District Court for the Eastern District of Pennsylvania. On January 25, 2016, the court entered an order placing the case on hold until the United States Supreme Court issued its decision in the
Spokeo
case. Following the Supreme Court’s decision in
Spokeo
, the judge in the
Jenkins
case lifted the stay. On June 24, 2016, we filed a motion to dismiss certain claims made in the case based upon the
Spokeo
decision. On October 19, 2016, the U.S. District Court denied the motion to dismiss. We intend to defend this case vigorously.
On February 23, 2015, we received from the Federal Trade Commission (“FTC”) a Civil Investigative Demand consisting of interrogatories and a request to produce documents relating to our compliance with the FCRA. We have responded to the request and requests for additional information by the FTC. At this time, we do not have sufficient information to evaluate the likelihood or merits of any potential enforcement action, or to predict the outcome or costs of responding to, or the costs, if any, of resolving this investigation.
At
September 30, 2016
and
December 31, 2015
, we had accrued amounts for estimated settlement losses related to legal matters. The Company does not believe there is a reasonable possibility that a material loss exceeding amounts already recognized may have been incurred as of the date of the balance sheets presented herein.
We are involved in other litigation matters not described above that are not likely to be material either individually or in the aggregate based on information available at this time. Our view of these matters may change as the litigation and events related thereto unfold.
9.
Net Income (Loss) per Share
Basic
net income (loss) per share
is computed by dividing the
net income (loss)
by the weighted average number of common shares outstanding during the period. Diluted
net income (loss) per share
is computed by using the weighted average number of common shares outstanding, including potential dilutive shares of common stock assuming the dilutive effect of outstanding stock options and restricted stock using the treasury stock method. Weighted average shares from common share equivalents in the amount of
51,156
and
547,411
for the
three months ended
, and
358,992
and
912,944
for the
nine months ended
September 30, 2016
and
2015
, respectively, were excluded from the dilutive shares outstanding because their effect was anti-dilutive.
The following table presents the calculation of basic and diluted
net income (loss) per share
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
(in thousands, except per share amounts)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
4,210
|
|
|
$
|
(8,192
|
)
|
|
$
|
9,289
|
|
|
$
|
(13,118
|
)
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
Weighted average common shares used in computing basic net income (loss) per share
|
76,823
|
|
|
76,564
|
|
|
76,615
|
|
|
76,772
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
Add weighted average effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Stock options and restricted stock
|
1,301
|
|
|
—
|
|
|
910
|
|
|
—
|
|
|
Weighted average common shares used in computing diluted net income (loss) per share
|
78,124
|
|
|
76,564
|
|
|
77,525
|
|
|
76,772
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.05
|
|
|
$
|
(0.11
|
)
|
|
$
|
0.12
|
|
|
$
|
(0.17
|
)
|
|
Diluted
|
$
|
0.05
|
|
|
$
|
(0.11
|
)
|
|
$
|
0.12
|
|
|
$
|
(0.17
|
)
|
10. Income Taxes
We make estimates and judgments in determining our provision for income taxes for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities that arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes.
Our provision for income taxes in interim periods is based on our estimated annual effective tax rate. We record cumulative adjustments in the quarter in which a change in the estimated annual effective rate is determined. The estimated annual effective tax rate calculation does not include the effect of discrete events that may occur during the year. The effect of these events, if any, is recorded in the quarter in which the event occurs.
Our effective income tax rate was
43.7%
and
35.2%
for the
nine months ended
September 30, 2016
and
2015
, respectively. Our effective rate is higher than the statutory rate for the
nine months ended
September 30, 2016
, primarily because of state income taxes and non-deductible expenses, including an increase in certain non-deductible expenses identified in connection with the filing of our 2015 taxes. The effective rate is lower than the statutory rate for the
nine months ended
September 30, 2015
, primarily because non-deductible expenses reduced the tax benefit associated with the pretax loss.
11
. Fair Value Measurements
The Company records certain financial liabilities at fair value on a recurring basis. The Company determines fair values based on the price it would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability.
The prescribed fair value hierarchy and related valuation methodologies are as follows:
Level 1 - Inputs are quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs are quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.
Level 3 - Inputs are derived from valuation techniques in which one or more of the significant inputs or value drivers are unobservable.
The categorization of an asset or liability within the fair value hierarchy is based on the inputs described above and does not necessarily correspond to the Company’s perceived risk of that asset or liability. Moreover, the methods used by the Company may produce a fair value calculation that is not indicative of the net realizable value or reflective of future fair values. Furthermore, although the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments and non-financial assets and liabilities could result in a different fair value measurement at the reporting date.
Assets and liabilities measured at fair value on a recurring basis:
Interest rate swap agreements:
The fair value of the Company’s interest rate derivatives are determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the derivatives. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.
Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Company and its counterparties. The Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its interest rate swaps. As a result, the Company determined that its interest rate swap valuation in its entirety is classified in Level 2 of the fair value hierarchy.
Contingent consideration obligations:
Contingent consideration obligations consist of potential obligations related to our acquisition activity. The amount to be paid under these obligations is contingent upon the achievement of stipulated operational or financial targets by the business subsequent to acquisition. The fair value of contingent consideration obligations is estimated using a probability weighted discount model which considers the achievement of the conditions upon which the respective contingent obligation is dependent. The probability of achieving the specified conditions is assessed by applying a Monte Carlo weighted-average model. Inputs into the valuation model include a discount rate specific to the acquired entity, a measure of the estimated volatility and the risk free rate of return.
Significant unobservable inputs used in the contingent consideration fair value measurements included the following at
September 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
Discount rates
|
|
14.8% - 26.8%
|
|
15.8% - 60.0%
|
|
Volatility rates
|
|
30.4%
|
|
37.0% - 53.5%
|
|
Risk free rate of return
|
|
0.5% - 0.6%
|
|
0.5% - 0.9%
|
In addition to the inputs described above, the fair value estimates consider the projected future operating or financial results for the factor upon which the respective contingent obligation is dependent. The fair value estimates are generally sensitive to changes in these projections. We develop the projected future operating results based on an analysis of historical results, market conditions and the expected impact of anticipated changes in our overall business and/or product strategies.
The following table discloses the liabilities measured at fair value on a recurring basis as of
September 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at September 30, 2016
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
(in thousands)
|
|
Contingent consideration related to the acquisition of:
|
|
|
|
|
|
|
|
|
Indatus
|
$
|
47
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
47
|
|
|
AssetEye
|
347
|
|
|
—
|
|
|
—
|
|
|
347
|
|
|
Interest rate swap agreements
|
86
|
|
|
—
|
|
|
86
|
|
|
—
|
|
|
|
$
|
480
|
|
|
$
|
—
|
|
|
$
|
86
|
|
|
$
|
394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at December 31, 2015
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
(in thousands)
|
|
Contingent consideration related to the acquisition of:
|
|
|
|
|
|
|
|
|
Indatus
|
$
|
814
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
814
|
|
|
VRX
|
27
|
|
|
—
|
|
|
—
|
|
|
27
|
|
|
|
$
|
841
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
841
|
|
There were no assets measured at fair value on a recurring basis at
September 30, 2016
or
December 31, 2015
.
The following table summarizes the changes in the fair value of our Level 3 liabilities for the
nine months ended
September 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
|
(in thousands)
|
|
Balance at beginning of period
|
$
|
841
|
|
|
$
|
4,150
|
|
|
Initial contingent consideration
|
245
|
|
|
1,415
|
|
|
Settlements through cash payments
|
—
|
|
|
(1,179
|
)
|
|
Net gain on change in fair value
|
(692
|
)
|
|
(3,212
|
)
|
|
Balance at end of period
|
$
|
394
|
|
|
$
|
1,174
|
|
Gains and losses resulting from changes in the fair value of the above liabilities are included in “General and administrative” expense in the accompanying Condensed Consolidated Statements of Operations.
Assets and liabilities measured at fair value on a non-recurring basis
As further discussed in Note
17
, in October 2016 the Company entered into an agreement with A Place for Mom whereby we sold certain assets associated with our senior living referral services, including certain indefinite-lived trade names. Based on the status of the negotiations, we concluded there was a possibility that the negotiated assets could be impaired and performed an impairment analysis as of
September 30, 2016
. We estimated the aggregate fair value of the negotiated assets to be
$5.0 million
at
September 30, 2016
, based on the price at which they were sold in October 2016 in an arms-length transaction with an unrelated party. The method utilized incorporated significant unobservable inputs and the Company concluded that the measurement should be classified within Level 3. The Company believes that the method used to determine the fair value of the assets was reasonable. See Note
5
for further discussion of these impairments.
There were no liabilities measured at fair value on a non-recurring basis at
September 30, 2016
or
December 31, 2015
. There were no assets measured at fair value on a non-recurring basis at
December 31, 2015
.
Financial Instruments
The financial assets and liabilities that are not measured at fair value in our Condensed Consolidated Balance Sheets include cash and cash equivalents, restricted cash, accounts receivable, cost-method investments, accounts payable and accrued expenses, acquisition-related deferred cash obligations, and obligations under the Credit Facility.
The carrying values of cash and cash equivalents, restricted cash, accounts receivable, and accounts payable and accrued expenses reported in our Condensed Consolidated Balance Sheets approximates fair value due to the short term nature of these instruments. Acquisition-related deferred cash obligations are recorded on the date of acquisition at their estimated fair value, based on the present value of the anticipated future cash flows. The difference between the amount of the deferred cash obligation to be paid and its estimated fair value on the date of acquisition is accreted over the obligation period. As a result, the carrying value of acquisition-related deferred cash obligations approximates their fair value.
Due to their short-term nature and market-indexed interest rates, we concluded that the carrying value of the Term Loan and revolving loans under the Credit Facility approximate their fair value.
The Company concluded that the fair value estimates described above should be categorized within Level 3.
12. Stockholders’ Equity
On May 6, 2014, our board of directors approved a share repurchase program authorizing the repurchase of up to
$50.0 million
of our outstanding common stock for a period of up to
one year
after the approval date. Shares repurchased under the plan are retired. In May 2015, our board of directors approved an extension of the share repurchase program to
May 6, 2016
, permitting the repurchase of up to
$50.0 million
of our common stock during the period commencing on the extension date and ending on May 6, 2016. On
April 26, 2016
, our board of directors approved a
one
-year extension of the share repurchase program. The terms of the extension permit the repurchase of up to
$50.0 million
of our common stock during the period commencing on the extension day and ending on
May 6, 2017
.
Repurchase activity during the
three and nine
months ended
September 30, 2016
and
2015
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Number of shares repurchased
|
—
|
|
|
807,922
|
|
|
1,012,823
|
|
|
1,579,226
|
|
|
Weighted-average cost per share
|
$
|
—
|
|
|
$
|
18.95
|
|
|
$
|
20.98
|
|
|
$
|
19.28
|
|
|
Total cost of shares repurchased, in thousands
|
$
|
—
|
|
|
$
|
15,309
|
|
|
$
|
21,244
|
|
|
$
|
30,455
|
|
13
. Derivative Financial Instruments
On
March 31, 2016
, the Company entered into
two
interest rate swap agreements (“Swap Agreements”), which are designed to mitigate our exposure to interest rate risk associated with our variable rate debt. The Swap Agreements cover an aggregate notional amount of
$75.0 million
from
March 2016
to
September 2019
by replacing the obligation’s variable rate with a blended fixed rate of
0.89%
. The Company designated the Swap Agreements as cash flow hedges of interest rate risk.
The effective portion of changes in the fair value of Swap Agreements is recorded in accumulated other comprehensive
income (loss)
and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in the fair value of the Swap Agreements is recognized directly in earnings. During the
three and nine
months ended
September 30, 2016
, we did not incur any hedge ineffectiveness.
Amounts reported in accumulated other comprehensive
income (loss)
related to the Swap Agreements will be reclassified to interest expense as interest payments are made on our variable-rate debt. The Company estimates that an additional
$0.2 million
will be reclassified as
an increase
to interest expense during the twelve-month period ending
September 30,
2017
.
As of
September 30, 2016
, the Swap Agreements are still outstanding. The table below presents the notional and fair value of the Swap Agreements as well as their classification on the Condensed Consolidated Balance Sheet as of
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
|
Notional
|
|
Fair Value
|
|
|
|
|
(in thousands)
|
|
Derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
|
Swap Agreements
|
Other long-term liabilities
|
|
$
|
75,000
|
|
|
$
|
(86
|
)
|
As of
September 30, 2016
, the Company has not posted any collateral related to the Swap Agreements. If the Company had breached any of the Swap Agreement’s default provisions at
September 30, 2016
, it could have been required to settle its obligations under the Swap Agreements at their termination value of
$0.1 million
.
The table below presents the amount of gains and/or losses related to the effective and ineffective portions of the Swap Agreements and their location on the Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Comprehensive
Income (Loss)
for the
three and nine
months ended
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Portion
|
|
Ineffective Portion
|
|
Derivatives Designated as Cash Flow Hedges
|
|
Gain (Loss) Recognized in OCI
|
|
Location of Gain Recognized in Income
|
|
Gain Recognized in Income
|
|
Location of Gain Recognized in Income
|
|
Gain Recognized in Income
|
|
|
|
(in thousands)
|
|
Three months ended:
|
|
|
|
|
|
|
|
|
|
|
|
Swap Agreements
|
|
$
|
456
|
|
|
Interest expense and other
|
|
$
|
76
|
|
|
Interest expense and other
|
|
$
|
—
|
|
|
Nine months ended:
|
|
|
|
|
|
|
|
|
|
|
|
Swap Agreements
|
|
$
|
(86
|
)
|
|
Interest expense and other
|
|
$
|
163
|
|
|
Interest expense and other
|
|
$
|
—
|
|
14. Comprehensive
Income (Loss)
Changes in accumulated balances of other comprehensive
income (loss)
for the
three and nine
months ended
September 30, 2016
and
2015
, by component, are presented in the table below. Amounts are shown net of income tax.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
|
Nine Months Ended September 30, 2016
|
|
|
Foreign Currency
|
|
Swap Agreements
|
|
Total
|
|
Foreign Currency
|
|
Swap Agreements
|
|
Total
|
|
|
(in thousands)
|
|
Balance, beginning of period
|
$
|
(442
|
)
|
|
$
|
(357
|
)
|
|
$
|
(799
|
)
|
|
$
|
(546
|
)
|
|
$
|
—
|
|
|
$
|
(546
|
)
|
|
Interest rate swap:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of realized losses on Swap Agreements
|
—
|
|
|
46
|
|
|
46
|
|
|
—
|
|
|
98
|
|
|
98
|
|
|
Unrealized gain (loss) on interest rate swaps
|
—
|
|
|
228
|
|
|
228
|
|
|
—
|
|
|
(181
|
)
|
|
(181
|
)
|
|
Foreign currency translation adjustments
|
(70
|
)
|
|
—
|
|
|
(70
|
)
|
|
34
|
|
|
—
|
|
|
34
|
|
|
Balance, end of period
|
$
|
(512
|
)
|
|
$
|
(83
|
)
|
|
$
|
(595
|
)
|
|
$
|
(512
|
)
|
|
$
|
(83
|
)
|
|
$
|
(595
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2015
|
|
Nine Months Ended September 30, 2015
|
|
|
Foreign Currency
|
|
Hedge Instruments
|
|
Total
|
|
Foreign Currency
|
|
Hedge Instruments
|
|
Total
|
|
|
(in thousands)
|
|
Balance, beginning of period
|
$
|
(445
|
)
|
|
$
|
—
|
|
|
$
|
(445
|
)
|
|
$
|
(209
|
)
|
|
$
|
—
|
|
|
$
|
(209
|
)
|
|
Foreign currency translation adjustments
|
(31
|
)
|
|
—
|
|
|
(31
|
)
|
|
(267
|
)
|
|
—
|
|
|
(267
|
)
|
|
Balance, end of period
|
$
|
(476
|
)
|
|
$
|
—
|
|
|
$
|
(476
|
)
|
|
$
|
(476
|
)
|
|
$
|
—
|
|
|
$
|
(476
|
)
|
Amounts reclassified to net income during the
three and nine
months ended
September 30, 2016
included net realized losses on the Swap Agreements. These reclassifications are reflected in the line, “Interest expense and other, net” in the accompanying Condensed Consolidated Statements of Operations.
The following tables show the income tax effects of the individual items of other comprehensive
income (loss)
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
|
Nine Months Ended September 30, 2016
|
|
|
Before Tax Amount
|
|
Tax (Benefit) Expense
|
|
Net of Tax Amount
|
|
Before Tax Amount
|
|
Tax Expense (Benefit)
|
|
Net of Tax Amount
|
|
|
(in thousands)
|
|
Foreign currency translation adjustments
|
$
|
(116
|
)
|
|
$
|
(46
|
)
|
|
$
|
(70
|
)
|
|
$
|
57
|
|
|
$
|
23
|
|
|
$
|
34
|
|
|
Gain (loss) on interest rate swaps, net
|
456
|
|
|
182
|
|
|
274
|
|
|
(86
|
)
|
|
(3
|
)
|
|
(83
|
)
|
|
Net income for period
|
7,750
|
|
|
3,540
|
|
|
4,210
|
|
|
16,488
|
|
|
7,199
|
|
|
9,289
|
|
|
Other comprehensive income
|
$
|
8,090
|
|
|
$
|
3,676
|
|
|
$
|
4,414
|
|
|
$
|
16,459
|
|
|
$
|
7,219
|
|
|
$
|
9,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2015
|
|
Nine Months Ended September 30, 2015
|
|
|
Before Tax Amount
|
|
Tax Benefit
|
|
Net of Tax Amount
|
|
Before Tax Amount
|
|
Tax Benefit
|
|
Net of Tax Amount
|
|
|
(in thousands)
|
|
Foreign currency translation adjustments
|
$
|
(31
|
)
|
|
$
|
—
|
|
|
$
|
(31
|
)
|
|
$
|
(267
|
)
|
|
$
|
—
|
|
|
$
|
(267
|
)
|
|
Net loss for period
|
(13,797
|
)
|
|
(5,605
|
)
|
|
(8,192
|
)
|
|
(20,238
|
)
|
|
(7,120
|
)
|
|
(13,118
|
)
|
|
Other comprehensive loss
|
$
|
(13,828
|
)
|
|
$
|
(5,605
|
)
|
|
$
|
(8,223
|
)
|
|
$
|
(20,505
|
)
|
|
$
|
(7,120
|
)
|
|
$
|
(13,385
|
)
|
15. Employee Benefit Plans
In 1998, our board of directors approved a defined contribution plan that provides retirement benefits under the provisions of Section 401(k) of the Internal Revenue Code. Our 401(k) Plan (“Plan”) covers substantially all employees who meet a minimum service requirement.
The Company sponsors various retirement plans for its non-U.S. employees. Accrued liabilities related to obligations under these plans totaled
$0.8 million
and
$0.7 million
as of
September 30, 2016
and
December 31, 2015
, respectively, and are included in the line, “Other long-term liabilities” in the accompanying Condensed Consolidated Balance Sheets.
16. Cost Method Investments
In August 2016, we acquired a minority interest in an unrelated company that specializes in the aggregation of commercial lease data (“Investee”). The shares we acquired represent an ownership interest of less than
20.0%
. We evaluated our relationship with the Investee and determined we do not have significant influence over the operations of the Investee nor is it economically dependent upon us. The carrying value of this investment at
September 30, 2016
was
$3.0 million
and is included in “Other assets” in the accompanying Condensed Consolidated Balance Sheets.
17
. Subsequent Events
On October 26, 2016, the Company entered into an agreement with A Place for Mom, whereby the Company agreed to sell certain assets associated with its senior living referral services to A Place for Mom for
$5.0 million
, of which
$0.5 million
will be paid within 90 days of the closing subject to potential claims related to general representations and warranties. The companies also agreed to collaborate to improve lead transparency utilizing A Place for Mom’s referral services and the Company’s senior living customer relationship management platform.
The carrying value of the assets sold, net of the impairment charge discussed in Note
5
, was
$5.0 million
at
September 30, 2016
. These assets did not meet the criteria to be classified as held for sale at
September 30, 2016
, and have therefore not been presented separately in the accompanying Condensed Consolidated Balance Sheets.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (which Sections were adopted as part of the Private Securities Litigation Reform Act of 1995). Statements preceded by, followed by, or that otherwise include the words “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” or similar expressions and the negatives of those terms are generally forward-looking in nature and not historical facts. These forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause our actual results, performance, or achievements to be materially different from any anticipated results, performance, or achievements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section entitled “Risk Factors” in Part II, Item 1A of this report. You should carefully review the risks described herein and in the other documents we file from time to time with the Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K for fiscal year
2015
. You should not place undue reliance on forward-looking statements herein, which speak only as of the date of this report. Except as required by law, we disclaim any intention, and undertake no obligation, to revise any forward-looking statements, whether as a result of new information, a future event, or otherwise.
Overview
We are a leading provider of on demand software and software-enabled services for the rental housing and vacation rental industries. Our broad range of property management solutions enables owners and managers of a wide variety of single family, multifamily, and vacation rental property types to enhance the visibility, control, and profitability of each portion of the renter life cycle and operation of a property. By integrating and streamlining a wide range of complex processes and interactions among the rental housing and vacation rental ecosystem of owners, managers, prospects, renters, and service providers, our platform helps optimize the property management process, improve the user experience, increase net operating income, and reduce costs for professional property managers and property owners.
The substantial majority of our revenue is derived from sales of our on demand software solutions. We also derive revenue from our professional and other services. A small percentage of our revenue is derived from sales of our on premise software solutions to our existing on premise clients. 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 license and associated maintenance agreements. We price our solutions based primarily on the number of units the client manages with our solutions. For our insurance-based solutions, we earn revenue based on a commission rate that considers earned premiums; agent commission; incurred losses; and premiums and profits retained by our underwriter. 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 in the United States.
As of
September 30, 2016
, over
12,250
clients used one or more of our on demand software solutions to help manage the operations of approximately
11.3 million
multifamily, single family, or vacation rental units. Our clients include each of the ten largest multifamily property management companies in the United States, ranked as of
January 1, 2016
by the National Multifamily Housing Council, based on the number of units managed. While the use and transition to on demand software
solutions in the rental housing industry is growing rapidly, we believe it remains at a relatively early stage of adoption. Additionally, there is a low level of penetration of our on demand software solutions in our existing client base. We believe these factors present us with significant opportunities to generate revenue through sales of additional on demand software solutions. Our existing and potential clients base their decisions to invest in our solutions on a number of factors, including general economic conditions.
Our company was formed in 1998 to acquire Rent Roll, Inc., which marketed and sold on premise property management systems for the conventional and affordable multifamily rental housing markets. In June 2001, we released OneSite, our first on demand property management system. Since 2002, we have expanded our on demand software and software-enabled services 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, and vacation rental markets. In addition, since July 2002, we have completed
35
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 on demand solutions. As of
September 30, 2016
, we had approximately
4,400
employees.
Solutions and Services
Our platform is designed to serve as a single system of record for all of the constituents of the rental housing ecosystem, including owners, managers, prospects, renters and service providers, and to support the entire renter life cycle, from prospect to applicant to residency or guest to post-residency or post-stay. Common authentication, work flow and user experience across solution categories enables each of these constituents to access different applications as appropriate for their role.
Our platform consists of four primary categories of solutions: Property Management, Leasing and Marketing, Resident Services, and Asset Optimization. These solutions provide complementary sales and marketing, asset optimization, risk mitigation, billing and utility management and spend management capabilities that collectively enable our clients to manage the stages of the renter life cycle. Each of our solutions categories includes multiple product centers that provide distinct capabilities and can be licensed separately or as a bundled package. Each product center is integrated with a central repository of prospect, renter, and property data. In addition, our open architecture allows third-party applications to access our solutions using our RealPage Exchange platform.
We offer different versions of our platform for different types of properties. For example, our platform supports the specific and distinct requirements of:
|
|
|
|
•
|
conventional single family properties (four units or less);
|
|
|
|
|
•
|
conventional multifamily properties (five or more units);
|
|
|
|
|
•
|
affordable Housing and Urban Development, or HUD, properties;
|
|
|
|
|
•
|
affordable tax credit properties;
|
|
|
|
|
•
|
rural housing properties;
|
|
|
|
|
•
|
privatized military housing;
|
Property Management
Our property management solutions are typically referred to as Enterprise Resource Planning, or ERP, systems. These solutions manage core property management business processes, including leasing, accounting, budgeting, purchasing, facilities management, document management, and support and advisory services, and include a central database of prospect, applicant, renter, and property information that is accessible in real time by our other solutions. Our property management solutions also interface with most popular general ledger accounting systems through our RealPage Exchange platform. This makes it possible for clients to deploy our solutions using our accounting system or a third-party accounting system. The property management solution category consists of six primary solutions: OneSite, Propertyware, Kigo, Spend Management Solutions, Enterprise Accounting, and The RealPage Cloud.
Leasing and Marketing
Leasing and marketing solutions are aimed at optimizing marketing spend and the leasing process. These solutions manage core leasing and marketing processes, including websites, paid lead generation, organic lead generation, lead
management, automated lead closure, lead analytics, real-time unit availability, automated online apartment leasing, and applicant screening. The leasing and marketing solutions category consists of seven primary solutions: Online Leasing, Contact Center, LeaseStar Platform, LeaseStar Marketing Management, MyNewPlace, Senior Marketing Management, and Renter Screening.
Resident Services
Resident services solutions provide a platform to optimize the management of current renters. These solutions manage core renter management business processes including utility billing; renter payment processing, service requests, and lease renewals; renter’s insurance; and consulting and advisory services. The resident services solutions category consists of six primary solutions: Utility Management, Payments, Resident Portal, Contact Center, Maintenance, and Renter’s Insurance.
Asset Optimization
Asset optimization solutions are aimed at optimizing property financial and operational performance. These solutions manage core asset management and business intelligence processes, including real-time yield management, revenue growth forecasting, key variable sensitivity forecasting, and operating metric benchmarking. The asset optimization solutions category consists of two primary solutions: Yield Management and Business Intelligence.
Professional services
We have developed repeatable, cost-effective consulting and implementation services to assist our clients in taking advantage of the capabilities enabled by our platform. Our consulting and implementation methodology leverages the nature of our on demand software architecture, the industry-specific expertise of our professional services employees and the design of our platform to simplify and expedite the implementation process. Our consulting and implementation services include project and application management procedures, business process evaluation, business model development, and data conversion. Our consulting teams work closely with clients to facilitate the smooth transition and operation of our solutions.
We also offer a variety of training programs for training administrators and onsite property managers on the use of our solutions and on current issues in the property management industry. Training options include regularly hosted classroom and online instruction (through our online learning courseware) as well as online seminars, or webinars. We also enable our clients to integrate their own training content with our content to deliver an integrated and customized training program for their on-site property managers.
Recent Acquisitions
2016 Acquisitions
eSupply Systems, LLC
In June 2016, we acquired substantially all of the assets of eSupply Systems, LLC (“eSupply”) and those of certain entities related to eSupply. eSupply is an e-procurement software and group purchasing service which augments our existing spend management solutions. The addition of this group purchasing organization provides increased purchasing power and highly competitive pricing structures for our clients. The addition of eSupply’s assets rounds out the Company’s spend management offering, by adding a powerful group purchasing service to an already robust e-procurement platform, a large network of vendors, a vendor credentialing service, and purchasing advisory services.
We acquired eSupply for a purchase price of
$7.0 million
, consisting of a cash payment of
$5.5 million
at closing and deferred cash obligations of up to
$1.6 million
, payable over
18 months
after the acquisition date. The deferred cash obligation is subject to adjustments specified in the purchase agreement related to the sellers’ indemnification obligations.
AssetEye, Inc.
In May 2016, we acquired all of the issued and outstanding stock of AssetEye, Inc. (“AssetEye”). AssetEye is a data aggregation, reporting, and collaboration platform for institutions holding multiple real estate asset classes. This acquisition expanded our on demand offerings to serve all asset classes, including commercial, hospitality, multifamily, single family, senior living, and student housing. The AssetEye software provides asset and portfolio managers with a solution to evaluate performance, trends, and operations across a portfolio with transparency into property-level data. On demand analytics allow stakeholders to quickly combine financial results and operating metrics based upon portfolio attributes that help evaluate asset management strategies.
We acquired AssetEye’s issued and outstanding stock for a purchase price of
$4.9 million
. The purchase price consisted of a cash payment of
$3.6 million
at closing, net of cash acquired of
$0.8 million
; deferred cash obligations of up to
$1.0 million
, payable over a period of
two years
following the date of acquisition; contingent cash payments of up to
$1.0 million
if certain revenue targets are achieved during the three-month period ended September 30, 2017; and additional cash payments of
$0.2 million
due to former shareholders of AssetEye and which are expected to be remitted over a short-term period.
NWP Services Corporation
In March 2016, we acquired all of the issued and outstanding stock of NWP Services Corporation (“NWP”). NWP provides a full range of utility management services, including resident billing; payment processing; utility expense management; analytics and reporting; sub-metering and maintenance; and regulatory compliance. The primary products offered by NWP include Utility Logic, Utility Smart, Utility Genius, SmartSource, and NWP Sub-meter. We are integrating NWP into our resident services product family. The integrated platform will enable property owners and managers to increase the collection of rent utilities and energy recovery. We acquired NWP’s issued and outstanding stock for a purchase price of
$69.0 million
. The purchase price consisted of a cash payment of
$59.0 million
at closing, net of cash acquired of
$0.1 million
; deferred cash obligations of
$7.2 million
, payable over a period of
three years
following the date of acquisition; and other amounts totaling
$3.2 million
, consisting of payments to certain employees and shareholders of NWP which are expected to be remitted over a short-term period. Through the NWP acquisition, we have obtained a significantly larger share of the utility metering services market. We expect to realize significant synergies by integrating NWP into our existing operating structure and with our Velocity product.
2015 Acquisitions
Indatus
In June 2015, we acquired certain assets from ICIM Corporation, including the Answer Automation, Call Tracker, and Zip Digital products marketed under the name Indatus. The Indatus offerings are software-as-a-service products that provide automated answering services, marketing spend analysis tools, and other features which enhance the ability of managers of multifamily properties to communicate with their residents.
We are currently integrating the Indatus assets with our existing contact center and maintenance products, which will increase the features of these existing solutions.
We acquired Indatus for a purchase price of
$49.4 million
, consisting of a cash payment of
$43.8 million
at closing, deferred cash payments of up to
$5.0 million
payable over nineteen months after the acquisition date and contingent cash payments of up to
$2.0 million
, in the aggregate, if certain revenue targets were met for the twelve month periods ending
June 30, 2016
and
2017
. The revenue targets for the twelve-month period ended
June 30, 2016
were not achieved and no payment of contingent consideration for that period was made.
VRX
In June 2015, we acquired certain assets from RJ Vacations, LLC and Switch Development Corporation, including the VRX product (“VRX”). VRX is a software-as-a-service application which allows vacation rental management companies to manage the cleaning and turning of units; accounting; and document management. VRX augments our existing line of solutions offered to the vacation rental industry. We acquired VRX for a purchase price of
$2.0 million
, consisting of a cash payment of
$1.5 million
at closing and a contingent cash payment of up to
$0.5 million
. Payment of the contingent cash obligation is dependent upon the achievement of certain subscription or booking activity targets and is subject to adjustments specified in the acquisition agreement related to the sellers’ indemnification obligations.
The VRX purchase agreement also provides for us to make additional contingent cash payments of up to
$3.0 million
. Payment of the additional contingent cash payments is dependent upon the achievement of certain revenue targets during the twelve month periods ended December 31, 2016, 2017 and 2018 and the sellers providing certain services during a specified period following the acquisition date. Due to the post-acquisition compensation nature of the additional contingent cash payments, they were not included in the acquisition consideration. One of the sellers separated from the Company prior to completing the earliest service period required for achievement of the contingent cash payments. As a result, the maximum potential payout of the additional contingent cash payments at
September 30, 2016
was
$1.5 million
. No amounts under the additional contingent cash payments have been earned or paid as of
September 30, 2016
.
Key Business Metrics
In addition to traditional financial measures, we monitor our operating performance using a number of financially and non-financially derived metrics that are not included in our condensed consolidated financial statements. We monitor the key performance indicators reflected in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
(in thousands, except dollar per unit data)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Total revenue
|
$
|
147,955
|
|
|
$
|
121,588
|
|
|
$
|
419,057
|
|
|
$
|
346,820
|
|
|
On demand revenue
|
$
|
140,883
|
|
|
$
|
116,772
|
|
|
$
|
400,904
|
|
|
$
|
333,872
|
|
|
On demand revenue as a percentage of total revenue
|
95.2
|
%
|
|
96.0
|
%
|
|
95.7
|
%
|
|
96.3
|
%
|
|
Ending on demand units
|
11,251
|
|
|
10,406
|
|
|
11,251
|
|
|
10,406
|
|
|
Average on demand units
|
11,196
|
|
|
10,354
|
|
|
11,016
|
|
|
9,995
|
|
|
Non-GAAP total revenue
|
$
|
147,794
|
|
|
$
|
120,974
|
|
|
$
|
418,295
|
|
|
$
|
345,208
|
|
|
Non-GAAP on demand revenue
|
$
|
140,722
|
|
|
$
|
116,158
|
|
|
$
|
400,142
|
|
|
$
|
332,260
|
|
|
Annualized non-GAAP on demand revenue per average on demand unit
|
$
|
50.28
|
|
|
$
|
44.87
|
|
|
$
|
48.43
|
|
|
$
|
44.32
|
|
|
Non-GAAP on demand annual client value
|
$
|
565,700
|
|
|
$
|
466,917
|
|
|
|
|
|
|
Adjusted EBITDA
|
$
|
32,976
|
|
|
$
|
24,218
|
|
|
$
|
91,090
|
|
|
$
|
65,687
|
|
|
Adjusted EBITDA Margin
|
22.3
|
%
|
|
20.0
|
%
|
|
21.8
|
%
|
|
19.0
|
%
|
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.
Ending on demand units
:
This metric represents the number of rental housing 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 rental housing 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 rental housing units, our overall revenue, and profitability.
Non-GAAP total revenue:
This metric is calculated by adding acquisition-related and other deferred revenue adjustments to total revenue. We believe it is useful to include deferred revenue written down for GAAP purposes under purchase accounting rules and revenue deferred due to a lack of historical experience determining the settlement of the contractual obligation 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 the Company’s ongoing performance.
The following provides a reconciliation of GAAP to non-GAAP total revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
(in thousands)
|
|
Total revenue
|
$
|
147,955
|
|
|
$
|
121,588
|
|
|
$
|
419,057
|
|
|
$
|
346,820
|
|
|
Acquisition-related and other deferred revenue adjustments
|
(161
|
)
|
|
(614
|
)
|
|
(762
|
)
|
|
(1,612
|
)
|
|
Non-GAAP total revenue
|
$
|
147,794
|
|
|
$
|
120,974
|
|
|
$
|
418,295
|
|
|
$
|
345,208
|
|
Non-GAAP on demand revenue
: This metric reflects total on demand revenue plus acquisition-related and other deferred revenue adjustments, as defined below. 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 the Company’s ongoing performance because it provides a more accurate depiction of on demand revenue.
The following provides a reconciliation of GAAP to non-GAAP on demand revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
(in thousands)
|
|
On demand revenue
|
$
|
140,883
|
|
|
$
|
116,772
|
|
|
$
|
400,904
|
|
|
$
|
333,872
|
|
|
Acquisition-related and other deferred revenue adjustments
|
(161
|
)
|
|
(614
|
)
|
|
(762
|
)
|
|
(1,612
|
)
|
|
Non-GAAP on demand revenue
|
$
|
140,722
|
|
|
$
|
116,158
|
|
|
$
|
400,142
|
|
|
$
|
332,260
|
|
Non-GAAP on demand revenue per average on demand unit (“RPU”)
:
This metric is calculated by dividing non-GAAP on demand revenue, including pro forma on demand revenue for acquisitions acquired during the period, by average on demand units for the same period. For interim periods, the calculation is performed on an annualized basis.
Non-GAAP on demand annual client value (“ACV”)
:
We define ACV as RPU multiplied by ending on demand units. We monitor this metric to measure our success increasing the number of on demand units and the amount of software solutions utilized by our clients to manage their rental housing units. In addition, we believe ACV provides a useful proxy for the annual run-rate value of on demand client relationships.
Adjusted EBITDA
: We define Adjusted EBITDA as
net income (loss)
, plus (1) acquisition-related and other deferred revenue adjustments, (2) depreciation, asset impairment, and the loss on disposal of assets, (3) amortization of intangible assets, (4)
acquisition-related income
, (5) interest expense, net, (6)
income tax expense (benefit)
, (7) litigation-related expense, (8) headquarters relocation costs, and (9) stock-based expense. We believe that investors and financial analysts find this non-GAAP financial measure to be useful in analyzing the Company’s financial and operational performance, comparing this performance to the Company’s peers and competitors, and understanding the Company’s ability to generate income from ongoing business operations.
The following provides a reconciliation of
net income (loss)
to Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
(in thousands)
|
|
Net income (loss)
|
$
|
4,210
|
|
|
$
|
(8,192
|
)
|
|
$
|
9,289
|
|
|
$
|
(13,118
|
)
|
|
Acquisition-related and other deferred revenue adjustments
|
(161
|
)
|
|
(614
|
)
|
|
(762
|
)
|
|
(1,612
|
)
|
|
Depreciation, asset impairment, and loss on disposal of assets
|
7,119
|
|
|
25,952
|
|
|
19,178
|
|
|
38,970
|
|
|
Amortization of intangible assets
|
7,847
|
|
|
6,927
|
|
|
22,695
|
|
|
18,586
|
|
|
Acquisition-related income
|
(266
|
)
|
|
(3,310
|
)
|
|
(332
|
)
|
|
(1,653
|
)
|
|
Interest expense
|
1,079
|
|
|
391
|
|
|
2,888
|
|
|
966
|
|
|
Income tax expense (benefit)
|
3,540
|
|
|
(5,605
|
)
|
|
7,199
|
|
|
(7,120
|
)
|
|
Litigation-related expense
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
Headquarters relocation costs
|
1,353
|
|
|
—
|
|
|
3,552
|
|
|
—
|
|
|
Stock-based expense
|
8,255
|
|
|
8,669
|
|
|
27,383
|
|
|
30,666
|
|
|
Adjusted EBITDA
|
$
|
32,976
|
|
|
$
|
24,218
|
|
|
$
|
91,090
|
|
|
$
|
65,687
|
|
Adjusted EBITDA Margin
: Adjusted EBITDA Margin is calculated by dividing Adjusted EBITDA by Non-GAAP total revenue. 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.
Non-GAAP Financial Measures
We report our financial results in accordance with GAAP; however, we believe that, in order to properly understand the Company’s 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 non-cash or non-recurring 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 and compare it 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 to be 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 and other deferred revenue:
These items are included to reflect deferred revenue written down for GAAP purposes under purchase accounting rules and revenue deferred due to a lack of historical experience determining the settlement of the contractual obligation 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 gains and/or losses on the disposal and impairment of long-lived assets, which are not reflective of the Company’s ongoing operations. We believe exclusion of these items facilitates a more accurate comparison of the Company’s 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 the Company’s ongoing operations for the period in which the charges are incurred, and are therefore not considered by management in making operating decisions.
Amortization of 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 the Company’s ongoing operations for the period in which such charges are incurred.
Acquisition-related income
:
These items consist of direct costs incurred in our business acquisition transactions and the impact of changes in the fair value of acquisition-related contingent consideration obligations. We believe exclusion of these items facilitates a more accurate comparison of the results of the Company’s ongoing operations across periods and eliminates volatility related to changes in the fair value of acquisition-related contingent consideration obligations.
Litigation-related expense:
This item relates to the Company's litigation with Yardi Systems, Inc., including related insurance litigation and settlement costs. This significant and non-recurring litigation and related ancillary matters were resolved in the second quarter of 2014. We believe that the costs incurred related to this litigation are not reflective of the Company’s ongoing operations.
Headquarters relocation costs:
These items consist of duplicative rent and other expenses related to the relocation of our corporate headquarters and data center, which was substantially completed in the third quarter of 2016. These costs are not reflective of the Company’s ongoing operations due to their non-recurring nature.
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 the Company’s performance during the period in which the expenses are incurred.
Key Components of Our Results of Operations
Revenue
We derive our revenue from three primary sources: our on demand software solutions, our on premise software solutions, and our professional and other services.
On demand revenue
:
Revenue from our on demand software solutions is comprised of license and subscription fees relating to our on demand software solutions, typically licensed for one year terms; commission income from sales of renter’s insurance policies; and transaction fees for certain on demand software solutions, such as payment processing, spend management, and billing services. Typically, we price our on demand software solutions based primarily on the number of units or beds the client manages with our solutions. For our insurance based solutions, our agreement provides for a fixed commission on earned premiums related to the policies sold by us. The agreement also provides for a contingent commission to be paid to us in accordance with the agreement. Our transaction-based solutions are priced based on a fixed rate per transaction.
On premise revenue
: Our on premise software solutions are distributed to our clients and maintained locally on the client’s hardware. Revenue from our on premise software solutions is comprised of license fees under term and perpetual license agreements. Typically, we have licensed our on premise software solutions pursuant to term license agreements with an initial term of one year that include maintenance and support. Clients can renew their term license agreement for additional one-year terms at renewal price levels.
We no longer actively market our legacy on premise software solutions to new clients, and only license these solutions to a small portion of our existing on premise clients as they expand their portfolio of rental housing properties. While we intend to support our acquired on premise software solutions, we expect that many of the clients who license these solutions will transition to our on demand software solutions over time.
Professional and other revenue:
Revenue from professional and other services consists of consulting and implementation services; training; and other ancillary services. 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 material engagements.
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; 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; as well as amortization of acquired technology related to strategic acquisitions and amortization of capitalized development costs. We allocate facilities, overhead costs, and depreciation based on headcount.
Operating Expenses
We classify our operating expenses into three categories: product development; sales and marketing; and general and administrative. Our operating expenses primarily consist of personnel costs; costs for third-party contracted development; marketing; legal; accounting and consulting services; and other professional service fees. Personnel costs for each category of operating expenses include salaries, bonuses, stock-based expense, and employee benefits for employees in that category. In addition, our operating expenses include an allocation of our facilities costs; overhead costs and depreciation based on headcount for that category; as well as amortization of purchased intangible assets resulting from our acquisitions.
Product development
:
Product development expense consists primarily of personnel costs for our product development employees and executives and fees to contract development vendors. Our product development efforts are focused primarily on increasing the functionality and enhancing the ease of use of our on demand software solutions and expanding our suite of on demand software solutions. In 2008 and 2011, we established product development and service centers in Hyderabad, India and Manila, Philippines, respectively, to take advantage of strong technical talent at lower personnel costs compared to the United States. In 2015, we expanded our operations in the Philippines by opening an office in Cebu City.
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 services for search engine optimization (“SEO”) and search engine marketing (“SEM”); renter’s insurance; other advertising, trade shows, user conferences, public relations, industry sponsorships and affiliations; and product marketing. In addition, sales and marketing expense includes amortization of certain purchased intangible assets, including client relationships and key vendor and supplier relationships, obtained in connection with our acquisitions.
General and administrative
:
General and administrative expense consists of personnel costs for our executives; finance and accounting; human resources; management information systems; and legal personnel, as well as legal, accounting and other professional service fees; and other corporate expenses.
Critical Accounting Policies and Estimates
The preparation of our condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base these estimates and assumptions on historical experience, projected future operating or financial results or on various other factors that we believe to be reasonable and appropriate under the circumstances. We reconsider and evaluate our estimates and assumptions on an on-going basis. Accordingly, actual results may differ significantly from these estimates.
We believe that the following critical accounting policies involve our more significant judgments, assumptions and estimates, and therefore, could have the greatest potential impact on our condensed consolidated financial statements:
|
|
|
|
•
|
Fair value measurements;
|
|
|
|
|
•
|
Accounts receivable and related allowance;
|
|
|
|
|
•
|
Purchase accounting and contingent consideration;
|
|
|
|
|
•
|
Goodwill and other intangible assets with indefinite lives;
|
|
|
|
|
•
|
Contingent liabilities;
|
|
|
|
|
•
|
Impairment of long-lived assets;
|
|
|
|
|
•
|
Intangible assets with finite lives;
|
|
|
|
|
•
|
Income taxes, including deferred tax assets and liabilities; and
|
|
|
|
|
•
|
Capitalized product development costs.
|
Derivative Financial Instruments
We are exposed to interest rate risk related to our variable rate debt. We manage this risk through a program that may include the use of interest rate derivatives, the counterparties to which are major financial institutions. Our objective in using interest rate derivatives is to add stability to interest cost by reducing our exposure to interest rate movements. We do not use derivative instruments for trading or speculative purposes.
Our interest rate derivatives are designated as cash flow hedges and are carried in the Condensed Consolidated Balance Sheets at their fair value. Unrealized gains and losses resulting from changes in the fair value of these instruments are classified as either effective or ineffective. The effective portion of such gains or losses is recorded as a component of accumulated other comprehensive income (“AOCI”), while the ineffective portion is recorded as a component of interest expense in the period of change. Amounts reported in AOCI related to interest rate derivatives are reclassified into interest expense as interest payments are made on our variable-rate debt. If an interest rate derivative agreement is terminated prior to its maturity, the amounts previously recorded in AOCI are recognized into earnings over the period that the forecasted transactions impact earnings. If the hedging relationship is discontinued because it is probable that the forecasted transactions will not occur according to our original strategy, any related amounts previously recorded in AOCI are recognized in earnings immediately.
Inventory
Inventories are stated at the lower of cost, determined on a first-in, first-out basis, or net realizable value. We establish inventory allowances for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated realizable values based on assumptions about forecasted demand, open purchase commitments, and market conditions.
Recently Adopted Accounting Standards
We adopted Accounting Standards Update (“ASU”) 2015-03,
Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
and ASU 2015-15,
Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line of Credit Agreements
in the first quarter of 2016. As a result of our retrospective adoption of these standards, we present term loans payable net of unamortized debt issuance costs in the Condensed Consolidated Balance Sheets. Prior to adoption of this ASU, such issuance costs were included in other assets. Our adoption of this standard did not result in a reclassification of previously reported amounts, as we did not have outstanding term loans at
December 31, 2015
. As required, debt issuance costs related to our secured revolving credit facility continue to be presented in other assets in the Condensed Consolidated Balance Sheets.
In November 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-16,
Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments
, which eliminates the requirement to restate prior period financial statements for measurement-period adjustments. This ASU requires that the cumulative impact of a measurement period adjustment, including the impact on prior periods, be recognized in the reporting period in which the adjustment is identified. We adopted ASU 2015-16 in the first quarter of 2016.
In April 2015, the FASB issued ASU 2015-05,
Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.
This ASU provides guidance to clarify the customer’s accounting for fees paid in a cloud computing arrangement and whether such an arrangement contains a software license or is solely a service contract. We adopted this standard in the first quarter of 2016 and will prospectively apply the guidance to all arrangements entered into or materially modified after January 1, 2016.
Results of Operations
The following tables set forth our unaudited results of operations for the specified periods and the components of such results as a percentage of our revenue for the respective periods. The period-to-period comparison of financial results is not necessarily indicative of future results.
Condensed Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
2016
|
|
2016
|
|
2015
|
|
2015
|
|
|
(in thousands, except per share and ratio amounts)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
On demand
|
$
|
140,883
|
|
|
95.2
|
%
|
|
$
|
116,772
|
|
|
96.0
|
%
|
|
On premise
|
682
|
|
|
0.5
|
|
|
834
|
|
|
0.7
|
|
|
Professional and other
|
6,390
|
|
|
4.3
|
|
|
3,982
|
|
|
3.3
|
|
|
Total revenue
|
147,955
|
|
|
100.0
|
|
|
121,588
|
|
|
100.0
|
|
|
Cost of revenue
(1)
|
64,111
|
|
|
43.3
|
|
|
51,740
|
|
|
42.6
|
|
|
Gross profit
|
83,844
|
|
|
56.7
|
|
|
69,848
|
|
|
57.4
|
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
Product development
(1)
|
18,743
|
|
|
12.7
|
|
|
16,858
|
|
|
13.9
|
|
|
Sales and marketing
(1)
|
33,860
|
|
|
22.9
|
|
|
32,698
|
|
|
26.8
|
|
|
General and administrative
(1)
|
21,677
|
|
|
14.7
|
|
|
13,424
|
|
|
11.0
|
|
|
Impairment of identified intangible assets
|
750
|
|
|
0.5
|
|
|
20,274
|
|
|
16.7
|
|
|
Total operating expense
|
75,030
|
|
|
50.8
|
|
|
83,254
|
|
|
68.4
|
|
|
Operating income (loss)
|
8,814
|
|
|
5.9
|
|
|
(13,406
|
)
|
|
(11.0
|
)
|
|
Interest expense and other, net
|
(1,064
|
)
|
|
(0.7
|
)
|
|
(391
|
)
|
|
(0.3
|
)
|
|
Income (loss) before income taxes
|
7,750
|
|
|
5.2
|
|
|
(13,797
|
)
|
|
(11.3
|
)
|
|
Income tax expense (benefit)
|
3,540
|
|
|
2.4
|
|
|
(5,605
|
)
|
|
(4.6
|
)
|
|
Net income (loss)
|
$
|
4,210
|
|
|
2.8
|
|
|
$
|
(8,192
|
)
|
|
(6.7
|
)
|
|
Net income (loss) per share attributable to common stockholders
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.05
|
|
|
|
|
$
|
(0.11
|
)
|
|
|
|
Diluted
|
$
|
0.05
|
|
|
|
|
$
|
(0.11
|
)
|
|
|
|
Weighted average shares used in computing net income (loss) per share attributable to common stockholders
|
|
|
|
|
|
|
|
|
Basic
|
76,823
|
|
|
|
|
76,564
|
|
|
|
|
Diluted
|
78,124
|
|
|
|
|
76,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes stock-based expense as follows:
|
|
|
|
|
|
|
|
|
Cost of revenue
|
$
|
929
|
|
|
|
|
$
|
817
|
|
|
|
|
Product development
|
1,900
|
|
|
|
|
1,759
|
|
|
|
|
Sales and marketing
|
1,406
|
|
|
|
|
3,118
|
|
|
|
|
General and administrative
|
4,020
|
|
|
|
|
2,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2016
|
|
2015
|
|
2015
|
|
|
(in thousands, except per share and ratio amounts)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
On demand
|
$
|
400,904
|
|
|
95.7
|
%
|
|
$
|
333,872
|
|
|
96.3
|
%
|
|
On premise
|
2,141
|
|
|
0.5
|
|
|
2,301
|
|
|
0.7
|
|
|
Professional and other
|
16,012
|
|
|
3.8
|
|
|
10,647
|
|
|
3.0
|
|
|
Total revenue
|
419,057
|
|
|
100.0
|
|
|
346,820
|
|
|
100.0
|
|
|
Cost of revenue
(1)
|
180,937
|
|
|
43.2
|
|
|
147,795
|
|
|
42.6
|
|
|
Gross profit
|
238,120
|
|
|
56.8
|
|
|
199,025
|
|
|
57.4
|
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
Product development
(1)
|
54,893
|
|
|
13.1
|
|
|
52,919
|
|
|
15.3
|
|
|
Sales and marketing
(1)
|
101,188
|
|
|
24.1
|
|
|
92,698
|
|
|
26.7
|
|
|
General and administrative
(1)
|
61,955
|
|
|
14.8
|
|
|
51,797
|
|
|
14.9
|
|
|
Impairment of identified intangible assets
|
750
|
|
|
0.2
|
|
|
20,801
|
|
|
6.0
|
|
|
Total operating expense
|
218,786
|
|
|
52.2
|
|
|
218,215
|
|
|
62.9
|
|
|
Operating income (loss)
|
19,334
|
|
|
4.6
|
|
|
(19,190
|
)
|
|
(5.5
|
)
|
|
Interest expense and other, net
|
(2,846
|
)
|
|
(0.7
|
)
|
|
(1,048
|
)
|
|
(0.3
|
)
|
|
Income (loss) before income taxes
|
16,488
|
|
|
3.9
|
|
|
(20,238
|
)
|
|
(5.8
|
)
|
|
Income tax expense (benefit)
|
7,199
|
|
|
1.7
|
|
|
(7,120
|
)
|
|
(2.1
|
)
|
|
Net income (loss)
|
$
|
9,289
|
|
|
2.2
|
|
|
$
|
(13,118
|
)
|
|
(3.7
|
)
|
|
Net income (loss) per share attributable to common stockholders
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.12
|
|
|
|
|
$
|
(0.17
|
)
|
|
|
|
Diluted
|
$
|
0.12
|
|
|
|
|
$
|
(0.17
|
)
|
|
|
|
Weighted average shares used in computing net income (loss) per share attributable to common stockholders
|
|
|
|
|
|
|
|
|
Basic
|
76,615
|
|
|
|
|
76,772
|
|
|
|
|
Diluted
|
77,525
|
|
|
|
|
76,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes stock-based expense as follows:
|
|
|
|
|
|
|
|
|
Cost of revenue
|
$
|
2,506
|
|
|
|
|
$
|
3,267
|
|
|
|
|
Product development
|
5,246
|
|
|
|
|
7,050
|
|
|
|
|
Sales and marketing
|
8,179
|
|
|
|
|
10,750
|
|
|
|
|
General and administrative
|
11,452
|
|
|
|
|
9,599
|
|
|
|
Three and Nine
Months Ended
September 30, 2016
Compared to the
Three and Nine
Months Ended
September 30, 2015
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
|
(in thousands, except per unit data)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
On demand
|
$
|
140,883
|
|
|
$
|
116,772
|
|
|
$
|
24,111
|
|
|
20.6
|
%
|
|
On premise
|
682
|
|
|
834
|
|
|
(152
|
)
|
|
(18.2
|
)
|
|
Professional and other
|
6,390
|
|
|
3,982
|
|
|
2,408
|
|
|
60.5
|
|
|
Total revenue
|
$
|
147,955
|
|
|
$
|
121,588
|
|
|
$
|
26,367
|
|
|
21.7
|
|
|
On demand unit metrics:
|
|
|
|
|
|
|
|
|
Ending on demand units
|
11,251
|
|
|
10,406
|
|
|
845
|
|
|
8.1
|
|
|
Average on demand units
|
11,196
|
|
|
10,354
|
|
|
842
|
|
|
8.1
|
|
|
Non-GAAP revenue metrics:
|
|
|
|
|
|
|
|
Non-GAAP on demand revenue
|
$
|
140,722
|
|
|
$
|
116,158
|
|
|
$
|
24,564
|
|
|
21.1
|
|
|
Annualized non-GAAP on demand revenue per average on demand unit
|
$
|
50.28
|
|
|
$
|
44.87
|
|
|
$
|
5.41
|
|
|
12.1
|
|
|
Non-GAAP on demand annual client value
|
$
|
565,700
|
|
|
$
|
466,917
|
|
|
$
|
98,783
|
|
|
21.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
|
(in thousands, except per unit data)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
On demand
|
$
|
400,904
|
|
|
$
|
333,872
|
|
|
$
|
67,032
|
|
|
20.1
|
%
|
|
On premise
|
2,141
|
|
|
2,301
|
|
|
(160
|
)
|
|
(7.0
|
)
|
|
Professional and other
|
16,012
|
|
|
10,647
|
|
|
5,365
|
|
|
50.4
|
|
|
Total revenue
|
$
|
419,057
|
|
|
$
|
346,820
|
|
|
$
|
72,237
|
|
|
20.8
|
|
|
On demand unit metrics:
|
|
|
|
|
|
|
|
|
Ending on demand units
|
11,251
|
|
|
10,406
|
|
|
845
|
|
|
8.1
|
|
|
Average on demand units
|
11,016
|
|
|
9,995
|
|
|
1,021
|
|
|
10.2
|
|
|
Non-GAAP revenue metrics:
|
|
|
|
|
|
|
|
|
Non-GAAP on demand revenue
|
$
|
400,142
|
|
|
$
|
332,260
|
|
|
$
|
67,882
|
|
|
20.4
|
|
|
Annualized non-GAAP on demand revenue per average on demand unit
|
$
|
48.43
|
|
|
$
|
44.32
|
|
|
$
|
4.11
|
|
|
9.3
|
|
The change in total revenue for the
three and nine
months ended
September 30, 2016
, as compared to the same period in
2015
, was due to the following:
On demand revenue.
During the
three and nine
months ended
September 30, 2016
, on demand revenue increased
$24.1 million
and
$67.0 million
, or
20.6%
and
20.1%
, respectively, as compared to the same periods in
2015
. This increase was driven by incremental revenue from our recent acquisitions, growth in the number of rental units managed with one or more of our solutions, and greater client adoption across our platform of solutions.
On demand revenue associated with our property management solutions increased year-over-year by
$3.8 million
, or
10.8%
, and
$12.0 million
, or
11.9%
, during the
three and nine
months ended
September 30, 2016
, respectively. This growth was primarily attributable to continued sales and client adoption across most of our property management solutions and incremental revenue from our recent acquisitions.
On demand revenue from our leasing and marketing solutions decreased
$1.1 million
and
$3.0 million
, or
3.6%
and
3.3%
, during the
three and nine
months ended
September 30, 2016
, respectively, as compared to the same periods in the prior year. This decrease was mainly due to lower transactional revenue from our paid lead generation and contact center solutions, which
continued to encounter headwinds from macro-economic conditions and increased competition. Growth from our online leasing and screening solutions partially offset this decrease.
On demand revenue from our resident services solutions has grown significantly during 2016, increasing year-over-year by
$19.6 million
, or
50.5%
, and
$52.2 million
, or
49.3%
, during the
three and nine
months ended
September 30, 2016
, respectively. This growth was attributable to incremental revenue from our recent acquisitions and strong growth across most of our resident services product solutions, most notably our payments and renter’s insurance solutions.
On demand revenue derived from our asset optimization solutions grew
$1.8 million
, or
15.4%
, during the
three months ended
, and
$5.8 million
, or
16.9%
, during the
nine months ended
September 30, 2016
, as compared to the same periods in 2015. Our asset optimization solutions continued to benefit from the strong growth of our Business Intelligence solution and the continued growth of our YieldStar solution.
On premise revenue.
On premise revenue for the
three and nine
months ended
September 30, 2016
was
$0.7 million
and
$2.1 million
, respectively, which was down slightly from the same periods in
2015
by
$0.2 million
. We no longer actively market our legacy on premise software solutions to new clients and only market and support our acquired on premise software solutions. We expect on premise revenue to decline over time as we transition acquired on premise clients to our on demand property management solutions.
Professional and other revenue.
Professional and other revenue increased
$2.4 million
and
$5.4 million
for the
three and nine
months ended
September 30, 2016
, respectively, as compared to the same periods in
2015
. This growth was primarily a result of additional sub-meter revenue from our recent acquisitions.
On demand unit metrics.
As of
September 30, 2016
, one or more of our on demand solutions was utilized in the management of
11.3 million
rental property units, representing an increase of
0.8 million
units, or
8.1%
, year-over-year. This increase was due to new client sales, marketing efforts to existing clients, and acquisitions completed in 2015 and 2016. These acquisitions accounted for approximately
0.3 million
units, or
2.3%
, of total ending on demand units.
Cost of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
|
(in thousands, except percentages)
|
|
Cost of revenue
|
$
|
56,052
|
|
|
$
|
44,440
|
|
|
$
|
11,612
|
|
|
26.1
|
%
|
|
$
|
157,249
|
|
|
$
|
127,117
|
|
|
$
|
30,132
|
|
|
23.7
|
%
|
|
Stock-based expense
|
929
|
|
|
817
|
|
|
112
|
|
|
13.7
|
|
|
2,506
|
|
|
3,267
|
|
|
(761
|
)
|
|
(23.3
|
)
|
|
Depreciation and amortization
|
7,130
|
|
|
6,483
|
|
|
647
|
|
|
10.0
|
|
|
21,182
|
|
|
17,411
|
|
|
3,771
|
|
|
21.7
|
|
|
Total cost of revenue
|
$
|
64,111
|
|
|
$
|
51,740
|
|
|
$
|
12,371
|
|
|
23.9
|
|
|
$
|
180,937
|
|
|
$
|
147,795
|
|
|
$
|
33,142
|
|
|
22.4
|
|
Cost of revenue.
During the
three and nine
months ended
September 30, 2016
, cost of revenue, excluding stock-based expense and depreciation and amortization, increased
$11.6 million
and
$30.1 million
, respectively, as compared to the same periods in
2015
. A year-over-year increase in direct costs of
$5.9 million
and
$14.5 million
during the respective periods was driven by our recent acquisitions and higher transaction volume from our Payments solution. Year-over-year increases in our personnel expense of
$3.4 million
and
$9.8 million
, respectively, were primarily attributable to incremental headcount from our recent acquisitions. Investment in our infrastructure, the relocation of our corporate headquarters and data center, and incremental cost from our recent acquisitions resulted in an increase in information technology and facilities expense of
$1.5 million
and
$3.9 million
, respectively, during the periods. A year-over-year increase in professional fees of
$0.8 million
and
$1.9 million
, respectively, due to incremental costs from our recent acquisitions also contributed to the noted increase in cost of revenue. Changes in stock-based expense and depreciation and amortization are separately addressed below.
Cost of revenue as a percentage of total revenue was
43.3%
and
43.2%
during the
three and nine
months ended
September 30, 2016
, respectively, as compared to
42.6%
for both of the same periods in
2015
. The cost of revenue from our NWP acquisition has served to increase this percentage because of NWP’s higher mix of sub-meter installation revenue and its predominantly domestic workforce. Excluding the effect of these factors, cost of revenue as a percentage of total revenue decreased between the 2016 and 2015 periods due to efficiency gains across most of our fixed cost areas, primarily within information technology, product implementation, product management, and client support across a broader revenue base.
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
|
(in thousands, except percentages)
|
|
Product development
|
$
|
15,341
|
|
|
$
|
13,898
|
|
|
$
|
1,443
|
|
|
10.4
|
%
|
|
$
|
45,483
|
|
|
$
|
41,997
|
|
|
$
|
3,486
|
|
|
8.3
|
%
|
|
Stock-based expense
|
1,900
|
|
|
1,759
|
|
|
141
|
|
|
8.0
|
|
|
5,246
|
|
|
7,050
|
|
|
(1,804
|
)
|
|
(25.6
|
)
|
|
Depreciation
|
1,502
|
|
|
1,201
|
|
|
301
|
|
|
25.1
|
|
|
4,164
|
|
|
3,872
|
|
|
292
|
|
|
7.5
|
|
|
Total product development expense
|
$
|
18,743
|
|
|
$
|
16,858
|
|
|
$
|
1,885
|
|
|
11.2
|
|
|
$
|
54,893
|
|
|
$
|
52,919
|
|
|
$
|
1,974
|
|
|
3.7
|
|
Product development.
Product development expense, excluding stock-based expense and depreciation, increased
$1.4 million
and
$3.5 million
for the
three and nine
months ended
September 30, 2016
, respectively, as compared to the same periods in
2015
. Personnel expense during these periods increased
$1.8 million
and
$4.7 million
, respectively, driven by increased headcount to support the development of our next generation solutions innovations and incremental headcount from our recent acquisitions. A year-over-year increase in facilities expense of
$0.6 million
and
$0.8 million
was primarily driven by the relocation of our corporate headquarters and data center and, to a lesser extent, incremental cost from our recent acquisitions.
These increases were partially offset by lower professional fees of
$0.6 million
and
$1.2 million
during the
three and nine
months ended
September 30, 2016
, respectively, as compared to the same periods in
2015
. This decrease was primarily driven by completed prior year projects related to our leasing and marketing website products. Additionally, non-recurring impairment charges of
$0.5 million
and
$1.3 million
related to in-process software development projects were recognized during the
three and nine
months ended
September 30, 2015
, respectively. Changes in stock-based expense and depreciation separately addressed below.
Although higher in absolute dollars, product development expense as a percentage of revenue during the three-month period decreased from
13.9%
at
September 30, 2015
to
12.7%
at
September 30, 2016
. Similarly, during the
nine
-month period, product development expense as a percentage of revenue decreased year-over-year from
15.3%
to
13.1%
. Improvement in our cost ratio resulted primarily from focused cost containment strategies and the completion of projects related to our leasing and marketing website products in the prior year, offset, in part, by investments in the development of our next generation and data analytics solutions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
|
(in thousands, except percentages)
|
|
Sales and marketing
|
$
|
28,310
|
|
|
$
|
26,167
|
|
|
$
|
2,143
|
|
|
8.2
|
%
|
|
$
|
81,102
|
|
|
$
|
71,911
|
|
|
$
|
9,191
|
|
|
12.8
|
%
|
|
Stock-based expense
|
1,406
|
|
|
3,118
|
|
|
(1,712
|
)
|
|
(54.9
|
)
|
|
8,179
|
|
|
10,750
|
|
|
(2,571
|
)
|
|
(23.9
|
)
|
|
Depreciation and amortization
|
4,144
|
|
|
3,413
|
|
|
731
|
|
|
21.4
|
|
|
11,907
|
|
|
10,037
|
|
|
1,870
|
|
|
18.6
|
|
|
Total sales and marketing expense
|
$
|
33,860
|
|
|
$
|
32,698
|
|
|
$
|
1,162
|
|
|
3.6
|
|
|
$
|
101,188
|
|
|
$
|
92,698
|
|
|
$
|
8,490
|
|
|
9.2
|
|
Sales and marketing.
Sales and marketing expense, excluding stock-based expense and depreciation and amortization, increased year-over-year by
$2.1 million
and
$9.2 million
during the
three and nine
months ended
September 30, 2016
, respectively. Personnel expense increased
$1.0 million
and
$4.6 million
during the respective periods, primarily due to incremental headcount from our recent acquisitions and investments to enhance the productivity of our sales function. The relocation of our corporate headquarters and data center and investment in our sales function led to an increase in information technology and facility expense of
$0.6 million
and
$1.6 million
, respectively, during the periods. Marketing program costs increased year-over-year by
$0.3 million
and
$2.9 million
, respectively, reflecting investments to accelerate client demand across our portfolio of solutions in addition to our recent acquisitions. An increase of other expense of
$0.2 million
and
$0.1 million
during the
three and nine
months ended
September 30, 2016
, as compared to the same periods in the prior year, also contributed to the changes. Changes in stock-based expense and depreciation and amortization are separately addressed below.
Sales and marketing expense as a percentage of total revenue decreased from
26.8%
and
26.7%
during the
three and nine
month periods ended
September 30, 2015
, respectively, to
22.9%
and
24.1%
for the same periods in
2016
. This reduction is attributable to benefits from our cost containment strategy, leverage gained from our focus on sales productivity, and lower consulting expense. Leverage was also obtained from lower stock-based expense during the
three and nine
-month periods of
2016, respectively, as compared to the same periods in 2015. These decreases were partially offset by higher depreciation and amortization expense related to our recent acquisitions and the relocation of our corporate headquarters and data center.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
|
(in thousands, except percentages)
|
|
General and administrative
|
$
|
16,381
|
|
|
$
|
9,633
|
|
|
$
|
6,748
|
|
|
70.1
|
%
|
|
$
|
46,882
|
|
|
$
|
39,731
|
|
|
$
|
7,151
|
|
|
18.0
|
%
|
|
Stock-based expense
|
4,020
|
|
|
2,975
|
|
|
1,045
|
|
|
35.1
|
|
|
11,452
|
|
|
9,599
|
|
|
1,853
|
|
|
19.3
|
|
|
Depreciation
|
1,276
|
|
|
816
|
|
|
460
|
|
|
56.4
|
|
|
3,621
|
|
|
2,467
|
|
|
1,154
|
|
|
46.8
|
|
|
Total general and administrative expense
|
$
|
21,677
|
|
|
$
|
13,424
|
|
|
$
|
8,253
|
|
|
61.5
|
|
|
$
|
61,955
|
|
|
$
|
51,797
|
|
|
$
|
10,158
|
|
|
19.6
|
|
General and administrative.
General and administrative expense, excluding stock-based expense and depreciation, increased
$6.7 million
and
$7.2 million
during the
three and nine
months ended
September 30, 2016
, respectively, as compared to the same periods in the prior year. Realized gains related to the change in the fair value of our acquisition-related contingent obligations decreased year-over-year by
$3.2 million
and
$2.2 million
in the respective periods. A year-over-year increase in personnel expense of
$1.9 million
and
$3.4 million
, respectively, was primarily related to incremental headcount from our recent acquisitions and investments to support our global footprint.
Facilities expense increased
$0.3 million
and
$1.3 million
, respectively, due to the acquisitions and the relocation of our corporate headquarters and data center.
In addition, we incurred higher professional and other expenses of
$0.6 million
and
$1.6 million
, respectively, a portion of which relate to projects expected to be completed in 2016. We also incurred a net increase of
$0.7 million
and
$0.1 million
during the
three and nine
month periods related to a combination of legal and sales tax issues. These increases were partially offset by a decrease in expense of
$1.4 million
during the nine months ended
September 30, 2015
related to the consolidation of our global footprint. Changes in stock-based expense and depreciation are separately addressed below.
General and administrative expense as a percentage of total revenue increased from
11.0%
to
14.7%
during the
three months ended
September 30, 2016
, as compared to the same period in 2015. The primary driver of this increase was the incremental cost resulting from our recent acquisitions and higher professional fees and related costs, a portion of which relate to projects expected to be completed in 2016. Additionally, we experienced higher personnel costs to support our growth and global footprint. The ratio of general and administrative expense to total revenue for the
nine months ended
September 30, 2016
was generally consistent with that of the prior year at
14.8%
in 2016 and
14.9%
in 2015.
Impairment of Identified Intangible Assets.
We recognized an impairment charge of
$0.8 million
during the
three and nine
months ended
September 30, 2016
, and charges of
$20.3 million
and
$20.8 million
during the same periods of 2015, respectively.
In October 2016, we entered into an agreement with A Place for Mom, whereby we agreed to sell certain assets associated with our senior living referral services, including certain indefinite-lived trade names, (“Referral Assets”) to A Place for Mom. We test our identified intangible assets for impairment on an annual basis in the fourth quarter of each year and test our long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Based on the sale negotiations, we concluded there was a possibility that the Referral Assets could be impaired and performed an impairment analysis as of
September 30, 2016
. Based on the results of this analysis, we recorded an impairment of the associated trade names of
$0.8 million
, the amount by which the carrying value of the trade names exceeded their estimated fair value on the date of analysis, in the third quarter of 2016. The sale of the Referral Assets to A Place for Mom was subsequently completed in October 2016. In connection with the sale of assets, we also agreed with A Place for Mom to collaborate to improve lead transparency utilizing A Place for Mom’s referral services and the Company’s senior living customer relationship management platform.
Our evaluation of the trade names associated with our 2011 acquisition of MyNewPlace in the third quarter of 2015 was triggered by the identification of conditions which indicated the possible existence of an impairment. These indicators included declines in actual and anticipated lead-generation revenues and a change in the Company’s long-term marketing strategy. We analyzed these intangible assets and recorded a
$20.3 million
impairment charge at
September 30, 2015
. Based on changes in our long-term marketing strategy and anticipated use of these trade names, we reclassified the remaining balance to finite-lived intangible assets as of
September 30, 2015
, and are amortizing them over a period of
seven years
.
We evaluated the InstaManager trade name for impairment in the first quarter of 2015, after completing the integration of the InstaManager and Kigo platforms into a single solution marketed under the Kigo name. Subsequent to this integration, we discontinued use of the InstaManager trade name to market or identify the software. We recognized an impairment charge of
$0.5 million
during the first quarter of 2015 related to this trade name.
Stock-based Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
|
(in thousands, except percentages)
|
|
Stock-based expense
|
$
|
8,255
|
|
|
$
|
8,669
|
|
|
$
|
(414
|
)
|
|
(4.8
|
)%
|
|
$
|
27,383
|
|
|
$
|
30,666
|
|
|
$
|
(3,283
|
)
|
|
(10.7
|
)%
|
Stock-based expense for the
three and nine
months ended
September 30, 2016
, decreased by
$0.4 million
and
$3.3 million
, respectively, as compared to the same periods of 2015. This decrease is primarily attributable to the impact of awards which became fully vested and forfeitures subsequent to the third quarter of 2015, partially offset by incremental expense from awards granted between the two periods.
Depreciation and Amortization Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
|
|
(in thousands, except percentages)
|
|
Depreciation expense
|
$
|
6,205
|
|
|
$
|
4,986
|
|
|
$
|
1,219
|
|
|
24.4
|
%
|
|
$
|
18,179
|
|
|
$
|
15,201
|
|
|
$
|
2,978
|
|
|
19.6
|
%
|
|
Amortization expense
|
7,847
|
|
|
6,927
|
|
|
920
|
|
|
13.3
|
|
|
22,695
|
|
|
18,586
|
|
|
4,109
|
|
|
22.1
|
|
|
Total depreciation and amortization expense
|
$
|
14,052
|
|
|
$
|
11,913
|
|
|
$
|
2,139
|
|
|
18.0
|
|
|
$
|
40,874
|
|
|
$
|
33,787
|
|
|
$
|
7,087
|
|
|
21.0
|
|
Depreciation expense increased
$1.2 million
and
$3.0 million
during the
three and nine
months ended
September 30, 2016
, respectively, as compared to the same periods in 2015. The increase in depreciation expense during these periods was primarily due to incremental depreciation expense from our recent acquisitions and expense arising from the relocation of our corporate headquarters and data center. Amortization expense increased during these periods primarily due to the addition of finite-lived intangible assets in connection with our recent acquisitions.
Interest Expense and Other, Net
The increase in interest expense and other, net for the
three and nine
months ended
September 30, 2016
, as compared to the same periods in
2015
, is primarily due to higher average obligation balances during the current period as a result of our
$125.0 million
Term Loan entered into in February 2016.
Provision for Taxes
We compute our provision for income taxes on a quarterly basis by applying the estimated annual effective tax rate to income from recurring operations and other taxable income. Our effective income tax rate was
43.7%
and
35.2%
for the
nine months ended
September 30, 2016
, and
2015
. Our effective rate is higher than the statutory rate for the
nine months ended
September 30, 2016
, primarily because of state income taxes and non-deductible expenses, including an increase in certain non-deductible expenses identified in connection with the filing of our 2015 taxes. The effective rate is lower than the statutory rate for the
nine months ended
September 30, 2015
, primarily because non-deductible expenses reduced the tax benefit associated with the pretax loss.
Liquidity and Capital Resources
Our primary sources of liquidity as of
September 30, 2016
consisted of
$69.1 million
of cash and cash equivalents,
$200.0 million
available under our revolving line of credit and
$33.7 million
of working capital (excluding
$69.1 million
of cash and cash equivalents and
$81.9 million
of deferred revenue).
Our principal uses of liquidity have been to fund our operations, 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. During 2016, we expect to incur elevated capital expenditures of approximately
$85.0 million
, primarily related to our corporate headquarters and data center moves. We also expect to receive approximately
$19.6 million
of tenant improvement reimbursement from the property owner of our corporate headquarters facility which will be reported as a source of cash from operating activities. We expect to generate returns on these investments by incurring lower future rent expense per employee and long-term transaction processing scale. Starting in 2017, we expect capital expenditures to return to more normalized levels which we target at approximately
5.0%
of revenue for maintenance and growth initiatives. In addition, we have made several acquisitions in which a portion of the cash purchase price is payable at various times and have quarterly debt service requirements through
2019
. We expect to fund these obligations from cash provided by operating activities.
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 operations, 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 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 may 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 of
December 31, 2015
, we had gross federal and state NOL carryforwards of approximately
$161.0 million
and
$67.5 million
, respectively. In connection with our acquisition of NWP, we have recorded an additional
$27.3 million
in gross federal and state NOLs. If not utilized, our federal NOL carryforwards will begin to expire in
2022
, and our state NOL carryforwards will begin to expire in
2016
. NOLs that we have generated are not currently subject to the carryforward limitation in Section 382 of the Internal Revenue Code (“Section 382 limitation”); however,
$43.6
million of NOLs generated by our subsidiaries prior to our acquisition of them are subject to the Section 382 limitation. The limitation on these pre-acquisition NOL carryforwards will fully expire in
2035
. A cumulative change in ownership among material shareholders, as defined in Section 382 of the Internal Revenue Code, during a three-year period may also limit utilization of our federal net operating loss carryforwards.
The following table sets forth cash flow data for the periods indicated therein:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
|
(in thousands)
|
|
Net cash provided by operating activities
|
$
|
105,124
|
|
|
$
|
68,514
|
|
|
Net cash used in investing activities
|
(135,405
|
)
|
|
(63,929
|
)
|
|
Net cash provided by (used in) financing activities
|
68,424
|
|
|
(12,688
|
)
|
Net Cash Provided by Operating Activities
During the
nine months ended
September 30, 2016
, net cash provided by operating activities consisted of net income of
$9.3 million
, net non-cash adjustments to net income of
$74.2 million
and a net inflow of cash from changes in working capital of
$21.6 million
. Non-cash adjustments primarily consisted of depreciation and amortization expense of
$40.9 million
, stock-based expense of
$27.4 million
, income tax-related items of
$5.4 million
, and charges recognized in net income of
$1.0 million
related to the disposition and impairment of our long-lived assets. These items were partially offset by other non-cash adjustments totaling
$0.5 million
.
Changes in working capital included net cash inflows from accounts payable and accrued liabilities of
$3.0 million
and from changes in other current assets of
$18.2 million
, primarily related to the receipt of payments from our tenant improvement allowance for our new corporate headquarters. Net inflows from changes in other current and long-term liabilities of
$5.4 million
also contributed to the increase from changes in working capital. These items were partially offset by net cash outflows related to accounts receivable of
$2.0 million
and deferred revenue of
$3.0 million
.
Net Cash Used in Investing Activities
For the
nine
months ended
September 30, 2016
, we used
$135.4 million
of net cash in investing activities. We used
$71.4 million
in our acquisition of NWP, AssetEye, and eSupply and
$61.0 million
for capital expenditures. Capital expenditures during the period primarily included expenditures to support our strategy of consolidating our real estate footprint, capitalized software development costs, and expenditures to support our information technology infrastructure. Additionally, in the third quarter of 2016 we purchased a minority interest in an unrelated company that specializes in the aggregation of commercial lease data for
$3.0 million
.
Net Cash Provided by Financing Activities
The net cash provided by our financing activities largely consisted of proceeds of
$123.1 million
from the Term Loan we entered into in February 2016, net of payments during the nine-month period ended
September 30, 2016
, of
$1.6 million
. Concurrent with the receipt of the Term Loan, we repaid
$40.0 million
of then outstanding revolving loans. Other significant uses of cash during the period included treasury stock purchases of
$21.2 million
under our share repurchase program, payments of acquisition-related consideration of
$4.9 million
, and other expenditures totaling
$0.9 million
consisting of financing costs related to the Term Loan and payments under our capital lease obligations. Finally, activity under our stock-based consideration plans resulted in cash inflows of
$12.3 million
during the
nine months ended
September 30, 2016
.
Contractual Obligations, Commitments and Contingencies
Contractual Obligations
Our contractual obligations relate primarily to borrowings and interest payments under credit facilities, capital leases, operating leases and purchase obligations. As further discussed below under Long-Term Debt Obligations, we entered into an amendment of our existing credit facility in February 2016. Additionally, certain of our business acquisitions completed during
2016
include provisions for the payment of deferred and contingent cash obligations. Deferred cash obligations are generally subject to adjustments specified in the underlying acquisition agreement related to the seller’s indemnification obligations and payment of contingent cash obligations is dependent upon the acquired business achieving negotiated operational or financial targets in the post-acquisition period. Deferred and contingent cash obligations related to our
2016
acquisitions have payment dates extending through
2019
. There have been no other material changes outside normal operations in our contractual obligations from our disclosures within our Form 10-K for the year ended
December 31, 2015
.
Long-Term Debt Obligations
On
September 30, 2014
, we entered into an agreement for a secured revolving credit facility (as amended by the Amendment discussed below, the “Credit Facility”) to refinance our outstanding revolving loans. The Credit Facility provides an aggregate principal amount of up to
$200.0 million
, with sublimits of
$10.0 million
for the issuance of letters of credit and for
$20.0 million
of swingline loans. Revolving loans under the Credit Facility may be voluntarily prepaid and re-borrowed. At our option, the revolving loans accrue interest at a per annum rate equal to either LIBOR, plus a margin ranging from
1.25%
to
1.75%
, or the Base Rate, plus a margin ranging from
0.25%
to
0.75%
. The Credit Facility permits, at our discretion, the use of one, two, three or six month LIBOR. The Base Rate is defined as the greater of Wells Fargo’s prime rate, the Federal Funds Rate plus
0.50%
, or one month LIBOR plus
1.00%
. In each case the applicable margin is determined based upon our consolidated net leverage ratio. The interest is due and payable quarterly, in arrears, for loans bearing interest at the Base Rate and at the end of the applicable interest period in the case of loans bearing interest at the adjusted LIBOR rate. All outstanding principal and accrued and unpaid interest are due upon the Credit Facility’s maturity on
September 30, 2019
.
In
February 2016
, the Company entered into an amendment (the “Amendment”) of the Credit Facility. The Amendment provides for an incremental term loan in the amount of
$125.0 million
(“Term Loan”) that is coterminous with the Credit Facility. Principal payments on the Term Loan are due in quarterly installments that began in
June 2016
. Amounts paid under the Term Loan may not be re-borrowed. The Term Loan is subject to mandatory repayment requirements in the event of certain asset sales or insurance or condemnation events occur, subject to customary reinvestment provisions. The Company may prepay the Term Loan in whole or in part at any time, without premium or penalty, with prepayment amounts to be applied to remaining scheduled principal amortization payments as specified by the Company. The Term Loan is subject to the same interest rate terms and payments dates as the revolving loans. Under the terms of the Amendment, an additional margin tier was added such that the Applicable Margin now ranges from
1.25%
to
2.00%
for LIBOR loans, and from
0.25%
to
1.00%
for Base Rate loans.
The Credit Facility is secured by substantially all of our assets, and certain of our existing and future material domestic subsidiaries are required to guarantee our obligations under the Credit Facility. The Credit Facility contains customary covenants, subject in each case to customary exceptions and qualifications, which limit our and certain of our subsidiaries’ ability to, among other things, incur additional indebtedness or guarantee indebtedness of others; create liens on our assets; enter into mergers or consolidations; dispose of assets; prepay certain indebtedness or make changes to our governing documents and certain of our agreements; pay dividends and make other distributions on our capital stock and redeem and repurchase our capital stock; make investments, including acquisitions; and enter into transactions with affiliates. Additionally, the Credit Facility contains customary affirmative covenants. We are also required to comply with a maximum consolidated net leverage ratio and a minimum interest coverage ratio. The interest coverage ratio, which is a ratio of our four previous consecutive fiscal quarters’ consolidated EBITDA, as defined in the agreement, to our interest expense, is not to be less than
3.00
to
1.00
as of the last day of any fiscal quarter. The consolidated net leverage ratio, which is the ratio of funded indebtedness on the last day of each fiscal quarter to the four previous consecutive fiscal quarters’ consolidated EBITDA, is not to be greater than
3.50
to
1.00
, provided that we can elect to increase the ratio to
3.75
to
1.00
for a specified period following a permitted acquisition. Pursuant to the Amendment, we can elect to increase the maximum consolidated net leverage ratio to
4.00
to
1.00
for a specified period following the issuance of convertible or high yield notes in an initial principal amount of at least
$150.0 million
.
The Credit Facility contains customary events of default, subject to customary cure periods for certain defaults, that include, among others, non-payment defaults, covenant defaults, material judgment defaults, bankruptcy and insolvency defaults, cross-defaults to certain other material indebtedness, defaults for non-compliance with the Employee Retirement Income Security Act (“ERISA”), inaccuracy of representations and warranties and a change in control default.
In the event of a default, the obligations under the Credit Facility could be accelerated, the applicable interest rate under the Credit Facility could be increased, the loan commitments could be terminated, our subsidiaries that have guaranteed the
Credit Facility could be required to pay the obligations in full and our lenders would be permitted to exercise remedies with respect to all of the collateral that is securing the Credit Facility, including substantially all of our and our subsidiary guarantors’ assets. Any such default that is not cured or waived could have a material adverse effect on our liquidity and financial condition.
As of
September 30, 2016
, we were in compliance with the covenants under the Credit Facility.
Share Repurchase Program
On May 6, 2014, our board of directors approved a share repurchase program authorizing the repurchase of up to
$50.0 million
of our outstanding common stock for a period of up to
one year
after the approval date. In May 2015, our board of directors approved an extension of the share repurchase program, permitting the repurchase of up to
$50.0 million
of our common stock during the period commencing on the extension date and ending on May 6, 2016. On
April 26, 2016
, an additional
one year
extension of the share repurchase program was approved. The terms of this extension permit the repurchase of up to
$50.0 million
of our common stock during the period commencing on the extension day and ending on
May 6, 2017
.
Repurchase activity during the
three and nine
months ended
September 30, 2016
and
2015
was as follows:
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Three Months Ended September 30,
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|
Nine Months Ended September 30,
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2016
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2015
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2016
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2015
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Number of shares repurchased
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—
|
|
|
807,922
|
|
|
1,012,823
|
|
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1,579,226
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Weighted-average cost per share
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$
|
—
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|
|
$
|
18.95
|
|
|
$
|
20.98
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|
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$
|
19.28
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Total cost of shares repurchased, in thousands
|
$
|
—
|
|
|
$
|
15,309
|
|
|
$
|
21,244
|
|
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$
|
30,455
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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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in interest rates. We do not hold or issue financial instruments for trading purposes.
We had cash and cash equivalents of
$69.1 million
and
$30.9 million
at
September 30, 2016
and
December 31, 2015
, respectively. We hold cash and cash equivalents for working capital purposes. We do not have material exposure to market risk with respect to investments, as our investments consist primarily of highly liquid investments purchased with original maturities of three months or less.
We had
$123.4 million
outstanding under our Term Loan at
September 30, 2016
. The Term Loan is reflected net of unamortized debt issuance costs of
$0.5 million
in the accompanying Condensed Consolidated Balance Sheet. At
December 31, 2015
, we had
$40.0 million
in revolving loans outstanding under the Credit Facility. There were
no
outstanding revolving loans at
September 30, 2016
. At our option, amounts borrowed under the Credit Facility accrue interest at a per annum rate equal to either LIBOR, plus a margin ranging from
1.25%
to
2.00%
, or the Base Rate, plus a margin ranging from
0.25%
to
1.00%
. The base LIBOR rate is, at our discretion, equal to either one, two, three, or six month LIBOR. The Base Rate is defined as the greater of Wells Fargo’s prime rate, the Federal Funds Rate plus
0.50%
, or one month LIBOR plus
1.00%
. If the applicable rates change by 10% of the
September 30, 2016
closing market rates, our annual interest expense would change by less than
$0.1 million
.
On March 31, 2016, we entered into two interest rate swap agreements to eliminate variability in interest payments on the Term Loan. The swap agreements replace the term note’s variable rate with a blended fixed rate of
0.89%
. We do not use derivative financial instruments for speculative or trading purposes; however, we may adopt additional specific hedging strategies in the future. Any declines in interest rates, however, will reduce future interest income.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Pursuant to Rule 13a-15(b) and Rule 15d-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we carried out an evaluation, with the participation of our management, and under the supervision of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were
effective as of
September 30, 2016
, in ensuring that information required to be disclosed in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management’s assessment of the effectiveness of our disclosure controls and procedures is expressed at the level of reasonable assurance because management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives.
Changes in Internal Controls
There were no changes in the Company’s internal control over financial reporting during the
three and nine
months ended
September 30, 2016
that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Inherent Limitations of Internal Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
