REALPAGE INC filed this 10-Q on 11/10/2014

RP-2014.09.30 10Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
FORM 10-Q
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-34846 
 
RealPage, Inc.
(Exact name of registrant as specified in its charter)
 
 
Delaware
 
75-2788861
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
4000 International Parkway
Carrollton, Texas
 
75007-1951
(Address of principal executive offices)
 
(Zip Code)
(972) 820-3000
(Registrant’s telephone number, including area code) 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
ý
 
  
Accelerated filer
 
¨
Non-accelerated filer
¨
  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Class
  
Outstanding at October 24, 2014
Common Stock, $0.001 par value
  
78,728,890


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INDEX
 
 
 
Item 5. Other Information
 


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PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
REALPAGE, INC.
Consolidated Balance Sheets
(in thousands, except share data)
 
September 30, 2014
 
December 31, 2013
 
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
30,670

 
$
34,502

Restricted cash
81,049

 
71,941

Accounts receivable, less allowance for doubtful accounts of $2,116 and $914 at September 30, 2014 and December 31, 2013, respectively
63,731

 
66,635

Deferred tax asset, net
2,868

 
3,284

Other current assets
9,566

 
7,453

Total current assets
187,884

 
183,815

Property, equipment and software, net
71,464

 
54,775

Goodwill
193,468

 
152,422

Identified intangible assets, net
105,192

 
108,815

Deferred tax asset, net
4,553

 

Other assets
5,023

 
3,386

Total assets
$
567,584

 
$
503,213

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
17,444

 
$
11,978

Accrued expenses and other current liabilities
25,995

 
23,122

Current portion of deferred revenue
68,321

 
66,085

Customer deposits held in restricted accounts
81,015

 
71,910

Total current liabilities
192,775

 
173,095

Deferred revenue
6,764

 
5,671

Deferred tax liability, net

 
1,379

Revolving credit facility
38,572

 

Other long-term liabilities
14,931

 
8,564

Total liabilities
253,042

 
188,709

Commitments and contingencies (Note 8)


 


Stockholders’ equity:
 
 
 
Preferred stock, $0.001 par value: 10,000,000 shares authorized and zero shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively

 

Common stock, $0.001 par value: 125,000,000 shares authorized, 82,826,622 and 80,511,791 shares issued and 78,849,752 and 78,433,626 shares outstanding at September 30, 2014 and December 31, 2013, respectively
83

 
81

Additional paid-in capital
422,414

 
390,854

Treasury stock, at cost: 3,976,870 and 2,078,165 shares at September 30, 2014 and December 31, 2013, respectively
(32,305
)
 
(11,183
)
Accumulated deficit
(75,470
)
 
(65,086
)
Accumulated other comprehensive loss
(180
)
 
(162
)
Total stockholders’ equity
314,542

 
314,504

Total liabilities and stockholders’ equity
$
567,584

 
$
503,213


See accompanying notes.

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REALPAGE, INC.
Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Revenue:
 
 
 
 
 
 
 
On demand
$
100,747

 
$
94,084

 
$
289,361


$
270,231

On premise
755

 
838

 
2,446


2,799

Professional and other
3,034

 
3,149

 
8,280


8,473

Total revenue
104,536

 
98,071

 
300,087

 
281,503

Cost of revenue
46,311

 
38,111

 
128,353

 
110,815

Gross profit
58,225

 
59,960

 
171,734

 
170,688

Operating expense:
 
 
 
 
 
 
 
Product development
17,528

 
13,232

 
48,310

 
36,997

Sales and marketing
29,949

 
25,166

 
83,970

 
71,992

General and administrative
15,443

 
15,554

 
53,191

 
44,880

Total operating expense
62,920

 
53,952

 
185,471

 
153,869

Operating (loss) income
(4,695
)
 
6,008

 
(13,737
)
 
16,819

Interest expense and other, net
(345
)
 
(236
)
 
(771
)
 
(921
)
(Loss) income before income taxes
(5,040
)
 
5,772

 
(14,508
)
 
15,898

Income tax benefit
(1,783
)
 
(7,114
)
 
(4,124
)
 
(2,616
)
Net (loss) income
$
(3,257
)

$
12,886


$
(10,384
)

$
18,514

Net (loss) income per share
 
 
 
 
 
 
 
Basic
$
(0.04
)
 
$
0.17

 
$
(0.13
)
 
$
0.25

Diluted
$
(0.04
)
 
$
0.17

 
$
(0.13
)
 
$
0.24

Weighted average shares used in computing net (loss) income per share
 
 
 
 
 
 
 
Basic
77,280

 
75,234

 
77,075

 
74,597

Diluted
77,280

 
76,347

 
77,075

 
75,900

 
 
 
 
 
 
 
 
See accompanying notes.

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REALPAGE, INC.
Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
 
Net (loss) income
$
(3,257
)
 
$
12,886

 
$
(10,384
)
 
$
18,514

Other comprehensive (loss) income—foreign currency translation adjustment
(9
)
 
12

 
(18
)
 
(36
)
Comprehensive (loss) income
$
(3,266
)
 
$
12,898

 
$
(10,402
)
 
$
18,478

See accompanying notes.

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REALPAGE, INC.
Consolidated Statements of Stockholders’ Equity
(in thousands)
(Unaudited)
 
 
Common Stock
 
Additional
Paid-in Capital
 
Accumulated
Other
Comprehensive Loss
 
Accumulated Deficit
 
Treasury Shares
 
Total
Stockholders’ Equity
 
Shares
 
Amount
 
 
 
 
Shares
 
Amount
 
Balance as of December 31, 2013
80,512

 
$
81

 
$
390,854

 
$
(162
)
 
$
(65,086
)
 
(2,078
)
 
$
(11,183
)
 
$
314,504

Foreign currency translation

 

 

 
(18
)
 

 

 

 
(18
)
Net (loss) income

 

 

 

 
(10,384
)
 

 

 
(10,384
)
Exercise of stock options
586

 

 
5,166

 

 

 

 

 
5,166

Treasury stock purchase, at cost

 

 

 

 

 
(1,899
)
 
(21,122
)
 
(21,122
)
Issuance of restricted stock
1,695

 
2

 

 

 

 

 

 
2

Issuance of common stock
34

 

 

 

 

 

 

 

Stock-based compensation

 

 
28,794

 

 

 

 

 
28,794

Acquisition-related contingent consideration

 

 
(2,400
)
 

 

 

 

 
(2,400
)
Balance as of September 30, 2014
82,827

 
$
83

 
$
422,414

 
$
(180
)
 
$
(75,470
)
 
(3,977
)
 
$
(32,305
)
 
$
314,542

See accompanying notes.

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REALPAGE, INC.
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
 
Nine Months Ended September 30,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net (loss) income
$
(10,384
)
 
$
18,514

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
30,533

 
22,823

Deferred tax benefit
(6,011
)
 
(4,873
)
Stock-based compensation
28,794

 
21,042

Loss on disposal of assets
36

 
310

Acquisition-related contingent consideration
564

 
1,300

Changes in assets and liabilities, net of assets acquired and liabilities assumed in business combinations:
 
 
 
Accounts receivable
3,043

 
(6,007
)
Customer deposits
(3
)
 
1

Other current assets
(2,445
)
 
(1,166
)
Other assets
(700
)
 
(386
)
Accounts payable
3,099

 
3,902

Accrued compensation, taxes and benefits
(257
)
 
(2,122
)
Deferred revenue
3,140

 
(2,498
)
Other current and long-term liabilities
645

 
769

Net cash provided by operating activities
50,054

 
51,609

Cash flows from investing activities:
 
 
 
Purchases of property, equipment and software
(29,125
)
 
(22,190
)
Acquisition of businesses, net of cash acquired
(41,942
)
 
(10,342
)
Intangible asset additions

 
(600
)
Net cash used in investing activities
(71,067
)
 
(33,132
)
Cash flows from financing activities:
 
 
 
Proceeds from revolving credit facility
68,572

 

Payments on revolving credit facility
(30,000
)
 
(10,000
)
Deferred financing costs
(992
)
 

Payments on capital lease obligations
(420
)
 
(411
)
Payments of deferred acquisition-related consideration
(4,007
)
 
(1,545
)
Issuance of common stock
5,168

 
6,854

Purchase of treasury stock
(21,122
)
 
(3,163
)
Net cash provided by (used in) financing activities
17,199

 
(8,265
)
Net (decrease) increase in cash and cash equivalents
(3,814
)
 
10,212

Effect of exchange rate on cash
(18
)
 
(36
)
Cash and cash equivalents:
 
 
 
Beginning of period
34,502

 
33,804

End of period
$
30,670

 
$
43,980


See accompanying notes.



REALPAGE, INC.
Consolidated Statements of Cash Flows, continued
(in thousands)
(Unaudited)


 
Nine Months Ended September 30,
 
2014
 
2013
Supplemental cash flow information:
 
 
 
Cash paid for interest
$
678

 
$
812

Cash paid for income taxes, net of refunds
$
358

 
$
453

Non-cash investing activities:
 
 
 
Accrued fixed assets
$
1,943

 
$
754

Non-cash financing activities:
 
 
 
Fixed assets acquired under capital lease
$

 
$
1,976



See accompanying notes.

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Notes to the Consolidated Financial Statements
(Unaudited)
1. The Company
RealPage, Inc., a Delaware corporation, and its subsidiaries, (the “Company” or “we” or “us”) is a provider of property management solutions that enable owners and managers of single-family and a wide variety of multi-family rental property types to manage their marketing, pricing, screening, leasing, accounting, purchasing and other property operations. Our on demand software solutions are delivered through an integrated software platform that provides a single point of access and a shared repository of prospect, resident and property data. By integrating and streamlining a wide range of complex processes and interactions among the rental housing ecosystem of owners, managers, prospects, residents and service providers, our platform 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 consolidated financial statements and footnotes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to those rules and regulations. We believe that the disclosures made are adequate to make the information not misleading.
The 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.
It is suggested that these financial statements 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 March 3, 2014 (“Form 10-K”).
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, 2014 and 2013 was in North America.
Net long-lived tangible assets held were $65.5 million and $51.5 million in North America and $6.0 million and $3.3 million in our international subsidiaries at September 30, 2014 and December 31, 2013, respectively.
Accounting Policies and Use of Estimates
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 tangible and intangible assets and the recoverability or impairment of tangible and intangible asset values; fair value measurements; purchase accounting allocations and related reserves; revenue and deferred revenue; stock-based compensation; 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: our on demand software solutions; our on premise software solutions; and professional and other services. We commence revenue recognition when all of the following conditions are met:
there is persuasive evidence of an arrangement;
the solution and/or service has been provided to the customer;
the collection of the fees is probable; and

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the amount of fees to be paid by the customer is fixed or determinable.
If the fees are not fixed or determinable, we recognize revenues when these criteria are met, which could be as payments become due from customers, or when amounts owed are collected. Accordingly, this may materially affect the timing of our revenue recognition and results of operations.
For multi-element arrangements that include multiple software solutions and/or services, we allocate arrangement consideration to all deliverables that have stand-alone value based on their relative selling prices. In such circumstances, we utilize the following hierarchy to determine the selling price to be used for allocating revenue to deliverables as follows:
Vendor specific objective evidence (VSOE), if available. The price at which we sell the element in a separate stand-alone transaction;
Third-party evidence of selling price (TPE), if VSOE of selling price is not available. Evidence from us or other companies of the value of a largely interchangeable element in a transaction; and
Estimated selling price (ESP), if neither VSOE nor TPE of selling price is available. Our best estimate of the stand-alone selling price of an element in a transaction.
Our process for determining ESP for deliverables without VSOE or TPE considers multiple factors that may vary depending upon the unique facts and circumstances related to each deliverable. Key factors primarily considered in developing ESP include prices charged by us for similar offerings when sold separately, pricing policies and approvals from standard pricing and other business objectives.
From time to time, we sell on demand software solutions with professional services. In such cases, as each element has stand-alone value, we allocate arrangement consideration based on our ESP of the on demand software solution and VSOE of the selling price of the professional services.
Taxes collected from customers 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 us selling certain risk mitigation services.
License and subscription fees are comprised 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 customer 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. If the policy is cancelled, our commissions are forfeited as a percent of the unearned premium. As a result, we recognize the commissions related to these services ratably over the policy term as the associated premiums are earned. 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.
On Premise Revenue
Revenue from our on premise software solutions is comprised of an annual term license, which includes maintenance and support. Customers can renew their annual term license for additional one-year terms at renewal price levels. We recognize the annual term license on a straight-line basis over the contract term.
In addition, we have arrangements that include perpetual licenses with maintenance and other services to be provided over a fixed term. We allocate and defer revenue equivalent to the VSOE of fair value for the undelivered elements and recognize the difference between the total arrangement fee and the amount deferred for the undelivered elements as revenue. We have determined that we do not have VSOE of fair value for our customer support and professional services in these specific arrangements. As a result, the elements within our multiple-element sales agreements do not qualify for treatment as separate units of accounting. Accordingly, we account for fees received under multiple-element arrangements with customer

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support or other professional services as a single unit of accounting and recognize the entire arrangement ratably over the longer of the customer support period or the period during which professional services are rendered.
Professional and Other Revenue
Professional and other revenue is recognized as the services are rendered for time and material contracts. Training revenues are recognized after the services are performed.
Fair Value Measurements
We measure certain financial assets and liabilities at fair value pursuant to a fair value hierarchy based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon its own market assumptions. The fair value hierarchy consists of the following three levels:
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 significant inputs or value drivers are unobservable.
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 customers being in the multi-family rental housing market. Our customers, however, are dispersed across different geographic areas. We do not require collateral from customers. We maintain an allowance for losses based upon the expected collectability of accounts receivable. Accounts receivable are written off upon determination of non-collectability following established Company policies based on the aging from the accounts receivable invoice date.
No single customer accounted for 5% or more of our revenue or accounts receivable for the three or nine months ended September 30, 2014 or 2013.
Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, Revenue from Contracts with Customers. This new standard 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. This guidance will be effective for us beginning January 1, 2017 and at that time, can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This standard sets forth management’s responsibility to evaluate, each reporting period, whether there is substantial doubt about our ability to continue as a going concern, and if so, to provide related footnote disclosures. The standard is effective for annual and interim reporting periods ending after December 15, 2016.  We are currently evaluating this new standard and expect it to have no impact on our financial position and results of operations.
3. Acquisitions
2014 Acquisitions
In January 2014, we acquired certain assets from Bookt LLC, including the InstaManager product (“InstaManager”). InstaManager is a software-as-a-service vacation rental booking engine used by professional managers of vacation rental properties. InstaManager offers marketing websites, online pricing and availability, online booking, automated reservations, payment processing and insurance sales. The acquisition of InstaManager expanded our product offerings to include property management software for the vacation rental market. We acquired InstaManager for a preliminary purchase price of $9.2 million, consisting of a cash payment of $6.0 million at closing, a deferred cash payment of up to $1.0 million payable over two years after the acquisition date, and additional cash payments totaling up to $7.0 million if certain revenue targets are met for

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the years ended March 31, 2015 and March 31, 2016 (a Level 3 input). The initial fair value of the deferred cash payment and the contingent cash payments was $0.8 million and $2.4 million, respectively. The fair value was based on management’s estimate of the fair value of the cash payment using a probability weighted discount model on the achievement of certain revenue targets and will be evaluated quarterly. This acquisition was financed from cash flows from operations. Acquired intangibles were recorded at their estimated fair value based on assumptions made by us. The acquired developed product technologies have a useful life of three years amortized on a straight-line basis. The trade name acquired has an indefinite useful life as we do not plan to cease using the trade name in the marketplace. Direct acquisition costs were less than $0.1 million and expensed as incurred. We included the results of operations of this acquisition in our consolidated financial statements from the effective date of the acquisition. Goodwill and identified intangibles associated with this acquisition are deductible for tax purposes. The fair value of the deferred cash payment and the contingent cash payments were $0.8 million and $3.2 million, respectively, at September 30, 2014, and for the three and nine months ended September 30, 2014, we recognized losses of $0.6 million and $0.8 million due to the changes in their estimated fair value.

In March 2014, we acquired certain assets from Virtual Maintenance Manager LLC, including the Virtual Maintenance Manager product (“VMM”). VMM is a software-as-a-service application that facilitates the management of the end-to-end maintenance lifecycle for single-family and multi-family rental properties and provides property managers visibility into their maintenance costs, manages resources, and provides business control for property managers. We integrated VMM into our existing Propertyware products. We acquired the VMM assets for a preliminary purchase price of $1.2 million, consisting of a cash payment of $1.0 million at closing, a deferred cash payment of up to $0.2 million payable over two years after the acquisition date, and additional cash payments of up to $2.0 million if certain revenue targets are met for the twelve months ended June 30, 2015 and June 30, 2016 (a Level 3 input). The initial fair value of the deferred cash payment and the contingent cash payments was $0.2 million and less than $0.1 million, respectively. The fair value was based on management’s estimate of the fair value of the cash payment using a probability weighted discount model on the achievement of certain revenue targets and will be evaluated quarterly. This acquisition was financed from cash flows from operations. Acquired intangibles were recorded at their estimated fair value based on assumptions made by us. The acquired developed product technologies have a useful life of three years amortized on a straight-line basis. Acquired customer relationships have a useful life of five years which will be amortized proportionately to the expected discounted cash flows derived from the asset. Direct acquisition costs were less than $0.1 million and expensed as incurred. We included the results of operations of this acquisition in our consolidated financial statements from the effective date of the acquisition. Goodwill and identified intangibles associated with this acquisition are deductible for tax purposes. The fair value of the contingent cash payments was less than $0.1 million at September 30, 2014, and for the three and nine months ended September 30, 2014, we recognized a gain of less than $0.1 million due to the changes in their estimated fair value.
In May 2014, we acquired certain assets from Notivus Multi-Family LLC ("Notivus"). Notivus is a software-as-a-service application that provides an outsourced vendor credentialing solution to assist multifamily owners and managers in the credentialing and ongoing monitoring of its current and prospective vendors, suppliers, and independent contractors. We are integrating Notivus into our existing Compliance Depot products. We acquired the Notivus assets for a preliminary purchase price of $4.4 million, consisting of a cash payment of $3.6 million at closing and a deferred cash payment of up to $0.8 million payable over two years after the acquisition date. The initial fair value of the deferred cash payment was approximately $0.8 million. The fair value was based on management’s estimate of the fair value of the cash payment using a probability weighted discount model on working capital targets and will be evaluated quarterly. This acquisition was financed from cash flows from operations. Acquired intangibles were recorded at their estimated fair value based on assumptions made by us. The acquired developed product technologies have a useful life of three years amortized on a straight-line basis. Direct acquisition costs were less than $0.1 million and expensed as incurred. We included the results of operations of this acquisition in our consolidated financial statements from the effective date of the acquisition. Goodwill and identified intangibles associated with this acquisition are deductible for tax purposes.
In June 2014, we acquired all of the issued and outstanding stock of Kigo, Inc. ("Kigo"). Kigo is a software-as-a-service vacation rental booking system headquartered in the United States with operations in Spain. Kigo offers services for vacation rental property management that include vacation rental calendars, scheduling, reservations, accounting, channel management, website design, payment processing and other tasks to aid the management of leads, revenue, resources and lodging calendars. We plan to integrate Kigo with our existing vacation rental products. We acquired Kigo for a preliminary purchase price of $36.2 million, consisting of a cash payment of $30.7 million and a deferred cash payment of up to $5.5 million, to be payable over two and a half years after the acquisition date. This acquisition was financed from proceeds from our revolving line of credit and cash flows from operations. Direct acquisition costs were $0.5 million and expensed as incurred. The acquired developed product technologies have a useful life of three years amortized on a straight-line basis. Acquired customer relationships have a useful life of ten years, which will be amortized proportionately to the expected discounted cash flows derived from the asset. The trade name acquired has an indefinite useful life as we do not plan to cease using the trade name in the marketplace. Goodwill and identified intangibles associated with this acquisition are not deductible

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for tax purposes. We included the results of operations of this acquisition in our consolidated financial statements from the effective date of this acquisition.
We preliminarily allocated the purchase price for InstaManager, VMM, Notivus and Kigo as follows:
 
 
 
InstaManager
 
VMM
 
Notivus
 
Kigo
 
 
(in thousands)
Intangible assets:
 
 
 
 
 
 
 
 
Developed product technologies
 
$
4,490

 
$
671

 
$
1,840

 
$
2,570

Customer relationships
 

 
200

 

 
1,120

Tradenames
 
527

 

 

 
602

Goodwill
 
4,135

 
358

 
2,852

 
32,996

Deferred revenue
 
(33
)
 

 
(156
)
 

Net deferred taxes
 

 

 

 
(495
)
Net other assets (liabilities)
 
55

 

 
(141
)
 
(547
)
Total purchase price
 
$
9,174

 
$
1,229

 
$
4,395

 
$
36,246

2013 Acquisitions
In February 2013, we acquired certain assets of Seniors for Living, Inc. (“SFL”). SFL is a leading performance-based marketing company that provides senior housing communities and home care companies with industry-leading referral and marketing services to help them achieve their occupancy goals. We have integrated SFL with our existing senior living software solutions. We acquired SFL for a purchase price of $2.7 million which consisted of a cash payment of $2.3 million and additional cash payments of $0.2 million each due 6 months and 12 months after the acquisition date. As of September 30, 2014, both payments of $0.2 million had been made. This acquisition was financed from proceeds from cash flows from operations. Acquired intangibles were recorded at fair value based on assumptions made by us. The acquired developed product technologies have a useful life of three years amortized on a straight-line basis. Acquired customer relationships have a useful life of five years which will be amortized proportionately to the expected discounted cash flows derived from the asset. Direct acquisition costs were less than $0.1 million and expensed as incurred. We included the results of operations of this acquisition in our consolidated financial statements from the effective date of the acquisition. Goodwill and identified intangibles associated with this acquisition are deductible for tax purposes.
In March 2013, we acquired certain assets from Yield Technologies, Inc., including RentSentinel and RentSocial (together, “RentSentinel”). The RentSentinel software-as-a-service platform is a fully featured apartment marketing management solution for the multi-family industry. RentSocial is an apartment search service that simplifies and incorporates the social marketing platform into the process of finding an apartment. We have integrated RentSentinel with our existing LeaseStar product family. We acquired RentSentinel for a purchase price of $10.5 million which consisted of a cash payment of $7.6 million, an issuance of 72,500 shares of our common stock and two traunches of 36,250 shares of our common stock which are issuable 12 months and 24 months after the acquisition date, respectively. As of September 30, 2014, 33,868 shares had been issued. This acquisition was financed from proceeds from cash flows from operations and our common stock. Acquired intangibles were recorded at fair value based on assumptions made by us. The acquired developed product technologies have a useful life of three years amortized on a straight-line basis. Acquired customer relationships have a useful life of nine years which will be amortized proportionately to the expected discounted cash flows derived from the asset. Direct acquisition costs were $0.1 million and expensed as incurred. We included the results of operations of this acquisition in our consolidated financial statements from the effective date of the acquisition. Goodwill and identified intangibles associated with this acquisition are not deductible for tax purposes.
In October 2013, we acquired substantially all of the operating assets of Windsor Compliance Services, Inc. (“Windsor Compliance”) for a purchase price of $2.7 million, which included a cash payment of $1.3 million at closing and additional cash payments of $1.0 million and $0.5 million due 12 months and 24 months after the acquisition date, respectively, which are contingent on Windsor Compliance providing services to a specified number of units on or before those dates (a Level 3 input). The initial fair value of the cash payments was $1.3 million . The fair value was based on management’s estimate of the fair value of the cash payment using a probability weighted discount model on the achievement of the servicing targets discussed above. Windsor Compliance is a firm specializing in compliance with tax credits and regulations for the affordable housing industry. We have integrated Windsor Compliance with our other affordable HUD products. This acquisition was financed from cash flows from operations. Acquired intangibles were recorded at fair value based on assumptions made by us. Acquired customer relationships have a useful life of ten years which will be amortized proportionately to the expected

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discounted cash flows derived from the asset. Direct acquisition costs were less than $0.1 million and expensed as incurred. We included the results of operations of this acquisition in our consolidated financial statements from the effective date of the acquisition. Goodwill and identified intangibles associated with this acquisition are deductible for tax purposes. The fair value of the additional cash payments was $1.4 million at September 30, 2014, and for the three and nine months ended September 30, 2014, we recognized losses of $0.1 million due to the changes in their estimated fair value.
In October 2013, we acquired all of the issued and outstanding capital stock of MyBuilding Inc. ("MyBuilding") for a purchase price of $6.9 million, consisting of a cash payment of $4.5 million at closing, a deferred cash payment of up to $1.5 million payable over two years after the acquisition date and additional cash payments totaling up to $1.1 million if certain revenue targets are met for the years ended December 31, 2014 and December 31, 2015. The initial fair value of the deferred cash payment and the contingent cash payments was $1.4 million and $0.3 million, respectively. The fair value was based on management’s estimate of the fair value of the cash payment using a probability weighted discount model on the achievement of certain revenue targets (a Level 3 input). MyBuilding provides software-as-a-service solutions that facilitate the creation of online communities that connect residents to multifamily property managers, local vendors, and other residents. We have integrated MyBuilding with our existing LeaseStar software solutions. This acquisition was financed from cash flows from operations. Acquired intangibles were recorded at fair value based on assumptions made by us. The acquired developed product technologies have a useful life of three years amortized on a straight-line basis. Acquired customer relationships have a useful life of ten years which will be amortized proportionately to the expected discounted cash flows derived from the asset. The trade name acquired has an indefinite useful life as we do not plan to cease using the trade name in the marketplace. Direct acquisition costs were less than $0.1 million and expensed as incurred. We included the results of operations of this acquisition in our consolidated financial statements from the effective date of the acquisition. Goodwill and identified intangibles associated with this acquisition are not deductible for tax purposes. The fair value of the deferred cash payment and the contingent cash payments were $1.4 million and $0.3 million, respectively, at September 30, 2014, and for the three and nine months ended September 30, 2014, we recognized losses of less than $0.1 million, due to the changes in their estimated fair value.
In October 2013, we acquired all of the membership interests of Active Building, LLC ("Active Building") for a purchase price of $14.4 million, consisting of a cash payment of $11.3 million at closing, a deferred cash payment of up to $2.0 million payable over three years after the acquisition date, and additional cash payments totaling up to $6.5 million if certain revenue targets are met for the years ended December 31, 2014 and December 31, 2015. The initial fair value of the deferred cash payment and the contingent cash payments was $1.7 million and $1.3 million, respectively. The fair value was based on management’s estimate of the fair value of the cash payment using a probability weighted discount model on the achievement of certain revenue targets (a Level 3 input). Active Building provides software-as-a-service solutions that facilitate the creation of online communities that connect residents to multifamily property managers, local vendors, and other residents. We have integrated Active Building with our existing LeaseStar software solutions. This acquisition was financed from cash flows from operations. Acquired intangibles were recorded at fair value based on assumptions made by us. The acquired developed product technologies have a useful life of three years amortized on a straight-line basis. Acquired customer relationships have a useful life of ten years which will be amortized proportionately to the expected discounted cash flows derived from the asset. The trade name acquired has an indefinite useful life as we do not plan to cease using the trade name in the marketplace. Direct acquisition costs were less than $0.1 million and expensed as incurred. We included the results of operations of this acquisition in our consolidated financial statements from the effective date of the acquisition. Goodwill and identified intangibles associated with this acquisition are deductible for tax purposes. The fair value of the deferred cash payment and the contingent cash payments was $1.9 million and $1.3 million, respectively, at September 30, 2014, and for the three and nine months ended September 30, 2014, we recognized gains of $0.1 million and $0.3 million, respectively, due to the changes in their estimated fair value.

We allocated the purchase prices for SFL, RentSentinel, Windsor Compliance, MyBuilding and Active Building as follows:
 

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SFL

RentSentinel

Windsor Compliance

My Building

Active Building
 

(in thousands)
Intangible assets:

 
 
 
 
 
 
 
 
 
Developed product technologies

$
1,406

 
$
4,238

 
$

 
$
1,450

 
$
3,990

Customer relationships

161

 
2,390

 
1,230

 
1,000

 
2,260

Tradenames


 

 

 
328

 
641

Goodwill

1,035

 
3,633

 
1,302

 
5,043

 
7,404

Deferred revenue


 
(304
)
 
(107
)
 
(258
)
 

Net deferred taxes


 
226

 

 
(813
)
 

Net other assets

88

 
313

 
226

 
111

 
76

Total purchase price, net of cash acquired

$
2,690

 
$
10,496

 
$
2,651

 
$
6,861

 
$
14,371

Other Acquisition-Related Fair Value Adjustments
We have acquired companies in previous years for which acquisition-related contingent consideration was included in the purchase price and recorded at fair value. The liability established for the acquisition-related contingent consideration will continue to be re-evaluated and recorded at an estimated fair value based on the probabilities, as determined by management, of achieving the related targets. This evaluation will be performed until all of the targets have been met or terms of the agreement expire. For the three and nine months ended September 30, 2014, there were no acquisition-related fair value adjustments for acquisitions made prior to January 1, 2013.
Payments made to SeniorLiving.net, acquired in July 2011, and Rent Mine Online, acquired in July 2012, during the three months ended September 30, 2014 totaled $3.3 million. Payments made to Vigilan, acquired in January 2012, SeniorLiving.net, acquired in July 2011, and Rent Mine Online, acquired in July 2012, during nine months ended September 30, 2014 totaled $3.8 million.
Pro Forma Results of Acquisitions
The following table presents pro forma results of operations for the three and nine months ended September 30, 2014 and September 30, 2013 as if the Kigo, Notivus, VMM, InstaManager, Active Building, MyBuilding, Windsor Compliance, SFL, and RentSentinel acquisitions had occurred on January 1, 2013. 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 on January 1, 2013, nor do the pro forma results intend to be a projection of results that may be obtained in the future.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
Pro Forma
 
2013
Pro Forma
 
2014
Pro Forma
 
2013
Pro Forma
 
(in thousands, except per share amounts)
Revenue:
 
On demand
$
100,747

 
$
95,953

 
$
290,691

 
$
276,554

On premise
755

 
838

 
2,446

 
2,799

Professional and other
3,034

 
3,149

 
8,280

 
8,473

Total revenue
104,536

 
99,940

 
301,417

 
287,826

Net (loss) income
$
(3,257
)
 
$
12,098

 
$
(10,857
)
 
$
14,806

Net (loss) income per share
 
 
 
 
 
 
 
Basic
$
(0.04
)
 
$
0.16

 
$
(0.14
)
 
$
0.20

Diluted
$
(0.04
)
 
$
0.16

 
$
(0.14
)
 
$
0.20

4. Property, Equipment and Software
Property, equipment and software consist of the following:

12


 
September 30,
 
December 31,
 
2014
 
2013
 
(in thousands)
Leasehold improvements
$
23,425

 
$
18,756

Data processing and communications equipment
58,321

 
47,719

Furniture, fixtures, and other equipment
15,015

 
11,266

Software
48,346

 
36,750

 
145,107

 
114,491

Less: Accumulated depreciation and amortization
(73,643
)
 
(59,716
)
Property, equipment and software, net
$
71,464

 
$
54,775

Depreciation and amortization expense for property, equipment and software was $5.6 million and $3.6 million for the three months ended September 30, 2014 and 2013, and $15.0 million and $10.9 million for the nine months ended September 30, 2014 and 2013, respectively. This includes depreciation for assets purchased through capital leases.
5. Goodwill and Other Intangible Assets
The change in the carrying amount of goodwill for the nine months ended September 30, 2014 is as follows:
 
(in thousands)
Balance at December 31, 2013
$
152,422

Goodwill acquired
40,341

Other
705

Balance at September 30, 2014
$
193,468

Other intangible assets consisted of the following at September 30, 2014 and December 31, 2013:
 
 
 
September 30, 2014
 
December 31, 2013
 
Amortization
Period
 
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
(in thousands)
Finite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Developed technologies
3 years
 
$
54,852

 
$
(37,009
)
 
$
17,843

 
$
45,014

 
$
(29,952
)
 
$
15,062

Customer relationships
1-10 years
 
86,753

 
(41,566
)
 
45,187

 
85,823

 
(33,503
)
 
52,320

Vendor relationships
7 years
 
5,650

 
(5,147
)
 
503

 
5,650

 
(4,709
)
 
941

Total finite-lived intangible assets
 
 
147,255

 
(83,722
)
 
63,533

 
136,487

 
(68,164
)
 
68,323

Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Tradenames
 
 
41,659

 

 
41,659

 
40,492

 

 
40,492

Total intangible assets
 
 
$
188,914

 
$
(83,722
)
 
$
105,192

 
$
176,979

 
$
(68,164
)
 
$
108,815

Amortization of finite-lived intangible assets was $5.4 million and $4.0 million for the three months ended, and $15.5 million and $11.9 million for the nine months ended September 30, 2014 and 2013, respectively.
6. Debt
Credit Facility Opened September 2014
On September 30, 2014, we entered into a new agreement for a secured revolving credit facility to refinance our outstanding revolving loans. The new 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. The credit facility also allows us, subject to certain conditions, to request additional term loans or revolving commitments in an aggregate principal amount of up to $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 EBIDTA, to exceed 3.25 to 1.00. At our option, the revolving loans accrue interest at a per annum rate equal to either LIBOR or Wells Fargo’s prime rate (or, if greater, the federal funds rate plus 0.50% or one month LIBOR plus 1.00%) in each case plus a margin ranging from 1.25% to 1.75% in the case of LIBOR loans, and 0.25% to 0.75% in the case of prime rate loans, in each case based upon our consolidated net leverage ratio. The interest is due and payable quarterly, in arrears, for loans bearing interest at the prime rate and at the end of the applicable


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interest period in the case of loans bearing interest at the adjusted LIBOR rate. The credit facility is secured by substantially all of the Company’s assets and certain of our existing and future material domestic subsidiaries are required to guaranty 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. The credit facility matures September 30, 2019.
Previous Credit Facility
Our previous secured revolving credit facility had an aggregate principal amount of up to $150.0 million, subject to a borrowing formula, with a sublimit of $10.0 million for the issuance of letters of credit on our behalf. At our option, the borrowings accrued interest at a per annum rate equal to either LIBOR or Wells Fargo’s prime rate (or, if greater, the federal funds rate plus 0.50% or three month LIBOR plus 1.00%), in each case plus a margin ranging from 2.00% to 2.50%, in the case of LIBOR loans, and 0.0% to 0.25% in the case of prime rate loans, in each case based upon our senior leverage ratio. The interest was due and payable monthly, in arrears, for loans bearing interest at the prime rate and at the end of the applicable 1-, 2-, or 3-month interest period in the case of loans bearing interest at the adjusted LIBOR rate.
In May 2014, we entered into an amendment to the previous credit facility. Under the terms of the amendment, the restrictive covenants were amended to permit us to repurchase up to $75 million of our common stock, subject to certain conditions. Additionally, the fixed charge coverage ratio was replaced with a new minimum interest expense coverage ratio and the capital expenditures limitations were increased.
In June 2014, we entered into an amendment to the previous credit facility. Under the terms of the amendment, the parties to the credit facility consented to the acquisition of Kigo and agreed that the acquisition of Kigo would be a "Permitted Acquisition," as defined in the credit facility and would be excluded from the calculation of the Permitted Acquisition limit. Additionally, the amendment increased the value of our equipment that could be in the hands of our employees, consultants, or customers in the ordinary course of business to $2.5 million and amended the definition of "Aggregate Permitted Acquisition Limit" to $150.0 million, plus an additional $100.0 million if certain conditions are met. In June 2014, we borrowed a total of $25.0 million from our revolving line of credit in order to partially finance our acquisition of Kigo.
As of September 30, 2014 and December 31, 2013, we had $38.6 million and $0.0 million, respectively, outstanding under our revolving line of credit. As of September 30, 2014, $161.4 million was available under our revolving line of credit of which $10.0 million was available for the issuance of letters of credit. We had unamortized debt issuance costs of $1.1 million and $0.3 million at September 30, 2014 and December 31, 2013, respectively. As of September 30, 2014, we were in compliance with the covenants under our credit facility.
7. Share-based Compensation
In February 2014, we granted 1,356,972 options with an exercise price of $17.75 which vest quarterly over three years. We also granted 681,395 shares of restricted stock at $17.75 which vest quarterly over three years.
In April 2014, we granted 39,156 shares of restricted stock at $18.39 which vest quarterly over three years to our Board of Directors.
In May 2014, we granted 159,194 options with an exercise price of $18.71 which vest quarterly over three years. We also granted 84,620 shares of restricted stock at $18.71 which vest quarterly over three years and 100,400 shares of restricted stock at $20.61 which fully vested on August 7, 2014.
In August 2014, we granted 295,615 options with an exercise price of $15.19 which vest quarterly over three years. We also granted 793,008 shares of restricted stock at $15.19, of which 151,513 shares vest quarterly over three years and 121,495 shares vest quarterly over one year. The remaining 520,000 shares consist of two tranches that become eligible for vesting if the average closing price per share of our common stock equals or exceeds an the established threshold for each tranche for twenty consecutive days prior to July 1, 2017. The shares vest quarterly over one year following the date they become eligible for vesting.
All stock options and restricted stock were granted under the 2010 Equity Incentive Plan, as amended and restated.
8. Commitments and Contingencies
Lease Commitments
In the first quarter of 2013, we entered into a capital lease agreement for software that expires in 2016. We recognize lease expense on a straight-line basis over the lease term.

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The assets under capital lease are as follows:
 
September 30, 2014
 
December 31, 2013
 
(in thousands)
Software
$
1,977

 
$
1,977

Less: Accumulated depreciation and amortization
(969
)
 
(549
)
Assets under capital lease, net
$
1,008

 
$
1,428

Aggregate annual rental commitments at September 30, 2014 under capital lease are as follows:
 
 
 
(in thousands)
2014
$
147

2015
588

2016
294

Total minimum lease payments
$
1,029

Less amount representing average interest at 2.2%
(21
)
 
1,008

Less current portion
571

Long-term portion
$
437

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, 2014 or December 31, 2013.
In the ordinary course of our business, we enter into standard indemnification provisions in our agreements with our customers. Pursuant to these provisions, we indemnify our customers 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 such claims by designing a non-infringing alternative, by obtaining a license on reasonable terms, or by terminating our relationship with the customer and refunding the customer’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, 2014 or December 31, 2013.
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.
We review the status of each matter and record a provision for a liability when we consider both that it is probable that a liability has been incurred and that the amount of the loss can be reasonably estimated. These provisions are reviewed quarterly and adjusted 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 existing 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. An unfavorable outcome in any legal matter, if material, could have an adverse effect on our operations, financial position, liquidity and results of operations.

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On January 24, 2011, Yardi Systems, Inc. ("Yardi") filed a lawsuit in the U.S. District Court for the Central District of California against RealPage, Inc. and DC Consulting, Inc. (the “Yardi Lawsuit”). We answered and filed counterclaims against Yardi, and on July 1, 2012, the Company and Yardi entered into a settlement agreement resolving all outstanding litigation between the parties.
In connection with the Yardi Lawsuit, the Company made claims for reimbursement against each of its primary and excess layer general liability and errors and omissions liability insurance carriers. Each of our primary and excess layer errors and omissions liability insurance carriers other than Homeland Insurance of New York (“Homeland”) reimbursed the Company up to each of its policy limits. On July 19, 2012, we became aware of assertions by one of our primary layer errors and omissions insurance carriers, Ace European Group, Ltd. d/b/a Ace European Group, Barbican Syndicate 1995 at Lloyds’s (“Ace”), that Ace no longer considered the previously reimbursed $5.0 million payment covered under such policy, and that Ace demanded reimbursement of the $5.0 million payment that it had previously reimbursed to us. On August 12, 2012, our first excess layer errors and omissions insurance carrier, Axis Surplus Insurance Company (“Axis”), informed us that if Ace’s policy is deemed void, then Axis’ first excess layer policy was void on the same basis which would result in the Company’s obligation to reimburse to Axis $5.0 million in payments that Axis had previously reimbursed to us. The Company disputed these assertions by these carriers. Accordingly, on August 14, 2012, the Company filed a lawsuit in the U.S. District Court for the Eastern District of Texas against Ace and Axis (the “Ace Lawsuit”) seeking a declaration by the court that Ace and Axis have no right to, and no lawful reason to demand reimbursement of, the amounts paid to the Company’s counsel in connection with the Yardi Lawsuit. On February 25, 2014, RealPage and Axis entered into a confidential settlement and mutual release of claims, as a result of which Axis was dismissed from the Ace Lawsuit. On March 11, 2014, Ace filed its answer, affirmative defenses and counterclaims. On April 1, 2014, RealPage and Ace entered into a confidential settlement agreement and mutual release of claims and on April 7, 2014, the court entered an order granting the joint motion to dismiss all claims and demands asserted in the lawsuit. We expensed $4.7 million, inclusive of the settlements and other related costs in the first quarter of 2014.
We are involved in other litigation matters not listed above but we believe that any reasonably possible adverse outcome of these matters would not be material either individually or in the aggregate at this time. Our view of the matters not listed may change in the future 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 753,583 and 302,820 for the three months ended September 30, 2014 and 2013, respectively, and 1,549,922 and 795,700 for the nine months ended September 30, 2014 and 2013, respectively, were excluded from the respective dilutive shares outstanding because their effect was anti-dilutive.

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The following table presents the calculation of basic and diluted net (loss) income per share:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands, except per share amounts)
Numerator:
 
Net (loss) income
$
(3,257
)
 
$
12,886

 
$
(10,384
)
 
$
18,514

Denominator:
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Weighted average common shares used in computing basic net (loss) income per share
77,280


75,234


77,075


74,597

Diluted:
 
 
 
 
 
 
 
Add weighted average effect of dilutive securities:
 
 
 
 
 
 
 
Stock options and restricted stock

 
1,113

 

 
1,303

Weighted average common shares used in computing diluted net (loss) income per share
77,280


76,347


77,075


75,900

Net (loss) income per common share:
 
 
 
 
 
 
 
Basic
$
(0.04
)
 
$
0.17

 
$
(0.13
)
 
$
0.25

Diluted
$
(0.04
)
 
$
0.17

 
$
(0.13
)
 
$
0.24

10. Income Taxes
We make estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which 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 35.4% and (123.3)% for the three months ended and 28.4% and (16.5)% for the nine months ended September 30, 2014 and 2013, respectively. During 2013, we were able to conclude that, given our performance, the realization of our deferred tax assets was more likely than not and accordingly reversed valuation allowances of approximately $9.2 million and recorded the reduction in valuation allowances as a tax benefit for the period. This reduction of the valuation allowance is the primary cause of the noted fluctuation of our effective income tax rate between the current and prior periods presented. Our effective tax rate fluctuated from the statutory rate predominantly due to the impact of permanent differences, including stock compensation, and the non-deductibility of contingent consideration, in relation to our results of operations before income taxes.

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 2013. 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.

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RealPage, Inc., a Delaware corporation, and its subsidiaries, (the “Company” or “we” or “us”) is a leading provider of on demand software solutions for the rental housing industry. Our broad range of property management solutions enables owners and managers of single-family and a wide variety of multi-family rental property types to manage their marketing, pricing, screening, leasing, accounting, purchasing and other property operations. Our on demand software solutions are delivered through an integrated software platform that provides access and a shared repository of prospect, resident and property data. By integrating and streamlining a wide range of complex processes and interactions among the rental housing ecosystem of owners, managers, prospects, residents and service providers, our platform helps optimize the property management process and improves the experience for all of these constituents.
Our solutions enable property owners and managers to increase revenues and reduce operating costs through higher occupancy, improved pricing methodologies, new sources of revenue from ancillary services, improved collections and more integrated and centralized processes. As of September 30, 2014, over 10,400 customers used one or more of our on demand software solutions to help manage the operations of approximately 9.5 million rental housing units. Our customers include each of the ten largest multi-family property management companies in the United States, ranked as of January 1, 2014 by the National Multi Housing Council, based on number of units managed.
We sell our solutions through our direct sales organization. Our total revenues were approximately $104.5 million and $98.1 million for the three months ended, and $300.1 million and $281.5 million for the nine months ended, September 30, 2014 and 2013, respectively. In the same periods, we had operating (loss) income of approximately $(4.7) million, $6.0 million, $(13.7) million, and $16.8 million respectively, and net (loss) income of approximately $(3.3) million, $12.9 million, $(10.4) million, and $18.5 million, respectively.
Our company was formed in 1998 to acquire Rent Roll, Inc., which marketed and sold on premise property management systems for the conventional multi-family rental housing markets. In June 2001, we released OneSite, our first on demand property management system. Since 2002, we have expanded our on demand software solutions to include a number of software-enabled value-added services that provide complementary sales and marketing, asset optimization, risk mitigation, billing and utility management and spend management capabilities. In connection with this expansion, we have allocated greater resources to the development and infrastructure needs of developing and increasing sales of our suite of on demand software solutions. In addition, since July 2002, we have completed 30 acquisitions of complementary technologies to supplement our internal product development and sales and marketing efforts and expand the scope of our solutions, the types of rental housing properties served by our solutions and our customer base.
Recent Acquisitions
In February 2013, we acquired certain assets of Seniors for Living, Inc. (“SFL”). SFL is a leading performance-based marketing company that provides senior housing communities and home care companies with industry-leading referral and marketing services to help them achieve their occupancy goals. We integrated SFL with our existing senior living software solutions. We acquired SFL for a purchase price of $2.7 million which consisted of a cash payment of $2.3 million and additional cash payments of $0.2 million paid 6 months and 12 months after the acquisition date.
In March 2013, we acquired certain assets from Yield Technologies, Inc., including RentSentinel and RentSocial (together, “RentSentinel”). The RentSentinel software-as-a-service platform is a fully featured apartment marketing management solution for the multi-family industry. RentSocial is an apartment search service that simplifies and incorporates the social marketing platform into the process of finding an apartment. We integrated RentSentinel with our existing LeaseStar product family. We acquired RentSentinel for a purchase price of $10.5 million which consisted of a cash payment of $7.6 million, issuance of 72,500 shares of our common stock and two traunches of 36,250 shares of our common stock which are issuable 12 months and 24 months after the acquisition date, respectively. As of September 30, 2014, 33,868 shares had been issued.
In October 2013, we acquired substantially all of the operating assets of Windsor Compliance Services, Inc. ("Windsor Compliance") for a purchase price of $2.7 million, which consisted of a cash payment of $1.3 million at closing and additional cash payments of $1.0 million and $0.5 million due 12 months and 24 months after the acquisition date, respectively, which are contingent on Windsor Compliance providing services to a specified number of units on or before those dates. Windsor Compliance is a firm specializing in compliance with tax credits and regulation for the affordable housing industry.
In October 2013, we acquired all of the issued and outstanding capital stock of MyBuilding Inc. ("MyBuilding") for a purchase price of $6.9 million consisting of a cash payment of $4.5 million at closing, a deferred cash payment of up to $1.5 million payable over two years after the acquisition date and a contingent deferred earn out consisting of two additional cash payments totaling $1.1 million if certain revenue targets are met for the years ended December 31, 2014 and December 31, 2015. A provider of software-as-a-service solutions, MyBuilding products facilitate the creation of online communities that connect residents to multifamily property managers, local vendors, and other residents.

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In October 2013, we acquired all of the membership interest of Active Building, LLC ("Active Building") for a purchase price of $14.4 million, which consisted of a cash payment of $11.3 million at closing, a deferred cash payment of up to $2.0 million payable over three years after the acquisition date, and additional cash payments totaling $6.5 million if certain revenue targets are met for the years ended December 31, 2014 and December 31, 2015. A provider of software-as-a-service solutions, Active Building products facilitate the creation of online communities that connect residents to multifamily property managers, local vendors, and other residents.
In January 2014, we acquired certain assets from Bookt LLC, including the InstaManager product (“InstaManager”), for a preliminary purchase price of $9.2 million, consisting of a cash payment of $6.0 million at closing, a deferred cash payment of up to $1.0 million payable over two years after the acquisition date, and additional cash payments totaling up to $7.0 million if certain revenue targets are met for the years ended March 31, 2015 and March 31, 2016. InstaManager is a software-as-a-service vacation rental booking system used by professional managers of vacation rental properties. InstaManager offers marketing websites, online pricing and availability, online booking, automated reservations, payment processing and insurance sales.
In March 2014, we acquired certain assets from Virtual Maintenance Manager LLC, including the Virtual Maintenance Manager product (“VMM”), for a preliminary purchase price of $1.2 million, consisting of a cash payment of $1.0 million at closing, a deferred cash payment of up to $0.2 million payable over two years after the acquisition date, and additional cash payments of up to $2.0 million if certain revenue targets are met for the years ended June 30, 2015 and June 30, 2016. VMM is a software-as-a-service application that facilitates the management of the end-to-end maintenance lifecycle for single-family and multi-family rental properties and provides property managers visibility into their maintenance costs, manages resources, and provides business control for property managers.
In May 2014, we acquired substantially all of the operating assets of Notivus Multi-Family, LLC ("Notivus") for a preliminary purchase price of $4.4 million, which consisted of a cash payment of $3.6 million at closing and a deferred cash payment of up to $0.8 million payable over two years after the acquisition date. The acquisition of Notivus expands our ability to provide vendor risk management and compliance software solutions for the rental housing industry.
In June 2014, we acquired all of the issued and outstanding stock of Kigo, Inc. ("Kigo"). Kigo is a software-as-a-service vacation rental booking system headquartered in the United States with operations in Spain. Kigo offers services for vacation rental property management that include vacation rental calendars, scheduling, reservations, accounting, channel management, website design, payment processing and other tasks to aid the management of leads, revenue, resources and lodging calendars. We plan to integrate Kigo with our existing vacation rental products and further extend our vacation booking system internationally. We acquired Kigo for a preliminary purchase price of $36.2 million, consisting of a cash payment of $30.7 million and a deferred cash payment of up to $5.5 million, to be payable over two and a half years after the acquisition date.
Critical Accounting Policies and Estimates
The preparation of our condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base these estimates and assumptions on historical experience or on various other factors that we believe to be reasonable and appropriate under the circumstances. We reconsider and evaluate our estimates and assumptions on an on-going basis. Accordingly, actual results may differ significantly from these estimates.
We believe that the following critical accounting policies involve our more significant judgments, assumptions and estimates, and therefore, could have the greatest potential impact on our condensed consolidated financial statements:
Revenue recognition;
Fair value measurements;
Accounts receivable;
Business combinations;
Goodwill and other intangible assets with indefinite lives;
Impairment of long-lived assets;
Intangible assets;
Stock-based compensation;
Income taxes; and
Capitalized product development costs.
A full discussion of our critical accounting policies, which involve significant management judgment, appears in our Form 10-K under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical

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Accounting Policies and Estimates.” For further information regarding our business, industry trends, accounting policies and estimates, and risks and uncertainties, refer to our Form 10-K.
Key Components of Our Results of Operations
Revenue
We derive our revenue from three primary sources: our on demand software solutions; our on premise software solutions; and our professional and other services.
On demand revenue. Revenue from our on demand software solutions is comprised of license and subscription fees relating to our on demand software solutions, typically licensed for one year terms, commission income from sales of renter’s insurance policies, and transaction fees for certain on demand software solutions, such as payment processing, spend management and billing services. Typically, we price our on demand software solutions based primarily on the number of units or beds the customer manages with our solutions. For our insurance based solutions, our agreement provides for a fixed commission on earned premiums related to the policies sold by us. The agreement also provides for a contingent commission to be paid to us in accordance with the agreement. This agreement provides for a calculation that considers, on the policies sold by us, earned premiums less i) earned agent commissions; ii) a percent of premium retained by our underwriting partner; iii) incurred losses; and iv) profit retained by our underwriting partner during the time period. Our estimate of our contingent commission revenue considers historical loss experience on the policies sold by us. For our transaction-based solutions, we price based on a fixed rate per transaction.
On premise revenue. Our on premise software solutions are distributed to our customers and maintained locally on the customers’ hardware. Revenue from our on premise software solutions is comprised of license fees under term and perpetual license agreements. Typically, we have licensed our on premise software solutions pursuant to term license agreements with an initial term of one year that include maintenance and support. Customers can renew their term license agreement for additional one-year terms at renewal price levels.
We no longer actively market our legacy on premise software solutions to new customers, and only license our on premise software solutions to a small portion of our existing on premise customers as they expand their portfolio of rental housing properties. While we intend to support our acquired on premise software solutions, we expect that many of the customers who license these solutions will transition to our on demand software solutions over time.
Professional and other revenue. Revenue from professional and other services consists of consulting and implementation services, training and other ancillary services. We complement our solutions with professional and other services for our customers 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 center and fees paid to third-party service providers. Personnel costs include salaries, bonuses, stock-based compensation and employee benefits. Cost of revenue also includes an allocation of facilities costs, overhead costs and depreciation, as well as amortization of acquired technology related to strategic acquisitions and amortization of capitalized development costs. We allocate facilities, overhead costs and depreciation based on headcount.
Operating Expenses
We classify our operating expenses into three categories: product development, sales and marketing, and general and administrative. Our operating expenses primarily consist of personnel costs, costs for third-party contracted development, marketing, legal, accounting and consulting services and other professional service fees. Personnel costs for each category of operating expenses include salaries, bonuses, stock-based compensation and employee benefits for employees in that category. In addition, our operating expenses include an allocation of our facilities costs, overhead costs and depreciation based on headcount for that category, as well as amortization of purchased intangible assets resulting from our acquisitions.
Product development. Product development expense consists primarily of personnel costs for our product development employees and executives and fees to contract development vendors. Our product development efforts are focused primarily on increasing the functionality and enhancing the ease of use of our on demand software solutions and expanding our suite of on demand software solutions. In 2008 and 2011, we established 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.
Sales and marketing. Sales and marketing expense consists primarily of personnel costs for our sales, marketing and business development employees and executives, travel and entertainment and marketing programs. Marketing programs consist of amounts paid for search engine optimization (“SEO”) and search engine marketing (“SEM”), renter’s insurance and

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other advertising, tradeshows, user conferences, public relations, industry sponsorships and affiliations and product marketing. In addition, sales and marketing expense includes amortization of certain purchased intangible assets, including customer relationships and key vendor and supplier relationships obtained in connection with our acquisitions.
General and administrative. General and administrative expense consists of personnel costs for our executive, finance and accounting, human resources, management information systems and legal personnel, as well as legal, accounting and other professional service fees and other corporate expenses.
Key Business Metrics
In addition to traditional financial measures, we monitor our operating performance using a number of financially and non-financially derived metrics that are not included in our condensed consolidated financial statements. We monitor the key performance indicators as follows:
On demand revenue. This metric represents the license and subscription fees relating to our on demand software solutions, typically licensed for one year terms, commission income from sales of renter’s insurance policies and transaction fees for certain of our on demand software solutions. We consider on demand revenue to be a key business metric because we believe the market for our on demand software solutions represents the largest growth opportunity for our business.
On demand revenue as a percentage of total revenue. This metric represents on demand revenue for the period presented divided by total revenue for the same period. We use on demand revenue as a percentage of total revenue to measure our success in executing our strategy to increase the penetration of our on demand software solutions and expand our recurring revenue streams attributable to these solutions. We expect our on demand revenue to remain a significant percentage of our total revenue although the actual percentage may vary from period to period due to a number of factors, including the timing of acquisitions, professional and other revenue and on premise perpetual license sales and maintenance fees.
Ending on demand units. This metric represents the number of rental housing units managed by our customers with one or more of our on demand software solutions at the end of the period. We use ending on demand units to measure the success of our strategy of increasing the number of rental housing units managed with our on demand software solutions. Property unit counts are provided to us by our customers as new sales orders are processed. Property unit counts may be adjusted periodically as information related to our customers’ properties is updated or supplemented, which could result in adjustments to the number of units previously reported.
Non-GAAP on demand revenue. This metric represents on demand revenue adjusted to reverse the effect of the write down of deferred revenue associated with purchase accounting for strategic acquisitions. We use this metric to evaluate our on demand revenue as we believe its inclusion provides a more accurate depiction of on demand revenue arising from our strategic acquisitions.
The following provides a reconciliation of non-GAAP on demand revenue to on demand revenue, our most directly comparable GAAP financial measure:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
On demand revenue
$
100,747

 
$
94,084

 
$
289,361

 
$
270,231

Acquisition-related and other deferred revenue adjustments
(392
)
 
1,793

 
725

 
1,795

Non-GAAP on demand revenue
$
100,355

 
$
95,877

 
$
290,086

 
$
272,026

Non-GAAP on demand revenue per average on demand unit. This metric represents non-GAAP on demand revenue for the period presented divided by average on demand units for the same period. For interim periods, the calculation is performed on an annualized basis. We calculate average on demand units as the average of the beginning and ending on demand units for each quarter in the period presented. We monitor this metric to measure our success in increasing the number of on demand software solutions utilized by our customers to manage their rental housing units, our overall revenue and profitability.
Adjusted EBITDA. We define this metric as net income (loss) plus acquisition-related and other deferred revenue, depreciation, asset impairment, and loss on sale of asset; amortization of intangible assets; interest expense, net; income tax expense (benefit); stock-based compensation expense, acquisition-related expense and certain litigation-related expenses. We believe that the use of Adjusted EBITDA is useful in evaluating our operating performance because it excludes certain non-cash expenses, including depreciation, amortization and stock-based compensation. Adjusted EBITDA is not determined in accordance with accounting principles generally accepted in the United States, or GAAP, and should not be considered as a substitute for or superior to financial measures determined in accordance with GAAP. For a reconciliation of Adjusted EBITDA

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to net income (loss), refer to the table below. Our Adjusted EBITDA decreased from approximately $23.7 million and $65.5 million for the three and nine months ended September 30, 2013, respectively, to approximately $16.3 million $53.3 million for the three and nine months ended September 30, 2014, respectively, as a result of our net loss in 2014.

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Results of Operations
The following tables set forth our results of operations for the specified periods. The period-to-period comparison of financial results is not necessarily indicative of future results.

Condensed Consolidated Statements of Operations Data
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands, except per share data)
Revenue:
 
 
 
 
 
 
 
On demand
$
100,747

 
$
94,084

 
$
289,361

 
$
270,231

On premise
755

 
838

 
2,446

 
2,799

       Professional and other
3,034

 
3,149

 
8,280

 
8,473

Total revenue
104,536

 
98,071

 
300,087

 
281,503

Cost of revenue(1)
46,311

 
38,111

 
128,353

 
110,815

Gross profit
58,225

 
59,960

 
171,734

 
170,688

Operating expense:
 
 
 
 
 
 
 
Product development(1)
17,528

 
13,232

 
48,310

 
36,997

Sales and marketing(1)
29,949

 
25,166

 
83,970

 
71,992

General and administrative(1)
15,443

 
15,554

 
53,191

 
44,880

Total operating expense
62,920

 
53,952

 
185,471

 
153,869

Operating (loss) income
(4,695
)
 
6,008

 
(13,737
)
 
16,819

Interest expense and other, net
(345
)
 
(236
)
 
(771
)
 
(921
)
(Loss) income before income taxes
(5,040
)
 
5,772

 
(14,508
)
 
15,898

Income tax benefit
(1,783
)
 
(7,114
)
 
(4,124
)
 
(2,616
)
Net (loss) income
$
(3,257
)
 
$
12,886

 
$
(10,384
)
 
$
18,514

Net (loss) income per share
 
 
 
 
 
 
 
Basic
$
(0.04
)
 
$
0.17

 
$
(0.13
)
 
$
0.25

Diluted
$
(0.04
)
 
$
0.17

 
$
(0.13
)
 
$
0.24

Weighted average shares used in computing net (loss) income per share
 
 
 
 
 
 
 
Basic
77,280

 
75,234

 
77,075

 
74,597

Diluted
77,280

 
76,347

 
77,075

 
75,900

(1) Includes stock-based compensation expense as follows:
 
 
 
 
 
 
 
Cost of revenue
$
1,141

 
$
785

 
$
3,014

 
$
2,211

Product development
2,707

 
1,271

 
6,763

 
3,123

Sales and marketing
3,774

 
2,686

 
10,018

 
7,891

General and administrative
1,914

 
2,994

 
8,999

 
7,817



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The following table sets forth our results of operations for the specified periods as a percentage of our revenue for those periods. The period-to-period comparison of financial results is not necessarily indicative of future results. 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
 
(as a percentage of total revenue)
Revenue:
 
 
 
 
 
 
 
On demand
96.4
 %
 
95.9
 %
 
96.4
 %
 
96.0
 %
On premise
0.7

 
0.9

 
0.8

 
1.0

Professional and other
2.9

 
3.2

 
2.8

 
3.0

Total revenue
100.0

 
100.0

 
100.0

 
100.0

Cost of revenue
44.3

 
38.9

 
42.8

 
39.4

Gross profit
55.7


61.1

 
57.2

 
60.6

Operating expense:
 
 
 
 
 
 
 
Product development
16.8

 
13.5

 
16.1

 
13.1

Sales and marketing
28.6

 
25.7

 
28.0

 
25.6

General and administrative
14.8

 
15.9

 
17.7

 
15.9

Total operating expenses
60.2

 
55.1

 
61.8

 
54.6

Operating (loss) income
(4.5
)
 
6.0

 
(4.6
)
 
6.0

Interest expense and other, net
(0.3
)
 
(0.2
)
 
(0.3
)
 
(0.3
)
(Loss) income before income taxes
(4.8
)
 
5.8

 
(4.9
)
 
5.7

Income tax benefit
(1.7
)
 
(7.3
)
 
(1.4
)
 
(0.9
)
Net (loss) income
(3.1
)
 
13.1

 
(3.5
)
 
6.6


Three and Nine Months Ended September 30, 2014 compared to Three and Nine Months Ended September 30, 2013
Revenue
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
Change
 
% Change
 
2014
 
2013
 
Change
 
% Change
 
(in thousands, except dollar per unit data)
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
On demand
$
100,747

 
$
94,084

 
$
6,663

 
7.1
 %
 
$
289,361

 
$
270,231

 
$
19,130

 
7.1
 %
On premise
755

 
838

 
(83
)
 
(9.9
)
 
2,446

 
2,799

 
(353
)
 
(12.6
)
Professional and other
3,034

 
3,149

 
(115
)
 
(3.7
)
 
8,280

 
8,473

 
(193
)
 
(2.3
)
Total revenue
$
104,536

 
$
98,071

 
$
6,465

 
6.6

 
$
300,087

 
$
281,503

 
$
18,584

 
6.6

On demand unit metrics:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending on demand units
9,496

 
8,730

 
766

 
8.8
 %
 
9,496

 
8,730

 
766

 
8.8
 %
Average on demand units
9,434

 
8,673

 
761

 
8.8

 
9,305

 
8,527

 
778

 
9.1

Non-GAAP on demand revenue
$
100,355

 
$
95,877

 
$
4,478

 
4.7

 
$
290,086

 
$
272,026

 
$
18,060

 
6.6

Non-GAAP on demand revenue per average on demand unit
$
42.55

 
$
44.22

 
$
(1.67
)
 
(3.8
)
 
$
41.57

 
$
42.54

 
$
(0.97
)
 
(2.3
)

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The changes in total revenue for the three and nine months ended September 30, 2014 and 2013 are due to the following changes in our three revenue components:
On demand revenue. Our on demand revenue increased $6.7 million and $19.1 million for the three and nine months ended September 30, 2014, respectively, as compared to the same periods in 2013, primarily due to an increase in rental property units managed with our on demand solutions as a result of our continued investment in our sales force. This increase was offset in part due to a decrease in RPU to $42.55 and $41.57 during the respective periods were driven by reduced spending by our customers on marketing and advertising resulting from lower resident turnover rates and higher occupancy rates.
On premise revenue. On premise revenue decreased $0.1 million and $0.4 million for the three and nine months ended September 30, 2014, respectively, as compared to the same periods in 2013. We no longer actively market our legacy on premise software solutions to new customers and only market and support our acquired on premise software solutions. We expect on premise revenue to continue to decline over time as we transition acquired on premise customers to our on demand property management solutions.
Professional and other revenue. Professional and other services revenue decreased $0.1 million and $0.2 million for the three and nine months ended September 30, 2014, respectively, as compared to the same periods in 2013, primarily due to a decrease in revenue from consulting services.
On demand unit metrics. As of September 30, 2014, one or more of our on demand solutions was utilized in the management of 9.5 million rental property units, representing an increase of 8.8% compared to the same period in 2013. The increase in the number of rental property units managed by one or more of our on demand solutions was due to new customer sales, marketing efforts to existing customers and our 2013 and 2014 acquisitions which contributed 1.7% to total ending on demand units.
For the three and nine months ended September 30, 2014, annualized non-GAAP on demand revenue per average on demand unit decreased compared to the three and nine months ended September 30, 2013, primarily due to a decrease in contingent commission revenues from our renter's insurance products, reduced spending by our customers on marketing and advertising, and lower resident turnover rates.

Cost of Revenue
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
Change
 
% Change
 
2014
 
2013
 
Change
 
% Change
 
(in thousands)
Cost of revenue
$
41,018

 
$
34,975

 
$
6,043

 
17.3
%
 
$
114,319

 
$
100,397

 
$
13,922

 
13.9
%
Depreciation and amortization
5,293

 
3,136

 
2,157

 
68.8

 
14,034

 
10,418

 
3,616

 
34.7

Total cost of revenue
$
46,311

 
$
38,111

 
$
8,200

 
21.5

 
$
128,353

 
$
110,815

 
$
17,538

 
15.8

Cost of revenue. The increase in cost of revenue for the three months ended September 30, 2014 as compared to the same period in 2013 was primarily due to: a $2.3 million increase in costs related to the increased sales of our solutions, which includes investments in infrastructure and other support services; a $3.0 million increase in personnel expense primarily related to costs to support our growth initiatives and to a lesser degree increases in headcount added as a result of our 2014 and 2013 acquisitions; a $0.4 million increase in stock-based compensation related to our professional services personnel and data center operations personnel; a $2.2 million increase in non-cash amortization of technology; and a $0.3 million increase in information technology expense.
The increase in cost of revenue for the nine months ended September 30, 2014 as compared to the same period in 2013 was primarily due to: a $3.8 million increase in costs related to the increased sales of our solutions, which includes investments in infrastructure and other support services; a $8.9 million increase in personnel expense primarily related to costs to support our growth initiatives and headcount added as a result of our 2014 and 2013 acquisitions; a $0.8 million increase in stock-based compensation related to our professional services personnel and data center operations personnel; a $3.6 million increase in non-cash amortization of technology; and a $0.4 million increase in information technology expense.

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Operating Expenses
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
Change
 
% Change
 
2014
 
2013
 
Change
 
% Change
 
(in thousands)
Product development
$
16,209


$
12,484

 
$
3,725

 
29.8
%
 
$
44,775

 
$
34,862

 
$
9,913

 
28.4
%
Depreciation and amortization
1,319

 
748

 
571

 
76.3

 
3,535

 
2,135

 
1,400

 
65.6

Total product development expense
$
17,528

 
$
13,232

 
$
4,296

 
32.5

 
$
48,310

 
$
36,997

 
$
11,313

 
30.6

Product development. The increase in product development expense for the three months ended September 30, 2014 as compared to the same period in 2013 was primarily due to: a $1.6 million increase in personnel expense for product development groups to further develop, test and launch new products and to a lesser degree a result of our 2014 and 2013 acquisitions and offset by a transition of certain expenses to our Philippine and Indian operations; a $0.4 increase in facility and infrastructure related costs; a $1.4 million increase in stock-based compensation expense; a $0.6 million increase in depreciation expense; and a $0.3 million increase in other product development related expenses.
The increase in product development expense for the nine months ended September 30, 2014 as compared to the same period in 2013 was primarily due to: a $4.2 million increase in personnel expense for product development groups to further develop, test and launch new products and as a result of our 2014 and 2013 acquisitions and offset by a transition of certain expenses to our Philippine and Indian operations; a $0.8 increase in facility and infrastructure related costs; a $3.6  million increase in stock-based compensation expense; a $1.4 million increase in depreciation expense; and a $1.3 million increase in other product development related expenses.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
Change
 
% Change
 
2014
 
2013
 
Change
 
% Change
 
(in thousands)
Sales and marketing
$
26,519

 
$
22,317

 
$
4,202

 
18.8
%
 
$
73,915

 
$
64,170

 
$
9,745

 
15.2
%
Depreciation and amortization
3,430

 
2,849

 
581

 
20.4

 
10,055

 
7,822

 
2,233

 
28.5

Total sales and marketing expense
$
29,949

 
$
25,166

 
$
4,783

 
19.0

 
$
83,970

 
$
71,992

 
$
11,978

 
16.6

Sales and marketing. The increase in sales and marketing expense for the three months ended September 30, 2014 as compared to the same period in 2013 was primarily due to: a $3.3 million increase in sales and marketing personnel expenses and commission related to our increased investment in sales personnel and personnel acquired as a result of our 2014 and 2013 acquisitions; a $1.1 million increase in stock-based compensation expense; a $0.3 million increase in travel-related expenses; and a $0.6 million increase in amortization expense; partially offset by a $0.2 million decrease in bad debt expense and a $1.1 million increase in marketing program expense offset by lower SEM expenses of $1.4 million.
The increase in sales and marketing expense for the nine months ended September 30, 2014 as compared to the same period in 2013 was primarily due to: a $6.0 million increase in sales and marketing personnel expense and commission related to our increased investment in sales personnel and personnel acquired as a result of our 2014 and 2013 acquisitions; a $2.1 million increase in stock-based compensation expense; a $2.6 million increase in marketing program expense offset by $1.3 million from reductions in SEM expenses; a $1.0 million increase in travel-related expenses; and a $2.2 million increase in amortization expense; partially offset by a $0.6 million decrease in bad debt expense.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
Change
 
% Change
 
2014
 
2013
 
Change
 
% Change
 
(in thousands)
General and administrative
$
14,523

 
$
14,682

 
$
(159
)
 
(1.1
)%
 
$
50,282

 
$
42,432

 
$
7,850

 
18.5
%
Depreciation and amortization
920

 
872

 
48

 
5.5

 
2,909

 
2,448

 
461

 
18.8

Total general and administrative expense
$
15,443

 
$
15,554

 
$
(111
)
 
(0.7
)
 
$
53,191

 
$
44,880

 
$
8,311

 
18.5


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General and administrative. The decrease in general and administrative expense for the three months ended September 30, 2014 as compared to the same period in 2013 was primarily due to: a $1.1 million decrease in stock-based compensation related to general and administrative personnel and a $0.4 million decrease in legal expense; partially offset by a $0.8 million increase in the fair value adjustments of acquisition-related liabilities; and a $0.6 million increase in other general and administrative costs.
The increase in general and administrative expense for the nine months ended September 30, 2014 as compared to the same period in 2013 was primarily due to: a $1.2 million increase in personnel expense to support the growth in our business, including increased investment in our offshore operations that support those functions; a $1.2 million increase in stock-based compensation related to general and administrative personnel; a $5.8 million increase in litigation expense primarily due to legal fees and the settlement of the Ace Lawsuit in 2014; and a $0.8 million increase in other general and administrative costs; partially offset by a $0.7 million decrease in the fair value adjustments of acquisition-related liabilities.
Interest Expense and Other, Net
The increase in interest expense and other, net for the three months ended September 30, 2014, as compared to the same period in 2013, was due to borrowings on our revolving credit facility to partially finance our acquisition of Kigo.
The decrease in interest expense and other, net for the nine months ended September 30, 2014, as compared to the same period in 2013, was due to a decrease in interest expense as a result of lower debt balances for the majority of nine months ended September 30, 2014 and incurring interest charges in conjunction with the settlement of a sales tax and use audit in 2013.
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 28.4% and (16.5)% for the nine months ended and 35.4% and (123.3)% for the three months ended September 30, 2014 and 2013, respectively. Our effective tax rate fluctuated from the statutory rate predominantly due to the impact of state taxes and permanent differences, including stock compensation and the non-deductibility of contingent consideration, in relation to our results of operations before income taxes. During 2013, we were able to conclude that, given our performance, the realization of our deferred tax assets was more likely than not and accordingly reversed valuation allowances of approximately $9.2 million and recorded the reduction in valuation allowances as a tax benefit for the period. This reduction of the valuation allowance is the primary cause of the noted fluctuation of our effective income tax rate between the current and prior periods presented.
Reconciliation of Non-GAAP Financial Measures
We define Adjusted EBITDA as net income (loss) plus acquisition-related and other deferred revenue adjustments, depreciation, asset impairment, and loss on sale of asset, amortization of intangible assets, interest expense, net, income tax expense (benefit), stock-based compensation expense, acquisition-related expense, and certain litigation-related expenses. We believe that the use of Adjusted EBITDA is useful to investors and other users of our financial statements in evaluating our operating performance because it provides them with an additional tool to compare business performance across companies and across periods. We believe that:

Adjusted EBITDA provides investors and other users of our financial information consistency and comparability with our past financial performance, facilitates period-to-period comparisons of operations and facilitates comparisons with our peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results;

it is useful to exclude certain non-cash charges, such as depreciation and asset impairment, amortization of intangible assets and stock-based compensation and non-core operational charges, such as acquisition-related expense and certain litigation-related expenses, from Adjusted EBITDA because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations and these expenses can vary significantly between periods as a result of new acquisitions, full amortization of previously acquired tangible and intangible assets or the timing of new stock-based awards, as the case may be; and

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 obligations in order to appropriately measure the underlying performance of our business operations in the period of activity and associated expense.


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We use Adjusted EBITDA in conjunction with traditional GAAP operating performance measures as part of our overall assessment of our performance, for planning purposes, including the preparation of our annual operating budget, to evaluate the effectiveness of our business strategies and to communicate with our board of directors concerning our financial performance.
We do not place undue reliance on Adjusted EBITDA as our only measure of operating performance. Adjusted EBITDA should not be considered as a substitute for other measures of liquidity or financial performance 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 our capital expenditures or future requirements for capital expenditures and that they do not reflect changes in, or cash requirements for, our working capital. We compensate for the inherent limitations associated with using the Adjusted EBITDA measures through disclosure of these limitations, presentation of our financial statements in accordance with GAAP and reconciliation of Adjusted EBITDA to the most directly comparable GAAP measure, net (loss) income.

The following provides a reconciliation of net(loss) income to Adjusted EBITDA:

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Net (loss) income
$
(3,257
)
 
$
12,886

 
$
(10,384
)
 
$
18,514

Acquisition-related and other deferred revenue
(392
)
 
1,793

 
725

 
1,795

Depreciation, asset impairment and loss on sale of asset
5,121

 
3,400

 
13,911

 
10,486

Amortization of intangible assets
5,857

 
4,242

 
16,658

 
12,647

Interest expense, net
349

 
236

 
780

 
1,199

Income tax benefit
(1,783
)
 
(7,114
)
 
(4,124
)
 
(2,616
)
Litigation related expense
39

 
278

 
4,884

 
331

Stock-based compensation expense
9,536

 
7,736

 
28,794

 
21,042

Acquisition-related expense
860

 
288

 
2,098

 
2,113

Adjusted EBITDA
$
16,330

 
$
23,745

 
$
53,342

 
$
65,511


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Liquidity and Capital Resources
Our primary sources of liquidity as of September 30, 2014