10-Q 1 rp-2013093010q.htm 10-Q RP-2013.09.30 10Q
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, 2013
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 31, 2013
Common Stock, $0.001 par value
  
77,671,812



INDEX



PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
REALPAGE, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share data)
 
September 30, 2013
 
December 31, 2012
 
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
43,980

 
$
33,804

Restricted cash
44,450

 
35,202

Accounts receivable, less allowance for doubtful accounts of $1,003 and $1,087 at September 30, 2013 and December 31, 2012, respectively
58,430

 
51,937

Deferred tax asset, net
8,723

 

Other current assets
8,320

 
6,541

Total current assets
163,903

 
127,484

Property, equipment, and software, net
48,191

 
32,487

Goodwill
139,025

 
134,025

Identified intangible assets, net
102,104

 
104,640

Other assets
3,530

 
3,561

Total assets
$
456,753

 
$
402,197

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
14,136

 
$
9,805

Accrued expenses and other current liabilities
19,491

 
19,246

Current portion of deferred revenue
61,341

 
60,633

Deferred tax liability, net

 
2

Customer deposits held in restricted accounts
44,420

 
35,171

Total current liabilities
139,388

 
124,857

Deferred revenue
6,544

 
9,446

Deferred tax liability, net
3,956

 
10

Revolving credit facility

 
10,000

Other long-term liabilities
5,233

 
2,813

Total liabilities
155,121

 
147,126

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, 2013 and December 31, 2012, respectively

 

Common stock, $0.001 par value: 125,000,000 shares authorized, 79,594,887 and 77,012,925 shares issued and 77,746,287 and 75,826,615 shares outstanding at September 30, 2013 and December 31, 2012, respectively
80

 
77

Additional paid-in capital
378,446

 
347,203

Treasury stock, at cost: 1,848,600 and 1,186,310 shares at September 30, 2013 and December 31, 2012, respectively
(9,486
)
 
(6,323
)
Accumulated deficit
(67,264
)
 
(85,778
)
Accumulated other comprehensive loss
(144
)
 
(108
)
Total stockholders’ equity
301,632

 
255,071

Total liabilities and stockholders’ equity
$
456,753

 
$
402,197


See accompanying notes.

1


REALPAGE, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Revenue:
 
 
 
 
 
 
 
On demand
$
94,084

 
$
78,973

 
$
270,231


$
224,629

On premise
838

 
1,226

 
2,799


3,903

Professional and other
3,149

 
3,040

 
8,473


7,916

Total revenue
98,071

 
83,239

 
281,503

 
236,448

Cost of revenue(1)
38,111

 
32,897

 
110,815

 
95,358

Gross profit
59,960

 
50,342

 
170,688

 
141,090

Operating expense:
 
 
 
 
 
 
 
Product development(1)
13,232

 
12,274

 
36,997

 
35,325

Sales and marketing(1)
25,166

 
21,792

 
71,992

 
57,186

General and administrative(1)
15,554

 
12,545

 
44,880

 
44,794

Total operating expense
53,952

 
46,611

 
153,869

 
137,305

Operating income
6,008

 
3,731

 
16,819

 
3,785

Interest expense and other, net
(236
)
 
(407
)
 
(921
)
 
(1,620
)
Income before income taxes
5,772

 
3,324

 
15,898

 
2,165

Income tax expense (benefit)
(7,114
)
 
1,211

 
(2,616
)
 
704

Net income
$
12,886


$
2,113


$
18,514


$
1,461

Net income per share
 
 
 
 
 
 
 
Basic
$
0.17

 
$
0.03

 
$
0.25

 
$
0.02

Diluted
$
0.17

 
$
0.03

 
$
0.24

 
$
0.02

Weighted average shares used in computing net income per share
 
 
 
 
 
 
 
Basic
75,234

 
72,178

 
74,597

 
71,293

Diluted
76,347

 
74,282

 
75,900

 
73,689

(1)    Includes stock-based compensation expense as follows:
 
 
 
 
 
 
 
Cost of revenue
$
785


$
649


$
2,211


$
2,088

Product development
1,271


1,116


3,123


3,180

Sales and marketing
2,686


2,653


7,891


4,422

General and administrative
2,994


1,595


7,817


4,627

See accompanying notes.

2


REALPAGE, INC.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
 
Net income
$
12,886

 
$
2,113

 
$
18,514

 
$
1,461

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

 
5

 
(36
)
 

Comprehensive income
$
12,898

 
$
2,118

 
$
18,478

 
$
1,461

See accompanying notes.

3


REALPAGE, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands)
(Unaudited)
 
 
Common Stock
 
Additional
Paid-in
 
Accumulated
Other
Comprehensive
 
Accumulated
 
Treasury Shares
 
Total
Stockholders’
 
Shares
 
Amount
 
Capital
 
Loss
 
Deficit
 
Shares
 
Amount
 
Equity
Balance as of December 31, 2012
77,013

 
$
77

 
$
347,203

 
$
(108
)
 
$
(85,778
)
 
(1,186
)
 
$
(6,323
)
 
$
255,071

Foreign currency translation

 

 

 
(36
)
 

 

 

 
(36
)
Net income

 

 

 

 
18,514

 

 

 
18,514

Exercise of stock options
1,084

 

 
6,851

 

 

 

 

 
6,851

Treasury stock purchase, at cost

 

 

 

 

 
(663
)
 
(3,163
)
 
(3,163
)
Issuance of restricted stock
1,403

 
3

 

 

 

 

 

 
3

Issuance of common stock
95

 

 
3,350

 

 

 

 

 
3,350

Stock-based compensation

 

 
21,042

 

 

 

 

 
21,042

Balance as of September 30, 2013
79,595

 
$
80

 
$
378,446

 
$
(144
)
 
$
(67,264
)
 
(1,849
)
 
$
(9,486
)
 
$
301,632

See accompanying notes.

4


REALPAGE, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
 
Nine Months Ended September 30,
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Net income
$
18,514

 
$
1,461

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
22,823

 
23,682

Deferred tax expense (benefit)
(4,873
)
 
(74
)
Stock-based compensation
21,042

 
14,317

Loss on disposal of assets
310

 
387

Acquisition-related contingent consideration
1,300

 
(422
)
Changes in assets and liabilities, net of assets acquired and liabilities assumed in business combinations:
 
 
 
Accounts receivable
(6,007
)
 
(1,023
)
Customer deposits
1

 
(45
)
Other current assets
(1,166
)
 
3,215

Other assets
(386
)
 
(693
)
Accounts payable
3,902

 
(2,255
)
Accrued compensation, taxes and benefits
(2,122
)
 
1,666

Deferred revenue
(2,498
)
 
197

Other current and long-term liabilities
769

 
742

Net cash provided by operating activities
51,609

 
41,155

Cash flows from investing activities:
 
 
 
Purchases of property, equipment and software
(22,190
)
 
(18,601
)
Acquisition of businesses, net of cash acquired
(10,342
)
 
(9,723
)
Intangible asset additions
(600
)
 
(225
)
Net cash used in investing activities
(33,132
)
 
(28,549
)
Cash flows from financing activities:
 
 
 
Payments on revolving credit facility
(10,000
)
 
(25,312
)
Payments on capital lease obligations
(411
)
 
(65
)
Payments of deferred acquisition-related consideration
(1,545
)
 
(9,768
)
Issuance of common stock
6,854

 
9,874

Purchase of treasury stock
(3,163
)
 
(2,388
)
Net cash used in financing activities
(8,265
)
 
(27,659
)
Net increase (decrease) in cash and cash equivalents
10,212

 
(15,053
)
Effect of exchange rate on cash
(36
)
 

Cash and cash equivalents:
 
 
 
Beginning of period
33,804

 
51,273

End of period
$
43,980

 
$
36,220

Supplemental cash flow information:
 
 
 
Cash paid for interest
$
812

 
$
1,317

Cash paid for income taxes, net of refunds
$
453

 
$
264

Fixed assets acquired under capital lease
$
1,976

 
$

See accompanying notes.

5


Notes to the Condensed 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 condensed 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 condensed consolidated financial statements included herein reflect all adjustments (consisting of normal, recurring adjustments) which are, in the opinion of management, necessary to state fairly the results for the interim periods presented. All intercompany balances and transactions have been eliminated in consolidation. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the fiscal year.
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 February 27, 2013 (“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, 2013 and 2012 was in North America.
Net long-lived assets held were $44.9 million and $29.9 million in North America and $3.3 million and $2.6 million in our international subsidiaries at September 30, 2013 and December 31, 2012, 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.

During the three months ended June 30, 2013, we revised our estimated useful lives of our data processing equipment and internally developed software to more accurately reflect our use of these assets. During the three months ended September 30, 2013, we revised the length of our expected customer benefit of our license fees billed at the initial order date. The result of the change for the three months ended June 30, 2013 was a $1.2 million increase in operating income, a $0.7 million increase in net income and an increase in basic and diluted earnings per share of $0.01. The result for the change for the three months ended September 30, 2013 was a $1.9 million increase in operating income, a $1.2 million increase in net income and an increase in basic and diluted earnings per share of $0.02.

6




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
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.

7


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 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, 2013 or 2012.
Recently Issued Accounting Standards
Based on our evaluation of recently issued accounting standards, there were no standards issued during 2013 that would materially impact our financial position, results of operations or related disclosures.
3. Acquisitions
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 plan to integrate 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. The additional cash payments were subject to a downward adjustment if certain working capital requirements were not met. Working capital requirements were partially met, and a $0.1 million cash payment was made as of September 30, 2013. This acquisition was financed from proceeds from cash flows from operations. Acquired intangibles were recorded at fair value based on

8


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 plan to integrate 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. 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.
We have allocated the purchase price for SFL and RentSentinel (preliminary) as follows:
 
SFL
 
RentSentinel
 
(in thousands)
Intangible assets:
 
Developed product technologies
$
1,406

 
$
3,640

Customer relationships
161

 
3,060

Goodwill
1,035

 
4,566

Net deferred taxes

 
(779
)
Net other assets
88

 
9

Total purchase price
$
2,690

 
$
10,496

2012 Acquisitions
In January 2012, we acquired substantially all of the operating assets of Vigilan, Incorporated (“Vigilan”). A provider of assisted living software-as-a-service solutions, Vigilan products allow assisted living communities to monitor and schedule detailed care, manage labor costs, provide accurate billing and maintain regulatory compliance through its comprehensive compliance module. This asset acquisition allowed us to integrate Vigilan with existing senior living software solutions to further expand the RealPage Senior Living product solutions. We acquired Vigilan for a purchase price of $5.0 million consisting of a cash payment of $4.0 million and two additional cash payments of up to $0.5 million each due 12 months and 24 months after the acquisition date. The $1.0 million withheld from the purchase consideration was subject to a downward adjustment if certain revenue targets (a level 3 input) were not met for the six months ended June 30, 2012. Revenue targets were met and the amount was not adjusted. Prior to June 30, 2013, the first additional cash payment of $0.5 million was 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 ten years which will be amortized proportionately to the expected discounted cash flows derived from the asset. All 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 deductible for tax purposes.
In July 2012, we acquired all of the issued and outstanding shares of Rent Mine Online, Inc. (“RMO”). The acquisition of RMO expanded our resident referral capabilities into the multifamily residential rental housing market. We acquired RMO for a purchase price consisting of a cash payment of $5.5 million at closing, a deferred cash payment of up to $3.5 million and a contingent deferred earn out payment of up to 300,000 shares of our common stock, payable based on the achievement of certain revenue targets on or before December 31, 2014. In addition, the purchase agreement included a conversion option on the contingent common shares, in which the seller can elect to receive, in lieu of common shares, an amount per share equal to the lesser of the average market price or an established threshold, up to one half of the common shares earned. The $3.5 million withheld from the purchase price was subject to a downward adjustment if certain revenue targets (a level 3 input) were not met as of March 31, 2013. The initial fair value for the future cash payment and the common

9


shares and conversion option were $0.2 million and $0.3 million, respectively. These fair values were based on management’s estimate of the fair value of the cash, common shares and conversion option using a probability weighted discount model on the achievement of certain revenue targets. Revenue targets were partially met, and on July 31, 2013, a cash payment of $0.7 million was made, and 22,000 shares of our common stock were issued. As of September 30, 2013, our remaining obligation was $0.7 million due in 2014. This acquisition was financed using cash flows from operations and our common stock. Acquired intangibles were recorded at fair value based on assumptions determined 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. 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 intangible assets are not deductible for tax purposes. For the three and nine months ended September 30, 2013, we recognized a gain of $0.0 million and a loss of $1.3 million due to changes in the estimated fair values of the contingent cash, respectively. For the three and nine months ended September 30, 2013, we recognized no gain and a loss of $0.3 million due to changes in the common shares and the conversion option, respectively.
We have allocated the purchase price for RMO and Vigilan as follows:
 
RMO
 
Vigilan
 
(in thousands)
Intangible assets:
 
Developed product technologies
$
2,460

 
$
1,430

Customer relationships
1,770

 
1,150

Goodwill
3,439

 
2,454

Net deferred taxes
(1,502
)
 

Net other assets
(410
)
 
(34
)
Total purchase price, net of cash acquired
$
5,757

 
$
5,000

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.
In July 2011, we acquired Senior-Living.com, Inc., operating under the name SeniorLiving.net (“SLN”). The purchase price included an estimated cash payment payable (acquisition-related contingent consideration). At the acquisition date, we recorded a liability for the estimated fair value of the acquisition-related contingent consideration of $0.3 million. The fair value was based on management’s estimate of the fair value of the cash using a probability weighted discounted cash flow model on the achievement of certain revenue targets. The cash payment has a maximum value of $0.5 million with various revenue targets. 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 (a level 3 input). Revenue targets for the first period were met, and a cash payment of $0.3 million was made during the third quarter. We recognized losses of less than $0.1 million for the three and nine months ended September 30, 2013 and 2012, and losses of less than $0.1 million for the three and nine months ended September 30, 2012, due to changes in the estimated fair value of the cash acquisition-related contingent consideration.
In August 2011, we acquired Multifamily Technology Solutions, Inc. (“MTS”), which owns the Internet listing service for rental properties called MyNewPlace. The purchase agreement included a put option on the RealPage restricted common shares, in which, if the average market price of our common shares falls below an established threshold, we would pay the difference between the average market price and the established threshold in cash. We established a liability of $1.2 million for the put option which is based on its estimated fair value at the acquisition date. The fair values of the put option was based on the Black-Scholes option pricing model using inputs consistent with those used in the valuation of our stock options. The liability established for the put option on the restricted common shares was re-evaluated and recorded at an estimated fair value based on the changes in market prices of our common stock (a level 2 input) until its expiration on July 31, 2013. We recognized gains of $0.1 million and $0.3 million as of the three months ended, and gains of $0.2 million and $0.3 million as of nine months ended September 30, 2013 and 2012, respectively, due to changes in the estimated fair value of the put option for restricted common shares.
Pro Forma Results of Acquisitions

10


The following table presents unaudited actual results of operations for the three months ended September 30, 2013 and pro forma results of operations for the nine months ended September 30, 2013 and the three and nine months ended September 30, 2012 as if the SFL, RentSentinel, and RMO acquisitions had occurred at the beginning of the periods presented. The pro forma financial information for the nine months ended September 30, 2013 includes the business combination accounting effects resulting from these acquisitions including: interest expense of $0.1 million; tax benefit of $0.8 million; and approximately $1.0 million of amortization charges from acquired intangible assets as though the aforementioned companies were combined as of the beginning of fiscal year 2013. The pro forma financial information for the three and nine months ended September 30, 2012, respectively, includes the business combination accounting effects resulting from these acquisitions including: interest expense of $0.1 million and $0.3 million; tax benefit of $0.6 million and $1.5 million; and approximately $0.8 million and $2.0 million of amortization charges from acquired intangible assets as though the aforementioned companies were combined as of the beginning of fiscal year 2012. 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 taken place at the beginning of the periods presented, or of future results:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
Actual
 
2012
Pro Forma
 
2013
Pro Forma
 
2012
Pro Forma
 
(in thousands, except per share amounts)
Revenue:
 
On demand
$
94,084

 
$
80,294

 
$
271,103

 
$
229,707

On premise
838

 
1,226

 
2,799

 
3,903

Professional and other
3,149

 
3,040

 
8,473

 
7,916

Total revenue
98,071

 
84,560

 
282,375

 
241,526

Net income (loss)
$
12,886

 
$
1,266

 
$
17,325

 
$
(1,082
)
Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.17

 
$
0.02

 
$
0.23

 
$
(0.02
)
Diluted
$
0.17

 
$
0.02

 
$
0.23

 
$
(0.02
)
4. Property, Equipment and Software
Property, equipment and software consist of the following:
 
September 30,
 
December 31,
 
2013
 
2012
 
(in thousands)
Leasehold improvements
$
17,539

 
$
11,859

Data processing and communications equipment
52,939

 
43,562

Furniture, fixtures, and other equipment
13,292

 
11,638

Software
47,216

 
38,710

 
130,986

 
105,769

Less: Accumulated depreciation and amortization
(82,795
)
 
(73,282
)
Property, equipment and software, net
$
48,191

 
$
32,487

Depreciation and amortization expense for property, equipment and software was $3.6 million and $3.5 million for the three months ended, and $10.9 million and $10.3 million for the nine months ended September 30, 2013 and 2012, 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, 2013 is as follows:
 
(in thousands)
Balance at December 31, 2012
$
134,025

Goodwill acquired
5,601

Other
(601
)
Balance at September 30, 2013
$
139,025

Other intangible assets consisted of the following at September 30, 2013 and December 31, 2012:

11


 
 
 
 
September 30, 2013
 
December 31, 2012
 
Amortization
Period
 
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
(in thousands)
Finite-lived intangible assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Developed technologies
3 years
 
$
38,717

 
$
(28,138
)
 
$
10,579

 
$
32,983

 
$
(23,215
)
 
$
9,768

Customer relationships
1-10 years
 
81,613

 
(30,749
)
 
50,864

 
77,847

 
(24,151
)
 
53,696

Vendor relationships
7 years
 
5,650

 
(4,562
)
 
1,088

 
5,650

 
(4,052
)
 
1,598

Total finite-lived intangible assets
 
 
125,980

 
(63,449
)
 
62,531

 
116,480

 
(51,418
)
 
65,062

Indefinite-lived intangible assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Tradenames
 
 
39,573

 

 
39,573

 
39,578

 

 
39,578

Total intangible assets
 
 
$
165,553

 
$
(63,449
)
 
$
102,104

 
$
156,058

 
$
(51,418
)
 
$
104,640

Amortization of finite-lived intangible assets was $4.0 million and $4.5 million for the three months ended, and $11.9 million and $13.3 million for nine months ended September 30, 2013 and 2012, respectively.
6. Debt
In December 2011, we entered into an Amended and Restated Credit Agreement (“Restated Agreement”) to amend our credit facility. The Restated Agreement provides for a secured revolving credit facility in 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. The Restated Agreement converted our outstanding term loan under the credit facility into revolving loans. Revolving loans accrue interest at a per annum rate equal to, at the Company’s option, 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 2.50% to 3.00%, in the case of LIBOR loans, and 0.00 to 0.25% in the case of prime rate loans, based upon the Company’s senior leverage ratio. The interest is 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. Principal, together with all accrued and unpaid interest, is due and payable on December 30, 2015. Advances under the credit facility may be voluntarily prepaid, and must be prepaid with the proceeds of certain dispositions, extraordinary receipts and indebtedness and in full upon a change in control.
In September 2012, we entered into an amendment to the Restated Agreement. Under the terms of the amendment, the LIBOR rate margin ranges from 2.00% to 2.50%, based on our senior leverage ratio. All other interest rates and maturity periods remain consistent with the Restated Agreement. Additionally, our capital expenditure limitations were expanded in the amendment.
As of September 30, 2013 and December 31, 2012, we had $0.0 million and $10.0 million outstanding under our revolving line of credit, which approximates its fair value. As of September 30, 2013, $150.0 million was available under our revolving line of credit and $10.0 million was available for the issuance of letters of credit. We had unamortized debt issuance costs of $0.4 million and $0.8 million at September 30, 2013 and December 31, 2012, respectively. As of September 30, 2013, we were in compliance with our debt covenants.
7. Share-based Compensation
In February 2013, we granted 774,231 options with an exercise price of $21.60 which vest over four years with 75% vesting over 15 quarters and the remaining 25% vesting on the 16th quarter. We also granted 387,118 shares of restricted stock at $21.60 which vest quarterly over four years and 154,337 shares at $21.60 that vest quarterly over one year. In addition, 70,000 shares of performance restricted stock were granted at $21.60 to certain employees which vest as product specific revenue targets are achieved.
In May 2013, we granted 661,745 options with an exercise price of $19.78 which vest over four years with 75% vesting over 15 quarters and the remaining 25% vesting on the 16th quarter. We also granted 382,058 shares of restricted stock at $19.78 which vest quarterly over four years.
In August 2013, we granted 301,614 options with an exercise price of $21.11 which vest over four years with 75% vesting over 15 quarters and the remaining 25% vesting on the 16th quarter. We also granted 154,559 shares of restricted stock at $21.11 which vest quarterly over four years, 130,110 shares at $21.11 which vest quarterly over one year and 56,000 shares

12


at $21.11 which vest semi-annually over one and one-half to two years. In addition, 30,000 shares of performance restricted stock were granted at $21.11 to certain employees which vest as product specific revenue targets are achieved.
All stock options and restricted stock were granted under the 2010 Equity Plan.
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.
The assets under capital lease are as follows:
 
September 30, 2013
 
December 31, 2012
 
(in thousands)
Software
$
1,976

 
$

Less: Accumulated depreciation and amortization
(423
)
 

Assets under capital lease, net
$
1,553

 
$

Aggregate annual rental commitments at September 30, 2013 under capital lease are as follows:
 
 
 
(in thousands)
2013
$
147

2014
587

2015
587

2016
294

Total minimum lease payments
1,615

Less amount representing average interest at 2.2%
(50
)
 
1,565

Less current portion
558

Long-term portion
$
1,007

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, 2013 or December 31, 2012.
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, 2013 or December 31, 2012.
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

13


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.
On January 24, 2011, Yardi Systems, Inc. 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 (the “Settlement Agreement”) resolving all outstanding litigation between the parties. The Settlement Agreement also includes a license of certain Yardi intellectual property to the Company and a license of certain of our intellectual property to Yardi.
The Settlement Agreement is a multiple element arrangement for accounting purposes. The Company identified each element of the arrangement and determined when those elements should be recognized. The Company allocated the consideration to each element using the estimated fair value of the elements. The Company considered several factors in determining the accounting fair value of the elements of the Settlement Agreement. The inputs and assumptions used in this valuation were from a market participant perspective and included projected revenue, estimated discount rates, useful lives and income tax rates, among others. The development of a number of these inputs and assumptions in the model requires a significant amount of management judgment and is based upon a number of factors. Changes in any number of these assumptions may have had a substantial impact on the fair value as assigned to each element. These inputs and assumptions represent management’s best estimates at the time of the transaction. Based on the estimated fair value, we have recognized the following: $3.0 million for the license from Yardi, which was capitalized as an intangible asset upon execution of the Settlement Agreement and amortized as a cost of revenue over its estimated useful life, beginning in July 2012; $1.0 million for the license sold to Yardi, which will be recognized as revenue over the estimated useful life of the technology, beginning in July 2012; and $8.5 million inclusive of the settlement and other related legal costs, which were expensed in the second quarter of 2012.
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 disputes these assertions by these carriers and intends to vigorously protect its coverage. 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 September 5, 2012, Ace filed a motion to dismiss the Ace Lawsuit and on September 6, 2012, defendant Axis filed a motion to dismiss the Ace Lawsuit. On September 24, 2012, the Company filed our opposition to the motions to dismiss and separately filed our motion for partial summary judgment on the basis that each of Ace’s and Axis’ notice of rescission was untimely under applicable statutory law. On May 20, 2013, the court entered an order directing the parties to engage in the alternative dispute resolution procedure set forth in the policies at issue, and staying the lawsuit until such procedure has been completed. The court did not rule on the substance of Company’s motion for summary judgment, denying that motion with leave to re-file if the court-ordered non-binding dispute resolution procedures do not result in a settlement of the action. We intend to continue to pursue coverage and other appropriate relief in connection with these insurance policies. We believe that it is remote that we will have a material loss in connection with these reimbursement demands.
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 Per Share

14


Basic net income per share is computed by dividing the net income by the weighted average number of common shares outstanding during the period. Diluted net income 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.
The following table presents the calculation of basic and diluted net income per share:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2013
 
2012
 
2013
 
2012
 
(in thousands, except per share amounts)
Numerator:
 
Net income
$
12,886

 
$
2,113

 
$
18,514

 
$
1,461

Denominator:
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Weighted average common shares used in computing basic net income per share
75,234


72,178


74,597


71,293

Diluted:
 
 
 
 
 
 
 
Add weighted average effect of dilutive securities:
 
 
 
 
 
 
 
Stock options and restricted stock
1,113

 
2,104

 
1,303

 
2,396

Weighted average common shares used in computing diluted net income per share
76,347


74,282


75,900


73,689

Net income per common share:
 
 
 
 
 
 
 
Basic
$
0.17

 
$
0.03

 
$
0.25

 
$
0.02

Diluted
$
0.17

 
$
0.03

 
$
0.24

 
$
0.02

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.
In the quarter ended September 30, 2013, we were able to conclude that given our improved performance, the realization of our deferred tax assets was more likely than not and accordingly reversed the valuation allowance of approximately $9.1 million and recorded a tax benefit during the period. This benefit was partially offset by tax expense. Our effective income tax rate was (123.3)% and 36.4% for the three months ended and (16.5)% and 32.5% for the nine months ended September 30, 2013 and 2012, respectively. Our effective tax rate fluctuated from the statutory rate predominantly due to the impact of permanent differences, including stock compensation, the non-deductibility of contingent consideration, and the reversal of the valuation allowance, in relation to our results of operations before income taxes.
11. Subsequent Events
In October 2013, we acquired substantially all of the operating assets of Windsor Compliance Services, Inc. ("Windsor Compliance") for a purchase price of $2.8 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 those dates. Windsor Compliance is a firm specializing in compliance with tax credits and regulation for the affordable housing industry. Due to the timing of this acquisition, the purchase price allocation was not complete as of the date of this filing due to the pending completion of the valuation of intangible assets.
In October 2013, we acquired all of the issued and outstanding capital stock of MyBuilding Inc. ("MyBuilding") for a purchase price of $7.1 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 $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,

15


local vendors, and other residents. Due to the timing of this acquisition, the purchase price allocation was not complete as of the date of this filing due to the pending completion of the valuation of intangible assets.
In October 2013, we acquired all of the membership interest of Active Building, LLC ("Active Building") for a purchase price of $19.8 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. Due to the timing of this acquisition, the purchase price allocation was not complete as of the date of this filing due to the pending completion of the valuation of intangible assets.


16


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, 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 2012. 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.
RealPage, Inc., a Delaware corporation, and its subsidiaries, (the “Company” or “we” or “us”) is a leading provider of on demand software solutions for the rental housing industry. Our broad range of property management solutions enables owners and managers of single-family and a wide variety of multi-family rental property types to manage their marketing, pricing, screening, leasing, accounting, purchasing and other property operations. Our on demand software solutions are delivered through an integrated software platform that provides a single point of access and a shared repository of prospect, resident and property data. By integrating and streamlining a wide range of complex processes and interactions among the rental housing ecosystem of owners, managers, prospects, residents and service providers, our platform helps optimize the property management process and improves the experience for all of these constituents.
Our solutions enable property owners and managers to increase revenues and reduce operating costs through higher occupancy, improved pricing methodologies, new sources of revenue from ancillary services, improved collections and more integrated and centralized processes. As of September 30, 2013, approximately 8,700 customers used one or more of our on demand software solutions to help manage the operations of approximately 8.7 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, 2012 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 $98.1 million and $83.2 million for the three months ended, and $281.5 million and $236.4 million for the nine months ended September 30, 2013 and 2012, respectively. In the same periods, we had operating income of approximately $6.0 million, $3.7 million, $16.8 million, and $3.8 million, respectively, and net income of approximately $12.9 million, $2.1 million, $18.5 million and $1.5 million, respectively.
Our company was formed in 1998 to acquire Rent Roll, Inc., which marketed and sold on premise property management systems for the conventional and affordable multi-family rental housing markets. In June 2001, we released OneSite, our first on demand property management system. Since 2002, we have expanded our on demand software solutions to include a number of software-enabled value-added services that provide complementary sales and marketing, asset optimization, risk mitigation, billing and utility management and spend management capabilities. In connection with this expansion, we have allocated greater resources to the development and infrastructure needs of developing and increasing sales of our suite of on demand software solutions. In addition, since July 2002, we have completed 26 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 January 2012, we acquired substantially all of the operating assets of Vigilan, Incorporated (“Vigilan”). A provider of assisted living software-as-a-service solutions, Vigilan products allow assisted living communities to monitor and schedule detailed care, manage labor costs, provide accurate billing and maintain regulatory compliance through its comprehensive compliance module. We acquired Vigilan for a purchase price of $5.0 million consisting of a cash payment of $4.0 million and two additional cash payments of up to $0.5 million due 12 months and 24 months after the acquisition date.
In July 2012, we acquired all of the issued and outstanding shares of Rent Mine Online, Inc. (“RMO”) for a purchase price which consists of a cash payment of $5.5 million at closing, a deferred payment of up to $3.5 million and a contingent deferred earn out payment of up to 300,000 shares of our common stock, payable based on the achievement of specified milestones on or before December 31, 2014. The acquisition of RMO expands our resident referral capabilities into the multifamily residential rental housing market.

17


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 plan to integrate 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 six 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 plan to integrate 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.
In October 2013, we acquired substantially all of the operating assets of Windsor Compliance Services, Inc. ("Windsor Compliance") for a purchase price of $2.8 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. 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 $7.1 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.
In October 2013, we acquired all of the membership interest of Active Building, LLC ("Active Building") for a purchase price of $19.8 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.
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 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

18


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 a product development and service center in Hyderabad, India and Manila, Philippines, respectively, to take advantage of strong technical talent at lower personnel costs compared to the United States.
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 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.

19


General and administrative. General and administrative expense consists of personnel costs for our executive, finance and accounting, human resources, management information systems and legal personnel, as well as legal, accounting and other professional service fees and other corporate expenses.
Key Business Metrics
In addition to traditional financial measures, we monitor our operating performance using a number of financially and non-financially derived metrics that are not included in our condensed consolidated financial statements. We monitor the key performance indicators as follows:
On demand revenue. This metric represents the license and subscription fees relating to our on demand software solutions, typically licensed for one year terms, commission income from sales of renter’s insurance policies and transaction fees for certain of our on demand software solutions. We consider on demand revenue to be a key business metric because we believe the market for our on demand software solutions represents the largest growth opportunity for our business.
On demand revenue as a percentage of total revenue. This metric represents on demand revenue for the period presented divided by total revenue for the same period. We use on demand revenue as a percentage of total revenue to measure our success in executing our strategy to increase the penetration of our on demand software solutions and expand our recurring revenue streams attributable to these solutions. We expect our on demand revenue to remain a significant percentage of our total revenue although the actual percentage may vary from period to period due to a number of factors, including the timing of acquisitions, professional and other revenue and on premise perpetual license sales and maintenance fees resulting from our February 2010 acquisition.
Ending on demand units. This metric represents the number of rental housing units managed by our customers with one or more of our on demand software solutions at the end of the period. We use ending on demand units to measure the success of our strategy of increasing the number of rental housing units managed with our on demand software solutions. Property unit counts are provided to us by our customers as new sales orders are processed. Property unit counts may be adjusted periodically as information related to our customers’ properties is updated or supplemented, which could result in 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,
 
2013
 
2012
 
2013
 
2012
 
(in thousands)
On demand revenue
$
94,084

 
$
78,973

 
$
270,231

 
$
224,629

Acquisition-related and other deferred revenue adjustments
1,793

 
3

 
1,795

 
86

Non-GAAP on demand revenue
$
95,877

 
$
78,976

 
$
272,026

 
$
224,715

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 depreciation and asset impairment; amortization of intangible assets; interest expense, net; income tax expense (benefit); stock-based compensation expense, acquisition-related expense, acquisition-related and other deferred revenue adjustments, certain litigation-related expenses and stock registration costs. We believe that the use of Adjusted EBITDA is useful in evaluating our operating performance because it excludes certain non-cash expenses, including depreciation, amortization and stock-based compensation. Adjusted EBITDA is not determined in accordance with accounting principles generally accepted in the United States, or GAAP, and should not be considered as a substitute for or superior to financial measures determined in accordance with GAAP. For a reconciliation of Adjusted EBITDA to net income, refer to the table below. Our Adjusted EBITDA grew from approximately $18.8 million and $52.5 million for the three and nine months ended September 30, 2012 to approximately $23.7 million and $65.5 million for the three and nine months ended September 30, 2013 as a result of our efforts to expand market share and increase revenue.

20


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,
 
2013
 
2012
 
2013
 
2012
 
(in thousands, except per share data)
Revenue:
 
 
 
 
 
 
 
On demand
$
94,084

 
$
78,973

 
$
270,231

 
$
224,629

On premise
838

 
1,226

 
2,799

 
3,903

Professional and other
3,149

 
3,040

 
8,473

 
7,916

Total revenue
98,071

 
83,239

 
281,503

 
236,448

Cost of revenue(1)
38,111

 
32,897

 
110,815

 
95,358

Gross profit
59,960

 
50,342

 
170,688

 
141,090

Operating expense:
 
 
 
 
 
 
 
Product development(1)
13,232

 
12,274

 
36,997

 
35,325

Sales and marketing(1)
25,166

 
21,792

 
71,992

 
57,186

General and administrative(1)
15,554

 
12,545

 
44,880

 
44,794

Total operating expense
53,952

 
46,611

 
153,869

 
137,305

Operating income
6,008

 
3,731

 
16,819

 
3,785

Interest expense and other, net
(236
)
 
(407
)
 
(921
)
 
(1,620
)
Income before income taxes
5,772

 
3,324

 
15,898

 
2,165

Income tax expense (benefit)
(7,114
)
 
1,211

 
(2,616
)
 
704

Net income
$
12,886

 
$
2,113

 
$
18,514

 
$
1,461

Net income per share
 
 
 
 
 
 
 
Basic
$
0.17

 
$
0.03

 
$
0.25

 
$
0.02

Diluted
$
0.17

 
$
0.03

 
$
0.24

 
$
0.02

Weighted average shares used in computing net income per share
 
 
 
 
 
 
 
Basic
75,234

 
72,178

 
74,597

 
71,293

Diluted
76,347

 
74,282

 
75,900

 
73,689

(1)    Includes stock-based compensation expense as follows:
 
 
 
 
 
 
 
Cost of revenue
$
785

 
$
649

 
$
2,211

 
$
2,088

Product development
1,271

 
1,116

 
3,123

 
3,180

Sales and marketing
2,686

 
2,653

 
7,891

 
4,422

General and administrative
2,994

 
1,595

 
7,817

 
4,627









21


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,
 
2013
 
2012
 
2013
 
2012
 
(as a percentage of total revenue)
Revenue:
 
 
 
 
 
 
 
On demand
95.9
 %
 
94.8
 %
 
96.0
 %
 
95.0
 %
On premise
0.9

 
1.5

 
1.0
 %
 
1.7

Professional and other
3.2

 
3.7

 
3.0
 %
 
3.3

Total revenue
100.0

 
100.0

 
100.0

 
100.0

Cost of revenue
38.9

 
39.5

 
39.4

 
40.3

Gross profit
61.1


60.5

 
60.6

 
59.7

Operating expense:
 
 
 
 
 
 
 
Product development
13.5

 
14.7

 
13.1

 
14.9

Sales and marketing
25.7

 
26.2

 
25.6

 
24.2

General and administrative
15.9

 
15.1

 
15.9

 
19.0

Total operating expenses
55.1

 
56.0

 
54.6

 
58.1

Operating income
6.0

 
4.5

 
6.0

 
1.6

Interest expense and other, net
(0.2
)
 
(0.5
)
 
(0.3
)
 
(0.7
)
Income before income taxes
5.8

 
4.0

 
5.7

 
0.9

Income tax expense (benefit)
(7.3
)
 
1.5

 
(0.9
)
 
0.3

Net income
13.1

 
2.5

 
6.6

 
0.6


Three and Nine Months Ended September 30, 2013 compared to Three and Nine Months Ended September 30, 2012
Revenue
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
Change
 
% Change
 
2013
 
2012
 
Change
 
% Change
 
(in thousands, except dollar per unit data)
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
On demand
$
94,084

 
$
78,973

 
$
15,111

 
19.1
 %
 
$
270,231

 
$
224,629

 
$
45,602

 
20.3
 %
On premise
838

 
1,226

 
(388
)
 
(31.6
)
 
2,799

 
3,903

 
(1,104
)
 
(28.3
)
Professional and other
3,149

 
3,040

 
109

 
3.6

 
8,473

 
7,916

 
557

 
7.0

Total revenue
$
98,071

 
$
83,239

 
$
14,832

 
17.8

 
$
281,503

 
$
236,448

 
$
45,055

 
19.1

On demand unit metrics:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending on demand units
8,730

 
7,823

 
907

 
11.6

 
8,730

 
7,823

 
907

 
11.6

Average on demand units
8,673

 
7,680

 
993

 
12.9

 
8,527

 
7,510

 
1,017

 
13.5

Non-GAAP on demand revenue
$
95,877

 
$
78,976

 
$
16,901

 
21.4

 
$
272,026

 
$
224,715

 
$
47,311

 
21.1

Non-GAAP on demand revenue per average on demand unit
$
44.22

 
$
41.13

 
$
3.09

 
7.5

 
$
42.54

 
$
39.90

 
$
2.64

 
6.6

The changes in total revenue for the three and nine months ended September 30, 2013 and 2012 are due to the following changes in our three revenue components:

22


On demand revenue. Our on demand revenue increased for the three and nine months ended September 30, 2013 as compared to same periods in 2012, primarily due to an increase in rental property units managed with our on demand solutions and an increase in the number of our on demand solutions utilized by our existing customer base, combined with revenue contributed from our strategic acquisitions.
On premise revenue. On premise revenue decreased for the three and nine months ended September 30, 2013 as compared to the same periods in 2012. 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 increased for the three and nine months ended September 30, 2013 as compared to the same periods in 2012, primarily due to an increase in revenue from consulting services.
On demand unit metrics. As of September 30, 2013, one or more of our on demand solutions was utilized in the management of 8.7 million rental property units. The increase from September 2012 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 2012 and 2013 acquisitions which contributed 1.8% to total ending on demand units.
For the three months ended September 30, 2013, annualized non-GAAP on demand revenue per average on demand unit increased compared to the three months ended September 30, 2012, primarily due to improved penetration of our on demand solutions into our customer base.

Cost of Revenue
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
Change
 
% Change
 
2013
 
2012
 
Change
 
% Change
 
(in thousands)
Cost of revenue
$
34,975

 
$
28,971

 
$
6,004

 
20.7
 %
 
$
100,397

 
$
83,441

 
$
16,956

 
20.3
 %
Depreciation and amortization
3,136

 
3,926

 
(790
)
 
(20.1
)
 
10,418

 
11,917

 
(1,499
)
 
(12.6
)
Total cost of revenue
$
38,111

 
$
32,897

 
$
5,214

 
15.8

 
$
110,815

 
$
95,358

 
$
15,457

 
16.2

Cost of revenue. The increase in cost of revenue for the three months ended September 30, 2013 as compared to the same period in 2012 was primarily due to: a $0.6 million increase from costs related to investments in infrastructure and other support services to support the increased sales of our solutions; a $4.7 million increase in personnel expense primarily related to costs to support our growth initiatives; a $0.2 million increase in facilities expense; and a $0.5 million increase in other costs; partially offset by a $0.6 million decrease in non-cash amortization of technology; and a $0.2 million decrease in property and equipment depreciation expense. The decrease in cost of revenue as a percentage of total revenue was primarily the result of leveraging our fixed cost base, which was partially offset by an increase in costs as a result of our 2012 and 2013 acquisitions.
The increase in cost of revenue for the nine months ended September 30, 2013 as compared to the same period in 2012 was primarily due to: a $0.6 million increase from costs related to investments in infrastructure and other support services to support the increased sales of our solutions; a $13.7 million increase in personnel expense primarily related to costs to support our growth initiatives; a $0.7 million increase in facilities expenses; a $2.0 million increase in costs directly attributable to our products and services; partially offset by a $1.3 million decrease in non-cash amortization of technology; and a $0.2 million decrease in property and equipment depreciation expense. The decrease in cost of revenue as a percentage of total revenue was primarily the result of leveraging our fixed cost base, which was partially offset by an increase in costs as a result of our 2012 and 2013 acquisitions.

Operating Expenses

23


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
Change
 
% Change
 
2013
 
2012
 
Change
 
% Change
 
(in thousands)
Product development
$
12,484


$
11,546

 
$
938

 
8.1
%
 
$
34,862

 
$
33,411

 
$
1,451

 
4.3
%
Depreciation and amortization
748

 
728

 
20

 
2.7

 
2,135

 
1,914

 
221

 
11.5

Total product development expense
$
13,232

 
$
12,274

 
$
958

 
7.8

 
$
36,997

 
$
35,325

 
$
1,672

 
4.7

Product development. The increase in product development expense for the three months ended September 30, 2013 as compared to the same period in 2012 was primarily due to: a $0.4 million increase in personnel expense; a $0.3 million increase in consulting fees; and a $0.3 million increase in facilities and other product development related expenses.
The increase in product development expense for the nine months ended September 30, 2013 as compared to the same period in 2012 was primarily due to: a $0.5 million increase in facilities expenses; a $0.7 million increase in personnel expense; a $0.2 million increase in depreciation expense; and a $0.3 million increase in consulting fees.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
Change
 
% Change
 
2013
 
2012
 
Change
 
% Change
 
(in thousands)
Sales and marketing
$
22,317

 
$
19,153

 
$
3,164

 
16.5
%
 
$
64,170

 
$
49,250

 
$
14,920

 
30.3
 %
Depreciation and amortization
2,849

 
2,639

 
210

 
8.0

 
7,822

 
7,936

 
(114
)
 
(1.4
)
Total sales and marketing expense
$
25,166

 
$
21,792

 
$
3,374

 
15.5

 
$
71,992

 
$
57,186

 
$
14,806

 
25.9

Sales and marketing. The increase in sales and marketing expense for the three months ended September 30, 2013 as compared to the same period in 2012 was primarily due to: a $1.1 million increase in marketing program expense, primarily related to an increase in SEO and SEM activity; a $1.5 million increase in personnel expense related to the increase of sales force head count as a result of our overall company growth; a $0.3 million increase in amortization expense; and a $0.5 million increase in other general sales and marketing expenses.
The increase in sales and marketing expense for the nine months ended September 30, 2013 as compared to the same period in 2012 was primarily due to: an increase of $3.5 million in stock-based compensation due to certain performance-based restricted stock awards that were previously expected to vest and were adjusted in 2012; a $1.9 million increase in marketing program expense, primarily related to an increase in SEO and SEM activity; a $7.0 million increase in personnel expense related to sales personnel added as a result of our overall company growth; a $0.6 million increase in information technology expenses; a $0.6 million increase in travel related expenses; and a $1.2 million increase in other general sales and marketing expenses.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
Change
 
% Change
 
2013
 
2012
 
Change
 
% Change
 
(in thousands)
General and administrative
$
14,682

 
$
11,893

 
$
2,789

 
23.5
%
 
$
42,432

 
$
42,879

 
$
(447
)
 
(1.0
)%
Depreciation and amortization
872

 
652

 
220

 
33.7

 
2,448

 
1,915

 
533

 
27.8

Total general and administrative expense
$
15,554

 
$
12,545

 
$
3,009

 
24.0

 
$
44,880

 
$
44,794

 
$
86

 
0.2

General and administrative. The increase in general and administrative expense for the three months ended September 30, 2013 as compared to the same period in 2012 was primarily due to: a $1.7 million increase in personnel expense related to our overall company growth; a $0.2 million increase in depreciation expense; a $1.4 million increase in stock-based compensation; and a $0.5 million increase from fair value adjustment of acquisition-related liabilities; partially offset by a $0.8 million decrease in professional fees.

24


The increase in general and administrative expense for the nine months ended September 30, 2013 as compared to the same period in 2012 was primarily due to a $3.1 million increase in personnel expense related to our overall company growth; a $0.5 million increase in depreciation expense; a $3.2 million increase in stock-based compensation; a $1.7 million increase from fair value adjustment of acquisition-related liabilities; a $0.4 million increase in information technology expense; a $0.3 million increase in consulting fees and a $0.4 million increase in other general and administrative expenses. This increase was partially offset by: a $8.9 million decrease in litigation expense related to fees and the accrual of the settlement of the Yardi litigation in 2012; and a $0.6 million decrease in professional fees. Refer to Part II, Item 1, “Legal Proceedings” for further information regarding the litigation settlement.

Interest Expense and Other, Net
The decrease in interest expense and other, net for the three months ended September 30, 2013, as compared to the same period in 2012, was due to a decrease in interest expense as a result of lower debt balances.
The decrease in interest expense and other, net for the nine months ended September 30, 2013, as compared to the same period in 2012, was primarily due to a decrease in interest expense as a result of lower debt balances partially offset by an increase in interest expense related to amounts due certain municipalities. See “Long-Term Debt Obligations” for further information regarding our Amended and Restated Credit Agreement.

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. In the quarter ended September 30, 2013, we were able to conclude that given our improved financial performance, the realization of our deferred tax assets was more likely than not and accordingly reversed the valuation allowance of approximately $9.1 million and recorded a tax benefit during the period. This benefit was partially offset by tax expense. Our effective income tax rate was (123.3)% and 36.4% for the three months ended and (16.5)% and 32.5% for the nine months ended September 30, 2013 and 2012, respectively. Our effective tax rate fluctuated from the statutory rate predominantly due to the impact of permanent differences, including stock compensation, the non-deductibility of contingent consideration, and the reversal of the valuation allowance, in relation to our results of operations before income taxes.
Reconciliation of Non-GAAP Financial Measures
We define Adjusted EBITDA as net income plus depreciation and asset impairment, amortization of intangible assets, interest expense, net, income tax expense (benefit), stock-based compensation expense, acquisition-related expense, acquisition-related and other deferred revenue adjustments, certain litigation-related expenses and stock registration costs. 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, 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 income.

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

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2013
 
2012
 
2013
 
2012
 
(in thousands)
Net income
$
12,886

 
$
2,113

 
$
18,514

 
$
1,461

Acquisition-related and other deferred revenue
1,793

 
3

 
1,795

 
86

Depreciation, asset impairment and loss on sale of asset
3,400

 
3,416

 
10,486

 
10,018

Amortization of intangible assets
4,242

 
4,537

 
12,647

 
14,051

Interest expense, net
236

 
518

 
1,199

 
1,734

Income tax expense (benefit)
(7,114
)
 
1,211

 
(2,616
)
 
704

Litigation related expense
278

 
860

 
331

 
9,759

Stock-based compensation expense
7,736

 
6,013

 
21,042

 
14,317

Acquisition-related expense (income)
288

 
(572
)
 
2,113

 
(256
)
       Stock Registration Costs
$

 
$
668

 
$

 
$
668

Adjusted EBITDA
$
23,745

 
$
18,767

 
$
65,511

 
$
52,542


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Liquidity and Capital Resources
Our primary sources of liquidity as of September 30, 2013 consisted of $44.0 million of cash and cash equivalents, $150.0 million available under our revolving line of credit and $41.9 million of current assets less current liabilities (excluding $44.0 million of cash and cash equivalents and $61.3 million of deferred revenue).
Our principal uses of liquidity have been to fund our operations, working capital requirements, capital expenditures, acquisitions and to service our debt obligations. We expect that working capital requirements, capital expenditures and acquisitions will continue to be our principal needs for liquidity over the near term. In addition, as of September 30, 2013, we made several acquisitions in which a portion of the cash purchase price is payable at various times through 2014. In October 2013, subsequent to quarter end, we made acquisitions in which a portion of the cash purchase price is payable at various times through 2015. We expect to fund these obligations from cash provided by operating activities or, in some cases, the issuance of shares of our common stock at our election.
We believe that our existing cash and cash equivalents, working capital (excluding deferred revenue and cash and cash equivalents) and our cash flow from operations, will be sufficient to fund our operations and planned capital expenditures for at least the next 12 months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the timing and size of acquisitions, the expansion of our sales and marketing activities, the timing and extent of spending to support product development efforts, the timing of introductions of new solutions and enhancements to existing solutions and the continuing market acceptance of our solutions. We may enter into acquisitions of complementary businesses, applications or technologies in the future, which could require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us, or at all. As of December 31, 2012, we had federal and state net operating loss carryforwards of $176.4 million and $6.4 million, respectively. These carryforwards may be available to offset potential payments of future federal and state income tax liabilities and, if unused, expire at various dates through 2031 for both federal and state income tax purposes.
The following table sets forth cash flow data for the periods indicated therein:
 
 
Nine Months Ended 
 September 30,
 
2013
 
2012
 
(in thousands)
Net cash provided by operating activities
$
51,609

 
$
41,155

Net cash used in investing activities
(33,132
)
 
(28,549
)
Net cash used in financing activities
(8,265
)
 
(27,659
)
Net Cash Provided by Operating Activities
In the nine months ended September 30, 2013, cash from operating activities consisted of a net income of $18.5 million, net non-cash charges of $44.2 million, and acquisition-related contingent consideration of $1.3 million, partially offset by a deferred tax benefit of $4.9 million resulting from the reversal of the valuation allowance and decreases in working capital of $7.5 million. Net non-cash charges to income increased $5.8 million or 15.1%, compared to the same period in 2012, and primarily consisted of depreciation, amortization and stock-based compensation expense. The cash outflow resulting from the changes in working capital was primarily due to changes in litigation accruals and accrued compensation, offset by decreases in other assets and accounts payable.
Net Cash Used in Investing Activities
In the nine months ended September 30, 2013, investing activities consisted of acquisition-related payments of $10.3 million primarily related to Seniors for Living and RentSentinel acquisitions, $0.6 million intangible asset purchase and $22.2 million of capital expenditures. Capital expenditures during the nine months ended September 30, 2013 were primarily related to investments in technology infrastructure to support our growth initiatives.

Net Cash Used in Financing Activities
Cash used in financing activities during the nine months ended September 30, 2013 was primarily due to payments of $10.0 million on our revolving line of credit, capital lease payments of $0.4 million, and $1.5 million in payments of acquisition-related contingent consideration offset by net proceeds of $3.7 million from stock issuances under our stock based compensation plans.

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Contractual Obligations, Commitments and Contingencies
Contractual Obligations
Our contractual obligations relate primarily to borrowings and interest payments under credit facilities, capital leases, operating leases and purchase obligations. There have been no material changes outside normal operations in our contractual obligations from our disclosures within our Form 10-K.
Long-Term Debt Obligations
In December 2011, we entered into an Amended and Restated Credit Agreement (“Restated Agreement”) to amend our original credit facility. The Restated Agreement provides for a secured revolving credit facility in 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. The Restated Agreement converted our outstanding term loan under the original credit facility into revolving loans. Revolving loans accrue interest at a per annum rate equal to, at the Company’s option, 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 2.50% to 3.00%, in the case of LIBOR loans, and 0.00% to 0.25% in the case of prime rate loans, based upon the Company’s senior leverage ratio. The interest is 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. Principal, together with all accrued and unpaid interest, is due and payable on December 30, 2015. Advances under the credit facility may be voluntarily prepaid, and must be prepaid with the proceeds of certain dispositions, extraordinary receipts and indebtedness and in full upon a change in control.
In September 2012, we entered into an amendment to the Restated Agreement. Under the terms of the amendment, the LIBOR rate margin ranges from 2.00% to 2.50%, based on our senior leverage ratio. All other interest rates and maturity periods remain consistent with the Restated Agreement. Additionally, our capital expenditure limitations were expanded in the amendment.
All of our obligations under the loan facility are secured by substantially all of our property. All of our existing and future domestic subsidiaries are required to guaranty our obligations under the credit facility, other than certain immaterial subsidiaries and our payment processing subsidiary, RealPage Payment Processing Services, Inc. Our foreign subsidiaries may, under certain circumstances, be required to guaranty our obligations under the credit facility. Such guarantees by existing and future subsidiaries are and will be secured by substantially all of the property of such subsidiaries.
Our credit facility contains customary covenants which limit our and certain of our subsidiaries’ ability to, among other things, incur additional indebtedness or guarantee indebtedness of others; create liens on our assets; enter into mergers or consolidations; dispose of assets; prepay indebtedness or make changes to our governing documents and certain of our agreements; pay dividends and make other distributions on our capital stock, and redeem and repurchase our capital stock; make investments, including acquisitions; enter into transactions with affiliates; and make capital expenditures. Our credit facility additionally contains customary affirmative covenants, including requirements to, among other things, take certain actions in the event we form or acquire new subsidiaries; hold annual meetings with our lenders; provide copies of material contracts and amendments to our lenders; locate our collateral only at specified locations; and use commercially reasonable efforts to ensure that certain material contracts permit the assignment of the contract to our lenders; subject in each case to customary exceptions and qualifications. We are also required to comply with a fixed charge coverage ratio, which is a ratio of our EBITDA to our fixed charges as determined in accordance with the credit facility, of 1.25:1:00 for each 12-month period ending at the end of a fiscal quarter, and a senior leverage ratio, which is a ratio of the outstanding revolver usage to our EBITDA as determined in accordance with the credit facility, of 2.75:1.00 on the last day of each fiscal quarter.
In the event of a default on our credit facility, the obligations under the credit facility could be accelerated, the applicable interest rate under the credit facility could be increased, and our subsidiaries that have guaranteed the credit facility could be required to pay the obligations in full, and our lenders would be permitted to exercise remedies with respect to all of the collateral that is securing the credit facility, including substantially all of our and our subsidiary guarantors’ assets. Any such default that is not cured or waived could have a material adverse effect on our liquidity and financial condition.

Off-Balance Sheet Arrangements
We do not have any off-balance sheet financing arrangements and we do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk

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Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in interest rates. We do not hold or issue financial instruments for trading purposes.
We had cash and cash equivalents of $44.0 million million and $33.8 million at September 30, 2013 and December 31, 2012, respectively.
We hold cash and cash equivalents for working capital purposes. We do not have material exposure to market risk with respect to investments, as our investments consist primarily of highly liquid investments purchased with original maturities of three months or less. We do not use derivative financial instruments for speculative or trading purposes; however, we may adopt specific hedging strategies in the future. Any declines in interest rates, however, will reduce future interest income.
We had no outstanding debt at September 30, 2013 and $10.0 million at December 31, 2012. The interest rate on this debt is variable and adjusts periodically based on the three-month LIBOR rate.
 
Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures
Pursuant to Rule 13a-15(b) and Rule 15d-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we carried out an evaluation, with the participation of our management, and under the supervision of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2013, in ensuring that information required to be disclosed in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management’s assessment of the effectiveness of our disclosure controls and procedures is expressed at the level of reasonable assurance because management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives.
Changes in Internal Controls
There were no changes in the Company’s internal control over financial reporting during the nine months ended September 30, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Inherent Limitations of Internal Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

29


PART II—OTHER INFORMATION
 
Item 1. Legal Proceedings.
From time to time, we have been and may be involved in various legal proceedings arising from our ordinary course of business.
On January 24, 2011, Yardi Systems, Inc. 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, we made claims for reimbursement against each of our 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 us 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 our obligation to reimburse to Axis $5.0 million in payments that Axis had previously reimbursed to us. We dispute these assertions by these carriers and intend to vigorously protect its coverage. Accordingly, on August 14, 2012, we 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 our counsel in connection with the Yardi Lawsuit. On September 5, 2012, Ace filed a motion to dismiss the Ace Lawsuit and on September 6, 2012, defendant Axis filed a motion to dismiss the Ace Lawsuit. On September 24, 2012, we filed our opposition to the motions to dismiss and separately filed our motion for partial summary judgment on the basis that each of Ace’s and Axis’ notice of rescission was untimely under applicable statutory law. On May 20, 2013, the court entered an order directing the parties to engage in the alternative dispute resolution procedure set forth in the policies at issue, and staying the lawsuit until such procedure has been completed. The court did not rule on the substance of Company’s motion for summary judgment, denying that motion with leave to re-file if the court-ordered non-binding dispute resolution procedures do not result in a settlement of the action. We intend to continue to pursue coverage and other appropriate relief in connection with these insurance policies.

Item 1A. Risk Factors
Risks Related to Our Business
Our quarterly operating results have fluctuated in the past and may fluctuate in the future, which could cause our stock price to decline.
Our quarterly operating results may fluctuate as a result of a variety of factors, many of which are outside of our control. Fluctuations in our quarterly operating results may be due to a number of factors, including the risks and uncertainties discussed elsewhere in this filing. Some of the important factors that could cause our revenues and operating results to fluctuate from quarter to quarter include:
the extent to which on demand software solutions maintain current and achieve broader market acceptance;
our ability to timely introduce enhancements to our existing solutions and new solutions;
our ability to renew the use of our on demand products and services by units managed by our existing customers and to increase the use of our on demand products and services for the management of units by our existing and new customers;
changes in our pricing policies or those of our competitors or new competitors;
changes in local economic, political and regulatory environments of our international operations;
the variable nature of our sales and implementation cycles;
general economic, industry and market conditions in the rental housing industry that impact the financial condition of our current and potential customers;
the amount and timing of our investment in research and development activities;
technical difficulties, service interruptions, data or document losses or security breaches;
Internet usage trends among consumers, and the methodologies internet search engines utilized to direct those consumers to websites such as our LeaseStar product family;

30


our ability to hire and retain qualified key personnel, including the rate of expansion of our sales force and IT department;
our ability to get ahead of external forces and emergence of new technologies and products;
our ability to enter into new markets;
changes in the legal, regulatory or compliance environment related to the rental housing industry, including without limitation fair credit reporting, payment processing, privacy, social media, utility billing, insurance, the Internet and e-commerce, licensing, the Health Insurance Portability Act of 1996 (“HIPAA”) and the Health Information Technology Economic and Clinical Health Act (“HITECH”);
the amount and timing of operating expenses and capital expenditures related to the expansion of our operations and infrastructure;
the timing of revenue and expenses related to recent and potential acquisitions or dispositions of businesses or technologies;
our ability to integrate acquisition operations in a cost-effective and timely manner;
litigation and settlement costs, including unforeseen costs;
public company reporting requirements; and
new accounting pronouncements and changes in accounting standards or practices, particularly any affecting the recognition of subscription revenue or accounting for mergers and acquisitions.
Fluctuations in our quarterly operating results or guidance that we provide may lead analysts to change their long-term model for valuing our common stock, cause us to face short-term liquidity issues, impact our ability to retain or attract key personnel or cause other unanticipated issues, all of which could cause our stock price to decline. As a result of the potential variations in our quarterly revenue and operating results, we believe that quarter-to-quarter comparisons of our revenues and operating results may not be meaningful and the results of any one quarter should not be relied upon as an indication of future performance.
We have a history of operating losses and may not maintain profitability in the future.
We have not been consistently profitable on a quarterly or annual basis. While we have experienced significant growth over recent quarters, we may not be able to sustain or increase our growth or profitability in the future. We expect to make significant future expenditures related to the development and expansion of our business. As a result of increased general and administrative expenses due to the additional operational and reporting costs associated with being a public company, we need to generate and sustain increased revenue to achieve future profitability expectations. We may incur significant losses in the future for a number of reasons, including the other risks and uncertainties described in this filing. Additionally, we may encounter unforeseen operating expenses, difficulties, complications, delays and other unknown factors that may result in losses in future periods. If these losses exceed our expectations or our growth expectations are not met in future periods, our financial performance will be affected adversely.
If we are unable to manage the growth of our diverse and complex operations, our financial performance may suffer.
The growth in the size, dispersed geographic locations, complexity and diversity of our business and the expansion of our product lines and customer base has placed, and our anticipated growth may continue to place, a significant strain on our managerial, administrative, operational, financial and other resources. We increased our number of employees from 922 as of December 31, 2008 to 3,320 as of September 30, 2013. We increased our number of on demand customers from 2,669 as of December 31, 2008 to approximately 8,700 as of September 30, 2013. We increased the number of on demand product centers that we offer from 29 as of December 31, 2008 to 51 as of September 30, 2013. In addition, in the past, we have grown and expect to continue to grow through acquisitions. Our ability to effectively manage our anticipated future growth will depend on, among other things, the following:
successfully supporting and maintaining a broad range of current and emerging solutions;
maintaining continuity in our senior management and key personnel;
attracting, retaining, training and motivating our employees, particularly technical, customer service and sales personnel;
enhancing our financial and accounting systems and controls;
enhancing our information technology infrastructure, processes and controls; and
managing expanded operations in geographically dispersed locations.

31


If we do not manage the size, complexity and diverse nature of our business effectively, we could experience product performance issues, delayed software releases and longer response times for assisting our customers with implementation of our solutions and could lack adequate resources to support our customers on an ongoing basis, any of which could adversely affect our reputation in the market and our ability to generate revenue from new or existing customers.
The nature of our platform is complex and highly integrated, and if we fail to successfully manage releases or integrate new solutions, it could harm our revenues, operating income and reputation.
We manage a complex platform of solutions that consists of our property management solutions, integrated software-enabled value-added services and web-based advertising and lease generation services. Many of our solutions include a large number of product centers that are highly integrated and require interoperability with other RealPage products, as well as products and services of third-party service providers. Additionally, we typically deploy new releases of the software underlying our on demand software solutions on a bi-weekly, monthly or quarterly schedule, depending on the solution. Due to this complexity and the condensed development cycles under which we operate, we may experience errors in our software, corruption or loss of our data or unexpected performance issues from time to time. For example, our solutions may face interoperability difficulties with software operating systems or programs being used by our customers, or new releases, upgrades, fixes or the integration of acquired technologies may have unanticipated consequences on the operation and performance of our other solutions. If we encounter integration challenges or discover errors in our solutions late in our development cycle, it may cause us to delay our launch dates. Any major integration or interoperability issues or launch delays could have a material adverse effect on our revenues, operating income and reputation.
Our business depends substantially on the renewal of our products and services for on demand units managed by our customers and the increase in the use of our on demand products and services for on demand units.
With the exception of some of our LeaseStar and Propertyware solutions, which are typically month-to-month, we generally license our solutions pursuant to customer agreements with a term of one year. The pricing of the agreements is typically based on a price per unit basis. Our customers have no obligation to renew these agreements after their term expires, or to renew these agreements at the same or higher annual contract value. In addition, under specific circumstances, our customers have the right to cancel their customer agreements before they expire, for example, in the event of an uncured breach by us, or in some circumstances, by giving 30 days’ notice or paying a cancellation fee. In addition, customers often purchase a higher level of professional services in the initial term than they do in renewal terms to ensure successful activation. As a result, our ability to grow is dependent in part on customers purchasing additional solutions or professional services for their on demand units after the initial term of their customer agreement. Though we maintain and analyze historical data with respect to rates of customer renewals, upgrades and expansions, those rates may not accurately predict future trends in renewal of on demand units. Our customers’ on demand unit renewal rates may decline or fluctuate for a number of reasons, including, but not limited to, the