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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
FORM 10-Q
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
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.)
2201 Lakeside Boulevard
Richardson, Texas
 
75082-4305
(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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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
¨
 
 
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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
 
April 21, 2017
Common Stock, $0.001 par value
 
82,681,996


Table of Contents

INDEX
 
 
 
 


Table of Contents

PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
RealPage, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share data)
 
March 31, 2017
 
December 31, 2016
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
59,516

 
$
104,886

Restricted cash
96,430

 
83,654

Accounts receivable, less allowance for doubtful accounts of $2,372 and $2,468 at March 31, 2017 and December 31, 2016, respectively
88,052

 
92,367

Prepaid expenses
13,033

 
10,836

Other current assets
4,654

 
5,712

Total current assets
261,685

 
297,455

Property, equipment, and software, net
138,379

 
130,428

Goodwill
312,837

 
259,938

Identified intangible assets, net
94,381

 
74,976

Deferred tax assets, net
59,195

 
15,665

Other assets
10,430

 
9,636

Total assets
$
876,907

 
$
788,098

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
28,742

 
$
21,421

Accrued expenses and other current liabilities
42,460

 
50,464

Current portion of deferred revenue
98,270

 
89,583

Current portion of term loan
3,125

 
5,469

Customer deposits held in restricted accounts
96,313

 
83,590

Total current liabilities
268,910

 
250,527

Deferred revenue
6,173

 
6,308

Term loan, net
117,746

 
116,657

Other long-term liabilities
32,739

 
29,843

Total liabilities
425,568

 
403,335

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 March 31, 2017 and December 31, 2016, respectively

 

Common stock, $0.001 par value: 125,000,000 shares authorized, 86,567,236 and 86,062,191 shares issued and 82,867,780 and 81,087,353 shares outstanding at March 31, 2017 and December 31, 2016, respectively
86

 
86

Additional paid-in capital
552,412

 
534,348

Treasury stock, at cost: 3,699,456 and 4,974,838 shares at March 31, 2017 and December 31, 2016, respectively
(33,934
)
 
(30,358
)
Accumulated deficit
(67,228
)
 
(119,260
)
Accumulated other comprehensive income (loss)
3

 
(53
)
Total stockholders’ equity
451,339

 
384,763

Total liabilities and stockholders’ equity
$
876,907

 
$
788,098

See accompanying notes.

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RealPage, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
 
 
Three Months Ended March 31,
 
2017
 
2016
Revenue:
 
 
 
On demand
$
146,213

 
$
123,411

On premise
675

 
772

Professional and other
6,031

 
4,200

Total revenue
152,919

 
128,383

Cost of revenue
63,042

 
54,748

Gross profit
89,877

 
73,635

Operating expenses:
 
 
 
Product development
20,387

 
17,272

Sales and marketing
35,147

 
32,199

General and administrative
24,251

 
18,346

Total operating expenses
79,785

 
67,817

Operating income
10,092

 
5,818

Interest expense and other, net
(1,086
)
 
(708
)
Income before income taxes
9,006

 
5,110

Income tax expense
811

 
2,114

Net income
$
8,195

 
$
2,996

 
 
 
 
Net income per share attributable to common stockholders:
 
 
 
Basic
$
0.10

 
$
0.04

Diluted
$
0.10

 
$
0.04

Weighted average shares used in computing net income per share attributable to common stockholders:
 
 
 
Basic
78,263

 
76,656

Diluted
81,386

 
77,147

See accompanying notes.

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RealPage, Inc.
Condensed Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited)
 
Three Months Ended March 31,
 
2017
 
2016
Net income
$
8,195

 
$
2,996

Gain (loss) on interest rate swaps, net
106

 
(79
)
Foreign currency translation adjustment
(50
)
 
96

Comprehensive income
$
8,251

 
$
3,013

See accompanying notes.

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RealPage, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands)
(unaudited)
 
 
Common Stock
 
Additional
Paid-in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Accumulated Deficit
 
Treasury Shares
 
Total
Stockholders’ Equity
 
Shares
 
Amount
 
 
 
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2016
86,062

 
$
86

 
$
534,348

 
$
(53
)
 
$
(119,260
)
 
(4,975
)
 
$
(30,358
)
 
$
384,763

Cumulative effect of adoption of ASU 2016-09

 

 
6

 

 
43,837

 

 

 
43,843

Issuance of common stock
405

 

 
7,929

 

 

 

 

 
7,929

Issuance of restricted stock
100

 

 
(2
)
 

 

 
1,488

 
2

 

Treasury stock purchases, at cost

 

 

 

 

 
(213
)
 
(3,578
)
 
(3,578
)
Stock-based expense

 

 
10,131

 

 

 

 

 
10,131

Interest rate swap agreements

 

 

 
93

 

 

 

 
93

Foreign currency translation

 

 

 
(50
)
 

 

 

 
(50
)
Reclassification of realized loss on cash flow hedge to earnings, net of tax

 

 

 
13

 

 

 

 
13

Net income

 

 

 

 
8,195

 

 

 
8,195

Balance as of March 31, 2017
86,567

 
$
86

 
$
552,412

 
$
3

 
$
(67,228
)
 
(3,700
)
 
$
(33,934
)
 
$
451,339

See accompanying notes.

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RealPage, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
Three Months Ended March 31,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
8,195

 
$
2,996

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
14,440

 
12,607

Deferred taxes
243

 
1,539

Stock-based expense
10,092

 
8,391

Excess tax benefit from stock-based compensation

 
(27
)
Loss on disposal and impairment of other long-lived assets
24

 

Acquisition-related consideration
121

 
(126
)
Changes in assets and liabilities, net of assets acquired and liabilities assumed in business combinations:
 
 
 
Accounts receivable
5,934

 
4,952

Prepaid expenses and other current assets
(843
)
 
(17
)
Other assets
(619
)
 
117

Accounts payable
1,104

 
1,106

Accrued compensation, taxes, and benefits
(5,556
)
 
(2,332
)
Deferred revenue
1,810

 
(1,597
)
Other current and long-term liabilities
(738
)
 
1,360

Net cash provided by operating activities
34,207

 
28,969

Cash flows from investing activities:
 
 
 
Purchases of property, equipment, and software
(9,925
)
 
(10,217
)
Acquisition of businesses, net of cash acquired
(66,103
)
 
(59,152
)
Net cash used in investing activities
(76,028
)
 
(69,369
)
Cash flows from financing activities:
 
 
 
Proceeds from term loan

 
124,688

Payments on revolving line of credit

 
(40,000
)
Deferred financing costs
(1,288
)
 
(392
)
Payments on capital lease obligations
(101
)
 
(152
)
Payments of acquisition-related consideration
(6,461
)
 
(2,361
)
Issuance of common stock
7,927

 
2,482

Excess tax benefit from stock-based compensation

 
27

Purchase of treasury stock related to stock-based compensation
(3,576
)
 
(1,262
)
Purchase of treasury stock under share repurchase program

 
(16,138
)
Net cash (used in) provided by financing activities
(3,499
)
 
66,892

Net (decrease) increase in cash and cash equivalents
(45,320
)
 
26,492

Effect of exchange rate on cash
(50
)
 
96

Cash and cash equivalents:
 
 
 
Beginning of period
104,886

 
30,911

End of period
$
59,516

 
$
57,499

See accompanying notes.

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RealPage, Inc.
Condensed Consolidated Statements of Cash Flows, continued
(in thousands)
(unaudited)
 
Three Months Ended March 31,
 
2017
 
2016
Supplemental cash flow information:
 
 
 
Cash paid for interest
$
789

 
$
512

Cash paid for income taxes, net of refunds
$
325

 
$
191

Non-cash investing activities:
 
 
 
Accrued property, equipment, and software
$
9,941

 
$
8,640

See accompanying notes.

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RealPage, Inc.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
1. The Company
RealPage, Inc., a Delaware corporation (together with its subsidiaries, the “Company” or “we” or “us”), is a technology leader to the real estate industry, helping owners, managers, and investors optimize both operational yields and investment returns. Our platform of data analytics and software solutions enables the rental real estate industry to manage property operations (such as marketing, pricing, screening, leasing, and accounting), identify opportunities through market intelligence, and obtain data-driven insight for better operational and financial decision-making. Our integrated, on demand platform provides a single point of access and a massive repository of real-time lease transaction data, including prospect, renter, and property data. By leveraging data as well as integrating and streamlining a wide range of complex processes and interactions among the apartment real estate ecosystem (owners, managers, prospects, renters, service providers, and investors), our platform helps our clients improve financial and operational performance and prudently place and harvest capital.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements and footnotes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. We believe that the disclosures made are appropriate and conform to those rules and regulations, and that the condensed or omitted information is not misleading.
The unaudited condensed consolidated financial statements included herein reflect all adjustments (consisting of normal, recurring adjustments) which are, in the opinion of management, necessary to state fairly the results for the interim periods presented. All intercompany balances and transactions have been eliminated in consolidation. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the fiscal year.
These financial statements should be read in conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K filed with the SEC on March 1, 2017 (“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 months ended March 31, 2017 and 2016 was earned in the United States. Net property, equipment, and software held consisted of $133.8 million and $125.3 million located in the United States, and $4.6 million and $5.1 million in our international subsidiaries at March 31, 2017 and December 31, 2016, respectively. Substantially all of the net property, equipment, and software held in our international subsidiaries was located in the Philippines, Spain, and India at both March 31, 2017 and December 31, 2016.
Concentrations of Credit Risk
Our cash accounts are maintained at various financial institutions and may, from time to time, exceed federally insured limits. The Company has not experienced any losses in such accounts.
Concentrations of credit risk with respect to accounts receivable result from substantially all of our clients being in the residential rental housing market. Our clients, however, are dispersed across different geographic areas. We do not require collateral from clients. We maintain an allowance for doubtful accounts based upon the expected collectability of accounts receivable.
No single client accounted for 10% or more of our revenue or accounts receivable for the three months ended March 31, 2017 or 2016.
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 intangible assets and the recoverability or impairment of tangible and intangible asset values; fair value measurements; contingent commissions related to the sale of insurance products; purchase accounting allocations and contingent consideration; revenue and deferred revenue and related

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reserves; stock-based expense; and our effective income tax rate and the recoverability of deferred tax assets, which are based upon our expectations of future taxable income and allowable deductions. Actual results could differ from these estimates. For greater detail regarding these accounting policies and estimates, refer to our Form 10-K.
Business Combinations
The Company applies the guidance contained in ASC Topic 805, Business Combinations (“ASC 805”) in determining whether an acquisition transaction constitutes a business combination. ASC 805 defines a business as consisting of inputs and processes applied to those inputs that have the ability to create outputs. The acquisition transactions in Note 3 were determined to constitute business combinations and were accounted for under ASC 805.
Purchase consideration includes assets transferred, liabilities assumed, and/or equity interests issued by us, all of which are measured at their fair value as of the date of acquisition. Our business combination transactions may be structured to include an up-front cash payment and deferred and/or contingent cash payments to be made at specified dates subsequent to the date of acquisition. Deferred cash payments are included in the acquisition consideration based on their fair value as of the acquisition date. The fair value of these obligations is estimated based on the present value, as of the date of acquisition, of the anticipated future payments. The future payments are discounted using a rate that considers an estimate of the return expected by a market-participant and a measurement of the risk inherent in the cash flows, among other inputs. Deferred cash payments are generally subject to adjustments specified in the underlying purchase agreement related to the seller’s indemnification obligations. Contingent cash payments are obligations to make future cash payments to the seller, the payment of which is contingent upon the achievement of stipulated operational or financial targets in the post-acquisition period. Contingent cash payments are included in the purchase consideration at their fair value as of the acquisition date. The fair value of these payments is estimated using a probability weighted discount model based on the achievement of the specified targets. The fair value of these liabilities is re-evaluated on a quarterly basis, and any change is reflected in the line “General and administrative” in the accompanying Condensed Consolidated Statements of Operations. These estimates are inherently uncertain and unpredictable. Unanticipated events and circumstances may occur that would affect the accuracy or validity of these estimates.
The total purchase consideration is allocated to the assets acquired and liabilities assumed based on their estimated fair values. Any excess consideration is classified as goodwill. Acquired intangibles are recorded at their estimated fair value based on the income approach using market-based estimates. Acquired intangibles generally include developed product technologies, which are amortized over their useful life on a straight-line basis, and client relationships, which are amortized over their useful life proportionately to the expected discounted cash flows derived from the asset. When trade names acquired are not classified as indefinite-lived, they are amortized on a straight-line basis over their expected useful life.
Acquisition costs are expensed as incurred and are included in the line “General and administrative” in the accompanying Condensed Consolidated Statements of Operations. We include the results of operations from acquired businesses in our condensed consolidated financial statements from the effective date of the acquisition.
Derivative Financial Instruments
The Company is exposed to interest rate risk related to our variable rate debt. The Company manages this risk through a program that includes the use of interest rate derivatives, the counterparties to which are major financial institutions. Our objective in using interest rate derivatives is to add stability to interest cost by reducing our exposure to interest rate movements. We do not use derivative instruments for trading or speculative purposes.
Our interest rate derivatives are designated as cash flow hedges and are carried in the Condensed Consolidated Balance Sheets at their fair value. Unrealized gains and losses resulting from changes in the fair value of these instruments are classified as either effective or ineffective. The effective portion of such gains or losses is recorded as a component of accumulated other comprehensive income (“AOCI”), while the ineffective portion is recorded as a component of interest expense in the period of change. Amounts reported in AOCI related to interest rate derivatives are reclassified into interest expense as interest payments are made on our variable-rate debt. If an interest rate derivative agreement is terminated prior to its maturity, the amounts previously recorded in AOCI are recognized into earnings over the period that the forecasted transactions impact earnings. If the hedging relationship is discontinued because it is probable that the forecasted transactions will not occur according to our original strategy, any related amounts previously recorded in AOCI are recognized in earnings immediately.
Revenue Recognition
We derive our revenue from three primary sources: on demand software solutions, on premise software solutions, and professional services. We commence revenue recognition when all of the following conditions are met:
there is persuasive evidence of an arrangement;
the solution and/or service has been provided to the client;
the collection of the fees is probable; and

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the amount of fees to be paid by the client is fixed or determinable.
If the fees are not fixed or determinable, we recognize revenues as payments become due from clients or when amounts owed are collected, provided all other conditions for revenue recognition have been met. Accordingly, this may materially affect the timing of our revenue recognition and results of operations.
When arrangements with clients include multiple software solutions and/or services, we allocate arrangement consideration to each deliverable based on its relative selling price. In such circumstances, we determine the relative selling price for each deliverable based on vendor specific objective evidence of selling price (“VSOE”), if available, or our best estimate of selling price (“BESP”). We have determined that third-party evidence of selling price is not available as our solutions and services are not largely interchangeable with those of other vendors. Our process for determining BESP considers multiple factors, including prices charged by us for similar offerings when sold separately, pricing and discount strategies, and other business objectives.
Taxes collected from clients and remitted to governmental authorities are presented on a net basis.
On Demand Revenue
Our on demand revenue consists of license and subscription fees, transaction fees related to certain of our software-enabled value-added services, and commissions derived from our selling certain risk mitigation services.
License and subscription fees are composed of a charge billed at the initial order date and monthly or annual subscription fees for accessing our on demand software solutions. The license fee billed at the initial order date is recognized as revenue on a straight-line basis over the longer of the contractual term or the period in which the client is expected to benefit, which we consider to be three years. Recognition starts once the product has been activated. Revenue from monthly and annual subscription fees is recognized on a straight-line basis over the access period.
We recognize revenue from transaction fees derived from certain of our software-enabled value-added services as the related services are performed.
As part of our risk mitigation services to the rental housing industry, we act as an insurance agent and derive commission revenue from the sale of insurance products to individuals. The commissions are based upon a percentage of the premium that the insurance company charges to the policyholder and are subject to forfeiture in instances where a policyholder cancels prior to the end of the policy. Our contract with our underwriting partner provides for contingent commissions to be paid to us in accordance with the agreement. This agreement provides for a calculation that considers, on the policies sold by us, earned premiums less i) earned agent commissions; ii) a percent of premium retained by our underwriting partner; iii) incurred losses; and iv) profit retained by our underwriting partner during the time period. Our estimate of contingent commission revenue considers historical loss experience on the policies sold by us. If the policy is cancelled, our commissions are forfeited as a percent of the unearned premium. As a result, we recognize commissions related to these services as earned ratably over the policy term.
On Premise Revenue
Sales of our on premise software solutions consist of an annual term license, which includes maintenance and support. Clients can renew their annual term license for additional one-year terms at renewal price levels. We recognize revenue for the annual term license and support services on a straight-line basis over the contract term.
We also derive on premise revenue from multiple element arrangements that include perpetual licenses with maintenance and other services to be provided over a fixed term. Revenue is recognized for delivered items using the residual method when we have VSOE of fair value for the undelivered items and all other criteria for revenue recognition have been met.
When VSOE has not been asserted for the undelivered items, we recognize the arrangement fees ratably over the longer of the client support period or the period during which professional services are rendered.
Professional and Other Revenue
Professional services and other revenue are recognized as the services are rendered for time and materials contracts. Training revenues are recognized after the services are performed.
Fair Value Measurements
Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
Legal Contingencies
We review the status of each matter and record a provision for a liability when we consider that it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We review these provisions quarterly and

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make adjustments where needed as additional information becomes available. If either or both of the criteria are not met, we assess whether there is at least a reasonable possibility that a loss, or additional losses beyond those already accrued, may be incurred. If there is a reasonable possibility that a material loss (or additional material loss in excess of any accrual) may be incurred, we disclose an estimate of the amount of loss or range of losses, either individually or in the aggregate, as appropriate, if such an estimate can be made, or disclose that an estimate of loss cannot be made.
Recently Adopted Accounting Standards
On March 30, 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This guidance simplifies accounting for stock-based compensation. Under the new guidance, excess tax benefits and tax deficiencies are now recognized as income tax expense or benefit in the income statement in the period they occur, regardless of whether the benefit reduces taxes payable in the current period. Previously, GAAP required tax benefits in excess of compensation cost to be recorded as additional paid-in capital to the extent taxes payable were reduced and tax deficiencies to be recorded in equity to the extent of previous accumulated excess tax benefit and then recorded to the income statement. The ASU also requires excess tax benefits to be reflected as operating cash flows and allows the Company to elect to either estimate the number of awards that are expected to vest or account for forfeitures as they occur.
We adopted ASU 2016-09 in the first quarter of 2017. As a result of our adoption of this ASU, we recorded a deferred tax asset of $43.8 million, net of a $0.3 million valuation allowance, related to excess stock-based compensation deductions that arose but were not recognized in prior years. Additionally, we elected to account for forfeitures as they occur using a modified retrospective transition method that required us to record an immaterial cumulative-effect adjustment to accumulated deficit. We elected to account for the change in presentation of excess tax benefits in the statements of cash flows prospectively, and as a result, no prior periods were adjusted. We began to account for all excess tax benefits and deficits arising from current period stock transactions as income tax benefit or expense effective January 1, 2017. The remaining amendments to this standard did not have a material impact on our condensed consolidated financial statements.
Recently Issued Accounting Standards
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business to assist entities with evaluating whether a set of transferred assets and activities ("set") is a business. Under the new guidance, an entity first determines whether substantially all of the fair value of the set is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the set is not a business. If it is not met, the entity evaluates whether the set meets the requirements that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. The ASU requires the changes to be implemented on a prospective basis and is applicable for annual reporting periods beginning after December 15, 2017, including interim periods therein. Early application is permitted. We plan to adopt the changes contained in ASU 2017-01 effective January 1, 2018 and, as required by the ASU, will apply the new guidance on a prospective basis. We do not expect this ASU will have a significant impact on our classification of businesses and complementary technologies acquired.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows - Restricted Cash, which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within, and must be applied retrospectively. Early adoption of this ASU is permitted, including adoption in an interim period, but any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. We will adopt ASU 2016-18 in the first quarter of 2018. After adoption, changes in customer deposits held in restricted accounts will result in an increase or reduction in cash flows from operating activities. Such changes do not have an impact under current rules.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted in fiscal years beginning after December 15, 2018. The amendments in this ASU are to be applied through a cumulative-effect adjustment to retained earnings as of the first reporting period in which the ASU is effective. We have not yet selected a transition date and are currently evaluating the impact of adopting ASU 2016-13 on our financial statements.
On February 25, 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Current GAAP requires lessees to classify their leases as either capital leases, for which the lessee recognizes a lease liability and a related leased asset, or operating leases, which are not reflected in the lessee’s balance sheet. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with a term of more than twelve months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease will depend primarily on its classification as a finance or an operating lease. However, unlike current GAAP, which requires only capital leases to be recognized on the

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balance sheet, ASU 2016-02 will require both operating and finance leases to be recognized on the balance sheet. Additionally, the ASU will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases, including qualitative and quantitative requirements.
ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance to the beginning of the earliest comparative period presented. We have not yet selected a transition date and are currently evaluating the impact of adopting ASU 2016-02 on our financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09, as amended by certain supplementary ASU’s released in 2016, will replace all current GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each separate performance obligation. In August 2015, the FASB issued ASU 2015-14, Topic 606 - Deferral of Effective Date. ASU 2015-14 permitted public business entities to defer the adoption of ASU 2014-09 until interim and annual reporting periods beginning after December 15, 2017. We will adopt ASU 2014-09 in the first quarter of 2018 and expect to adopt on a modified retrospective basis. Under this method of adoption, we would recognize the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings in the period of initial adoption. Comparative prior year periods would not be adjusted.
Based on our preliminary analysis, we anticipate that commissions paid to our direct sales force will qualify as incremental costs of obtaining a contract and will be capitalized and subsequently amortized. Additionally, we anticipate limited changes in the timing of our revenue recognition and client accommodation credits. The standard will require a significant amount of new revenue disclosures in our consolidated financial statements, and we are currently evaluating the impact of these new disclosure requirements. We continue to evaluate the new standard against our existing accounting policies and our contracts with clients to determine the effect the guidance will have on our financial statements and what changes to systems and controls may be warranted.
3. Acquisitions
Current Acquisition Activity
Lease Rent Options
In February 2017, we entered into an agreement to acquire Lease Rent Options ("LRO") and related assets from The Rainmaker Group Holdings, Inc. The closing of the proposed acquisition is subject to standard closing conditions, including the completion of the Hart-Scott-Rodino Antitrust Improvements Act review process. The acquisition of LRO will extend our revenue management footprint, augment our repository of real-time lease transaction data, and increase our data science talent and capabilities. We expect the acquisition of LRO to increase the market penetration of our YieldStar Revenue Management solution and drive revenue growth in our other asset optimization solutions.
Pursuant to the purchase agreement, consideration will consist of a cash payment at closing of approximately $298.5 million, subject to reduction for outstanding indebtedness, unpaid transaction expenses, and a working capital adjustment; and a deferred cash obligation of up to $1.5 million. The deferred cash obligation serves as security for our benefit against the sellers' indemnification obligations. Subject to any indemnification claims made, the deferred cash obligation will be released approximately twelve months following the acquisition date.
Axiometrics LLC
In January 2017, we acquired substantially all of the assets of Axiometrics LLC (“Axiometrics”). Axiometrics provides its customers with timely market intelligence on apartment markets accumulated from survey and research data. Axiometrics also provides tools to analyze the data at an asset level by multiple variables such as asset class, age, and specific competitive floor plans. The acquisition of Axiometrics expanded our multifamily data analytics platform and will be integrated with MPF Research, our market research database, to form Data Analytics.
We acquired Axiometrics for a purchase price of $73.8 million. The purchase price consisted of a cash payment of $66.1 million at closing; deferred cash obligations of up to $7.5 million, payable over a period of two years following the date of acquisition; and contingent cash obligations of up to $5.0 million if certain revenue targets are achieved during the twelve-month period ending December 31, 2018. The fair value of the deferred and contingent cash obligations was $6.9 million and $0.8 million, respectively, at the date of acquisition. This acquisition was financed using cash on hand.
The acquired identified intangible assets consisted of developed technology, client relationships, and trade names. These intangible assets were assigned estimated useful lives of five, ten, and three years, respectively. We recognized goodwill in the

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amount of $52.9 million related to this acquisition, which is primarily comprised of anticipated synergies with our existing multifamily data analytics platform. Goodwill and the acquired identified intangible assets are deductible for tax purposes.
The preliminary allocation of the Axiometrics purchase price is as follows, in thousands:
Accounts receivable
$
1,630

Property, equipment, and software
416

Intangible assets:
 
Developed product technologies
15,500

Client relationships
6,830

Trade names
3,200

Goodwill
52,863

Other assets
273

Accounts payable and accrued liabilities
(277
)
Deferred revenue
(6,680
)
Total purchase price
$
73,755

The estimated fair values of assets acquired and liabilities assumed presented above are provisional and are based on the information available as of the acquisition date. We believe that information provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed, but the Company is awaiting additional information necessary to finalize those values. Therefore, the provisional measurements of fair value are subject to change, and such changes could be significant. We expect to finalize the valuation of these assets and liabilities as soon as practicable, but no later than one year from the acquisition date.
2016 Acquisitions
eSupply Systems, LLC
In June 2016, we acquired substantially all of the assets of eSupply Systems, LLC (“eSupply”) and those of certain entities related to eSupply. eSupply is an e-procurement software and group purchasing service which augmented our Spend Management solutions.
We acquired eSupply for a purchase price of $7.0 million, consisting of a cash payment of $5.5 million at closing and a deferred cash obligation of up to $1.6 million, payable over 18 months after the acquisition date. The fair value of the deferred cash obligation on the date of acquisition was $1.5 million. The first deferred cash payment was made in the fourth quarter of 2016. This acquisition was financed using proceeds from the Term Loan issued in February 2016.
The acquired identified intangible assets primarily consisted of developed technology and client relationships. These intangible assets were assigned estimated useful lives of three and ten years, respectively. We recognized goodwill in the amount of $3.2 million related to this acquisition, which is primarily comprised of anticipated synergies with our existing Spend Management solutions. Goodwill and the acquired identified intangible assets are deductible for tax purposes.
We have adjusted our initial purchase price allocation based on our continuing review of information available at the date we acquired eSupply. These adjustments have resulted in a net decrease in our initial allocation to goodwill and increase in the purchase price of less than $0.1 million. We expect to finalize the valuation of these assets and liabilities as soon as practicable, but no later than one year from the acquisition date.
AssetEye, Inc.
In May 2016, we acquired all of the issued and outstanding stock of AssetEye, Inc. (“AssetEye”). AssetEye is a data aggregation, reporting, and collaboration platform for institutions holding multiple real estate asset classes. This solution provides asset and portfolio managers with a solution to evaluate performance, trends, and operations across a portfolio with transparency into property-level data. The acquisition of AssetEye expanded our on demand solutions to serve all asset classes, including: commercial, hospitality, multifamily, single family, senior living, and student housing.
We acquired AssetEye’s issued and outstanding stock for a purchase price of $4.9 million. The purchase price consisted of a cash payment of $3.6 million at closing, net of cash acquired of $0.8 million; deferred cash obligations of $1.0 million, payable over a period of two years following the date of acquisition; contingent cash payments of up to $1.0 million if certain revenue targets are achieved during the three-month period ending September 30, 2017; and additional cash payments of $0.2 million due to former shareholders of AssetEye. The fair value of the deferred and contingent cash obligations was $0.9 million and $0.2 million, respectively, at the date of acquisition. This acquisition was financed with proceeds from the Term Loan issued in February 2016.

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The acquired identified intangible assets primarily included developed technology and client relationships having useful lives of five and ten years, respectively. We recognized goodwill in the amount of $3.2 million related to this acquisition, which is primarily comprised of anticipated synergies between the AssetEye solution and our existing complementary solutions as well as our sales and marketing infrastructure. Goodwill and identified intangible assets recognized in connection with this transaction are not deductible for tax purposes.
NWP Services Corporation
In March 2016, we acquired all of the issued and outstanding stock of NWP Services Corporation (“NWP”). NWP provides a full range of utility management services, including: resident billing; payment processing; utility expense management; analytics and reporting; sub-metering and maintenance; and regulatory compliance. The primary products offered by NWP include Utility Logic, Utility Smart, Utility Genius, SmartSource, and NWP Sub-meter. We are primarily integrating NWP into our resident services product family. The integrated platform will enable property owners and managers to increase the collection of rent utilities and energy recovery. Goodwill arising from this acquisition consists of anticipated synergies from the integration of NWP into our existing structure.
We acquired NWP’s issued and outstanding stock for an initial purchase price of $69.0 million. The purchase price consisted of a cash payment of $59.0 million at closing, net of cash acquired of $0.1 million; deferred cash obligations of $7.2 million, payable over a period of three years following the date of acquisition; and other amounts totaling $3.2 million, consisting of payments to certain employees and former shareholders of NWP. The acquisition-date fair value of the deferred cash obligation was $6.8 million. This acquisition was financed with proceeds from the Term Loan issued in February 2016. Acquisition costs associated with this transaction totaled $0.3 million and were expensed as incurred.
The acquired identified intangible assets were comprised of developed technologies, trade name, and client relationships having useful lives of five, three, and ten years, respectively. Goodwill and identified intangible assets acquired in this business combination, valued at $35.3 million and $16.3 million in our initial purchase price allocation, had carryover tax bases of $0.7 million and $11.0 million, respectively, which are deductible for tax purposes. Goodwill and identified intangible assets recognized in excess of those carryover tax basis amounts are not deductible for tax purposes. Accounts receivable acquired had a gross contractual value of $11.3 million at acquisition, of which $3.4 million was estimated to be uncollectible.
We assigned approximately $10.2 million of value to deferred tax assets in our initial purchase price allocation, consisting primarily of $9.9 million of federal and state net operating losses (“NOL”). This NOL amount reflects the tax benefit from approximately $27.3 million of NOLs we expect to realize after considering various limitations and restrictions on NWP’s pre-acquisition NOLs.
In connection with the acquisition of NWP, we recorded an indemnification asset of $1.2 million, which represents the selling security holders’ obligation under the purchase agreement to indemnify the Company for the outcome of certain accrued obligations. The indemnification asset was recognized on the same basis as the corresponding liability, which is based on its estimated fair value as of the date of acquisition.
Subsequent to the acquisition date, management continued to review information relating to events and circumstances that existed at the acquisition date. This review resulted in measurement period adjustments to the provisional amounts recorded at the acquisition date related to deferred cash obligations paid to the sellers and deferred tax assets associated with the transaction. These measurement period adjustments resulted in a change in goodwill, deferred tax assets, and the deferred cash obligation of $(1.8) million, $1.0 million, and $(0.8) million, respectively.

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Purchase Price Allocation
The preliminary allocation of each purchase price, including the effects of measurement period adjustments, was as follows:
 
NWP
 
AssetEye
 
eSupply
 
(in thousands)
Restricted cash
$
4,960

 
$

 
$

Accounts receivable
7,902

 
90

 
287

Property, equipment, and software
3,194

 

 

Intangible assets:
 
 
 
 
 
Developed product technologies
2,740

 
1,638

 
2,160

Client relationships
12,900

 
1,041

 
1,390

Trade names
709

 
6

 
35

Goodwill
33,520

 
3,154

 
3,194

Deferred tax assets, net
11,173

 

 

Other assets, net of other liabilities
3,065

 
8

 
53

Accounts payable and accrued liabilities
(6,962
)
 

 
(44
)
Client deposits held in restricted accounts
(5,018
)
 

 

Deferred revenue

 
(16
)
 
(29
)
Deferred tax liabilities, net

 
(1,010
)
 

Total purchase price
$
68,183

 
$
4,911

 
$
7,046

At March 31, 2017 and December 31, 2016, deferred cash obligations related to acquisitions completed in 2016 totaled $8.1 million and $8.7 million, respectively, and were carried net of a discount of $1.2 million at each date. The aggregate fair value of contingent cash obligations related to these acquisitions was $0.7 million and $0.5 million at March 31, 2017 and December 31, 2016, respectively. During the three months ended March 31, 2017, we recognized an expense of $0.2 million due to changes in the fair value of contingent cash obligations related to these acquisitions.
We made deferred cash payments of $0.6 million during the three months ended March 31, 2017, related to these acquisitions. During the same period, we made payments totaling $0.1 million related to amounts due to certain employees and former shareholders of the acquired businesses described above.
Acquisition Activity Prior to 2016
At March 31, 2017 and December 31, 2016, the aggregate carrying value of deferred cash obligations related to acquisitions completed prior to 2016 totaled $0.4 million and $6.6 million, respectively. During the three months ended March 31, 2017 and 2016, we paid deferred cash obligations related to these acquisitions in the amount of $6.1 million and $2.5 million, respectively.
The aggregate fair value of contingent cash obligations related to acquisitions completed prior to 2016 was estimated to be zero at both March 31, 2017 and December 31, 2016. A gain of $0.3 million was recognized due to changes in the fair value of contingent cash obligations related to these acquisitions during the three months ended March 31, 2016.
Pro Forma Results of Acquisitions
The following table presents unaudited pro forma results of operations for the three months ended March 31, 2017 and 2016, as if the aforementioned acquisitions, excluding the proposed LRO acquisition, had occurred at the beginning of each period presented. The pro forma information includes the business combination accounting effects resulting from these acquisitions, including interest expense, tax benefit, and additional amortization resulting from the valuation of amortizable intangible assets. We prepared the pro forma financial information for the combined entities for comparative purposes only, and it is not indicative of what actual results would have been if the acquisitions had occurred at the beginning of the periods presented, or of future results.

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Three Months Ended March 31,
 
2017
Pro Forma
 
2016
Pro Forma
 
(in thousands, except per share amounts)
Total revenue
$
154,223

 
$
141,875

Net income
7,669

 
1,560

Net income per share:
 
 
 
Basic
$
0.10

 
$
0.02

Diluted
$
0.09

 
$
0.02

4. Property, Equipment, and Software
Property, equipment, and software consisted of the following at March 31, 2017 and December 31, 2016:
 
March 31, 2017
 
December 31, 2016
 
(in thousands)
Leasehold improvements
$
53,093

 
$
51,242

Data processing and communications equipment
76,035

 
76,773

Furniture, fixtures, and other equipment
26,044

 
26,513

Software
97,585

 
86,983

Property, equipment, and software, gross
252,757

 
241,511

Less: Accumulated depreciation and amortization
(114,378
)
 
(111,083
)
Property, equipment, and software, net
$
138,379

 
$
130,428

Depreciation and amortization expense for property, equipment, and purchased software was $6.6 million and $5.5 million for the three months ended March 31, 2017 and 2016, respectively.
The carrying amount of capitalized software development costs was $59.4 million and $55.4 million at March 31, 2017 and December 31, 2016, respectively. Total accumulated amortization related to these assets was $21.4 million and $19.8 million at the respective dates. Amortization expense related to capitalized software development costs totaled $1.7 million and $1.1 million for the three months ended March 31, 2017 and 2016, respectively.
5. Goodwill and Identified Intangible Assets
Changes in the carrying amount of goodwill during the three months ended March 31, 2017 were as follows, in thousands:
Balance as of December 31, 2016
$
259,938

Goodwill acquired
52,863

Other
36

Balance as of March 31, 2017
$
312,837


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Identified intangible assets consisted of the following at March 31, 2017 and December 31, 2016:
 
 
March 31, 2017
 
December 31, 2016
 
 
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Carrying
Amount
 
Accumulated
Amortization
 
Net
 
 
(in thousands)
Finite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
Developed technologies
 
$
91,423

 
$
(65,258
)
 
$
26,165

 
$
75,924

 
$
(62,419
)
 
$
13,505

Client relationships
 
115,298

 
(67,005
)
 
48,293

 
108,468

 
(64,173
)
 
44,295

Vendor relationships
 
5,650

 
(5,650
)
 

 
5,650

 
(5,650
)
 

Trade names
 
9,472

 
(1,680
)
 
7,792

 
5,899

 
(1,225
)
 
4,674

Total finite-lived intangible assets
 
221,843

 
(139,593
)
 
82,250

 
195,941

 
(133,467
)
 
62,474

Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
Trade names
 
12,131

 

 
12,131

 
12,502

 

 
12,502

Total identified intangible assets
 
$
233,974

 
$
(139,593
)
 
$
94,381

 
$
208,443

 
$
(133,467
)
 
$
74,976

Amortization expense related to finite-lived intangible assets was $6.1 million and $6.0 million for the three months ended March 31, 2017 and 2016, respectively.
6Debt
On September 30, 2014, we entered into an agreement for a secured revolving credit facility (as amended by the amendments discussed below, the “Credit Facility”) to refinance our outstanding revolving loans. The Credit Facility provides an aggregate principal amount of up to $200.0 million of revolving loans, with sublimits of $10.0 million for the issuance of letters of credit and $20.0 million for swingline loans (“Revolving Facility”). The Credit Facility also allows us, subject to certain conditions, to request term loans or additional revolving commitments up to an aggregate principal amount of $150.0 million, plus an amount that would not cause our Consolidated Net Leverage Ratio, as defined below, to exceed 3.25 to 1.00. At our option, amounts outstanding under the Credit Facility accrued interest, prior to the amendments described below, at a per annum rate equal to either LIBOR, plus a margin ranging from 1.25% to 1.75%, or the Base Rate, plus a margin ranging from 0.25% to 0.75% (“Applicable Margin”). The base LIBOR rate is, at our discretion, equal to either one, two, three, or six month LIBOR. The Base Rate is defined as the greater of Wells Fargo's prime rate, the Federal Funds Rate plus 0.50%, or one month LIBOR plus 1.00%. In each case, the Applicable Margin is determined based upon our Consolidated Net Leverage Ratio, as defined below.
The Credit Facility is secured by substantially all of our assets, and certain of our existing and future material domestic subsidiaries are required to guarantee our obligations under the Credit Facility. The Credit Facility contains customary covenants, subject in each case to customary exceptions and qualifications. Our covenants include, among other limitations, a requirement that we comply with a maximum Consolidated Net Leverage Ratio and a minimum Consolidated Interest Coverage Ratio. Prior to amendments in February 2016, February 2017, and April 2017, described below, the Consolidated Net Leverage Ratio, which is defined as the ratio of consolidated funded indebtedness on the last day of each fiscal quarter to the four previous consecutive fiscal quarters’ consolidated EBITDA, could not exceed 3.50 to 1.00, provided that we could elect to increase the ratio to 3.75 to 1.00 for a specified period following certain acquisitions. The Consolidated Interest Coverage Ratio, which is defined as the ratio of our four previous fiscal quarters’ consolidated EBITDA to our interest expense for the same period, must not be less than 3.00 to 1.00 on the last day of each fiscal quarter.
In February 2016, we entered into an amendment to the Credit Facility (“First Amendment”). The First Amendment provided for an incremental term loan in the amount of $125.0 million (“Term Loan”) that was coterminous with the existing Credit Facility, reducing the aggregate amount of term loans we were able to request under the Credit Facility to $25.0 million plus an amount that would not cause our Consolidated Net Leverage Ratio to exceed 3.25 to 1.00. Under the terms of the First Amendment, an additional pricing tier was added to the Applicable Margin which modified the range to 1.25% to 2.00% for LIBOR loans, and 0.25% to 1.00% for Base Rate loans. The First Amendment also permitted the Company to elect to increase the maximum permitted Consolidated Net Leverage Ratio, on a one-time basis, to 4.00 to 1.00 following the issuance of convertible notes or high yield notes in an initial principal amount of at least $150.0 million. We incurred debt issuance costs in the amount of $0.7 million in conjunction with the execution of the First Amendment.
In February 2017, we entered into the second and third amendments to the Credit Facility (“Second Amendment” and “Third Amendment,” respectively). Among other changes, the Second Amendment increased the aggregate amount of additional term loans or revolving commitments we are allowed to request to $150.0 million, plus an amount that would not cause our Consolidated Net Leverage Ratio to exceed 3.25 to 1.00. The Third Amendment provided for an incremental $200.0 million delayed draw term loan that is available to be drawn until May 31, 2017 (“Delayed Draw Term Loan”), extended the

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maturity of the Credit Facility to February 27, 2022, and amended the amortization schedule for the Term Loan. Under the amended amortization schedule, the Company will make quarterly principal payments of 0.6% of the Term Loan’s and Delayed Draw Term Loan’s respective original principal amounts outstanding beginning on June 30, 2017. The quarterly payment amounts increase to 1.3% of their respective original principal amounts outstanding beginning on June 30, 2018, and to 2.5% beginning on June 30, 2020. Any remaining principal balance on the Term Loan and Delayed Draw Term Loan is due on the maturity date. We incurred debt issuance costs in the amount of $1.3 million in conjunction with the execution of the Second and Third Amendments.
On April 3, 2017, we entered into a new amendment to the Credit Facility (“Fourth Amendment”). The Fourth Amendment modified certain terms of the Credit Facility to, among other things, increase the maximum Consolidated Net Leverage Ratio to 4.00 to 1.00, with an automatic increase to 5.00 to 1.00 following an acquisition having aggregate consideration equal to or greater than $150.0 million and occurring within a specified time period following an unsecured debt issuance equal to or greater than $225.0 million. The automatic increase may occur once during the term of the Credit Facility and lasts for two consecutive fiscal quarters, after which the amendment provides for incremental step downs until the ratio returns to 4.00 to 1.00. Additionally, the automatic increase may only occur during periods in which the referenced unsecured debt is outstanding. Related to this increase, the Fourth Amendment provided for an additional pricing tier for interest rates and fees if the Company’s Consolidated Net Leverage Ratio equals or exceeds 4.00 to 1.00, resulting in a new Applicable Margin range of 1.25% to 2.25% for LIBOR loans and 0.25% to 1.25% for Base Rate loans. The amendment also added a new financial covenant, requiring the Company to comply with a maximum Consolidated Senior Secured Net Leverage Ratio, defined as the ratio of consolidated secured funded indebtedness on the last day of each fiscal quarter to the four previous consecutive fiscal quarters’ consolidated EBITDA, of 3.50 to 1.00. At our option, this ratio may be increased to 3.75 to 1.00 for a period of one year following the completion of an acquisition having aggregate consideration greater than $50.0 million. We are not permitted to exercise this option more than one time during any consecutive eight quarter period.
Revolving loans under the Credit Facility may be voluntarily prepaid and re-borrowed. Principal payments on the Term Loan and Delayed Draw Term Loan are due in quarterly installments, as described above, and may not be re-borrowed. Accumulated interest on amounts outstanding under the Credit Facility is due and payable quarterly, in arrears, for loans bearing interest at the Base Rate and at the end of the applicable interest period in the case of loans bearing interest at the adjusted LIBOR. All outstanding principal and accrued but unpaid interest is due on the maturity date. The Term Loan and Delayed Draw Term Loan are subject to mandatory repayment requirements in the event of certain asset sales or if certain insurance or condemnation events occur, subject to customary reinvestment provisions. The Company may prepay the Term Loan and Delayed Draw Term Loan in whole or in part at any time, without premium or penalty, with prepayment amounts to be applied to remaining scheduled principal amortization payments as specified by the Company.
We had $122.6 million of principal outstanding under our Term Loan, and zero outstanding under the Revolving Facility at both March 31, 2017 and December 31, 2016. As of March 31, 2017, we had $400.0 million of available credit under our Credit Facility, consisting of $200.0 million available under our Revolving Facility and $200.0 million available under our Delayed Draw Term Loan. We had unamortized debt issuance costs of $0.7 million at March 31, 2017 and December 31, 2016 related to the Revolving Facility. At March 31, 2017 and December 31, 2016, the Term Loan was carried net of unamortized debt issuance costs of $1.8 million and $0.5 million, respectively, in the accompanying Condensed Consolidated Balance Sheets. As of March 31, 2017, we were in compliance with the covenants under our Credit Facility.
At March 31, 2017, future maturities of principal under the Term Loan were as follows for the years ending December 31, in thousands:
2017
$
2,344

2018
5,469

2019
6,250

2020
10,938

2021
12,500

Thereafter
85,136

 
$
122,637


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7. Stock-based Expense
During the three months ended March 31, 2017, the Company made the following grants of restricted stock:
Number of Shares
 
Vesting
1,052,902

 
Shares vest ratably over a period of twelve quarters beginning on the first day of the second calendar quarter immediately following the grant date.
9,460

 
Shares vest ratably over a period of four quarters beginning on the first day of the calendar quarter immediately following the grant date.
During the three months ended March 31, 2017, we granted 526,037 shares of restricted stock which require the achievement of certain market-based conditions to become eligible to vest. The shares become eligible to vest based on the achievement of the following conditions:
Number of Shares
 
Condition to Become Eligible to Vest
175,346

 
After the grant date and prior to July 1, 2020, the average closing price per share of our common stock equals or exceeds $38.05 for twenty consecutive trading days.
175,346

 
After the grant date and prior to July 1, 2020, the average closing price per share of our common stock equals or exceeds $41.09 for twenty consecutive trading days.
175,345

 
After the grant date and prior to July 1, 2020, the average closing price per share of our common stock equals or exceeds $45.66 for twenty consecutive trading days.
Shares that become eligible to vest, if any, become Eligible Shares. These awards vest ratably over four calendar quarters beginning on the first day of the next calendar quarter immediately following the date on which they become Eligible Shares. Vesting is conditional upon the recipient remaining a service provider, as defined in the plan document, to the Company through each applicable vesting date.
All awards were granted under the Amended and Restated 2010 Equity Incentive Plan, as amended.
8. Commitments and Contingencies
Lease Commitments
The Company leases office facilities and equipment for various terms under long-term, non-cancellable operating lease agreements. The leases expire at various dates through 2028 and provide for renewal options. The agreements generally require the Company to pay for executory costs such as real estate taxes, insurance, and repairs. Minimum annual rental commitments under non-cancellable operating leases were as follows at March 31, 2017, in thousands:
2017
$
8,944

2018
11,686

2019
10,604

2020
8,381

2021
7,753

Thereafter
51,040

 
$
98,408

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 March 31, 2017 or December 31, 2016.
In the ordinary course of our business, we include standard indemnification provisions in our agreements with clients. Pursuant to these provisions, we indemnify our clients for losses suffered or incurred in connection with third-party claims that our products infringed upon any U.S. patent, copyright, trademark, or other intellectual property right. Where applicable, we generally limit such infringement indemnities to those claims directed solely to our products and not in combination with other software or products. With respect to our products, we also generally reserve the right to resolve any such claims by designing a

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non-infringing alternative, by obtaining a license on reasonable terms, or by terminating our relationship with the client and refunding the client’s fees.
The potential amount of future payments to defend lawsuits or settle indemnified claims under these indemnification provisions is unlimited in certain agreements; however, we believe the estimated fair value of these indemnification provisions is minimal, and, accordingly, we had no liabilities recorded for these agreements as of March 31, 2017 or December 31, 2016.
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 our normal business operations. Moreover, the results of complex legal proceedings are difficult to predict and our view of these matters may change in the future as the litigation and events related thereto unfold. We expense legal fees as incurred. Insurance recoveries associated with legal costs incurred are recorded when they are deemed probable of recovery.
In March 2015, we were named in a purported class action lawsuit in the United States District Court for the Eastern District of Pennsylvania, styled Stokes v. RealPage, Inc., Case No. 2:15-cv-01520. The claims in this purported class action relate to alleged violations of the Fair Credit Reporting Act (“FCRA”) in connection with background screens of prospective tenants of our clients. On January 25, 2016, the court entered an order placing the case on hold until the United States Supreme Court issued its decision in Spokeo, Inc. v. Robins, which case addressed issues related to standing to bring claims related to the FCRA. On May 16, 2016, the U.S. Supreme Court issued its opinion in the Spokeo litigation, vacating the decision of the United States Court of Appeals for the Ninth Circuit, and remanding the case for further consideration by the U.S. Court of Appeals. Following the Supreme Court’s decision in Spokeo, the judge in the Stokes case lifted the stay. On June 24, 2016, we filed a motion to dismiss certain claims made in the case based upon the Spokeo decision. On October 19, 2016, the U.S. District Court denied the motion to dismiss. We intend to defend this case vigorously.
In November 2014, we were named in a purported class action lawsuit in the United States District Court for the Eastern District of Virginia, styled Jenkins v. RealPage, Inc., Case No. 3:14cv758. The claims in this purported class action relate to alleged violations of the FCRA in connection with background screens of prospective tenants of our clients. This case has since been transferred to the United States District Court for the Eastern District of Pennsylvania. On January 25, 2016, the court entered an order placing the case on hold until the United States Supreme Court issued its decision in the Spokeo case. Following the Supreme Court’s decision in Spokeo, the judge in the Jenkins case lifted the stay. On June 24, 2016, we filed a motion to dismiss certain claims made in the case based upon the Spokeo decision. On October 19, 2016, the U.S. District Court denied the motion to dismiss. We intend to defend this case vigorously.
On February 23, 2015, we received from the Federal Trade Commission (“FTC”) a Civil Investigative Demand consisting of interrogatories and a request to produce documents relating to our compliance with the FCRA. We have responded to the request and requests for additional information by the FTC. At this time, we do not have sufficient information to evaluate the likelihood or merits of any potential enforcement action, or to predict the outcome or costs of responding to, or the costs, if any, of resolving this investigation.
At March 31, 2017 and December 31, 2016, we had accrued amounts for estimated settlement losses related to legal matters. The Company does not believe there is a reasonable possibility that a material loss exceeding amounts already recognized may have been incurred as of the date of the balance sheets presented herein.
We are involved in other litigation matters not described above that are not likely to be material either individually or in the aggregate based on information available at this time. Our view of these matters may change as the litigation and events related thereto unfold.
9. Net Income per Share
Basic net income per share is computed by dividing 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. Weighted average shares from common share equivalents in the amount of 729,637 and 882,035 for the three months ended March 31, 2017 and 2016, respectively, were excluded from the dilutive shares outstanding because their effect was anti-dilutive.
As required by ASU 2016-09, the weighted average effect of dilutive securities for the three months ended March 31, 2017, was calculated without including consideration of windfall tax benefits, resulting in the repurchase of fewer hypothetical shares and a greater dilutive effect. This change was applied on a prospective basis, and dilutive securities for the same period in 2016 have not been adjusted.

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The following table presents the calculation of basic and diluted net income per share:
 
Three Months Ended March 31,
 
2017
 
2016
 
(in thousands, except per share amounts)
Numerator:
 
 
 
Net income
$
8,195

 
$
2,996

Denominator:
 
 
 
Basic:
 
 
 
Weighted average common shares used in computing basic net income per share
78,263

 
76,656

Diluted:
 
 
 
Add weighted average effect of dilutive securities:
 
 
 
Stock options and restricted stock
3,123

 
491

Weighted average common shares used in computing diluted net income per share
81,386

 
77,147

Net income per share:
 
 
 
Basic
$
0.10

 
$
0.04

Diluted
$
0.10

 
$
0.04

10. Income Taxes
We make estimates and judgments in determining our provision for income taxes for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities that arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes.
Our provision for income taxes in interim periods is based on our estimated annual effective tax rate. We record cumulative adjustments in the quarter in which a change in the estimated annual effective rate is determined. The estimated annual effective tax rate calculation does not include the effect of discrete events that may occur during the year. The effect of these events, if any, is recorded in the quarter in which the event occurs.
Our effective income tax rate was 9.0% and 41.4% for the three months ended March 31, 2017 and 2016, respectively. Our effective rate is lower than the statutory rate for the three months ended March 31, 2017, primarily because of excess tax benefits from stock-based compensation of $2.7 million recognized as a discrete item during the period, as required by ASU 2016-09. The effective rate is higher than the statutory rate for the three months ended March 31, 2016, primarily because of state income taxes and non-deductible expenses.
As a result of our adoption of ASU 2016-09, on January 1, 2017 we recorded a deferred tax asset of $43.8 million, net of a $0.3 million valuation allowance, with a corresponding increase to retained earnings. The deferred tax asset consisted of excess stock-based compensation deductions that arose but were not recognized in prior years. See additional discussion of our adoption of ASU 2016-09 in Note 2.
11. Fair Value Measurements
The Company records certain assets and financial liabilities at fair value on a recurring basis. The Company determines fair values based on the price it would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability.
The prescribed fair value hierarchy is as follows:
Level 1 - Inputs are quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs are quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable; and market-corroborated inputs which are derived principally from or corroborated by observable market data.
Level 3 - Inputs are derived from valuation techniques in which one or more of the significant inputs or value drivers are unobservable.
The categorization of an asset or liability within the fair value hierarchy is based on the inputs described above and does not necessarily correspond to the Company’s perceived risk of that asset or liability. Moreover, the methods used by the Company may produce a fair value calculation that is not indicative of the net realizable value or reflective of future fair values. Furthermore, although the Company believes its valuation methods are appropriate and consistent with other market

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participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments and non-financial assets and liabilities could result in a different fair value measurement at the reporting date.
Assets and liabilities measured at fair value on a recurring basis:
Interest rate swap agreements: The fair value of the Company’s interest rate swap agreements are determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the swap agreements. This analysis reflects the contractual terms of the swap agreements, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.
Although the Company has determined that the majority of the inputs used to value its swap agreements fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its swap agreements utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Company and its counterparties. The Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its swap agreements’ positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its swap agreements. As a result, the Company determined that its valuation of the swap agreements in its entirety is classified in Level 2 of the fair value hierarchy.
Contingent consideration obligations: Contingent consideration obligations consist of potential obligations related to our acquisition activity. The amount to be paid under these obligations is contingent upon the achievement of stipulated operational or financial targets by the business subsequent to acquisition. The fair value of contingent consideration obligations is estimated using a probability weighted discount model which considers the achievement of the conditions upon which the respective contingent obligation is dependent. The probability of achieving the specified conditions is assessed by applying a Monte Carlo weighted-average model. Inputs into the valuation model include a discount rate specific to the acquired entity, a measure of the estimated volatility, and the risk free rate of return.
In addition to the inputs described above, the fair value estimates consider the projected future operating or financial results for the factor upon which the respective contingent obligation is dependent. The fair value estimates are generally sensitive to changes in these projections. We develop the projected future operating results based on an analysis of historical results, market conditions, and the expected impact of anticipated changes in our overall business and/or product strategies.
Significant unobservable inputs used in the contingent consideration fair value measurements included the following at March 31, 2017 and December 31, 2016:
 
 
March 31, 2017
 
December 31, 2016
Discount rates
 
14.8 - 27.5%

 
14.8 - 27.8%
Volatility rates
 
25.7
%
 
29.9%
Risk free rate of return
 
0.9
%
 
0.7%
The following tables disclose the assets and liabilities measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016, by the fair value hierarchy levels as described above:
 
Fair value at March 31, 2017
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(in thousands)
Assets:
 
 
 
 
 
 
 
Interest rate swap agreements
$
1,257

 
$

 
$
1,257

 
$

Liabilities:
 
 
 
 
 
 
 
Contingent consideration related to the acquisition of:
 
 
 
 
 
 
 
AssetEye
704

 

 

 
704

Axiometrics
812

 

 

 
812

Total liabilities measured at fair value
$
1,516

 
$

 
$

 
$
1,516


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Fair value at December 31, 2016
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(in thousands)
Assets:

 
 
 
 
 
 
Interest rate swap agreements
$
1,098

 
$

 
$
1,098

 
$

Liabilities:
 
 
 
 
 
 
 
Contingent consideration related to the acquisition of:
 
 
 
 
 
 
 
Indatus
2

 

 

 
2

AssetEye
539

 

 

 
539

Total liabilities measured at fair value
$
541

 
$

 
$

 
$
541

There were no transfers between Level 1 and Level 2, or between Level 2 and Level 3 measurements during the three months ended March 31, 2017.
Changes in the fair value of Level 3 measurements were as follows for the three months ended March 31, 2017 and 2016:
 
Three Months Ended March 31,
 
2017
 
2016
 
(in thousands)
Balance at beginning of period
$
541

 
$
841

Initial contingent consideration
812

 

Net loss (gain) on change in fair value
163

 
(273
)
Balance at end of period
$
1,516

 
$
568

Financial Instruments
The financial assets and liabilities that are not measured at fair value in our Condensed Consolidated Balance Sheets include cash and cash equivalents, restricted cash, accounts receivable, cost-method investments, accounts payable and accrued expenses, acquisition-related deferred cash obligations, and obligations under the Term Loan.
The carrying values of cash and cash equivalents; restricted cash; accounts receivable; and accounts payable and accrued expenses reported in our Condensed Consolidated Balance Sheets approximates fair value due to the short term nature of these instruments. Acquisition-related deferred cash obligations are recorded on the date of acquisition at their estimated fair value, based on the present value of the anticipated future cash flows. The difference between the amount of the deferred cash obligation to be paid and its estimated fair value on the date of acquisition is accreted over the obligation period. As a result, the carrying value of acquisition-related deferred cash obligations approximates their fair value.
The carrying value of the Term Loan approximates fair value since it is subject to a short-term floating interest rate that approximates borrowing rates currently available to the Company for debt of similar terms and maturities.
12. Stockholders’ Equity
In May 2014, our board of directors approved a share repurchase program authorizing the repurchase of up to $50.0 million of our outstanding common stock for a period of up to one year after the approval date. Our board of directors approved a one year extension of this program in both 2015 and 2016. On April 28, 2017, our board of directors again approved a one year extension of the share repurchase program. The terms of this extension permit the repurchase of up to $50.0 million of our common stock during the period commencing on the extension day and ending on May 4, 2018.
Repurchase activity during the three months ended March 31, 2017 and 2016 was as follows:
 
Three Months Ended March 31,
 
2017
 
2016
Number of shares repurchased

 
777,669

Weighted-average cost per share
$

 
$
20.75

Total cost of shares repurchased, in thousands
$

 
$
16,138

13. Derivative Financial Instruments
On March 31, 2016, the Company entered into two interest rate swap agreements (collectively the “Swap Agreements”), which are designed to mitigate our exposure to interest rate risk associated with a portion of our variable rate debt. The Swap

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Agreements cover an aggregate notional amount of $75.0 million from March 2016 to September 2019 by replacing the obligation’s variable rate with a blended fixed rate of 0.89%. The Company designated the Swap Agreements as cash flow hedges of interest rate risk.
The effective portion of changes in the fair value of the Swap Agreements is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in the fair value of the Swap Agreements is recognized directly in earnings. Amounts reported in accumulated other comprehensive income related to the Swap Agreements will be reclassified to interest expense as interest payments are made on our variable-rate debt. The Company estimates that an additional $0.3 million will be reclassified as a decrease of interest expense during the twelve-month period ending March 31, 2018.
As of March 31, 2017, the Swap Agreements were still outstanding. The table below presents the notional and fair value of the Swap Agreements as well as their classification on the Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016:
 
Balance Sheet Location
 
Notional
 
Fair Value
 
 
 
(in thousands)
Derivatives designated as cash flow hedging instruments:
 
 
 
 
 
Swap agreements as of March 31, 2017
Other assets
 
$
75,000

 
$
1,257

Swap agreements as of December 31, 2016
Other assets
 
$
75,000

 
$
1,098

As of March 31, 2017, the Company has not posted any collateral related to the Swap Agreements. If the Company had breached any of the Swap Agreement’s default provisions at March 31, 2017, it could have been required to settle its obligations under the Swap Agreements at their termination value of $1.3 million.
The table below presents the amount of gains and losses related to the effective and ineffective portions of the Swap Agreements and their location on the Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2017 and 2016, in thousands:
 
 
Effective Portion
 
Ineffective Portion
Derivatives Designated as Cash Flow Hedges
 
Gain (Loss) Recognized in OCI
 
Location of Loss Recognized in Income
 
Gain (Loss) Recognized in Income
 
Location of Loss Recognized in Income
 
Gain (Loss) Recognized in Income
Three months ended March 31, 2017:
 
 
 
 
 
 
 
 
Swap agreements, net of tax
 
$
93

 
Interest expense and other
 
$
(21
)
 
Interest expense and other
 
$
(18
)
Three months ended March 31, 2016:
 
 
 
 
 
 
 
 
Swap agreements, net of tax
 
$
(79
)
 
Interest expense and other
 
$

 
Interest expense and other
 
$

14. Subsequent Events
As discussed in Note 6, on April 3, 2017, we entered into the Fourth Amendment to the Credit Facility. The Fourth Amendment modified certain terms of the Credit Facility to, among other things, increase the maximum Consolidated Net Leverage Ratio to 4.00 to 1.00, and provided for an automatic increase of this ratio to 5.00 to 1.00 for period of two consecutive fiscal quarters following the completion of an acquisition meeting certain criteria. The Fourth Amendment added an additional pricing tier to the Applicable Margin, resulting in a new range of 1.25% to 2.25% for LIBOR loans and 0.25% to 1.25% for Base Rate loans. Additionally, this amendment added a new financial covenant requiring the Company to comply with a maximum Consolidated Senior Secured Net Leverage Ratio of 3.50 to 1.00, determined in accordance with the terms of the Credit Agreement. The Company may elect to increase this ratio to 3.75 to 1.00 for a period of one year following certain acquisitions. We incurred issuance costs of $0.3 million related to this amendment.
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (which Sections were adopted as part of the Private Securities Litigation Reform Act of 1995). Statements preceded by, followed by, or that otherwise include the words “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” or similar expressions and the negatives of those terms are generally forward-looking in nature and not historical facts. These forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause our actual results, performance, or achievements to be materially different from any anticipated results, performance, or achievements. Factors that might cause

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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 2016. You should not place undue reliance on forward-looking statements herein, which speak only as of the date of this report. Except as required by law, we disclaim any intention, and undertake no obligation, to revise any forward-looking statements, whether as a result of new information, a future event, or otherwise.
Overview
We are a technology leader to the real estate industry, helping owners, managers, and investors optimize both operational yields and investment returns. By leveraging data as well as integrating and streamlining a wide range of complex processes and interactions among the apartment real estate ecosystem, our platform helps our clients improve financial and operational performance and prudently place and harvest capital.
The substantial majority of our revenue is derived from sales of our on demand software solutions. We also derive revenue from our professional and other services. A small percentage of our revenue is derived from sales of our on premise software solutions. Our on demand software solutions are sold pursuant to subscription license agreements and our on premise software solutions are sold pursuant to term or perpetual licenses and associated maintenance agreements. We price our solutions based primarily on the number of units the client manages with our solutions. For our insurance-based solutions, we earn revenue based on a commission rate that considers earned premiums; agent commission; incurred losses; and premiums and profits retained by our underwriter. Our transaction-based solutions are priced based on a fixed rate per transaction. We sell our solutions through our direct sales organization and derive substantially all of our revenue from sales in the United States.
We believe there is increasing demand for solutions that bring efficiency and precision to the rental real estate industry, which has historically lacked the tools available to other investment classes. While the use of, and transition to, data analytics and on demand software solutions in the rental real estate industry is growing rapidly, we believe it remains at a relatively early stage of adoption. Additionally, there is a low level of penetration of our on demand software solutions in our existing client base. These factors present us with significant opportunities to generate revenue through sales of additional data analytics and on demand software solutions.
Our company was formed in 1998 to acquire Rent Roll, Inc., which marketed and sold on premise property management systems for the conventional and affordable multifamily rental housing markets. In June 2001, we released OneSite, our first on demand property management system. Since 2002, we have expanded our platform of solutions to include property management; lease management; resident services; and asset optimization capabilities. In addition to the multifamily markets, we now serve the single family, senior living, student living, military housing, commercial, hospitality, and vacation rental markets. In addition, since July 2002, we have completed 36 acquisitions of complementary technologies to supplement our internal product development and sales and marketing efforts and expand the scope of our solutions, the types of rental housing and vacation rental properties served by our solutions, and our client base. In connection with this expansion and these acquisitions, we have committed greater resources to developing and increasing sales of our platform of data analytics and on demand solutions. As of March 31, 2017, we had approximately 4,800 employees.
Solutions and Services
Our platform is designed to serve as a single system of record for all of the constituents of the rental real estate ecosystem; to support the entire renter life cycle, from prospect to applicant to residency or guest to post-residency or post-stay; and to optimize operational yields and returns on investment. Common authentication, work flow, and user experience across solution categories enables each of these constituents to access different applications as appropriate for their roles.
Our platform consists of four primary categories of solutions: Property Management, Lease Management, Resident Services, and Asset Optimization. These solutions provide complementary asset performance and investment decision support; risk mitigation, billing and utility management; resident engagement, spend management, operations and facilities management; and lead generation and lease management capabilities that collectively enable our clients to manage all the stages of the renter life cycle. Each of our solution categories includes multiple product centers that provide distinct capabilities that can be bundled as a package or licensed separately. Each product center integrates with a central repository of lease transaction data, including prospect, renter, and property data. In addition, our open architecture allows third-party applications to access our solutions using our RealPage Exchange platform.
We offer different versions of our platform for different types of properties in different real estate markets. For example, our platform supports the specific and distinct requirements of:
conventional single family properties;
conventional multifamily properties;
affordable Housing and Urban Development ("HUD") properties;

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affordable tax credit properties;
rural housing properties;
privatized military housing;
commercial properties;
student housing;
senior living; and
vacation rentals.
Property Management
Our property management solutions are referred to as ERP systems. These solutions manage core property management business processes, including leasing, accounting, budgeting, purchasing, facilities management, document management, and support and advisory services. It includes a central database of prospect, applicant, renter, and property information that is accessible in real time by our other solutions. Our property management solutions also interface with most popular general ledger accounting systems through our RealPage Exchange platform. This makes it possible for clients to deploy our solutions using our accounting system or a third-party accounting system. Our property management solution category consists of seven primary solutions including OneSite, Propertyware, Kigo, Spend Management Solutions, The RealPage Cloud, SmartSource, and EasyLMS.
Lease Management
Lease management solutions aim to optimize marketing spend and the leasing process. These solutions manage core leasing and marketing processes including websites and syndication, paid lead generation, organic lead generation, lead management, automated lead closure, lead analytics, real-time unit availability, automated online apartment leasing, and applicant screening. Our lease management solution category consists of six primary solutions: Online Leasing, Contact Center, Websites & Syndication, MyNewPlace, Lead2Lease, and Resident Screening.
Resident Services
Our resident services solutions provide a platform to optimize the transactional and social experience of prospects and renters, and enhance a property’s reputation. These solutions facilitate core renter management business processes including utility billing, renter payment processing, service requests, lease renewals, renters insurance, and consulting and advisory services. Our resident services solution category consists of five primary solutions: Resident & Utility Billing, Resident Payments, Resident Portal, Contact Center Maintenance, and Renter's Insurance.
Asset Optimization
Our asset optimization solutions aim to optimize property financial and operational performance, and provide comprehensive analytics-based decision support for optimum investment performance throughout the phases of real estate investment (e.g., acquisition, operation, renovation, and disposition). These solutions facilitate core asset management, business intelligence, performance benchmarking and investment analysis including, real-time yield management, revenue growth forecasting, key variable sensitivity forecasting, internal operating metric benchmarking and external market benchmarking. Our asset optimization solution category consists of four primary solutions: YieldStar Revenue Management, Business Intelligence, Data Analytics, and Asset and Investment Management.
Professional services
We have developed repeatable, cost-effective consulting and implementation services to assist our clients in taking advantage of the capabilities enabled by our asset optimization solutions. Our consulting and implementation methodology leverages the nature of our on demand software architecture, the industry-specific expertise of our professional services employees, and the design of our platform to simplify and expedite the implementation process. Our consulting and implementation services include project and application management procedures, business process evaluation, business model development and data conversion. Our consulting teams work closely with customers to facilitate the smooth transition and operation of our solutions.
We offer training programs for training administrators and onsite property managers on the use of our solutions. Training options include regularly hosted classroom and online instruction (through our online learning courseware), as well as online webinars. Our clients can integrate their own training content with our content to deliver an integrated and customized training program for their on-site property managers.

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Recent Acquisitions
Current Acquisition Activity
Lease Rent Options
In February 2017, we entered into an agreement to acquire Lease Rent Options ("LRO") and related assets from The Rainmaker Group Holdings, Inc. The closing of the proposed acquisition is subject to standard closing conditions, including the completion of the Hart-Scott-Rodino Antitrust Improvements Act review process. The acquisition of LRO will extend our revenue management footprint, augment our repository of real-time lease transaction data, and increase our data science talent and capabilities. We expect the acquisition of LRO to increase the market penetration of our YieldStar Revenue Management solution and drive revenue growth in our other asset optimization solutions.
Pursuant to the purchase agreement, consideration will consist of a cash payment at closing of approximately $298.5 million, subject to reduction for outstanding indebtedness, unpaid transaction expenses, and a working capital adjustment, and a deferred cash obligation of up to $1.5 million. The deferred cash obligation serves as security for our benefit against the sellers' indemnification obligations. Subject to any indemnification claims made, the deferred cash obligation will be released approximately twelve months following the acquisition date. We expect to finance the acquisition using funds available under our Credit Facility.
Axiometrics LLC
In January 2017, we acquired substantially all of the assets of Axiometrics LLC ("Axiometrics"), a leading provider of multifamily market data. This acquisition augmented our existing lease transaction data pool, further enhancing the accuracy and value of the analysis and forecasts provided to our clients through our data analytics solutions. We will integrate Axiometrics with our existing market research database, MPF Research, to form Data Analytics.
Purchase consideration was comprised of a cash payment at closing of $66.1 million, a deferred cash obligation of up to $7.5 million, and contingent cash payments of up to $5.0 million. The deferred cash obligation serves as security for our benefit against the sellers' indemnification obligation and, subject to any indemnification claims made, will be released over a period of two years following the acquisition date. Payment of the contingent cash obligation is dependent upon the achievement of certain revenue targets during the twelve-month period ending December 31, 2018.
2016 Acquisitions
eSupply Systems, LLC
In June 2016, we acquired substantially all of the assets of eSupply Systems, LLC (“eSupply”) and those of certain entities related to eSupply. eSupply is an e-procurement software and group purchasing service which augments our existing spend management solutions. The addition of this group purchasing organization provides increased purchasing power and highly competitive pricing structures for our clients. The addition of eSupply’s assets rounds out our spend management offering by adding a powerful group purchasing service to an already robust e-procurement platform, a large network of vendors, a vendor credentialing service, and purchasing advisory services.
We acquired eSupply for a purchase price of $7.0 million, consisting of a cash payment of $5.5 million at closing and deferred cash obligations of up to $1.6 million, payable over 18 months after the acquisition date. The deferred cash obligation is subject to adjustments specified in the purchase agreement related to the sellers’ indemnification obligations.
AssetEye, Inc.
In May 2016, we acquired all of the issued and outstanding stock of AssetEye, Inc. (“AssetEye”). AssetEye is a data aggregation, reporting, and collaboration platform for institutions holding multiple real estate asset classes. This acquisition expanded our on demand offerings to serve all asset classes, including commercial, hospitality, multifamily, single family, senior living, and student housing. The AssetEye software provides asset and portfolio managers with a solution to evaluate performance, trends, and operations across a portfolio with transparency into property-level data. On demand analytics allow stakeholders to quickly combine financial results and operating metrics based upon portfolio attributes that help evaluate asset management strategies.
We acquired AssetEye’s issued and outstanding stock for a purchase price of $4.9 million. The purchase price consisted of a cash payment of $3.6 million at closing, net of cash acquired of $0.8 million; deferred cash obligations of up to $1.0 million, payable over a period of two years following the date of acquisition; contingent cash payments of up to $1.0 million if certain revenue targets are achieved during the three-month period ending September 30, 2017; and additional cash payments of $0.2 million due to former shareholders of AssetEye.
NWP Services Corporation
In March 2016, we acquired all of the issued and outstanding stock of NWP Services Corporation (“NWP”). NWP provides a full range of utility management services, including resident billing; payment processing; utility expense

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management; analytics and reporting; sub-metering and maintenance; and regulatory compliance. The primary products offered by NWP include Utility Logic, Utility Smart, Utility Genius, SmartSource, and NWP Sub-meter. We are integrating NWP into our resident services product family. The integrated platform will enable property owners and managers to increase the collection of rent utilities and energy recovery. We acquired NWP’s issued and outstanding stock for a purchase price of $69.0 million. The purchase price consisted of a cash payment of $59.0 million at closing, net of cash acquired of $0.1 million; deferred cash obligations of $7.2 million, payable over a period of three years following the date of acquisition; and other amounts totaling $3.2 million, consisting of payments to certain employees and shareholders of NWP. Through the NWP acquisition, we have obtained a significantly larger share of the utility metering services market. We expect to realize significant synergies by integrating NWP into our existing operating structure and with our Velocity product.
Key Business Metrics
In addition to traditional financial measures, we monitor our operating performance using a number of financially and non-financially derived metrics that are not included in our condensed consolidated financial statements. We monitor the key performance indicators reflected in the following table:
 
Three Months Ended March 31,
 
2017
 
2016
 
(in thousands, except dollar per unit data and percentages)
Revenue:
 
 
 
Total revenue
$
152,919

 
$
128,383

On demand revenue
$
146,213

 
$
123,411

On demand revenue as a percentage of total revenue
95.6
%
 
96.1
%
Ending on demand units
11,112

 
10,999

Average on demand units
11,050

 
10,783

Non-GAAP total revenue
$
153,624

 
$
128,040

Non-GAAP on demand revenue
$
146,918

 
$
123,068

Annualized non-GAAP on demand revenue per average on demand unit
$
53.65

 
$
48.10

Non-GAAP on demand annual client value
$
596,159

 
$
529,052

Adjusted EBITDA
$
37,078

 
$
27,452

Adjusted EBITDA Margin
24.1
%
 
21.4
%
On demand revenue: This metric represents the GAAP revenue derived from license and subscription fees relating to our on demand software solutions, typically licensed over one year terms; commission income from sales of renter’s insurance policies; and transaction fees for certain of our on demand software solutions. We consider on demand revenue to be a key business metric because we believe the market for our on demand software solutions represents the largest growth opportunity for our business.
On demand revenue as a percentage of total revenue: This metric represents on demand revenue for the period presented divided by total revenue for the same period. We use on demand revenue as a percentage of total revenue to measure our success executing our strategy to increase the penetration of our on demand software solutions and expand our recurring revenue streams attributable to these solutions. We expect our on demand revenue to remain a significant percentage of our total revenue although the actual percentage may vary from period to period due to a number of factors, including the timing of acquisitions; professional and other revenues; and on premise perpetual license sales and maintenance fees.
Ending on demand units: This metric represents the number of rental housing units managed by our clients with one or more of our on demand software solutions at the end of the period. We use ending on demand units to measure the success of our strategy of increasing the number of rental housing units managed with our on demand software solutions. Property unit counts are provided to us by our clients as new sales orders are processed. Property unit counts may be adjusted periodically as information related to our clients’ properties is updated or supplemented, which could result in adjustments to the number of units previously reported.
Average on demand units: We calculate average on demand units as the average of the beginning and ending on demand units for each quarter in the period presented. This metric is a measure of our success increasing the number of on demand software solutions utilized by our clients to manage their rental housing units, our overall revenue, and profitability.
Non-GAAP total revenue: This metric is calculated by adding acquisition-related and other deferred revenue adjustments to total revenue. We believe it is useful to include deferred revenue written down for GAAP purposes under purchase

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accounting rules and revenue deferred due to a lack of historical experience determining the settlement of the contractual obligation in order to appropriately measure the underlying performance of our business operations in the period of activity and associated expense. Further, we believe this measure is useful to investors as a way to evaluate the Company’s ongoing performance.
The following provides a reconciliation of GAAP to non-GAAP total revenue:
 
Three Months Ended March 31,
 
2017
 
2016
 
(in thousands)
Total revenue
$
152,919

 
$
128,383

Acquisition-related and other deferred revenue adjustments
705

 
(343
)
Non-GAAP total revenue
$
153,624

 
$
128,040

Non-GAAP on demand revenue: This metric reflects total on demand revenue plus acquisition-related and other deferred revenue adjustments, as defined below. We believe inclusion of these items provides a useful measure of the underlying performance of our on demand business operations in the period of activity and associated expense. Further, we believe that investors and financial analysts find this measure to be useful in evaluating the Company’s ongoing performance because it provides a more accurate depiction of on demand revenue.
The following provides a reconciliation of GAAP to non-GAAP on demand revenue: 
 
Three Months Ended March 31,
 
2017
 
2016
 
(in thousands)
On demand revenue
$
146,213

 
$
123,411

Acquisition-related and other deferred revenue adjustments
705

 
(343
)
Non-GAAP on demand revenue
$
146,918

 
$
123,068

Non-GAAP on demand revenue per average on demand unit (“RPU”): This metric is calculated by dividing non-GAAP on demand revenue by average on demand units for the same period, including pro forma adjustments for significant acquisitions and dispositions during the period. For interim periods, the calculation is performed on an annualized basis.
Non-GAAP on demand annual client value (“ACV”): We define ACV as RPU multiplied by ending on demand units. We monitor this metric to measure our success increasing the number of on demand units and the amount of software solutions utilized by our clients to manage their rental housing units. In addition, we believe ACV provides a useful proxy for the annual run-rate value of on demand client relationships.
Adjusted EBITDA: We define Adjusted EBITDA as net income, plus (1) acquisition-related and other deferred revenue adjustments, (2) depreciation, asset impairment, and the loss on disposal of assets, (3) amortization of intangible assets, (4) acquisition-related expense (income), (5) interest expense, net, (6) income tax expense, (7) litigation-related expense, (8) headquarters relocation costs, and (9) stock-based expense. We believe that investors and financial analysts find this non-GAAP financial measure to be useful in analyzing the Company’s financial and operational performance, comparing this performance to the Company’s peers and competitors, and understanding the Company’s ability to generate income from ongoing business operations.

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The following provides a reconciliation of net income to Adjusted EBITDA:
 
Three Months Ended March 31,
 
2017
 
2016
 
(in thousands)
Net income
$
8,195

 
$
2,996

Acquisition-related and other deferred revenue adjustments
705

 
(343
)
Depreciation, asset impairment, and loss on disposal of assets
6,675

 
5,496

Amortization of intangible assets
7,789

 
7,111

Acquisition-related expense (income)
1,691

 
(57
)
Interest expense
1,120

 
719

Income tax expense
811

 
2,114

Headquarters relocation costs

 
1,025

Stock-based expense
10,092

 
8,391

Adjusted EBITDA
$
37,078

 
$
27,452

Adjusted EBITDA Margin: Adjusted EBITDA Margin is calculated by dividing Adjusted EBITDA by non-GAAP total revenue. We believe that investors and financial analysts find this non-GAAP financial measure to be useful in analyzing our financial and operational performance, comparing this performance to our peers and competitors, and understanding our ability to generate income from ongoing business operations.
Non-GAAP Financial Measures
We report our financial results in accordance with GAAP; however, we believe that, in order to properly understand the Company’s short-term and long-term financial, operational, and strategic trends, it may be helpful for investors to exclude certain non-cash or non-recurring items when used as a supplement to financial performance measures in accordance with GAAP. These non-cash or non-recurring items result from facts and circumstances that vary in both frequency and impact on continuing operations. We also use results of operations excluding such items to evaluate our operating performance compared against prior periods, make operating decisions, determine executive compensation, and serve as a basis for long-term strategic planning. These non-GAAP financial measures provide us with additional means to understand and evaluate the operating results and trends in our ongoing business by eliminating certain non-cash expenses and other items that we believe might otherwise make comparisons of our ongoing business with prior periods more difficult, obscure trends in ongoing operations, reduce our ability to make useful forecasts, or obscure the ability to evaluate the effectiveness of certain business strategies, and management incentive structures. In addition, we also believe that investors and financial analysts find this information helpful in analyzing our financial and operational performance and comparing this performance to our peers and competitors. These non-GAAP financial measures are used in conjunction with traditional GAAP financial measures as part of our overall assessment of our performance.
We do not place undue reliance on non-GAAP financial measures as measures of operating performance. Non-GAAP financial measures should not be considered substitutes for other measures of financial performance or liquidity reported in accordance with GAAP. There are limitations to using non-GAAP financial measures, including that other companies may calculate these measures differently than we do; that they do not reflect changes in, or cash requirements for, our working capital; and that they do not reflect our capital expenditures or future requirements for capital expenditures. We compensate for the inherent limitations associated with using non-GAAP financial measures through disclosure of these limitations, presentation of our financial statements in accordance with GAAP, and reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures.
We exclude or adjust each of the items identified below from the applicable non-GAAP financial measure referenced above for the reasons set forth with respect to each excluded item:
Acquisition-related and other deferred revenue: These items are included to reflect deferred revenue written down for GAAP purposes under purchase accounting rules and revenue deferred due to a lack of historical experience determining the settlement of the contractual obligation in order to appropriately measure the underlying performance of our business operations in the period of activity and associated expense.
Asset impairment and loss on disposal of assets: These items comprise gains and/or losses on the disposal and impairment of long-lived assets, which are not reflective of our ongoing operations. We believe exclusion of these items facilitates a more accurate comparison of our results of operations between periods.
Depreciation of long-lived assets: Long-lived assets are depreciated over their estimated useful lives in a manner reflecting the pattern in which the economic benefit is consumed. Management is limited in its ability to change or influence

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these charges after the asset has been acquired and placed in service. We do not believe that depreciation expense accurately reflects the performance of the Company’s ongoing operations for the period in which the charges are incurred, and are therefore not considered by management in making operating decisions.
Amortization of intangible assets: These items are amortized over their estimated useful lives and generally cannot be changed or influenced by management after acquisition. Accordingly, these items are not considered by us in making operating decisions. We do not believe such charges accurately reflect the performance of the Company’s ongoing operations for the period in which such charges are incurred.
Acquisition-related expense (income): These items consist of direct costs incurred in our business acquisition transactions and the impact of changes in the fair value of acquisition-related contingent consideration obligations. We believe exclusion of these items facilitates a more accurate comparison of the results of the Company’s ongoing operations across periods and eliminates volatility related to changes in the fair value of acquisition-related contingent consideration obligations.
Litigation-related expense: This item relates to the Company's litigation with Yardi Systems, Inc., including related insurance litigation and settlement costs. This significant and non-recurring litigation and related ancillary matters were resolved in the second quarter of 2014. We believe that the costs incurred related to this litigation are not reflective of the Company’s ongoing operations.
Headquarters relocation costs: These items consist of duplicative rent and other expenses related to the relocation of our corporate headquarters and data center, which was substantially completed in the third quarter of 2016. These costs are not reflective of the Company’s ongoing operations due to their non-recurring nature.
Stock-based expense: This item is excluded because these are non-cash expenditures that we do not consider part of ongoing operating results when assessing the performance of our business, and also because the total amount of the expenditure is partially outside of management’s control because it is based on factors such as stock price, volatility, and interest rates, which may be unrelated to the Company’s performance during the period in which the expenses are incurred.
Key Components of Our Results of Operations
Revenue
We derive our revenue from three primary sources: our on demand software solutions, our on premise software solutions, and our professional and other services.
On demand revenue: Revenue from our on demand software solutions is comprised of license and subscription fees relating to our on demand software solutions, typically licensed for one year terms; commission income from sales of renter’s insurance policies; and transaction fees for certain on demand software solutions, such as payment processing, spend management, and billing services. Typically, we price our on demand software solutions based primarily on the number of units the client manages with our solutions. For our insurance based solutions, our agreement provides for a fixed commission on earned premiums related to the policies sold by us. The agreement also provides for a contingent commission to be paid to us in accordance with the agreement. Our transaction-based solutions are priced based on a fixed rate per transaction.
On premise revenue: Our on premise software solutions are distributed to our clients and maintained locally on the client’s hardware. Revenue from our on premise software solutions is comprised of license fees under term and perpetual license agreements. Typically, we have licensed our on premise software solutions pursuant to term license agreements with an initial term of one year that include maintenance and support. Clients can renew their term license agreement for additional one-year terms at renewal price levels.
We no longer actively market our legacy on premise software solutions to new clients, and only license these solutions to a small portion of our existing on premise clients as they expand their portfolio of rental housing properties. While we intend to continue supporting our on premise software solutions, we expect that many of the clients who license these solutions will transition to our on demand software solutions over time.
Professional and other revenue: Revenue from professional and other services consists of consulting and implementation services; training; and other ancillary services. We complement our solutions with professional and other services for our clients willing to invest in enhancing the value or decreasing the implementation time of our solutions. Our professional and other services are typically priced as time and materials engagements.
Cost of Revenue
Cost of revenue consists primarily of personnel costs related to our operations; support services; training and implementation services; expenses related to the operation of our data centers; and fees paid to third-party service providers. Personnel costs include salaries, bonuses, stock-based expense, and employee benefits. Cost of revenue also includes an allocation of facilities costs; overhead costs and depreciation; as well as amortization of acquired technology related to strategic acquisitions and amortization of capitalized development costs. We allocate facilities, overhead costs, and depreciation based on headcount.

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Operating Expenses
We classify our operating expenses into three categories: product development, sales and marketing, and general and administrative. Our operating expenses primarily consist of personnel costs; costs for third-party contracted development; marketing; legal; accounting and consulting services; and other professional service fees. Personnel costs for each category of operating expenses include salaries, bonuses, stock-based expense, and employee benefits for employees in that category. In addition, our operating expenses include an allocation of our facilities costs; overhead costs and depreciation based on headcount for that category; as well as amortization of purchased intangible assets resulting from our acquisitions.
Product development: Product development expense consists primarily of personnel costs for our product development employees and executives and fees to contract development vendors. Our product development efforts are focused primarily on increasing the functionality and enhancing the ease of use of our platform of solutions and expanding our suite of data analytics and on demand software solutions. In addition to our locations in the United States, we maintain product development and service centers in Hyderabad, India; Manila, Philippines; and Cebu City, Philippines.
Sales and marketing: Sales and marketing expense consists primarily of personnel costs for our sales, marketing, and business development employees and executives; information technology; travel and entertainment; and marketing programs. Marketing programs consist of amounts paid for services for search engine optimization (“SEO”) and search engine marketing (“SEM”); renter’s insurance; other advertising; trade shows; user conferences; public relations; industry sponsorships and affiliations; and product marketing. In addition, sales and marketing expense includes amortization of certain purchased intangible assets, including client relationships; key vendor and supplier relationships; and finite-lived trade names, obtained in connection with our acquisitions.
General and administrative: General and administrative expense consists of personnel costs for our executives, finance and accounting, human resources, management information systems, and legal personnel, as well as legal, accounting, and other professional service fees, and other corporate expenses.
Critical Accounting Policies and Estimates
The preparation of our condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base these estimates and assumptions on historical experience, projected future operating or financial results or on various other factors that we believe to be reasonable and appropriate under the circumstances. We reconsider and evaluate our estimates and assumptions on an on-going basis. Accordingly, actual results may differ significantly from these estimates.
We believe that the following critical accounting policies involve our more significant judgments, assumptions and estimates, and therefore, could have the greatest potential impact on our condensed consolidated financial statements:
Revenue recognition;
Fair value measurements;
Business combinations;
Goodwill and other intangible assets with indefinite lives;
Impairment of long-lived assets;
Stock-based expense;
Income taxes, including deferred tax assets and liabilities; and
Capitalized product development costs.
Please refer to our Annual Report on Form 10-K filed with the SEC on March 1, 2017 for a discussion of such policies.
Recently Adopted Accounting Standards
On March 30, 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This guidance simplifies accounting for stock-based compensation. Under the new guidance, excess tax benefits and tax deficiencies are now recognized as income tax expense or benefit in the income statement in the period they occur, regardless of whether the benefit reduces taxes payable in the current period. Previously, GAAP required tax benefits in excess of compensation cost to be recorded as additional paid-in capital to the extent taxes payable were reduced and tax deficiencies to be recorded in equity to the extent of previous accumulated excess tax benefit and then recorded to the income statement. The ASU also requires excess tax benefits to be reflected as operating cash flows and allows us to elect to either estimate the number of awards that are expected to vest or account for forfeitures as they occur.
We adopted ASU 2016-09 in the first quarter of 2017. As a result of our adoption of this ASU, we recorded a deferred tax asset of $43.8 million, net of a $0.3 million valuation allowance, related to excess stock compensation deductions that arose but were not recognized in prior years. Additionally, we elected to account for forfeitures as they occur using a modified

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retrospective transition method that required us to record an immaterial cumulative-effect adjustment to accumulated deficit. We elected to account for the change in presentation of excess tax benefits in the statements of cash flows prospectively, and as a result, no prior periods were adjusted. We began to account for all excess tax benefits and deficits arising from current period stock transactions as income tax benefit or expense effective January 1, 2017. The remaining amendments to this standard did not have a material impact on our condensed consolidated financial statements.
Results of Operations
The following tables set forth our unaudited results of operations for the specified periods and the components of such results as a percentage of total revenue for the respective periods. The period-to-period comparison of financial results is not necessarily indicative of future results.
Condensed Consolidated Statements of Operations
 
Three Months Ended March 31,
 
2017
 
2017
 
2016
 
2016
 
(in thousands, except per share and ratio amounts)
Revenue:
 
 
 
 
 
 
 
On demand
$
146,213

 
95.6
 %
 
$
123,411

 
96.1
 %
On premise
675

 
0.5

 
772

 
0.6

Professional and other
6,031

 
3.9

 
4,200

 
3.3

Total revenue
152,919

 
100.0

 
128,383

 
100.0

Cost of revenue(1)
63,042

 
41.2

 
54,748

 
42.6

Gross profit
89,877

 
58.8

 
73,635

 
57.4

Operating expenses:
 
 
 
 
 
 
 
Product development(1)
20,387

 
13.3

 
17,272

 
13.5

Sales and marketing(1)
35,147

 
23.0

 
32,199

 
25.1

General and administrative(1)
24,251

 
15.9

 
18,346

 
14.3

Total operating expenses
79,785

 
52.2

 
67,817

 
52.9

Operating income
10,092

 
6.6

 
5,818

 
4.5

Interest expense and other, net
(1,086
)
 
(0.7
)
 
(708
)
 
(0.6
)
Income before income taxes
9,006

 
5.9

 
5,110

 
3.9

Income tax expense
811

 
0.5

 
2,114

 
1.6

Net income
$
8,195

 
5.4
 %
 
$
2,996

 
2.3
 %
 
 
 
 
 
 
 
 
Net income per share attributable to common stockholders:
 
 
 
 
 
 
 
Basic
$
0.10

 
 
 
$
0.04

 
 
Diluted
$
0.10

 
 
 
$
0.04

 
 
Weighted average shares used in computing net income per share attributable to common stockholders:
 
 
 
 
 
 
 
Basic
78,263

 
 
 
76,656

 
 
Diluted
81,386

 
 
 
77,147

 
 
 
 
 
 
 
 
 
 
(1) Includes stock-based expense as follows:
 
 
 
 
 
 
 
Cost of revenue
$
853

 
 
 
$
751

 
 
Product development
1,879

 
 
 
1,449

 
 
Sales and marketing
3,128

 
 
 
2,974

 
 
General and administrative
4,232

 
 
 
3,217

 
 

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Comparison of the Three Months Ended March 31, 2017 and 2016.
Revenue
 
Three Months Ended March 31,
 
2017
 
2016
 
Change
 
% Change
 
(in thousands, except per unit data and percentages)
Revenue:
 
 
 
 
 
 
 
On demand
$
146,213

 
$
123,411

 
$
22,802

 
18.5
 %
On premise
675

 
772

 
(97
)
 
(12.6
)
Professional and other
6,031

 
4,200

 
1,831

 
43.6

Total revenue
$
152,919

 
$
128,383

 
$
24,536

 
19.1

On demand unit metrics:
 
 
 
 
 
 
 
Ending on demand units
11,112

 
10,999

 
113

 
1.0

Average on demand units
11,050

 
10,783

 
267

 
2.5

Non-GAAP revenue metrics:
 
 
 
 
 
 
Non-GAAP on demand revenue
$
146,918

 
$
123,068

 
$
23,850

 
19.4

Annualized non-GAAP on demand revenue per average on demand unit
$
53.65

 
$
48.10

 
$
5.55

 
11.5

Non-GAAP on demand annual client value
$
596,159

 
$
529,052

 
$
67,107

 
12.7
 %
The change in total revenue for the three months ended March 31, 2017, as compared to the same period in 2016, was due to the following:
On demand revenue: During the three months ended March 31, 2017, on demand revenue increased $22.8 million, or 18.5%, as compared to the same period in 2016. This increase was driven by incremental revenue from our recent acquisitions and growth across our platform of solutions, especially in our resident services and asset optimization platforms. On demand revenue also benefited from overall greater client adoption across our platform of solutions, as evidenced by a year-over-year increase in RPU of $5.55.
On demand revenue generated by our property management solutions for the three months ended March 31, 2017, increased by $3.9 million, or 10.6%, as compared to the same period in the prior year. This growth was primarily attributable to continued sales and client adoption across most of our property management solutions and incremental revenue from our 2016 acquisitions of eSupply and NWP.
On demand revenue from our lease management solutions for the three months ended March 31, 2017, decreased year-over-year by $1.6 million, or 5.4%. This decrease was mainly due to lower revenues from our contact center and senior leasing solutions. These decreases reflect the effect of continued unfavorable macro-economic conditions, increased competition and the sale of certain assets associated with our senior living referral services in the fourth quarter of 2016.
On demand revenue from our resident services solutions continued to experience significant growth, increasing by $15.6 million, or 34.6%, during the three months ended March 31, 2017, as compared to the same period in 2016. This growth is attributable to incremental revenues from our 2016 acquisition of NWP and the continued growth of our other resident services solutions, most notably payment processing and renter's insurance solutions.
On demand revenue derived from our asset optimization solutions grew $4.9 million, or 38.3%, during the three months ended March 31, 2017, as compared to the same period in 2016. This growth is attributable to incremental revenues from our 2017 acquisition of Axiometrics and the growth of our YieldStar Revenue Management, business intelligence, and portfolio asset management solutions.
On premise revenue: On premise revenue was $0.7 million for the three months ended March 31, 2017, which is generally consistent with on premise revenue during the same period of 2016. We no longer actively market our legacy on premise software solutions to new clients and only market and support our acquired on premise software solutions. We expect on premise revenue as a percentage of our total revenue to continue to decrease as we transition on premise software solutions to our on demand solutions.
Professional and other revenue: Professional and other revenue increased $1.8 million, or 43.6%, for the three months ended March 31, 2017, as compared to the same period in 2016. This growth was primarily a result of additional sub-meter installation revenue from our 2016 acquisition of NWP.

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On demand unit metrics: As of March 31, 2017, one or more of our on demand solutions was utilized in the management of 11.1 million rental property units, representing a net increase of 0.1 million units, or 1.0%, year-over-year. Excluding the impact of the sale of certain assets associated with our senior living referral services in the fourth quarter of 2016, on demand units increased year-over-year by 3.9%. This increase was due to new client sales, marketing efforts to existing clients, and acquisitions completed in 2016. On demand units managed by our clients renewed at a rate of 96.8%, based on an average over the eight-quarter period ending March 31, 2017.
Cost of Revenue
 
Three Months Ended March 31,
 
2017
 
2016
 
Change
 
% Change
 
(in thousands, except percentages)
Cost of revenue
$
55,617

 
$
47,140

 
$
8,477

 
18.0
 %
Stock-based expense
853

 
751

 
102

 
13.6

Depreciation and amortization
6,572

 
6,857

 
(285
)
 
(4.2
)
Total cost of revenue
$
63,042

 
$
54,748

 
$
8,294

 
15.1
 %
Cost of revenue: During the three months ended March 31, 2017, cost of revenue, excluding stock-based expense and depreciation and amortization, increased $8.5 million, as compared to the same period in 2016. A year-over-year increase in direct costs of $4.1 million during the period was driven by our recent acquisitions and higher transaction volume from our payments solution. During the same period, personnel expense increased by $4.0 million, primarily attributable to incremental headcount from our recent acquisitions of NWP and Axiometrics, which contributed $3.3 million to the noted increase, and investments to support our continued growth.
Our gross margin, including depreciation and amortization expense and stock-based expense, increased from 57.4% for the three months ended March 31, 2016, to 58.8% for the same period in 2017, primarily driven by the growth of our resident services and asset optimization solutions. Cost containment strategies in our personnel and information technology expenses also contributed to this increase. Margin growth was diluted by our NWP acquisition, which has a higher mix of sub-meter installation revenue and a higher cost workforce relative to similar solutions offered by the Company.
Operating Expenses
Changes in the stock-based expense and depreciation and amortization expense components of all operating expense categories are separately discussed below.
 
Three Months Ended March 31,
 
2017
 
2016
 
Change
 
% Change
 
(in thousands, except percentages)
Product development
$
16,978

 
$
14,623

 
$
2,355

 
16.1
%
Stock-based expense
1,879

 
1,449

 
430

 
29.7

Depreciation
1,530

 
1,200

 
330

 
27.5

Total product development expense
$
20,387

 
$
17,272

 
$
3,115

 
18.0
%
Product development:  Product development expense increased $2.4 million for the three months ended March 31, 2017, as compared to the same period in 2016. Year-over-year increases in personnel expense of $1.7 million and professional fees of $0.4 million were both driven by investments to support the development of our next generation of solutions and to enhance our existing solutions. An increase in information technology of $0.3 million also contributed to the increase in product development expense for the period.
The ratio of product development expense to total revenue for the three months ended March 31, 2017, was generally consistent with that of the prior year at 13.3% in 2017 and 13.5% in 2016.

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Three Months Ended March 31,
 
2017
 
2016
 
Change
 
% Change
 
(in thousands, except percentages)
Sales and marketing
$
27,331

 
$
25,673

 
$
1,658

 
6.5
%
Stock-based expense
3,128

 
2,974

 
154

 
5.2

Depreciation and amortization
4,688

 
3,552

 
1,136

 
32.0

Total sales and marketing expense
$
35,147

 
$
32,199

 
$
2,948

 
9.2
%
Sales and marketing: Sales and marketing expense increased year-over-year by $1.7 million during the three months ended March 31, 2017, as compared to the same period in 2016. Personnel expense increased $1.0 million between the respective periods, primarily due to incremental headcount from our 2017 acquisition of Axiometrics and investments to enhance the productivity of our sales function. Marketing program costs increased year-over-year by $0.7 million, reflecting investments to accelerate client demand across our portfolio of solutions. These increases were partially offset by a decrease in SEO spend of $0.3 million, primarily arising from our sale of certain assets associated with our senior living referral services in the fourth quarter of 2016.
Sales and marketing expense as a percentage of total revenue decreased from 25.1% during the three month period ended March 31, 2016, to 23.0% for the same period in 2017. This reduction is attributable to benefits from our cost containment strategy and leverage gained from our focus on sales productivity. These decreases were partially offset by higher amortization expense related to our recent acquisitions.
 
Three Months Ended March 31,
 
2017
 
2016
 
Change
 
% Change
 
(in thousands, except percentages)
General and administrative
$
18,369

 
$
14,131

 
$
4,238

 
30.0
%
Stock-based expense
4,232

 
3,217

 
1,015

 
31.6

Depreciation
1,650

 
998

 
652

 
65.3

Total general and administrative expense
$
24,251

 
$
18,346

 
$
5,905

 
32.2
%
General and administrative: General and administrative expense for the three months ended March 31, 2017, increased $4.2 million, as compared to the same period in the prior year. Professional fees increased year-over-year by $2.6 million, driven by higher levels of legal and consulting services primarily related to our acquisitions. An increase of $1.5 million in personnel expense was principally attributable to incremental headcount from our 2016 acquisition of NWP and 2017 acquisition of Axiometrics, which together represent $0.9 million of this increase, and investments to support our continued growth.
General and administrative expense as a percentage of total revenue increased from 14.3% to 15.9% during the three months ended March 31, 2017, as compared to the same period in 2016. The primary driver of this increase was higher professional fees in the current period, as described above. This increase was partially offset by a reduction in facilities expense from the first quarter of 2016, which included costs related to the relocation of our corporate headquarters and data center. Higher stock-based compensation expense also contributed to the noted increase.
Stock-based Expense
 
Three Months Ended March 31,
 
2017
 
2016
 
Change
 
% Change
 
(in thousands, except percentages)
Stock-based expense
$
10,092

 
$
8,391

 
$
1,701

 
20.3
%
Stock-based expense for the three months ended March 31, 2017, increased by $1.7 million as compared to the same period of 2016. This increase is attributable to incremental expense from awards granted subsequent to the first quarter of 2016, partially offset by awards which fully vested during the same period. Stock-based expense as a percent of total revenue was 6.6% and 6.5% for the three months ended March 31, 2017 and 2016, respectively.

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Depreciation and Amortization Expense
 
Three Months Ended March 31,
 
2017
 
2016
 
Change
 
% Change
 
(in thousands, except percentages)
Depreciation expense
$
6,651

 
$
5,496

 
$
1,155

 
21.0
%
Amortization expense
7,789

 
7,111

 
678

 
9.5

Total depreciation and amortization expense
$
14,440

 
$
12,607

 
$
1,833

 
14.5
%
Depreciation and amortization expense increased $1.8 million during the three months ended March 31, 2017, as compared to the same period in 2016. Depreciation expense increased year-over-year primarily due to elevated capital expenditures in 2016 related to the relocation of our corporate headquarters and data center. Higher amortization expense was driven by the addition of finite-lived intangible assets in connection with our recent acquisitions.
Interest Expense and Other, Net
Interest expense and other for the three months ended March 31, 2017, increased year-over-year by $0.4 million. This is primarily due to an increase in interest expense in the current year, attributable to higher average outstanding borrowings from our Term Loan entered into in February 2016.
Provision for Taxes
We compute our provision for income taxes on a quarterly basis by applying an estimated annual effective tax rate to income from recurring operations and other taxable income and by calculating the tax effect of discrete items recognized during the quarter. Our effective income tax rate was 9.0% and 41.4% for the three months ended March 31, 2017 and 2016, respectively. Our effective rate was lower than the statutory rate for the three months ended March 31, 2017, primarily because of excess tax benefits from stock compensation of $2.7 million recognized as a discrete item during the period, as required by ASU 2016-09. The effective rate was higher than the statutory rate for the three months ended March 31, 2016, primarily because of state income taxes and non-deductible expenses.
Liquidity and Capital Resources
Our primary sources of liquidity as of March 31, 2017, consisted of $59.5 million of cash and cash equivalents, $200.0 million available under the Revolving Facility, $200.0 million available under the Delayed Draw Term Loan, and $31.5 million of working capital (excluding $59.5 million of cash and cash equivalents and $98.3 million of deferred revenue).
Our principal uses of liquidity have been to fund our operations, working capital requirements, capital expenditures and acquisitions, to service our debt obligations, and to repurchase shares of our common stock. We expect that working capital requirements, capital expenditures, acquisitions and debt service will continue to be our principal needs for liquidity over the near term. We incurred elevated capital expenditures in 2016, primarily related to the relocation of our corporate headquarters and data center. We expect to generate returns on these investments by incurring lower future rent expense per employee and long-term transaction processing scale. In 2017, we expect capital expenditures to return to more normalized levels. In addition, we have made several acquisitions in which a portion of the cash purchase price is payable at various times through 2019. We expect to fund these obligations from cash provided by operating activities.
In February 2017, we entered into an agreement to acquire LRO and related assets from The Rainmaker Group Holdings, Inc. The closing of the proposed acquisition is subject to standard closing conditions, including the completion of the Hart-Scott-Rodino Antitrust Improvements Act review process. Pursuant to the purchase agreement, purchase consideration will consist of a cash payment at closing of approximately $298.5 million, subject to reduction for outstanding indebtedness, unpaid transaction expenses, and a working capital adjustment; and a deferred cash obligation of up to $1.5 million. The deferred cash obligation serves as security for our benefit against the sellers' indemnification obligations and, subject to any indemnification claims made, will be released approximately twelve months following the acquisition date. We expect to finance this transaction with funds available under our Credit Facility.
We believe that our existing cash and cash equivalents, working capital (excluding deferred revenue and cash and cash equivalents), and our cash flows from operations are sufficient to fund our operations, working capital requirements, and planned capital expenditures; and to service our debt obligations for at least the next twelve months. Our future working capital requirements will depend on many factors, including our rate of revenue growth, the timing and size of acquisitions, the expansion of our sales and marketing activities, the timing and extent of spending to support product development efforts, the timing of introductions of new solutions and enhancements to existing solutions, and the continuing market acceptance of our solutions. In addition to the transaction discussed above, we may enter into acquisitions of complementary businesses, applications, or technologies in the future that could require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us, or at all.

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