UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-34846

RealPage, Inc.

(Exact name of registrant as specified in its charter)

Delaware		75-2788861
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
4000 International Parkway
Carrollton, Texas		75007-1951
(Address of principal executive offices)		(Zip 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 þ No o

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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at October 31, 2011
Common Stock, $0.001 par value		71,817,310

 

 

INDEX

PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets			1
Condensed Consolidated Statements of Operations			2
Condensed Consolidated Statements of Stockholders’ Equity			3
Condensed Consolidated Statements of Cash Flows			4
Notes to the Condensed Consolidated Financial Statements			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3. Quantitative and Qualitative Disclosures About Market Risk			27
Item 4. Controls and Procedures			27
PART II—OTHER INFORMATION
Item 1. Legal Proceedings			28
Item 1A. Risk Factors			29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			53
Item 6. Exhibits			53
Signatures			56
Exhibit 4.5
Exhibit 10.1
Exhibit 10.2
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

REALPAGE, INC.

Condensed Consolidated Balance Sheets
(in thousands, except share data)

		September 30,				December 31,
		2011				2010
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	47,491			$	118,010
Restricted cash			20,334				15,346
Accounts receivable, less allowance for doubtful accounts of $1,003 and $1,370 at September 30, 2011 and December 31, 2010, respectively			36,739				29,577
Deferred tax asset, net of valuation allowance			601				1,529
Other current assets			12,111				6,060
Total current assets			117,276				170,522
Property, equipment, and software, net			26,552				24,515
Goodwill			128,632				73,885
Identified intangible assets, net			115,141				54,361
Deferred tax asset, net of valuation allowance			2,760				17,322
Other assets			2,855				2,187
Total assets		$	393,216			$	342,792
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	8,259			$	4,787
Accrued expenses and other current liabilities			27,401				15,436
Current portion of deferred revenue			51,204				47,717
Current portion of long-term debt			10,768				10,781
Customer deposits held in restricted accounts			20,278				15,253
Total current liabilities			117,910				93,974
Deferred revenue			8,910				7,947
Long-term debt, less current portion			47,173				55,258
Other long-term liabilities			5,926				13,029
Total liabilities			179,919				170,208
Commitments and contingencies (Note 8)
Stockholders’ equity:
Preferred stock, $0.001 par value, 10,000,000 shares authorized and zero shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively			—				—
Common stock, $0.001 par value: 125,000,000 shares authorized, 72,027,632 and 68,703,366 shares issued and 71,766,288 and 68,490,277 shares outstanding at September 30, 2011 and December 31, 2010, respectively			72				69
Additional paid-in capital			306,220				263,219
Treasury stock, at cost: 261,344 and 213,089 shares at September 30, 2011 and December 31, 2010, respectively			(1,741	)			(958	)
Accumulated deficit			(91,202	)			(89,730	)
Accumulated other comprehensive loss			(52	)			(16	)
Total stockholders’ equity			213,297				172,584
Total liabilities and stockholders’ equity		$	393,216			$	342,792

See accompanying notes

REALPAGE, INC.

Condensed Consolidated Statements of Operations
(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Revenue:
On demand		$	62,765			$	43,097			$	172,741			$	120,393
On premise			1,772				2,127				5,045				6,419
Professional and other			3,118				2,804				9,052				7,403
Total revenue			67,655				48,028				186,838				134,215
Cost of revenue(1)			27,585				20,203				78,078				56,595
Gross profit			40,070				27,825				108,760				77,620
Operating expense:
Product development(1)			11,230				9,127				32,083				26,431
Sales and marketing(1)			17,688				9,428				44,992				25,793
General and administrative(1)			11,840				6,969				31,190				20,230
Total operating expense			40,758				25,524				108,265				72,454
Operating (loss) income			(688	)			2,301				495				5,166
Interest expense and other, net			(684	)			(1,822	)			(2,582	)			(4,749	)
(Loss) income before income taxes			(1,372	)			479				(2,087	)			417
Income tax (benefit) expense			(266	)			187				(615	)			164
Net (loss) income		$	(1,106	)		$	292			$	(1,472	)		$	253
Net loss attributable to common stockholders
Basic		$	(1,106	)		$	(327	)		$	(1,472	)		$	(2,691	)
Diluted		$	(1,106	)		$	(327	)		$	(1,472	)		$	(2,691	)
Net loss per share attributable to common stockholders
Basic		$	(0.02	)		$	(0.01	)		$	(0.02	)		$	(0.08	)
Diluted		$	(0.02	)		$	(0.01	)		$	(0.02	)		$	(0.08	)
Weighted average shares used in computing net loss per share attributable to common stockholders
Basic			68,792				43,636				68,096				31,878
Diluted			68,792				43,636				68,096				31,878
(1)   Includes stock-based compensation expense as follows:
Cost of revenue		$	459			$	140			$	1,069			$	407
Product development			1,258				627				3,343				1,664
Sales and marketing			3,433				201				8,793				541
General and administrative			1,258				391				3,025				1,133

See accompanying notes.

REALPAGE, INC.

Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)

														Accumulated
										Additional				Other																Total
		Common Stock								Paid-in				Comprehensive				Accumulated				Treasury Shares								Stockholders’
		Shares				Amount				Capital				Loss				Deficit				Shares				Amount				Equity
Balance as of December 31, 2010			68,703			$	69			$	263,219			$	(16	)		$	(89,730	)			(213	)		$	(958	)		$	172,584
Foreign currency translation			—				—				—				(36	)			—				—				—				(36	)
Net loss			—				—				—				—				(1,472	)			—				—				(1,472	)
Exercise of stock options			2,223				3				8,550				—				—				—				—				8,553
Treasury stock purchase, at cost			—				—				—				—				—				(48	)			(783	)			(783	)
Issuance of restricted stock			1,102				—				18,221				—				—				—				—				18,221
Stock-based compensation			—				—				16,230				—				—				—				—				16,230
Balance as of September 30, 2011			72,028			$	72			$	306,220			$	(52	)		$	(91,202	)			(261	)		$	(1,741	)		$	213,297

See accompanying notes.

REALPAGE, INC.

Condensed Consolidated Statements of Cash Flows
(Unaudited)

		Nine Months Ended
		September 30,
		2011				2010
Cash flows from operating activities:
Net (loss) income		$	(1,472	)		$	253
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization			21,458				14,856
Deferred tax benefit			(1,430	)			(162	)
Stock-based compensation			16,230				3,745
Loss on sale of assets			398				57
Acquisition-related contingent consideration			102				39
Changes in assets and liabilities, net of assets acquired and liabilities assumed in business combinations:
Accounts receivable			(3,900	)			1,840
Customer deposits			37				(325	)
Other current assets			(2,778	)			(3,870	)
Other assets			(587	)			(72	)
Accounts payable			1,473				1,621
Accrued compensation, taxes and benefits			(1,161	)			(427	)
Deferred revenue			1,906				(3,041	)
Other current and long-term liabilities			(577	)			227
Net cash provided by operating activities			29,699				14,741
Cash flows from investing activities:
Purchases of property, equipment and software			(10,782	)			(7,427	)
Acquisition of businesses, net of cash acquired			(87,817	)			(17,231	)
Net cash used in investing activities			(98,599	)			(24,658	)
Cash flows from financing activities:
(Costs) proceeds from public offerings			(775	)			57,688
Proceeds from notes payable			—				10,000
Payments on notes payable			(8,086	)			(23,562	)
Proceeds from revolving credit facility, net			—				2,040
Payments on capital lease obligations			(438	)			(1,241	)
Preferred stock dividend			—				(666	)
Issuance of common stock			8,499				664
Purchase of treasury stock			(783	)			(20	)
Net cash (used in) provided by financing activities			(1,583	)			44,903
Net (decrease) increase in cash and cash equivalents			(70,483	)			34,986
Effect of exchange rate on cash			(36	)			(19	)
Cash and cash equivalents:
Beginning of period			118,010				4,427
End of period		$	47,491			$	39,394
Supplemental cash flow information:
Cash paid for interest		$	1,957			$	4,288
Cash paid for income taxes, net of refunds		$	797			$	227
Non-cash financing activities:
Accrued dividends and accretion of preferred stock		$	—			$	3,030
Conversion of preferred stock to common shares		$	—			$	73,732
Accrued property and equipment		$	254			$	1,154

See accompanying notes.

Notes to the Condensed Consolidated Financial Statements
(Unaudited)

1. The Company

RealPage, Inc., a Delaware corporation, and its subsidiaries, (the “Company” or “we” or “us”) is a provider of property management solutions that enable owners and managers of single-family and a wide variety of multi-family rental property types to manage their marketing, pricing, screening, leasing, accounting, purchasing and other property operations. Our on demand software solutions are delivered through an integrated software platform that provides a single point of access and a shared repository of prospect, resident and property data. By integrating and streamlining a wide range of complex processes and interactions among the rental housing ecosystem of owners, managers, prospects, residents and service providers, our platform optimizes the property management process and improves the experience for all of these constituents. Our solutions enable property owners and managers to optimize revenues and reduce operating costs through higher occupancy, improved pricing methodologies, new sources of revenue from ancillary services, improved collections and more integrated and centralized processes.

Public Offerings

On August 11, 2010, our registration statement on Form S-1 (File No 333-166397) relating to our initial public offering (“IPO”) was declared effective by the Securities and Exchange Commission (“SEC”). We sold 6,000,000 shares of common stock in our initial public offering. Our common stock began trading on August 12, 2010 on the NASDAQ Global Select Stock Market under the symbol “RP,” and our initial public offering closed on August 17, 2010. Upon closing of our initial public offering, all outstanding shares of our preferred stock, including a portion of accrued but unpaid dividends on our outstanding shares of Series A, Series A1 and Series B convertible preferred stock, were converted into 29,567,952 shares of common stock.

In connection with the consummation of the Offering, our Board of Directors and stockholders approved our Amended and Restated Certificate of Incorporation (the “Restated Certificate”), which was filed with the Delaware Secretary of State and became effective on August 17, 2010. The Restated Certificate provides for two classes of capital stock to be designated, respectively, Common Stock and Preferred Stock. The total number of shares which the Company is authorized to issue is 135,000,000 shares. 125,000,000 shares are Common Stock, par value $0.001 per share, and 10,000,000 shares are Preferred Stock, par value $0.001 per share.

On December 6, 2010, our registration statement on Form S-1 (File No 333-170667) relating to a public stock offering was declared effective by the SEC. We sold an additional 4,000,000 shares of common stock in the offering. The offering closed on December 10, 2010.

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 SEC. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to those rules and regulations. We believe that the disclosures made are adequate to make the information not misleading.

The condensed consolidated financial statements included herein reflect all adjustments (consisting of normal, recurring adjustments) which are, in the opinion of management, necessary to state fairly the results for the interim periods presented. All intercompany balances and transactions have been eliminated in consolidation. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the fiscal year.

It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K filed with the SEC on February 28, 2011 (“Form 10K”).

Segment and Geographic Information

Our chief operating decision maker is our Chief Executive Officer, who reviews financial information presented on a company-wide basis. As a result, we determined that the Company has a single reporting segment and operating unit structure.

Principally, all of our revenue for the three and nine months ended September 30, 2011 and 2010 was in North America.

Net long-lived assets held were $26.1 million and $24.0 million in North America and $0.5 million and $0.5 million in our international subsidiaries at September 30, 2011 and December 31, 2010, respectively.

Accounting Policies and Use of Estimates

The preparation of financial statements in conformity with GAAP requires our management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Significant accounting policies and estimates include: the allowance for doubtful accounts; the useful lives of intangible assets and the recoverability or impairment of tangible and intangible asset values; purchase accounting allocations and related reserves; deferred revenue; stock-based compensation; and our effective income tax rate and the recoverability of deferred tax assets, which are based upon our expectations of future taxable income and allowable deductions. Actual results could differ from these estimates. For greater detail regarding these accounting policies and estimates, refer to our Form 10-K.

Revenue Recognition

We derive our revenue from three primary sources: our on demand software solutions; our on premise software solutions; and professional and other services. We commence revenue recognition when all of the following conditions are met:

•

there is persuasive evidence of an arrangement;

•

the solution and/or service has been provided to the customer;

•

the collection of the fees is probable; and

•

the amount of fees to be paid by the customer is fixed or determinable.

For multi-element arrangements that include multiple software solutions and/or services, we allocate arrangement consideration to all deliverables that have stand-alone value based on their relative selling prices. In such circumstances, we utilize the following hierarchy to determine the selling price to be used for allocating revenue to deliverables as follows:

•

Vendor specific objective evidence (VSOE), if available. The price at which we sell the element in a separate stand-alone transaction;

•

Third-party evidence of selling price (TPE), if VSOE of selling price is not available. Evidence from us or other companies of the value of a largely interchangeable element in a transaction; and

•

Estimated selling price (ESP), if neither VSOE nor TPE of selling price is available. Our best estimate of the stand-alone selling price of an element in a transaction.

Our process for determining ESP for deliverables without VSOE or TPE considers multiple factors that may vary depending upon the unique facts and circumstances related to each deliverable. Key factors primarily considered in developing ESP include prices charged by us for similar offerings when sold separately, pricing policies and approvals from standard pricing and other business objectives.

From time to time, we sell on demand software solutions with professional services. In such cases, as each element has stand alone value, we allocate arrangement consideration based on our estimated selling price of the on demand software solution and VSOE of the selling price of the professional services.

On Demand Revenue

Our on demand revenue consists of license and subscription fees, transaction fees related to certain of our software-enabled value-added services and commissions derived from us selling certain risk mitigation services.

License and subscription fees are comprised of a charge billed at the initial order date and monthly or annual subscription fees for accessing our on demand software solutions. The license fee billed at the initial order date is recognized as revenue on a straight-line basis over the longer of the contractual term or the period in which the customer is expected to benefit, which we consider to be four years. Recognition starts once the product has been activated. Revenue from monthly and annual subscription fees is recognized on a straight-line basis over the access period.

We recognize revenue from transaction fees derived from certain of our software-enabled value-added services as the related services are performed.

As part of our risk mitigation services to the rental housing industry, we act as an insurance agent and derive commission revenue from the sale of insurance products to individuals. The commissions are based upon a percentage of the premium that the insurance company charges to the policyholder and are subject to forfeiture in instances where a policyholder cancels prior to the end of the policy. If the policy is cancelled, our commissions are forfeited as a percent of the unearned premium. As a result, we recognize the commissions related to these services ratably over the policy term as the associated premiums are earned.

On Premise Revenue

Revenue from our on premise software solutions is comprised of an annual term license, which includes maintenance and support. Customers can renew their annual term license for additional one-year terms at renewal price levels. We recognize the annual term license on a straight-line basis over the contract term.

In addition, we have arrangements that include perpetual licenses with maintenance and other services to be provided over a fixed term. We allocate and defer revenue equivalent to the VSOE of fair value for the undelivered elements and recognize the difference between the total arrangement fee and the amount deferred for the undelivered elements as revenue. We have determined that we do not have VSOE of fair value for our customer support and professional services in these specific arrangements. As a result, the elements within our multiple-element sales agreements do not qualify for treatment as separate units of accounting. Accordingly, we account for fees received under multiple-element arrangements with customer support or other professional services as a single unit of accounting and recognize the entire arrangement ratably over the longer of the customer support period or the period during which professional services are rendered.

Professional and Other Revenue

Professional & other revenue is recognized as the services are rendered for time and material contracts. Training revenues are recognized after the services are performed.

Concentrations of Credit Risk

Our cash accounts are maintained at various financial institutions and may, from time to time, exceed federally insured limits. The Company has not experienced any losses in such accounts.

Concentrations of credit risk with respect to accounts receivable result from substantially all of our customers being in the multi-family rental housing market. Our customers, however, are dispersed across different geographic areas. We do not require collateral from customers. We maintain an allowance for losses based upon the expected collectability of accounts receivable. Accounts receivable are written off upon determination of non-collectability following established Company policies based on the aging from the accounts receivable invoice date.

No single customer accounted for 5% or more of our revenue or accounts receivable for the three and nine months ended September 30, 2011 or 2010.

Comprehensive (Loss) Income

Comprehensive (loss) income consists of net (loss) income and other comprehensive loss. Other comprehensive loss is comprised of foreign currency translation losses. Our comprehensive (loss) income was as follows for the periods presented:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
		(in thousands, unaudited)
Net (loss) income		$	(1,106	)		$	292			$	(1,472	)		$	253
Foreign currency translation loss			(16	)			(6	)			(36	)			(19	)
Comprehensive (loss) income		$	(1,122	)		$	286			$	(1,508	)		$	234

Recently Issued Accounting Standards

In December 2010, the FASB issued ASU 2010-29 “Business Combinations (Topic 805)—Disclosure of Supplementary Pro Forma Information for Business Combinations” (“ASU 2010-29”) effective prospectively for material (either on an individual or aggregate basis) business combinations entered into in fiscal years beginning on or after December 15, 2010 with early adoption permitted. This accounting standard update clarifies SEC registrants presenting comparative financial statements should disclose in their pro forma information revenue and earnings of the combined entity as though the current period business combinations had occurred as of the beginning of the comparable prior annual reporting period only. The update also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. We adopted ASU 2010-29 during the first quarter of 2011. These requirements will change our annual pro forma disclosures for acquisitions which have historically included the impact on all comparable periods. ASU 2010-29 also changes our annual and quarterly pro forma disclosures to include a description and the related amount of material adjustments made to pro forma results as seen in Note 3 herein.

In June 2011, the FASB issued ASU 2011-05 “Comprehensive Income (Topic 220) — Presentation of Comprehensive Income” (“ASU 2011-05”) effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 with early adoption permitted. This accounting standard provides new disclosure guidance related to the presentation of the Statement of Comprehensive Income. This guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. We will adopt this accounting standard in the fouth quarter 2011. We do not anticipate that this adoption will have any impact on our financial position or results of operations.

3. Acquisitions

2011 Acquisitions

In May 2011, we acquired substantially all of the assets of Compliance Depot, LLC (“Compliance Depot”) for approximately $22.5 million which included a cash payment of $19.2 million at closing and three deferred payments of $1.1 million payable nine, twelve and eighteen months after the acquisition date. The acquisition of Compliance Depot expands our ability to provide vendor risk management and compliance software solutions for the rental housing industry. Acquired intangibles were recorded at fair value based on assumptions made by us. The acquired developed product technologies have a useful life of three years amortized on a straight-line basis. Acquired customer relationships have a useful life of nine years which will be amortized proportionately to the expected discounted cash flows derived from the asset. The tradenames acquired have an indefinite useful life as we do not plan to cease using the tradenames in the marketplace. All direct acquisition costs were less than $0.1 million and expensed as incurred. We included the results of operations of this acquisition in our consolidated financial statements from the effective date of the acquisition. Goodwill and identified intangibles associated with this acquisition are deductible for tax purposes.

In July 2011, we acquired Senior-Living.com, Inc., operating under the name SeniorLiving.net (“SLN”), pursuant to an Agreement and Plan of Merger. The preliminary purchase price consisted of a cash payment of $4.0 million at closing, additional cash payments of $0.5 million, half of which is due on each of the first and second anniversaries of the acquisition date, and an estimated cash payment payable (acquisition-related contingent consideration) and up to 400,000 shares of our common stock, in each case payable based on the achievement of certain revenue targets as defined in the purchase agreement. At the acquisition date, we recorded a liability for the estimated fair value of the acquisition-related contingent consideration of $0.3 million. In addition, we recorded the fair value of the common shares of $8.4 million. These fair values were based on management’s estimate of the fair value of the cash and the restricted common shares using a probability weighted discounted cash flow model on the achievement of certain revenue targets. The cash payment has a maximum value of $0.5 million. The acquisition of SLN expands our lead generation capabilities into the senior living rental housing market. The acquired developed product technologies have a useful life of three years amortized on a straight-line basis. Acquired customer relationships have a useful life of ten years which will be amortized proportionately to the expected discounted cash flows derived from the asset. The tradenames acquired have an indefinite useful life as we do not plan to cease using the tradenames in the marketplace. All direct acquisition costs were less than $0.1 million and expensed as incurred. We included the results of operations of this acquisition in our consolidated financial statements from the effective date of the acquisition. Goodwill and identified intangibles associated with this acquisition are not deductible for tax purposes. The liability established for the acquisition-related contingent consideration will continue to be re-evaluated and recorded at an estimated fair value based on the probabilities, as determined by management, of achieving the related targets. This evaluation will be performed until all of the targets have been met or terms of the agreement expire. As of September 30, 2011, our liability for the estimated cash payment was $0.3 million and the estimated fair value of the common stock was $8.4 million. During the third quarter 2011, there were no costs due to changes in the estimated fair value of the cash acquisition-related contingent consideration.

In August 2011, we acquired Multifamily Technology Solutions, Inc. (“MTS”), which owns the Internet listing service for rental properties called MyNewPlace, pursuant to an Agreement and Plan of Merger. MTS continued as the surviving corporation of the Merger and a wholly owned subsidiary of RealPage. The preliminary purchase price consisted of a cash payment of $64.0 million, including amount placed in escrow, net of cash acquired, 294,770 shares of RealPage restricted common stock and the assumption of MTS stock options exercisable for 349,693 shares of RealPage common stock. In addition, the purchase agreement included a put option on the restricted common shares, in which, if the average market price of our common shares falls below an established threshold, we will pay the difference between the average market price and the established threshold in cash. We established a liability of $1.2 million for the put option which is based on its estimated fair value at the acquisition date. We also recorded the fair value of the restricted common shares and the assumed stock options of $6.3 million and $3.6 million, respectively. The fair value of the restricted common shares was based on management’s estimate of the fair value of restricted common shares using a probability weighted discounted cash flow model. The fair values of the assumed stock options and the put option was based on the Black-Scholes option pricing model using inputs consistent with those used in the valuation of our stock options. The acquisition of MTS adds an Internet listing service for rental properties and expands our syndication and organic lead generation capabilities. The acquired developed product technologies have a useful life of three years amortized on a straight-line basis. Acquired customer relationships

have a useful life of ten years which will be amortized proportionately to the expected discounted cash flows derived from the asset. The tradenames acquired have an indefinite useful life as we do not plan to cease using the tradenames in the marketplace. All direct acquisition costs were approximately $0.7 million and expensed as incurred. We included the results of operations of this acquisition in our consolidated financial statements from the effective date of the acquisition. Goodwill and identified intangibles associated with this acquisition are not deductible for tax purposes. The liability established for the put option on the restricted common shares will continue to be re-evaluated and recorded at an estimated fair value based on the changes in market prices of our common stock. During the third quarter 2011, there were no costs due to changes in the estimated fair value of the acquisition-related contingent consideration. One of the minority shareholders of MTS, is a customer of the Company. In connection with the distribution of the purchase price, we paid this customer for their proportion of the purchase price. This transaction was at arm’s length and is not related to the ongoing relationship with the Company.

The purchase agreement also included a portion of the cash and restricted common shares consideration to be placed into escrow. As such, we placed $14.0 million in cash and 65,873 restricted common shares into an escrow account on the date of acquisition. One half of these amounts will be released from escrow twelve months after the acquisition date. The remaining amounts will be released eighteen months after the acquisition date.

We allocated the purchase price for MTS (preliminary), SLN (preliminary) and Compliance Depot as follows:

		MTS				SLN				Compliance Depot
		(in thousands)
Intangible assets:
Developed product technologies		$	2,280			$	1,200			$	382
Customer relationships			27,600				2,630				9,030
Tradenames			24,800				2,560				2,230
Goodwill			33,342				8,127				13,371
Deferred revenue			(164	)			—				(2,380	)
Net deferred taxes			(15,574	)			(1,347	)			—
Net other assets			2,663				5				(110	)
Total purchase price, net of cash acquired		$	74,947			$	13,175			$	22,523

2010 Acquisitions

In November 2010, we acquired certain of the assets of Level One, LLC and L1 Technology, LLC (collectively “Level One”), subsidiaries of IAS Holdings, LLC, for approximately $61.9 million, which included a cash payment of $53.9 million at closing and a deferred payment of up to approximately $8.0 million, payable in cash or the issuance of our common stock eighteen months after the acquisition date. The acquisition of Level One further expanded our ability to provide on demand leasing center services. To facilitate the acquisition, we borrowed $30.0 million on our delayed draw term loans and utilized $24.0 million of the net proceeds from our initial public offering. Acquired intangibles were recorded at fair value based on assumptions made by us. The acquired developed product technologies have a useful life of three years amortized on a straight-line basis. Acquired customer relationships have a useful life of nine years which will be amortized proportionately to the expected discounted cash flows derived from the asset. The tradenames acquired have an indefinite useful life as we do not plan to cease using the tradenames in the marketplace. All direct acquisition costs were approximately $0.3 million and expensed as incurred. We included the results of operations of this acquisition in our consolidated financial statements from the effective date of the acquisition. Goodwill and identified intangibles associated with this acquisition are deductible for tax purposes.

In July 2010, we purchased 100% of the outstanding stock of eReal Estate Integration, Inc. (“eREI”) for approximately $8.6 million, net of cash acquired, which included a cash payment of $3.8 million and an estimated cash payment payable upon the achievement of certain revenue targets (acquisition-related contingent consideration) and the issuance of 499,999 restricted common shares, which vest as certain revenue targets are achieved as defined in the purchase agreement. At the acquisition date, we recorded a liability for the estimated fair value of the acquisition-related contingent consideration of $0.8 million. In addition, we recorded the fair value of the restricted common shares of $3.3 million. These fair values were based on management’s estimate of the fair value of the cash and the restricted common shares using a probability weighted discounted cash flow model on the achievement of certain revenue targets. The cash payment and the related restricted common shares have a maximum value of $1.8 million and $4.4 million, respectively. This acquisition was financed from proceeds from our revolving line of credit and cash flows from operations. The acquisition of eREI improved our lead management and lead syndication capabilities. Acquired intangibles were recorded at fair value based on assumptions made by us. The acquired developed product technologies have a useful life of three years amortized on a straight-line basis. Acquired customer relationships have a useful life of ten years which will be amortized proportionately to the expected discounted cash flows derived from the asset. The tradenames acquired have an indefinite useful life as we do not plan to cease using the tradenames in the marketplace. All direct acquisition costs were approximately $0.1 million and expensed as incurred. We included the results of operations of this acquisition in our consolidated financial statements from the effective date of the

acquisition. Goodwill and identified intangibles associated with this transaction are not deductible for tax purposes. The liability established for the acquisition-related contingent consideration will continue to be re-evaluated and recorded at an estimated fair value based on the probabilities, as determined by management, of achieving the related targets. This evaluation will be performed until all of the targets have been met or terms of the agreement expire. As of September 30, 2011, our liability for the estimated cash payment was $0.9 million. During the three and nine months ended September 30, 2011, we recognized (gains) and losses of $(3,000) and $0.1 million due to changes in the estimated fair value of the cash acquisition-related contingent consideration.

In February 2010, we acquired the assets of Domin-8 Enterprise Solutions, Inc. (“Domin-8”). The acquisition of these assets improved our ability to serve our multi-family clients with mixed portfolios that include smaller, centrally-managed apartment communities. The aggregate purchase price at closing was $12.9 million, net of cash acquired, which was paid upon acquisition of the assets. We acquired deferred revenue as a contractual obligation, which was recorded at its assessed fair value of $4.5 million. The fair value of the deferred revenue was determined based on estimated costs to support acquired contracts plus a reasonable margin. The acquired intangibles were recorded at fair value based on assumptions made by us. The customer relationships have useful lives of approximately nine years and are amortized in proportion to the estimated cash flows derived from the relationship. Acquired developed product technologies have a useful life of three years and are amortized straight-line over the estimated useful life. We have determined that the tradename has an indefinite life, as we anticipate keeping the tradename for the foreseeable future given its recognition in the marketplace. Approximately $0.9 million of transaction costs related to this acquisition were expensed as incurred. We included the operating results of this acquisition in our consolidated results of operations from the effective date of the acquisition. This acquisition was financed from the proceeds from the amended credit agreement and cash flow from operations. This acquisition made immediately available product offerings that complemented our existing products. We accounted for the acquisition by allocating the total consideration to the fair value of assets received and liabilities assumed. Goodwill and identified intangibles associated with this acquisition are deductible for tax purposes.

We allocated the purchase price for Level One, eREI and Domin-8 as follows:

		Level One				eREI				Domin-8
		(in thousands)
Intangible assets:
Developed product technologies		$	692			$	5,279			$	3,678
Customer relationships			18,300				498				6,418
Tradenames			3,740				844				1,278
Goodwill			36,897				4,664				4,896
Deferred revenue			(352	)			—				(4,502	)
Net deferred taxes			—				(2,648	)			—
Net other assets			2,573				(14	)			1,155
Total purchase price, net of cash acquired		$	61,850			$	8,623			$	12,923

Pro Forma Results of Acquisitions

The following table presents unaudited pro forma results of operations for the three and nine months ended September 30, 2011 and September 30, 2010 as if the Domin-8, eREI, Level One, Compliance Depot, SLN and MTS acquisitions had occurred at the beginning of the periods presented. The pro forma financial information includes business combination effects resulting from these acquisitions including approximately $0.3 million, $1.7 million, $1.8 million and $6.9 million of amortization charges from acquired intangible assets and approximately $0.8 million, $0.1 million, $2.6 million and $1.9 million of an income tax benefit for the related tax effects as though the aforementioned companies were combined as of the beginning of the three months ended September 30, 2011 and 2010 and the nine months ended September 30, 2011 and 2010, respectively. We prepared the pro forma financial information for the combined entities for comparative purposes only, and it is not indicative of what actual results would have been if the acquisitions had taken place at the beginning of the periods presented, or of future results.

		Three Months Ended September 30,								Nine Months Ended September 30,
		2011				2010				2011				2010
		Pro Forma				Pro Forma				Pro Forma				Pro Forma
		(in thousands)
Revenue:
On demand		$	65,585			$	55,771			$	186,236			$	154,414
On premise			1,772				2,127				5,045				7,169
Professional and other			3,118				2,804				9,052				7,431
Total revenue			70,475				60,702				200,333				169,014
Net loss		$	(1,300	)		$	(168	)		$	(3,905	)		$	(2,866	)
Net loss attributable to common stockholders:
Basic and diluted			(1,300	)			(787	)			(3,905	)			(5,810	)
Net loss per share attributable to common stockholders:
Basic		$	(0.02	)		$	(0.02	)		$	(0.06	)		$	(0.18	)
Diluted		$	(0.02	)		$	(0.02	)		$	(0.06	)		$	(0.18	)

4. Property, Equipment and Software

Property, equipment and software consist of the following:

		September 30,				December 31,
		2011				2010
		(in thousands)
Leasehold improvements		$	8,819			$	8,772
Data processing and communications equipment			36,349				31,712
Furniture, fixtures, and other equipment			9,630				8,012
Software			30,207				26,617
			85,005				75,113
Less: Accumulated depreciation and amortization			(58,453	)			(50,598	)
Property, equipment and software, net		$	26,552			$	24,515

Depreciation and amortization expense for property, equipment and software was $3.1 million, $2.9 million, $9.5 million and $8.5 million for the three months ended September 30, 2011 and 2010 and the nine months ended September 2011 and 2010, respectively. This includes depreciation for assets purchased through capital leases.

5. Goodwill and Other Intangible Assets

The change in the carrying amount of goodwill for the nine months ended September 30, 2011 is as follows:

		(in thousands)
Balance at December 31, 2010		$	73,885
Goodwill acquired in 2011			54,840
Other			(93	)
Balance at September 30, 2011		$	128,632

Other intangible assets consisted of the following at September 30, 2011 and December 31, 2010:

						September 30, 2011												December 31, 2010
		Amortization				Carrying				Accumulated								Carrying				Accumulated
		Period				Amount				Amortization				Net				Amount				Amortization				Net
		(in thousands)
Finite-lived intangible assets
Developed technologies		3 years				$	24,938			$	(12,982	)		$	11,956			$	21,082			$	(7,618	)		$	13,464
Customer relationships		1-10 years					74,183				(12,702	)			61,481				34,923				(6,932	)			27,991
Vendor relationships		7 years					5,650				(3,127	)			2,523				5,650				(2,480	)			3,170
Option to purchase building		1 year					131				(120	)			11				131				(22	)			109
Non-competition agreement		4-5 years					120				(120	)			—				120				(112	)			8
Total finite-lived intangible assets							105,022				(29,051	)			75,971				61,906				(17,164	)			44,742
Indefinite-lived intangible assets Tradenames							39,170				—				39,170				9,619				—				9,619
Total intangible assets						$	144,192			$	(29,051	)		$	115,141			$	71,525			$	(17,164	)		$	54,361

Amortization of finite-lived intangible assets was $4.3 million, $2.5 million, $11.9 million and $6.3 million for the three months ended September 30, 2011 and 2010 and the nine months ended September 2011 and 2010, respectively.

6. Debt

Term Loan

At December 31, 2010, under the terms of our amended credit agreement, the term loan and revolving line of credit bear interest at a stated rate of 3.5% plus LIBOR, or a stated rate of 0.75% plus Wells Fargo’s prime rate (or, if greater, the federal funds rate plus 0.5% or three month LIBOR plus 1.0%). Interest on the term loans and the revolver is payable monthly, or for LIBOR loans, at the end of the applicable 1-, 2-, or 3-month interest period. Principal payments on the term loan are paid in quarterly installments equal to 3.75% of the principal amount of term loans, with the balance of all term loans and the revolver due on June 30, 2014. Debt issuance costs incurred in connection with the Credit Agreement are deferred and amortized over the remaining term of the arrangement.

In February 2011, we entered into an amendment to the Credit Agreement. Under terms of the February 2011 amendment, our revolving line of credit was increased from $10.0 million to $37.0 million. In addition, the interest rates on the term loan and revolving line of credit vary dependent on defined leverage ratios and range from a stated rate of 2.75% — 3.25% plus LIBOR or a stated rate of 0.0% — 0.5% plus Wells Fargo’s prime rate (or, if greater, the federal funds rate plus 0.5% or three month LIBOR plus 1.0%). Principal payments on the term loan and outstanding revolver balance remain consistent with our amended credit agreement.

As of September 30, 2011, we have total outstanding debt of $57.9 million and $37.0 million available under our revolving line of credit. We have unamortized debt issuance costs of $1.1 million and $1.3 million at September 30, 2011 and December 31, 2010, respectively. As of September 30, 2011, we are in compliance with our debt covenants.

7. Share-based Compensation

On March 1, 2011, we granted 449,850 options with an exercise price of $24.03 which vest over four years with 75% vesting over 15 quarters and the remaining 25% vesting on the 16^th quarter. We also granted 299,900 shares of restricted stock at $24.03 which vest ratably over four years. Both stock options and restricted stock were granted under the 2010 Equity Plan.

On April 1, 2011, we granted 17,535 shares of restricted stock at $28.52 which vest ratably over four years to our Board of Directors under the 2010 Equity Plan.

On May 10, 2011, we granted 147,950 options with an exercise price of $29.50 which vest over four years with 75% vesting over 15 quarters and the remaining 25% vesting on the 16^th quarter. We also granted 98,800 shares of restricted stock at $29.50 which vest ratably over four years. Both stock options and restricted stock were granted under the 2010 Equity Plan. In connection with our strategic acquisition of Compliance Depot in May 2011, we granted 17,500 shares of restricted stock at $29.50 to certain employees of Compliance Depot which vest as certain revenue targets are achieved.

In connection with our acquisition of SLN on August 9, 2011, we granted an employee 67,500 options with an exercise price of $24.03 and 49,500 shares of restricted stock. The options vest over four years with 75% vesting over 15 quarters and the remaining 25% vesting on the 16^th quarter. The restricted shares vest over four years with 0% vesting in the first two years and 12.5% vesting quarterly thereafter. Both stock options and restricted stock were granted under the 2010 Equity Plan.

On August 9, 2011, we granted 266,700 options with an exercise price of $24.03 which vest over four years with 75% vesting over 15 quarters and the remaining 25% vesting on the 16^th quarter. We also granted 177,900 shares of restricted stock which vest ratably over four years. Both stock options and restricted stock were granted under the 2010 Equity Plan.

In connection with our acquisition of MTS, on August 24, 2011, we assumed 349,693 options granted from MTS’s 2005 Equity Incentive Plan (“MTS Plan”). Assumed options were converted to equivalent share-based awards of RealPage based on the ratio of our fair market value of stock to the fair market value of MTS’s stock on the acquisition date. The number of shares and ratio of exercise price to market price were equitably adjusted to preserve the intrinsic value of the award as of immediately prior to the acquisition. The conversion was accounted for as a modification under the provisions of GAAP which did not result in an incremental increase in the fair value of the assumed option awards. As of September 30, 2011, we had 344,183 assumed options outstanding under the MTS Plan. The majority of assumed options vest over a four-year period at a rate of 25% or 20% after one year and then monthly on a straight-line basis thereafter while others vest ratably over a four-year period. Options granted generally are exercisable up to 10 years. No further options will be granted under the MTS Plan.

On August 29, 2011, in connection with our acquisition of MTS, we granted certain employees 249,300 options with an exercise price of $19.73 which vest which vest over four years with 75% vesting over 15 quarters and the remaining 25% vesting on the 16th quarter and also granted 146,200 shares of restricted stock which vest ratably over four years. These stock options and restricted shares were granted under the 2010 Equity Plan.

8. Commitments and Contingencies

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 reduces our exposure and enables us to recover a portion of any future amounts paid. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal. Accordingly, we had no liabilities recorded for these agreements as of September 30, 2011 or December 31, 2010.

In the ordinary course of our business, we enter into standard indemnification provisions in our agreements with our customers. Pursuant to these provisions, we indemnify our customers for losses suffered or incurred in connection with third-party claims that our products infringed upon any U.S. patent, copyright, trademark or other intellectual property right. Where applicable, we generally limit such infringement indemnities to those claims directed solely to our products and not in combination with other software or products. With respect to our products, we also generally reserve the right to resolve such claims by designing a non-infringing alternative, by obtaining a license on reasonable terms, or by terminating our relationship with the customer and refunding the customer’s fees.

The potential amount of future payments to defend lawsuits or settle indemnified claims under these indemnification provisions is unlimited in certain agreements; however, we believe the estimated fair value of these indemnity provisions is minimal, and, accordingly, we had no liabilities recorded for these agreements as of September 30, 2011 or December 31, 2010.

Litigation

From time to time, in the normal course of our business, we are a party to litigation matters and claims. Litigation can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict and our view of these matters may change in the future as the litigation and events related thereto unfold. We expense legal fees as incurred. Insurance recoveries associated with legal costs incurred are recorded when they are deemed probable of recovery. We record a provision for contingent losses when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. An unfavorable outcome in any legal matter, if material, could have an adverse effect on our operations, financial position, liquidity and results of operations.

On January 24, 2011, Yardi Systems, Inc. (“Yardi”) filed a lawsuit in the U.S. District Court for the Central District of California against RealPage, Inc. and DC Consulting, Inc. and filed a First Amended Complaint on August 12, 2011. On March 28, 2011, we filed an answer and counterclaims, on May 18, 2011, we filed amended counterclaims, on September 2, 2011, we filed Second Amended Counterclaims and on September 12, 2011, we filed an answer to Yardi’s First Amended Complaint. Yardi has also filed a pending motion to dismiss several of our counterclaims which we have opposed. Trial in this case is currently set for August 2012. This case is at an early stage and we are not able to predict its outcome. For additional information regarding this lawsuit, see “Legal Proceedings” in Item 1 of Part II of this report.

We are involved in other litigation matters not listed above but we do not consider the matters to be material either individually or in the aggregate at this time. Our view of the matters not listed may change in the future as the litigation and events related thereto unfold.

9. Net Loss Per Share

Net loss per share is presented in conformity with the two-class method required for participating securities. In August 2010, all of the Company’s outstanding redeemable convertible preferred stock converted into common stock in connection with our IPO. Prior to the conversion, holders of Series A Preferred, Series A1 Preferred, Series B Preferred and Series C Preferred were each entitled to receive 8% per annum cumulative dividends, payable prior and in preference to any dividends on any other shares of our capital stock. In the event a dividend was paid on common stock, holders of Series A Preferred, Series A1 Preferred, Series B Preferred, Series C Preferred and non-vested restricted stock were entitled to a proportionate share of any such dividend as if they were holders of common shares (on an as-if converted basis). Holders of Series A Preferred, Series A1 Preferred, Series B Preferred, Series C Preferred and non-vested restricted stock did not share in the loss of the Company.

For the period prior to the conversion of the redeemable convertible preferred stock, net loss per share information is computed using the two-class method. Under the two-class method, basic net income per share attributable to common stockholders is computed by dividing the net income attributable to common stockholders by the weighted average number of common shares outstanding during the period. Net loss attributable to common stockholders is determined by allocating undistributed earnings, calculated as net loss less current period Series A Preferred, Series A1 Preferred, Series B Preferred and Series C Preferred cumulative dividends, between the holders of common stock and Series A Preferred, Series A1 Preferred, Series B Preferred and Series C Preferred. Diluted net income per share attributable to common stockholders 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 using the treasury stock method. Weighted average shares from common share equivalents in the amount of 8,521 shares and 3,476,622 shares and 239,804 shares and 2,036,796 shares were excluded from the dilutive shares outstanding because their effect was anti-dilutive for the three and nine months ended September 30, 2011 and 2010, respectively.

The following table presents the calculation of basic and diluted net loss per share attributable to common stockholders:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
		(in thousands, except per share amounts)
Numerator:
Net (loss) income		$	(1,106	)		$	292			$	(1,472	)		$	253
8% cumulative dividends on participating preferred stock			—				(619	)			—				(2,944	)
Net loss attributable to common stockholders — basic and diluted		$	(1,106	)		$	(327	)		$	(1,472	)		$	(2,691	)
Denominator:
Basic:
Weighted average common shares used in computing basic net loss per share			68,792				43,636				68,096				31,878
Diluted:
Weighted average common shares used in computing basic net loss per share			68,792				43,636				68,096				31,878
Add weighted average effect of dilutive securities:
Stock options			—				—				—				—
Restricted stock			—				—				—				—
Weighted average common shares used in computing diluted net loss per share			68,792				43,636				68,096				31,878
Net loss per common share:
Basic		$	(0.02	)		$	(0.01	)		$	(0.02	)		$	(0.08	)
Diluted		$	(0.02	)		$	(0.01	)		$	(0.02	)		$	(0.08	)

10. Income Taxes

We make estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. Our tax provision for interim periods is derived using an estimate of our annual effective rate, adjusted for any material items.

The acquisition of the stock of SLN and MTS resulted in an additional net deferred tax liability of $16.9 million. This net liability includes a deferred tax liability of $23.8 million related to indefinite lived intangibles, a deferred tax asset, net of valuation allowance, of $6.4 million related to net operating loss carryforwards and other miscellaneous deferred tax assets of $0.5 million. These net operating loss carryforwards are subject to a Section 382 limitation. The limitation on these pre-acquisition net operating loss carryforwards will fully expire in 2020.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (which Sections were adopted as part of the Private Securities Litigation Reform Act of 1995). Statements preceded by, followed by or that otherwise include the words “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” or similar expressions and the negatives of those terms are generally forward-looking in nature and not historical facts. These forward looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any anticipated results, performance or achievements. 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. For risks and uncertainties that could impact our forward-looking statements, please see Part II Item 1A, “Risk Factors” herein.

Overview

RealPage, Inc., a Delaware corporation, and its subsidiaries, (the “Company” or “we” or “us”) is a leading provider of on demand software solutions for the rental housing industry. Our broad range of property management solutions enables owners and managers of single-family and a wide variety of multi-family rental property types to manage their marketing, pricing, screening, leasing, accounting, purchasing and other property operations. Our on demand software solutions are delivered through an integrated software platform that provides a single point of access and a shared repository of prospect, resident and property data. By integrating and streamlining a wide range of complex processes and interactions among the rental housing ecosystem of owners, managers, prospects, residents and service providers, our platform helps optimize the property management process and improves the experience for all of these constituents.

Our solutions enable property owners and managers to increase revenues and reduce operating costs through higher occupancy, improved pricing methodologies, new sources of revenue from ancillary services, improved collections and more integrated and centralized processes. As of September 30, 2011, over 7,600 customers used one or more of our on demand software solutions to help manage the operations of approximately 6.4 million rental housing units. Our customers include each of the ten largest multi-family property management companies in the United States, ranked as of January 1, 2011 by the National Multi Housing Council, based on number of units managed.

We sell our solutions through our direct sales organization. Our total revenues were approximately $67.7 million, $48.0 million, $186.8 million and $134.2 million for the three months ended September 30, 2011 and 2010 and the nine months ended September 2011 and 2010, respectively. In the same periods, we had operating (loss) income of approximately $(0.7) million, $2.3 million, $0.5 million and $5.2 million, respectively, and net (loss) income of approximately $(1.1) million, $0.3 million, $(1.5) million and $0.3 million, respectively.

Our company was formed in 1998 to acquire Rent Roll, Inc., which marketed and sold on premise property management systems for the conventional and affordable multi-family rental housing markets. In September 2001, we released OneSite, our first on demand property management system. Since 2002, we have expanded our on demand software solutions to include a number of software-enabled value-added services that provide complementary sales and marketing, asset optimization, risk mitigation, billing and utility management and spend management capabilities. In connection with this expansion, we have allocated greater resources to the development and infrastructure needs of developing and increasing sales of our suite of on demand software solutions. In addition, since July 2002, we have completed 17 acquisitions of complementary technologies to supplement our internal product development and sales and marketing efforts and expand the scope of our solutions, the types of rental housing properties served by our solutions and our customer base.

On August 11, 2010, our registration statement on Form S-1 (File No 333-166397) relating to our initial public offering was declared effective by the SEC. We sold 6,000,000 shares of common stock in our initial public offering. Our common stock began trading on August 12, 2010 on the NASDAQ Global Select Stock Market under the symbol “RP,” and the offering closed on August 17, 2010. Upon closing of our initial public offering, all outstanding shares of our convertible preferred stock, including a portion of accrued but unpaid dividends on our outstanding shares of Series A, Series A1 and Series B convertible preferred stock, were converted into 29,567,952 shares of common stock.

On December 6, 2010, our registration statement on Form S-1 (File No 333-170667) relating to a public stock offering was declared effective by the SEC. We sold an additional 4,000,000 shares of common stock in the offering. The offering closed on December 10, 2010.

New Product Family

In August 2011, we announced our new product family, LeaseStar, which will consolidate and integrate products and services related to our acquisitions of eREI, LevelOne, SeniorLiving.net, MTS and our suite of products and services historically branded as Crossfire. We believe the LeaseStar product family will unify major organic and paid lead channels into a single marketplace where consumers can find a rental unit and transact business by viewing real time availability, pricing, pre-qualify and lease online.

Recent Acquisitions

In July 2010, we acquired 100% of the outstanding stock of eReal Estate Integration, Inc. (“eREI”). eREI’s core products provide phone and Internet lead tracking and lead management services, as well as syndication services that push property content to search engines, Internet listing services and classified listed websites. The addition of these products improved our lead management and lead syndication capabilities within our CrossFire product family. The purchase price of eREI was approximately $8.6 million, which included a cash payment of $3.8 million at close, an estimated cash payment payable upon the achievement of certain revenue targets and the issuance of 499,999 restricted common shares, which vest as certain revenue targets are achieved, as defined in the purchase agreement.

In November 2010, we acquired certain of the assets of Level One, LLC and L1 Technology, LLC, (“Level One”), subsidiaries of IAS Holdings, LLC. Level One services property management companies by providing centralized lead capture services designed to enable owners to lease more apartments, reduce overall marketing spend and free up on-site leasing staff. We are in the process of integrating Level One with our CrossFire product family. We continue to market the Level One brand. Level One’s services are utilized in the management of approximately one million rental property units. The purchase price of Level One was approximately $61.9 million, which included a cash payment of $53.9 million and a deferred payment of up to approximately $8.0 million, payable in cash or the issuance of our common stock eighteen months after the acquisition date. To facilitate the acquisition, we borrowed $30.0 million under our delayed draw term loans and utilized $24.0 million of the net proceeds from our initial public offering.

In May 2011, we acquired substantially all of the assets of Compliance Depot LLC (“Compliance Depot”) for approximately $22.5 million which included a cash payment of $19.2 million and deferred payments of $1.1 million payable six, twelve and eighteen months after the acquisition date. The acquisition of Compliance Depot expands our ability to provide vendor risk management and compliance software for the rental housing industry. Interfacing with vendors through a branded platform, Compliance Depot allows property managers and owners to: track compliance with vendor obligations to carry workers compensation and general liability insurance, identify vendor bankruptcy filings, liens, criminal records, collections and professional license verification, confirm federal regulation compliance, such as The Patriot Act; as well as manage contractual agreements and federal and state tax documents.

In July 2011, we acquired Senior-Living.com, Inc., operating under the name SeniorLiving.net (“SLN”), for a purchase price consisting of a cash payment of $4.0 million at closing, additional cash payments of $0.5 million, half of which is due on each of the first and second anniversaries of the acquisition date, and a deferred earn out payment of up to $0.5 million in cash and up to 400,000 shares of our common stock, in each case payable based on the achievement of specified milestones on or before June 30, 2014. The acquisition of SLN expands our lead generation capabilities into the senior living rental housing market.

In August 2011, we acquired Multifamily Technology Solutions, Inc. (“MTS”), which owns the Internet listing service for rental properties called MyNewPlace, pursuant to an Agreement and Plan of Merger. MTS continued as the surviving corporation of the Merger and a wholly owned subsidiary of RealPage. We acquired MTS for a purchase price of $74.9 million, net of cash acquired, comprised of approximately $64.0 million in cash, 294,770 shares of RealPage restricted common stock and the assumption of MTS stock options exercisable for 349,693 shares of RealPage common stock. The acquisition of MTS adds a pay-for-performance Internet listing service, expands our suite of SAAS lead generation and management tools and service delivery capabilities.

Critical Accounting Policies and Estimates

The preparation of our condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base these estimates and assumptions on historical experience or on various other factors that we believe to be reasonable and appropriate under the circumstances. We reconsider and evaluate our estimates and assumptions on an on-going basis. Accordingly, actual results may differ significantly from these estimates

We believe that the following critical accounting policies involve our more significant judgments, assumptions and estimates, and therefore, could have the greatest potential impact on our condensed consolidated financial statements:

•

Revenue recognition;

•

Accounts receivable;

•

Business combinations;

•

Goodwill and other intangible assets with indefinite lives;

•

Impairment of long-lived assets

•

Intangible assets;

•

Stock-based compensation;

•

Income taxes; and

•

Capitalized product development costs.

A full discussion of our critical accounting policies, which involve significant management judgment, appears in our Form 10-K under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates.” For further information regarding our business, industry trends, accounting policies and estimates, and risks and uncertainties, refer to our Form 10-K.

Key Components of Our Results of Operations

Revenue

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 for accessing our on demand software solutions, typically licensed for one year terms, commission income for sales of renter’s insurance policies, and transaction fees for certain on demand software solutions, such as payment processing, spend management and billing services. We typically price our on demand software solutions based primarily on the number of units the customer manages with our solutions. For our insurance and transaction-based solutions, we price based on a fixed commission rate of earned premiums or a fixed rate per transaction, respectively.

On premise revenue. Our on premise software solutions are distributed to our customers and maintained locally on the customers’ hardware. Revenue from our on premise software solutions is comprised of license fees under term and perpetual license agreements. Typically, we have licensed our on premise software solutions pursuant to term license agreements with an initial term of one year that includes maintenance and support. Customer can renew their term license agreement for additional one-year terms at renewal price levels. In February 2010, we completed a strategic acquisition of assets that include on premise software solutions that were historically marketed and sold pursuant to perpetual license agreements and related maintenance agreements.

We no longer actively market our legacy on premise software solutions (i.e. RentRoll and HUDManager) to new customers, and only market and support our acquired on premise software solutions. We expect on premise revenue to continue to decline over time as we transition acquired on premise customers to our on demand property management systems.

Professional and other revenue. Revenue from professional and other services consists of consulting and implementation services, training and other ancillary services. Professional and other services engagements are typically time and material based.

Cost of Revenue

Cost of revenue consists primarily of personnel costs related to our operations, support services, training and implementation services, expenses related to the operation of our data center and fees paid to third-party service providers. Personnel costs include salaries, bonuses, stock-based compensation and employee benefits. Cost of revenue also includes an allocation of facilities costs, overhead costs and depreciation, as well as amortization of acquired technology related to strategic acquisitions and amortization of capitalized development costs. We allocate facilities, overhead costs and depreciation based on headcount.

Operating Expenses

We classify our operating expenses into three categories: product development, sales and marketing, and general and administrative. Our operating expenses primarily consist of personnel costs, which include compensation, employee benefits and payroll taxes, costs for third-party contracted development, marketing, legal, accounting and consulting services and other professional service fees. Personnel costs for each category of operating expenses include salaries, bonuses, stock-based compensation and employee benefits for employees in that category. In addition, our operating expenses include an allocation of our facilities costs, overhead costs and depreciation based on headcount for that category, as well as amortization of purchased intangible assets resulting from our acquisitions.

Product development. Product development expense consists primarily of personnel costs for our product development employees and executives and fees to contract development vendors. Our product development efforts are focused primarily on increasing the functionality and enhancing the ease of use of our on demand software solutions and expanding our suite of on demand software solutions. We established a product development and service center in Hyderabad, India and a product development center in Manila, Philippines in 2008 and 2011, respectively, to take advantage of strong technical talent at lower personnel costs compared to the United States.

Sales and marketing. Sales and marketing expense consists primarily of personnel costs for our sales, marketing and business development employees and executives, travel and entertainment and marketing programs. Marketing programs consist of advertising, tradeshows, user conferences, public relations, industry sponsorships and affiliations and product marketing. Additionally, sales and marketing expense includes amortization of certain purchased intangible assets, including customer relationships and key vendor and supplier relationships obtained in connection with our acquisitions.

General and administrative. General and administrative expense consists of personnel costs for our executive, finance and accounting, human resources, management information systems and legal personnel, as well as legal, accounting and other professional service fees and other corporate expenses.

Key Business Metrics

In addition to traditional financial measures, we monitor our operating performance using a number of financially and non-financially derived metrics that are not included in our condensed consolidated financial statements. We monitor the key performance indicators as follows:

On demand revenue. This metric represents the license and subscription fees for accessing our on demand software solutions, typically licensed for one year terms, commission income from sales of renter’s insurance policies and transaction fees for certain of our on demand software solutions. We consider on demand revenue to be a key business metric because we believe the market for our on demand software solutions represents the largest growth opportunity for our business.

On demand revenue as a percentage of total revenue. This metric represents on demand revenue for the period presented divided by total revenue for the same period. We use on demand revenue as a percentage of total revenue to measure our success in executing our strategy to increase the penetration of our on demand software solutions and expand our recurring revenue streams attributable to these solutions. We expect our on demand revenue to remain a significant percentage of our total revenue although the actual percentage may vary from period to period due to a number of factors, including the timing of acquisitions, professional and other revenue and on premise perpetual license sales and maintenance fees resulting from our February 2010 acquisition.

Ending on demand units. This metric represents the number of rental housing units managed by our customers with one or more of our on demand software solutions at the end of the period. We use ending on demand units to measure the success of our strategy of increasing the number of rental housing units managed with our on demand software solutions. Property unit counts are provided to us by our customers as new sales orders are processed. Property unit counts may be adjusted periodically as information related to our customers’ properties is updated or supplemented, which could result in adjusting the number of units previously reported.

Non-GAAP on demand revenue. This metric represents on demand revenue adjusted to reverse the effect of the write down of deferred revenue associated with purchase accounting for strategic acquisitions. We use this metric to evaluate our on demand revenue as we believe its inclusion provides a more accurate depiction of on demand revenue arising from our strategic acquisitions.

Non-GAAP on demand revenue per average on demand unit. This metric represents on demand revenue for the period presented divided by average on demand units for the same period. For interim periods, the calculation is performed on an annualized basis. We calculate average on demand units as the average of the beginning and ending on demand units for each quarter in the period presented. We monitor this metric to measure our success in increasing the number of on demand software solutions utilized by our customers to manage their rental housing units, our overall revenue and profitability. Non-GAAP on demand revenue per average on demand unit for the interim periods presented are annualized.

Adjusted EBITDA. We define this metric as net income (loss) plus depreciation and asset impairment; amortization of intangible assets; interest expense, net; income tax expense (benefit); stock-based compensation expense, acquisition-related expense and purchase accounting adjustment. In 2011, Adjusted EBITDA excludes litigation related expenses pertaining to the Yardi litigation as discussed in Part II, Item 1 “Legal Proceedings.” Beginning in the second quarter of 2011, Adjusted EBITDA includes acquisition-related deferred revenue adjustments. We believe that the use of Adjusted EBITDA is useful in evaluating our operating performance because it excludes certain non-cash expenses, including depreciation, amortization and stock-based compensation. Adjusted EBITDA is not determined in accordance with accounting principles generally accepted in the United States, or GAAP, and should not be considered as a substitute for or superior to financial measures determined in accordance with GAAP. For further discussion regarding Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, refer to “Reconciliation of Quarterly Non-GAAP Financial Measures” herein. Our Adjusted EBITDA grew from approximately $9.1 million and $24.3 million for the three and nine months ended September 30, 2010 to approximately $15.0 million and $40.9 million for the three and nine months ended September 30, 2011 as a result of our efforts to expand market share and increase revenue.

Results of Operations

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

Condensed Consolidated Statements of Operations Data

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Revenue:
On demand		$	62,765			$	43,097			$	172,741			$	120,393
On premise			1,772				2,127				5,045				6,419
Professional and other			3,118				2,804				9,052				7,403
Total revenue			67,655				48,028				186,838				134,215
Cost of revenue(1)			27,585				20,203				78,078				56,595
Gross profit			40,070				27,825				108,760				77,620
Operating expense:
Product development(1)			11,230				9,127				32,083				26,431
Sales and marketing(1)			17,688				9,428				44,992				25,793
General and administrative(1)			11,840				6,969				31,190				20,230
Total operating expense			40,758				25,524				108,265				72,454
Operating (loss) income			(688	)			2,301				495				5,166
Interest expense and other, net			(684	)			(1,822	)			(2,582	)			(4,749	)
(Loss) income before income taxes			(1,372	)			479				(2,087	)			417
Income tax expense			(266	)			187				(615	)			164
Net (loss) income		$	(1,106	)		$	292			$	(1,472	)		$	253
Net (loss) income attributable to common stockholders
Basic		$	(1,106	)		$	(327	)		$	(1,472	)		$	(2,691	)
Diluted		$	(1,106	)		$	(327	)		$	(1,472	)		$	(2,691	)
Net income (loss) per share attributable to common stockholders
Basic		$	(0.02	)		$	(0.01	)		$	(0.02	)		$	(0.08	)
Diluted		$	(0.02	)		$	(0.01	)		$	(0.02	)		$	(0.08	)
Weighted average shares used in computing net loss per share attributable to common stockholders
Basic			68,792				43,636				68,096				31,878
Diluted			68,792				43,636				68,096				31,878
(1)   Includes stock-based compensation expense as follows:
Cost of revenue		$	459			$	140			$	1,069			$	407
Product development			1,258				627				3,343				1,664
Sales and marketing			3,433				201				8,793				541
General and administrative			1,258				391				3,025				1,133

The following table sets forth our results of operations for the specified periods as a percentage of our revenue for those periods. The period-to-period comparison of financial results is not necessarily indicative of future results.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
		(as a percentage of total								(as a percentage of total
		revenue)								revenue)
Revenue:
On demand			92.8	%			89.7	%			92.5	%			89.7	%
On premise			2.6				4.4				2.7				4.8
Professional and other			4.6				5.8				4.8				5.5
Total revenue			100.0				100.0				100.0				100.0
Cost of revenue			40.8				42.1				41.8				42.2
Gross profit			59.2				57.9				58.2				57.8
Operating expense:
Product development			16.6				19.0				17.2				19.7
Sales and marketing			26.1				19.6				24.0				19.2
General and administrative			17.5				14.5				16.7				15.1
Total operating expenses			60.2				53.1				57.9				54.0

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
		(as a percentage of total								(as a percentage of total
		revenue)								revenue)
Operating (loss) income			(1.0	)			4.8				0.3				3.8
Interest expense and other, net			(1.0	)			(3.8	)			(1.4	)			(3.5	)
Net (loss) income before taxes			(2.0	)			1.0				(1.1	)			(0.3	)
Income tax expense (benefit)			(0.4	)			0.4				(0.3	)			0.1
Net (loss) income			(1.6	)			0.6				(0.8	)			0.2

Three and Nine Months Ended September 30, 2011 compared to Three and Nine Months Ended September 30, 2010

Revenue

		Three Months Ended September 30,																Nine Months Ended September 30,
		2011				2010				Change				% Change				2011				2010				Change				% Change
		(in thousands, except dollar per unit data)
Revenue:
On demand		$	62,765			$	43,097			$	19,668				45.6	%		$	172,741			$	120,393			$	52,348				43.5	%
On premise			1,772				2,127				(355	)			(16.7	)			5,045				6,419				(1,374	)			(21.4	)
Professional and other			3,118				2,804				314				11.2				9,052				7,403				1,649				22.3
Total revenue			67,655			$	48,028			$	19,627				40.9				186,838			$	134,215			$	52,623				39.2
On demand unit metrics:
Ending on demand units			7,074				5,567				1,507				27.1				7,074				5,567				1,507				27.1
Average on demand units			6,727				5,387				1,340				24.9				6,370				5,059				1,311				25.9
Non-GAAP on demand revenue		$	63,041			$	43,097			$	19,944				46.3			$	173,261			$	120,393			$	52,868				43.9
Non-GAAP on demand revenue per average on demand unit		$	37.49			$	32.00			$	5.49				17.2			$	36.27			$	31.73			$	4.54				14.3

On demand revenue. Our on demand revenue increased $19.7 million, or 45.6%, for the three months ended September 30, 2011 as compared to same period in 2010, primarily due to an increase in rental property units managed with our on demand solutions and an increase in the number of our on demand solutions utilized by our existing customer base, combined with revenue contributed from our Level One, Compliance Depot, SLN and MTS strategic acquisitions.

Our on demand revenue increased $52.3 million, or 43.5%, for the nine months ended September 30, 2011 as compared to same period in 2010, primarily due to an increase in rental property units managed with our on demand solutions and an increase in the number of our on demand solutions utilized by our existing customer base, combined with revenue contributed from our Level One, Compliance Depot, SLN and MTS strategic acquisitions.

On premise revenue. On premise revenue decreased $0.4 million, or 16.7%, for the three months ended September 30, 2011 as compared to the same period in 2010. We have completed the effort of migrating our legacy on premise customer base (i.e. RentRoll and HUDManager) to our on demand property management systems. We no longer actively market our legacy on premise software solutions to new customers, and only market and support our acquired on premise software solutions. We expect on premise revenue to continue to decline over time as we transition acquired on premise customers to our on demand property management systems.

On premise revenue decreased $1.4 million, or 21.4%, for the nine months ended September 30, 2011 as compared to the same period in 2010. We have completed the effort of migrating our legacy on premise customer base (i.e. RentRoll and HUDManager) to our on demand property management systems. We no longer actively market our legacy on premise software solutions to new customers, and only market and support our acquired on premise software solutions. We expect on premise revenue to continue to decline over time as we transition acquired on premise customers to our on demand property management systems.

Professional and other revenue. Professional and other services revenue increased $0.3 million, or 11.2%, for the three months ended September 30, 2011 as compared to the same period in 2010, primarily attributable to installation and implementation support services, training services, partially offset by a decrease in consulting-related revenues.

Professional and other services revenue increased $1.6 million, or 22.3%, for the nine months ended September 30, 2011 as compared to the same period in 2010, primarily due to an increase in revenue from installation and implementation support services, training services and OneSite consulting services offset by a decrease in other consulting-related revenues.

Total revenue. Our total revenue increased $19.6 million, or 40.9%, for the three months ended September 30, 2011 as compared to the same period in 2010, primarily due to an increase in rental property units managed with our on demand solutions and improved penetration of our on demand solutions into our existing customer base.

Our total revenue increased $52.6 million, or 39.2%, for the nine months ended September 30, 2011 as compared to the same period in 2010, primarily due to an increase in rental property units managed with our on demand solutions and improved penetration of our on demand solutions into our existing customer base.

On demand unit metrics. As of September 30, 2011, one or more of our on demand solutions was utilized in the management of 7.1 million rental property units, representing an increase of 1.5 million units, or 27.1% as compared to September 30, 2010. The increase in the number of rental property units managed by one or more of our on demand solutions was due to new customer sales and marketing efforts and our Level One, Compliance Depot and MTS acquisitions contributing approximately 13.9% of ending on demand units as of September 30, 2011.

For the three months ended September 30, 2011, our annualized non-GAAP on demand revenue per average on demand unit was $37.49 representing an increase of $5.49, or 17.2%, as compared to the three months ended September 30, 2010, primarily due to improved penetration of our on demand solutions (including our strategic acquisitions) into our customer base.

For the nine months ended September 30, 2011, our annualized non-GAAP on demand revenue per average on demand unit was $36.27 representing an increase of $4.54, or 14.3%, as compared to the nine months ended September 30, 2010, primarily due to improved penetration of our on demand solutions (including our strategic acquisitions) into our customer base.

Cost of Revenue

		Three Months Ended September 30,																Nine Months Ended September 30,
		2011				2010				Change				% Change				2011				2010				Change				% Change
		(in thousands)
Cost of revenue		$	23,834			$	16,895			$	6,939				41.1	%		$	66,911			$	47,683			$	19,228				40.3	%
Depreciation and amortization			3,751				3,308				443				13.4				11,167				8,912				2,255				25.3
Total cost of revenue		$	27,585			$	20,203			$	7,382				36.5			$	78,078			$	56,595			$	21,483				38.0

Cost of revenue. Total cost of revenue increased $7.4 million, or 36.5%, for the three months ended September 30, 2011 as compared to the same period in 2010. The increase in cost of revenue was primarily due to: a $2.5 million increase from costs related to investments in infrastructure and other support services to support the increased sales of our solutions; a $4.2 million increase in personnel expense of which $4.0 million was added as a result of our Level One, Compliance Depot, SLN and MTS acquisitions; a $0.3 million increase in non-cash amortization of acquired technology as a result of our Level One, Compliance Depot, SLN and MTS acquisitions; a $0.1 million increase in property and equipment depreciation expense resulting from expanding our infrastructure to support revenue delivery activities; and a $0.3 million increase in stock-based compensation related to our professional services and datacenter operations personnel. Cost of revenue as a percentage of total revenue was 40.8% for the three months ended September 30, 2011 as compared to 42.1% for the same period in 2010. The decrease in cost of revenue as a percentage of total revenue is the result of higher profitability from our core multi-family business which had year-over-year margin expansion as the business continues to scale, partially offset by costs added through acquisitions.

Total cost of revenue increased $21.5 million, or 38.0%, for the nine months ended September 30, 2011 as compared to the same period in 2010. The increase in cost of revenue was primarily due to: a $5.4 million increase from costs related to investments in infrastructure and other support services to support the increased sales of our solutions; a $13.1 million increase in personnel expense of which $10.2 million was added as a result of our Level One, Compliance Depot, SLN and MTS acquisitions; a $1.8 million increase in non-cash amortization of acquired technology as a result of our Level One, Compliance Depot, SLN and MTS acquisitions; a $0.5 million increase in property and equipment depreciation expense resulting from expanding our infrastructure to support revenue delivery activities; and a $0.7 million increase in stock-based compensation related to our professional services and datacenter operations personnel. Cost of revenue as a percentage of total revenue was 41.8% for the nine months ended September 30, 2011 as compared to 42.2% for the same period in 2010. The decrease in cost of revenue as a percentage of total revenue is the result of higher profitability from our core multi-family business which had year-over-year margin expansion as the business continues to scale, partially offset by costs added through acquisitions.

Operating Expenses

		Three Months Ended September 30,																Nine Months Ended September 30,
		2011				2010				Change				% Change				2011				2010				Change				%Change
		(in thousands)
Product development		$	10,795			$	8,560			$	2,235				26.1	%		$	30,701			$	24,746			$	5,955				24.1	%
Depreciation and amortization			435				567				(132	)			(23.3	)			1,382				1,685				(303	)			(18.0	)
Total product development expense		$	11,230			$	9,127			$	2,103				23.0			$	32,083			$	26,431			$	5,652				21.4

Product development. Total product development expense increased $2.1 million, or 23.0%, for the three months ended September 30, 2011 as compared to the same period in 2010. The increase in product development expense was primarily due to: a $1.0 million increase in personnel expense of which $0.8 million related to product development groups added as a result of our Level One, Compliance Depot, SLN and MTS acquisitions; a $0.1 million increase from consulting fees; a $0.6 million increase in stock-based compensation related to product development personnel; and a $0.4 million increase in other general product development expense.

Total product development expense increased $5.7 million, or 21.4%, for the nine months ended September 30, 2011 as compared to the same period in 2010. The increase in product development expense was primarily due to: a $3.3 million increase in personnel expense of which $1.2 million related to product development groups added as a result of our Level One, Compliance Depot, SLN and MTS acquisitions; $0.2 million increase from consulting fees; a $1.7 million increase in stock-based compensation related to product development personnel; and a $0.5 million increase in other general product development expense.

		Three Months Ended September 30,																Nine Months Ended September 30,
		2011				2010				Change				% Change				2011				2010				Change				% Change
		(in thousands)
Sales and marketing		$	15,017			$	8,357			$	6,660				79.7	%		$	37,718			$	22,636			$	15,082				66.6	%
Depreciation and amortization			2,671				1,071				1,600				149.4				7,274				3,157				4,117				130.4
Total sales and marketing expense		$	17,688			$	9,428			$	8,260				87.6			$	44,992			$	25,793			$	19,199				74.4