The following discussion and analysis of our financial condition and results of operations should be read together with our Condensed Consolidated Financial Statements and the related notes included elsewhere in this Quarterly Report and in our Annual Report. This discussion and analysis contains forward-looking statements that are based on our current expectations and reflect our plans, estimates and anticipated future financial performance. These statements involve numerous risks and uncertainties. Our actual results may differ materially from those expressed or implied by these forward-looking statements as a result of many factors, including those set forth in the section entitled "Risk Factors" in our Annual Report, as well as our other public filings with theSEC . Please also refer to the section of this Quarterly Report entitled "Forward-Looking Statements" for additional information.
Overview
We are a leading provider of cloud business management solutions for the real estate industry. Our solutions enable our customers to digitally transform their businesses, automate and streamline critical business operations and deliver a better customer experience. Our products assist an interconnected and growing ecosystem of users, including property managers, property owners, real estate investment managers, rental prospects, residents, and service providers with critical transactions across the real estate lifecycle, including screening potential tenants, sending and receiving payments and providing insurance-related risk mitigation services.AppFolio's intuitive interface, coupled with streamlined and automated workflows, make it easier for our customers to eliminate redundant and manual processes so they can deliver a great experience for their users while improving financial and operational performance. We rely heavily on our talented team of employees to execute our growth plans and achieve our long-term strategic objectives. We believe our people are at the heart of our success and our customers' success, and we have worked hard not only to attract and retain talented individuals, but also to provide a challenging and rewarding environment to motivate and develop our valuable human capital. As we navigate the challenges of increased competition for talent, we have evolved our compensation and employee reward practices, which has had, and we expect will continue to have, a material impact on our results.
Property management units under management. We believe that our ability to
increase our number of property management units under management is an
indicator of our market penetration, growth, and potential future business
opportunities. We define property management units under management as the
number of active units in our core solutions. We had 6.57 million and 5.62
million property management units under management as of
Key Components of Results of Operations
Revenue
Our core solutions and certain of our Value Added Services are offered on a subscription basis. Our core solutions subscription fees vary by property type and are designed to scale to the size of our customers' businesses. We recognize revenue for subscription-based services on a straight-line basis over the contract term beginning on the date that our service is made available. We generally invoice monthly or, to a lesser extent, annually in advance of the subscription period. We also offer certain Value Added Services, which are not covered by our subscription fees, on a per-use basis. Usage-based fees are charged either as a percentage of the transaction amount (e.g., for certain of our electronic payment services) or on a flat fee per transaction basis with no minimum usage commitments (e.g., for our tenant screening and risk mitigation services). We recognize revenue for usage-based services in the period the service is rendered. Our electronic payments services fees are recorded gross of the interchange and payment processing related fees. We generally invoice our usage-based services on a monthly basis or collect the fee at the time of service. A significant majority of our Value Added Services revenue comes directly and indirectly from the use of our electronic payment services, tenant screening services, and risk mitigation services. Usage-based fees are paid either by customers or by users. We charge our customers for on-boarding assistance to our core solutions and certain other non-recurring services. We generally invoice for these other services in advance of the services being completed and recognize revenue upon completion of the related service. We generate revenue from the legacy customers of previously acquired businesses by providing services outside of our property management core solution platform. Revenue derived from these services is recorded in Other revenue. As ofMarch 31, 2022 , we had 17,550 property management customers. 19
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Costs and Operating Expenses
Cost of Revenue. Many of our Value Added Services are facilitated by third-party service providers. Cost of revenue paid to these third-party service providers includes the cost of electronic interchange and payment processing-related services to support our electronic payments services, the cost of credit reporting services for our tenant screening services, and various costs associated with our risk mitigation service providers. These third-party costs vary both in amount and as a percent of revenue for each Value Added Service offering. Cost of revenue also consists of personnel-related costs for our employees focused on customer service and the support of our operations (including salaries, performance-based compensation, benefits, and stock-based compensation), platform infrastructure costs (such as data center operations and hosting-related costs), and allocated shared and other costs. Cost of revenue excludes depreciation of property and equipment, amortization of capitalized software development costs and amortization of intangible assets. Sales and Marketing. Sales and marketing expense consists of personnel-related costs for our employees focused on sales and marketing (including salaries, sales commissions, performance-based compensation, benefits, and stock-based compensation), costs associated with sales and marketing activities, and allocated shared and other costs. Marketing activities include advertising, online lead generation, lead nurturing, customer and industry events, and the creation of industry-related content and collateral. Sales commissions and other incremental costs to acquire customers and grow adoption and utilization of our Value Added Services by our new and existing customers are deferred and then amortized on a straight-line basis over a period of benefit, which we have determined to be three years. We focus our sales and marketing efforts on generating awareness of our software solutions, creating sales leads, establishing and promoting our brands, and cultivating an educated community of successful and vocal customers. Research and Product Development. Research and product development expense consists of personnel-related costs for our employees focused on research and product development (including salaries, performance-based compensation, benefits, and stock-based compensation), fees for third-party development resources, and allocated shared and other costs. Our research and product development efforts are focused on enhancing functionality and the ease of use of our existing software solutions by adding new core functionality, Value Added Services and other improvements, as well as developing new products and services for existing and adjacent markets. We capitalize our software development costs that meet the criteria for capitalization. Amortization of capitalized software development costs is included in depreciation and amortization expense. General and Administrative. General and administrative expense consists of personnel-related costs for employees in our executive, finance, information technology, human resources, legal, compliance, corporate development and administrative organizations (including salaries, performance-based cash compensation, benefits, and stock-based compensation). In addition, general and administrative expense includes fees for third-party professional services (including audit, legal, compliance, tax, and consulting services), transaction costs related to business combinations and divestitures, regulatory fees, other corporate expenses, and allocated shared and other costs. Depreciation and Amortization. Depreciation and amortization expense includes depreciation of property and equipment, amortization of capitalized software development costs, and amortization of intangible assets. We depreciate or amortize property and equipment, software development costs, and intangible assets over their expected useful lives on a straight-line basis, which approximates the pattern in which the economic benefits of the assets are consumed. Other (Loss) Income, Net. Other (loss) income, net includes gains and losses associated with the sale of property and equipment and income from certain post-closing transition services provided by us to MyCase during fiscal year 2021. Interest Income. Interest income includes interest earned on investment securities, amortization and accretion of the premium and discounts paid from the purchase of investment securities, and interest earned on notes receivable and on cash deposited in our bank accounts.
Benefit from Income Taxes. Benefit from income taxes consists of federal and
state income taxes in
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Table of Contents Results of Operations Revenue Three Months Ended March 31, Change 2022 2021 Amount % (dollars in thousands) Core solutions$ 30,809 $ 24,174 $ 6,635 27 % Value Added Services 71,500 51,510 19,990 39 % Other 2,987 3,237 (250) (8) % Total revenue$ 105,296 $ 78,921 $ 26,375 33 % The increase in revenue for the three months endedMarch 31, 2022 was primarily attributable to growth in our base of property management customers and growth in users of our subscription and usage-based services. During the three month period endedMarch 31, 2022 , we experienced growth of 18% in the average number of property management units under management resulting from 9% growth in the average number of property management customers.
Cost of Revenue (Exclusive of Depreciation and Amortization)
Three Months Ended March 31, Change 2022 2021 Amount % (dollars in thousands) Cost of revenue (exclusive of depreciation and amortization)$ 43,347 $ 33,298 $ 10,049 30 % Percentage of revenue 41.2 % 42.2 % Stock-based compensation, included above$ 358 $ 471 $ (113) (24) % Percentage of revenue 0.3 % 0.6 % For the three months endedMarch 31, 2022 , expenditures to third-party service providers related to the delivery of our Value Added Services increased$7.4 million , which was directly associated with the increased adoption and utilization of our Value Added Services, as evidenced by the$20.0 million increase in Value Added Services revenue. Personnel-related costs, including performance-based compensation, necessary to support growth and key investments, increased$2.3 million . As a percentage of revenue, cost of revenue (exclusive of depreciation and amortization) fluctuates primarily based on the mix of Value Added Services revenue in the period, given the varying percentage of revenue we pay to third-party service providers. We expect cost of revenue (exclusive of depreciation and amortization) for the year endingDecember 31, 2022 , to increase as a percentage of revenue, as we expect expenditures to third-party service providers related to the delivery of our Value Added Services revenue to increase at a faster rate than total revenue as a result of a higher growth rate related to our Value Added Services revenue. Sales and Marketing Three Months Ended March 31, Change 2022 2021 Amount % (dollars in thousands) Sales and marketing$ 24,919 $ 16,179 $ 8,740 54 % Percentage of revenue 23.7 % 20.5 % Stock-based compensation, included above$ 1,460 $ 402 $ 1,058 263 % Percentage of revenue 1.4 % 0.5 % Sales and marketing expense for the three months endedMarch 31, 2022 increased primarily due to a$6.4 million increase in personnel-related costs, including performance-based compensation, necessary to support growth in the business. Allocated shared and other costs increased by$1.7 million , primarily related to software and other costs incurred in support of our overall growth. 21
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Research and Product Development
Three Months Ended March 31, Change 2022 2021 Amount % (dollars in thousands)
Research and product development$ 24,320 $ 14,383 $ 9,937 69 % Percentage of revenue 23.1 % 18.2 % Stock-based compensation, included above$ 2,806 $ 857 $ 1,949 227 % Percentage of revenue 2.7 % 1.1 % Research and product development expense for the three months endedMarch 31, 2022 increased primarily due to an increase in personnel-related costs, including performance-based compensation, net of capitalized software development costs of$9.5 million , due to investments in our research and product development organization to support our strategy to expand the use cases of our product capabilities to the larger customer segment and to continue to strengthen the security of our product. General and Administrative Three Months Ended March 31, Change 2022 2021 Amount % (dollars in thousands) General and administrative$ 18,964 $ 13,361 $ 5,603 42 % Percentage of revenue 18.0 % 16.9 %
Stock-based compensation, included above
2.7 % 1.3 % General and administrative expense for the three months endedMarch 31, 2022 increased primarily due to a$3.7 million increase in personnel-related costs for investments in headcount and an increase of$1.9 million in allocated shared and other costs for professional fees, education and training, insurance, software and other costs to support our growth. Depreciation and Amortization Three Months Ended March 31, Change 2022 2021 Amount % (dollars in thousands)
Depreciation and amortization$ 8,415 $ 7,369 $ 1,046 14 % Percentage of revenue 8.0 % 9.3 % Depreciation and amortization expense for the three months endedMarch 31, 2022 increased primarily due to increased amortization expense associated with higher accumulated capitalized software development balances. Other (Loss) Income, net Three Months Ended March 31, Change 2022 2021 Amount % (dollars in thousands) Other (loss) income, net$ (10) $ 562 $ (572) (102) % Percentage of revenue - % 0.7 % Other (loss) income, net for the three months endedMarch 31, 2022 decreased primarily due to$429 thousand in other income recorded during the three months endedMarch 31, 2021 related to certain post-closing transition services provided to MyCase. 22 --------------------------------------------------------------------------------
Table of Contents Benefit from Income Taxes Three Months Ended March 31, Change 2022 2021 Amount % (dollars in thousands)
Benefit from income taxes$ (285) $ (5,533) $ 5,248 * Percentage of revenue (0.3) % (7.0) %
*Percentage not meaningful
Our effective tax rate as compared to the
We expect to have a full valuation allowance on our
Liquidity and Capital Resources
Our principal sources of liquidity continue to be cash, cash equivalents, and investment securities, as well as cash flows generated from our operations. We have financed our operations primarily through cash generated from operations. We believe that our existing cash and cash equivalents, investment securities, and cash generated from operating activities will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months. Our future capital requirements will depend on many factors, including continued market acceptance of our software solutions, changes in the number of our customers, adoption and utilization of our Value Added Services by new and existing customers, the timing and extent of the introduction of new core functionality, products and Value Added Services, the timing and extent of our expansion into new or adjacent markets, and the timing and extent of our investments across our organization. In addition, we have in the past entered into, and may in the future enter into, arrangements to acquire or invest in new technologies or markets adjacent to those we serve today. Furthermore, our Board of Directors has authorized the repurchase of up to$100.0 million of shares of our Class A common stock from time to time. To date, we have repurchased$4.2 million of our Class A common stock under the share repurchase program.
Cash Flows
The following table summarizes our cash flows for the periods indicated (in thousands): Three Months Ended March 31, 2022 2021 Net cash used in operating activities$ (2,244) $ (4,437) Net cash used in investing activities (5,280)
(87,190)
Net cash used in financing activities (973)
(3,892)
Net decrease in cash, cash equivalents and restricted cash
$ (95,519) Operating Activities Our primary source of operating cash inflows is cash collected from our customers in connection with their use of our core solutions and Value Added Services. Our primary uses of cash from operating activities are for personnel-related expenditures and third-party costs incurred to support the delivery of our software solutions. Net cash used in operating activities was$2.2 million for the three months endedMarch 31, 2022 compared to net cash used in operating activities of$4.4 million for the three months endedMarch 31, 2021 . The net decrease in cash used in operating activities was primarily due to an increase in cash collections from customers and a decrease in income taxes paid related to the sale of MyCase during the three months endedMarch 31, 2021 , offset by an increase in loss from operations. 23
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Investing Activities
Cash used in investing activities is generally composed of purchases of investment securities, maturities and sales of investment securities, purchases of property and equipment, and additions to capitalized software development.
Net cash used in investing activities for the three months endedMarch 31, 2022 was$5.3 million compared to$87.2 million for the three months endedMarch 31, 2021 . The net decrease in cash used in investing activities was primarily due to a decrease in purchases of available-for-sale investment securities, offset by an increase in proceeds from maturities of available-for-sale investment securities.
Financing Activities
Cash used in financing activities is generally composed of net share settlements for employee tax withholdings associated with the vesting of restricted stock units ("RSUs") offset by proceeds from the exercise of stock options. Net cash used in financing activities for the three months endedMarch 31, 2022 was$1.0 million compared to$3.9 million for the three months endedMarch 31, 2021 . The decrease in cash used in financing activities was primarily due to decreases in tax withholdings for net share settlements due to fewer RSUs vesting during the three months endedMarch 31, 2022 .
Critical Accounting Policies and Estimates
There have been no changes to our critical accounting policies and estimates described in our Annual Report that have had a material impact on our Condensed Consolidated Financial Statements and related notes.
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