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 the SEC. 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 work 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 7.08 million and 6.04 million property management units under management as of September 30, 2022 and 2021, respectively.

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 with 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 onboarding 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 of September 30, 2022 and 2021, we had 18,109 and
16,844 property management customers, respectively.

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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 sales, regulatory fees, other
corporate expenses, impairment of long-lived assets, 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 Income (Loss), Net. Other income (loss), net includes gains and losses
associated with the sale of businesses and property and equipment, and income
from certain post-closing transition services provided by us to MyCase, Inc.
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 cash deposited in
our bank accounts.

Provision for (Benefit from) Income Taxes. Provision for (benefit from) income taxes consists of federal and state income taxes in the United States.


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Results of Operations


Revenue

                                       Three Months Ended                                                        Nine Months Ended
                                          September 30,                           Change                           September 30,                          Change
                                     2022               2021             Amount              %                2022               2021             Amount             %
                                                                                          (dollars in thousands)
Core solutions                   $   33,940          $ 26,920          $  7,020               26  %       $  97,163          $  76,457          $ 20,706             27  %
Value Added Services                 88,399            65,578            22,821               35  %         241,349            177,535            63,814             36  %
Other                                 2,740             3,311              (571)             (17) %           9,313              9,778              (465)            (5) %
Total revenue                    $  125,079          $ 95,809          $ 29,270               31  %       $ 347,825          $ 263,770          $ 84,055             32  %



The increase in revenue for the three and nine months ended September 30, 2022,
compared to the same periods in the prior year, was primarily attributable to
growth in our base of property management customers driving an increase in the
number of property management units under management, and growth in users of our
subscription and usage-based services. During the three and nine month period
ended September 30, 2022, we experienced growth of 17% in the number of property
management units under management resulting from 8% growth in the number of
property management customers, compared to the same periods in the prior year.


Cost of Revenue (Exclusive of Depreciation and Amortization)



                                          Three Months Ended                                                      Nine Months Ended
                                             September 30,                         Change                           September 30,                          Change
                                        2022              2021             Amount              %               2022               2021             Amount              %
                                                                                             (dollars in thousands)
Cost of revenue (exclusive of
depreciation and amortization)       $ 50,707          $ 38,730          $ 11,977              31  %       $ 141,484          $ 104,847          $ 36,637              35  %
Percentage of revenue                    40.5  %           40.4  %                                              40.7  %            39.7  %
Stock-based compensation,
included above                       $    789          $    575          $    214              37  %       $   1,873          $   1,509          $    364              24  %
Percentage of revenue                     0.6  %            0.6  %                                               0.5  %             0.6  %


For the three and nine months ended September 30, 2022, expenditures to
third-party service providers related to the delivery of our Value Added
Services increased $8.5 million and $27.2 million, respectively, compared to the
same periods in the prior year. These increases were directly associated with
the increased adoption and utilization of our Value Added Services.
Personnel-related costs, including performance-based compensation, necessary to
support growth and key investments, increased $3.5 million and $9.2 million for
the three and nine months ended September 30, 2022, respectively, compared to
the same periods in the prior year. Additionally, offsetting cost of revenue
(exclusive of depreciation and amortization) during the three and nine months
ended September 30, 2022 was $0.4 million and during the nine months ended
September 30, 2021 was $2.0 million of incentives earned from third-party
service providers related to programs intended to increase adoption and
utilization of online payments.

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 ending December 31, 2022, to
increase as a percentage of revenue compared to the year ended December 31,
2021, as we expect expenditures to third-party service providers related to the
delivery of our Value Added Services to increase at a faster rate than total
revenue as a result of a higher growth rate related to our Value Added Services
revenue.

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Sales and Marketing

                                           Three Months Ended                                                    Nine Months Ended
                                              September 30,                         Change                         September 30,                         Change
                                         2022              2021             Amount             %              2022              2021             Amount             %
                                                                                            (dollars in thousands)
Sales and marketing                   $ 25,644          $ 19,362          $ 6,282              32  %       $ 77,558          $ 53,255          $ 24,303             46  %
Percentage of revenue                     20.5  %           20.2  %                                            22.3  %           20.2  %
Stock-based compensation,
included above                        $  2,023          $    738          $ 1,285             174  %       $  5,496          $  1,587          $  3,909            246  %
Percentage of revenue                      1.6  %            0.8  %                                             1.6  %            0.6  %


Sales and marketing expense for the three and nine months ended September 30,
2022 increased primarily due to increases in personnel-related costs, including
performance-based compensation, necessary to support growth in the business of
$5.0 million and $17.2 million, respectively, compared to the same periods in
the prior year. Allocated shared and other costs increased by $1.9 million and
$6.6 million for the three and nine months ended September 30, 2022,
respectively, compared to the same periods in the prior year, with such increase
being primarily related to software and other costs incurred in support of our
overall growth.

We expect sales and marketing expense for the year ending December 31, 2022 to
increase as a percentage of revenue compared to the year ended December 31,
2021, as we continue to invest in headcount to support our growth and increase
our advertising, promotion and other marketing activities.

Research and Product Development



                                          Three Months Ended                                                      Nine Months Ended
                                             September 30,                          Change                          September 30,                         Change
                                        2022              2021             Amount              %               2022              2021             Amount              %
                                                                                             (dollars in thousands)

Research and product
development                          $ 28,959          $ 16,500          $ 12,459               76  %       $ 79,966          $ 46,389          $ 33,577              72  %
Percentage of revenue                    23.2  %           17.2  %                                              23.0  %           17.6  %
Stock-based compensation,
included above                       $  4,330          $  1,451          $  2,879              198  %       $ 11,160          $  3,522          $  7,638             217  %
Percentage of revenue                     3.5  %            1.5  %                                               3.2  %            1.3  %


Research and product development expense for the three and nine months ended
September 30, 2022 increased primarily due to an increase in personnel-related
costs including performance-based compensation, net of capitalized software
development costs, of $11.6 million and $31.5 million, respectively, compared to
the same periods in the prior year.

We expect research and product development expenses for the year ending
December 31, 2022 to increase as a percentage of revenue compared to the year
ended December 31, 2021, as we continue to invest 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                                                    Nine Months Ended
                                               September 30,                         Change                         September 30,                         Change
                                          2022              2021             Amount             %              2022              2021             Amount              %
                                                                                              (dollars in thousands)

General and administrative             $ 19,347          $ 13,404          $ 5,943              44  %       $ 76,258          $ 40,971          $ 35,287              86  %
Percentage of revenue                      15.5  %           14.0  %                                            21.9  %           15.5  %
Stock-based compensation,
included above                         $  3,688          $  1,299          $ 2,389             184  %       $  9,680          $  3,435          $  6,245             182  %
Percentage of revenue                       2.9  %            1.4  %                                             2.8  %            1.3  %


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General and administrative expense for the three months ended September 30, 2022
increased primarily due to an increase in personnel-related costs, including
performance-based compensation, of $3.1 million, compared to the same period in
the prior year. Allocated shared and other costs increased $0.9 million for the
three months ended September 30, 2022, compared to the same period in the prior
year, for professional fees, education and training, insurance, software and
other costs to support our growth. Additionally, offsetting general and
administrative expense for the three months ended September 30, 2021 was a
$1.9 million insurance recovery related to our previously disclosed settlement
with the Federal Trade Commission (the "FTC").

General and administrative expense for the nine months ended September 30, 2022
increased primarily due to a lease-related asset impairment charge of
$19.8 million. Personnel-related costs, including performance-based
compensation, increased $10.1 million for the nine months ended September 30,
2022, compared to the same period in the prior year. Allocated shared and other
costs increased $3.5 million for the nine months ended September 30, 2022,
compared to the same period in the prior year, for professional fees, education
and training, insurance, software and other costs to support our growth.
Additionally, offsetting general and administrative expense for the nine months
ended September 30, 2021 was a $1.9 million insurance recovery related to our
previously disclosed settlement with the Federal Trade Commission (the "FTC").

Excluding the impairment charge, we expect general and administrative expenses
for the year ending December 31, 2022 to increase as a percentage of revenue
compared to the year ended December 31, 2021, as we continue to invest in
headcount. Further, we expect to incur additional personnel-related costs in
future periods related to certain incentive-based compensation programs.

Depreciation and Amortization

                                          Three Months Ended                                                  Nine Months Ended
                                             September 30,                        Change                        September 30,                        Change
                                         2022              2021           Amount            %              2022              2021             Amount            %
                                                                                          (dollars in thousands)
Depreciation and amortization        $   8,241          $ 7,826          $  415              5  %       $ 24,977          $ 22,844          $ 2,133              9  %
Percentage of revenue                      6.6  %           8.2  %                                           7.2  %            8.7  %

Depreciation and amortization expense for the three and nine months ended September 30, 2022 increased, compared to the same periods in the prior year, primarily due to increased amortization expense associated with accumulated capitalized software development balances.



Other Income (Loss), Net

                                       Three Months Ended                                                      Nine Months Ended
                                          September 30,                          Change                          September 30,                         Change
                                      2022              2021            Amount              %                2022              2021            Amount             %
                                                                                         (dollars in thousands)
Other income (loss), net          $    4,221          $ (353)         $ 4,574            (1,296) %       $    4,256          $  705          $ 3,551             504  %
Percentage of revenue                    3.4  %         (0.4) %                                                 1.2  %          0.3  %


Other income (loss), net for the three and nine months ended September 30, 2022
increased, compared to the same periods in the prior year, primarily due to the
gain of $4.2 million associated with the WegoWise Transaction.

Provision for (Benefit from) Income Taxes



                                         Three Months Ended                                                   Nine Months Ended
                                           September 30,                          Change                        September 30,                        Change
                                      2022                 2021            Amount            %              2022             2021             Amount            %
                                                                                        (dollars in thousands)
Provision for (benefit
from) income taxes                $    938               $ (160)         $ 1,098             *           $   889          $ (6,017)         $ 6,906             *
Percentage of revenue                  0.7   %             (0.2) %                                           0.3  %           (2.3) %


*Percentage not meaningful

Our effective tax rate as compared to the U.S. federal statutory rate of 21% differs primarily due to the significance of the benefits associated with stock-based compensation expense, and research and development tax credits.


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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):

                                                                                 Nine Months Ended
                                                                                   September 30,
                                                                              2022               2021
Net cash provided by operating activities                                  $ 19,284          $  26,459
Net cash used in investing activities                                        (5,083)           (73,766)
Net cash used in financing activities                                        (5,002)            (8,512)
Net increase (decrease) in cash, cash equivalents and restricted
cash                                                                       $  9,199          $ (55,819)


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 provided by operating activities was $19.3 million for the nine months
ended September 30, 2022 compared to net cash provided by operating activities
of $26.5 million for the nine months ended September 30, 2021. The net decrease
in cash provided by operating activities was primarily due to an increase in
employee related costs and the settlement of accounts payable offset by an
increase in cash collections from customers due to higher revenue growth and a
decrease in income taxes paid related to the sale of MyCase, Inc. during the
nine months ended September 30, 2021.

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 nine months ended September 30,
2022 was $5.1 million compared to $73.8 million for the nine months ended
September 30, 2021. The net decrease in cash used in investing activities was
primarily due to decreases in purchases of available-for-sale investment
securities and capitalization of software development costs, offset by a
decrease in proceeds from sales of available-for-sale investment securities and
net proceeds from the WegoWise Transaction.

Financing Activities

Cash used in financing activities is generally composed of net share settlements for employee tax withholdings associated with the vesting of equity awards offset by proceeds from the exercise of stock options.



Net cash used in financing activities for the nine months ended September 30,
2022 was $5.0 million compared to $8.5 million for the nine months ended
September 30, 2021. The decrease in cash used in financing activities was
primarily due to a decrease in taxes paid related to net share settlement of
equity awards.

Critical Accounting Policies and Estimates

Impairment of long-lived assets


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In accordance with ASC 360, Property, Plant, and Equipment ("ASC 360"), we
evaluate our long-lived assets, such as property and equipment and right-of-use
assets, for impairment whenever events and circumstances indicate that the
assets might be impaired due to the carrying amount of an asset group not being
recoverable. When the projected undiscounted cash flows estimated to be
generated by those assets are less than their carrying amounts, the assets are
adjusted to their estimated fair value and an impairment loss is recorded as a
component of operating expenses.

During the second quarter of 2022, we decided to exit and make available for
sublease certain other leased office spaces. As a result, we reassessed our
asset groupings and evaluated the recoverability of our right-of-use and other
lease related assets, and determined that the carrying value of the respective
asset groups was not fully recoverable. As a result, we utilized discounted cash
flow models to estimate the fair value of the asset groups and calculated the
corresponding impairment loss. We recorded an impairment of $19.4 million
consisting of $15.7 million related to ROU assets and $3.7 million related to
property and equipment associated with our leased office spaces as described
further in Note 7, Leases. We used the following significant assumptions to
determine the impairment charge: time period it will take to obtain a sublessee,
the applicable discount rate and the anticipated sublease income.

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