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 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 March 31, 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 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 of March 31, 2022, we had 17,550 property
management customers.

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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 the United States.


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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 ended March 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 ended March 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 ended March 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 ending December 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 ended March 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.

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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 ended March 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 $ 2,794 $ 1,046 $ 1,748 167 % Percentage of revenue

                              2.7  %         1.3  %


General and administrative expense for the three months ended March 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 ended March 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 ended March 31, 2022 decreased
primarily due to $429 thousand in other income recorded during the three months
ended March 31, 2021 related to certain post-closing transition services
provided to MyCase.

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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 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, offset by the change in the valuation allowance against deferred taxes.

We expect to have a full valuation allowance on our U.S. federal and state deferred tax assets at the end of 2022 and therefore we expect income tax expense recorded for the year ended December 31, 2022 to be limited to the change in deferred taxes during the year plus current minimum state taxes.

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 $ (8,497)

   $ (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
ended March 31, 2022 compared to net cash used in operating activities of $4.4
million for the three months ended March 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 ended March 31, 2021, offset by an increase in loss from
operations.
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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 ended March 31, 2022
was $5.3 million compared to $87.2 million for the three months ended March 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 ended March 31, 2022
was $1.0 million compared to $3.9 million for the three months ended March 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 ended March 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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