APPF 10-Q Quarterly Report Sept. 30, 2024 | Alphaminr
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APPF 10-Q Quarter ended Sept. 30, 2024

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APPFOLIO INC
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2024 .
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________.

Commission File Number 001-37468
AppFolio, Inc.
(Exact name of registrant as specified in its charter)
Delaware 26-0359894
(State of incorporation or organization) (I.R.S. Employer Identification No.)
70 Castilian Drive 93117
Santa Barbara, California
(Address of principal executive offices) (Zip Code)
( 805 ) 364-6093
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol Name of each exchange on which registered
Class A common stock, $0.0001 par value APPF NASDAQ Global Market
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of October 17, 2024, the number of shares of the registrant’s Class A common stock outstanding was 23,079,878 and the number of shares of the registrant’s Class B common stock outstanding was 13,253,438 .

Table of Contents
TABLE OF CONTENTS
Page No.


Table of Contents
FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2024 (this "Quarterly Report"), contains forward-looking statements within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of 1995 (the “PSLRA”), which statements involve substantial risks and uncertainties. The forward-looking statements made in this Quarterly Report are intended to qualify for the protection of the safe harbor provided by the PSLRA and are based primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, operating results, cash flows and/or prospects. Forward-looking statements include all statements that are not statements of historical fact. Forward-looking statements can also be identified by words such as “may,” “will,” “should,” “might,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” “future,” or “continue,” or the negative of these words or other similar terms or expressions. Examples of forward-looking statements include, among others, statements regarding changes in the competitive environment, responding to customer needs, research and product development plans, future products and services, growth in the size of our business and number of customers, strategic plans and objectives, business forecasts and plans, our future or assumed financial condition, results of operations and liquidity, trends affecting our business and industry, capital needs and financing plans, capital resource allocation plans, share repurchase plans, and commitments and contingencies, including with respect to the outcome of legal proceedings or regulatory matters. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors, including those risks, uncertainties and other factors described in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Quarterly Report and "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (our "Annual Report"), as well as in the other reports we file with the Securities and Exchange Commission (the "SEC"). You should read this Quarterly Report, and the other documents we file with the SEC, with the understanding that our actual future results may be materially different from the results expressed or implied by these forward-looking statements. As such, you should not rely upon forward-looking statements as predictions of future events. Any forward-looking statement made by us in this Quarterly Report is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report to reflect events or circumstances after the date of this Quarterly Report or to reflect new information or the occurrence of unanticipated events, except as required by law.


1
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
2
Table of Contents
APPFOLIO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands)
September 30,
2024 		December 31,
2023
Assets
Current assets
Cash and cash equivalents $ 62,417 $ 49,509
Investment securities—current 268,951 162,196
Accounts receivable, net 25,581 20,709
Prepaid expenses and other current assets 38,194 39,943
Total current assets 395,143 272,357
Property and equipment, net 25,478 28,362
Operating lease right-of-use assets 17,744 19,285
Capitalized software development costs, net 16,330 21,562
Goodwill 56,060 56,060
Other long-term assets 12,542 11,263
Total assets $ 523,297 $ 408,889
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable $ 509 $ 1,141
Accrued employee expenses 33,625 35,567
Accrued expenses 14,899 21,723
Other current liabilities 14,664 11,335
Total current liabilities 63,697 69,766
Operating lease liabilities 38,402 41,114
Other liabilities 8,371 697
Total liabilities 110,470 111,577
Commitments and contingencies (Note 8)
Stockholders’ equity:
Class A common stock 2 2
Class B common stock 2 2
Additional paid-in capital 250,790 236,985
Accumulated other comprehensive Income (loss) 475 99
Treasury stock ( 25,756 ) ( 25,756 )
Retained earnings 187,314 85,980
Total stockholders’ equity 412,827 297,312
Total liabilities and stockholders’ equity $ 523,297 $ 408,889
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
3
Table of Contents
APPFOLIO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share amounts)

Three Months Ended
September 30, 		Nine Months Ended
September 30,
2024 2023 2024 2023
Revenue $ 205,733 $ 165,440 $ 590,538 $ 448,615
Costs and operating expenses:
Cost of revenue (exclusive of depreciation and amortization) (1)
71,631 62,739 205,878 176,801
Sales and marketing (1)
25,406 29,701 77,161 86,101
Research and product development (1)
40,662 41,592 118,079 116,517
General and administrative (1)
21,139 23,907 62,525 74,417
Depreciation and amortization 4,327 7,568 14,209 22,055
Total costs and operating expenses 163,165 165,507 477,852 475,891
Income (loss) from operations 42,568 ( 67 ) 112,686 ( 27,276 )
Other income (loss), net — ( 249 ) — ( 283 )
Interest income, net 4,014 1,788 10,482 4,627
Income (loss) before provision for income taxes 46,582 1,472 123,168 ( 22,932 )
Provision for (benefit from) income taxes 13,576 ( 24,973 ) 21,834 4,634
Net income (loss) $ 33,006 $ 26,445 $ 101,334 $ ( 27,566 )
Net income (loss) per common share:
Basic $ 0.91 $ 0.74 $ 2.80 $ ( 0.78 )
Diluted $ 0.90 $ 0.72 $ 2.76 $ ( 0.78 )
Weighted average common shares outstanding:
Basic 36,306 35,691 36,211 35,567
Diluted 36,756 36,482 36,752 35,567
(1) Includes stock-based compensation expense as follows:
Three Months Ended
September 30, 		Nine Months Ended
September 30,
2024 2023 2024 2023
Stock-based compensation expense included in costs and operating expenses:
Cost of revenue (exclusive of depreciation and amortization) $ 1,126 $ 1,149 $ 3,261 $ 2,905
Sales and marketing 2,071 2,041 5,284 4,902
Research and product development 7,471 6,064 19,625 15,851
General and administrative 5,367 6,003 16,133 16,274
Total stock-based compensation expense $ 16,035 $ 15,257 $ 44,303 $ 39,932

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

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APPFOLIO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(in thousands)

Three Months Ended
September 30, 		Nine Months Ended
September 30,
2024 2023 2024 2023
Net income (loss) $ 33,006 $ 26,445 $ 101,334 $ ( 27,566 )
Other comprehensive income:
Changes in unrealized gains on investment securities, net of tax 659 578 376 1,675
Comprehensive income (loss) $ 33,665 $ 27,023 $ 101,710 $ ( 25,891 )
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

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APPFOLIO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(in thousands)
Accumulated
Additional Other
Common Stock Common Stock Paid-in Comprehensive Treasury Retained
Class A Class B Capital
Income (Loss)
Stock Earnings Total
Shares Amount Shares Amount
Balance at December 31, 2023 21,749 $ 2 14,116 $ 2 $ 236,985 $ 99 $ ( 25,756 ) $ 85,980 $ 297,312
Exercise of stock options 244 — — — 3,874 — — — 3,874
Stock-based compensation — — — — 13,646 — — — 13,646
Vesting of restricted stock units, net of shares withheld for taxes 89 — — — ( 14,086 ) — — — ( 14,086 )
Conversion of Class B common stock to Class A common stock 199 — ( 199 ) — — — — — —
Other comprehensive loss — — — — — ( 214 ) — — ( 214 )
Net Income — — — — — — — 38,663 38,663
Balance at March 31, 2024 22,281 $ 2 13,917 $ 2 $ 240,419 $ ( 115 ) $ ( 25,756 ) $ 124,643 $ 339,195
Exercise of stock options 3 — — — 25 — — — 25
Stock based compensation — — — — 15,032 — — — 15,032
Vesting of restricted stock units, net of shares withheld for taxes 71 — — — ( 12,436 ) — — — ( 12,436 )
Conversion of Class B common stock to Class A common stock 644 — ( 644 ) — — — — — —
Other comprehensive loss — — — — — ( 69 ) — — ( 69 )
Net Income — — — — — — — 29,665 29,665
Balance at June 30, 2024 22,999 $ 2 13,273 $ 2 $ 243,040 $ ( 184 ) $ ( 25,756 ) $ 154,308 $ 371,412
Exercise of stock options 3 — — — 14 — — — 14
Stock based compensation — — — — 16,315 — — — 16,315
Vesting of restricted stock units, net of shares withheld for taxes 57 — — — ( 8,579 ) — — — ( 8,579 )
Conversion of Class B common stock to Class A common stock 20 — ( 20 ) — — — — — —
Other comprehensive income — — — — — 659 — — 659
Net Income — — — — — — — 33,006 33,006
Balance at September 30, 2024 23,079 $ 2 13,253 $ 2 $ 250,790 $ 475 $ ( 25,756 ) $ 187,314 $ 412,827
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.


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Accumulated
Additional Other
Common Stock Common Stock Paid-in Comprehensive Treasury Retained
Class A Class B Capital
Income (Loss)
Stock Earnings Total
Shares Amount Shares Amount
Balance at December 31, 2022 20,569 $ 2 14,746 $ 2 $ 209,704 $ ( 1,684 ) $ ( 25,756 ) $ 83,278 $ 265,546
Exercise of stock options 64 — — — 834 — — — 834
Stock-based compensation — — — — 14,075 — — — 14,075
Vesting of restricted stock units, net of shares withheld for taxes 79 — — — ( 5,539 ) — — — ( 5,539 )
Conversion of Class B common stock to Class A common stock 27 — ( 27 ) — — — — — —
Issuance of restricted stock awards 2 — — — — — — — —
Other comprehensive income — — — — — 763 — — 763
Net loss — — — — — — — ( 35,110 ) ( 35,110 )
Balance at March 31, 2023 20,741 $ 2 14,719 $ 2 $ 219,074 $ ( 921 ) $ ( 25,756 ) $ 48,168 $ 240,569
Exercise of stock options 95 — — — 668 — — — 668
Stock-based compensation — — — — 11,000 — — — 11,000
Vesting of restricted stock units, net of shares withheld for taxes 82 — — — ( 7,717 ) — — — ( 7,717 )
Issuance of restricted stock awards 4 — — — — — — — —
Other comprehensive income — — — — — 334 — — 334
Net loss — — — — — — — ( 18,901 ) ( 18,901 )
Balance at June 30, 2023 20,922 $ 2 14,719 $ 2 $ 223,025 $ ( 587 ) $ ( 25,756 ) $ 29,267 $ 225,953
Exercise of stock options 59 — — — 683 — — — 683
Stock-based compensation — — — — 15,508 — — — 15,508
Vesting of restricted stock units, net of shares withheld for taxes 61 — — — ( 6,511 ) — — — ( 6,511 )
Conversion of Class B common stock to Class A common stock 602 — ( 602 ) — — — — — —
Other comprehensive income — — — — — 578 — — 578
Net income — — — — — — — 26,445 26,445
Balance at September 30, 2023 21,644 $ 2 14,117 $ 2 $ 232,705 $ ( 9 ) $ ( 25,756 ) $ 55,712 $ 262,656
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

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APPFOLIO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Nine Months Ended
September 30,
2024 2023
Cash from operating activities
Net Income (loss)
$ 101,334 $ ( 27,566 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization 12,804 20,115
Amortization of operating lease right-of-use assets 1,541 1,618
Gain on lease modification — ( 4,281 )
Stock-based compensation, including as amortized 45,707 41,872
Other ( 6,146 ) ( 1,514 )
Changes in operating assets and liabilities:
Accounts receivable ( 4,872 ) ( 3,857 )
Prepaid expenses and other current assets 1,111 ( 712 )
Accounts payable ( 291 ) ( 1,485 )
Operating lease liabilities ( 3,196 ) ( 3,080 )
Accrued expenses and other liabilities 3,601 7,990
Net cash provided by operating activities 151,593 29,100
Cash from investing activities
Purchases of available-for-sale investments ( 265,319 ) ( 108,919 )
Proceeds from sales of available-for-sale investments — 1,013
Proceeds from maturities of available-for-sale investments 163,755 94,252
Purchases of property and equipment ( 1,821 ) ( 5,932 )
Capitalization of software development costs ( 4,112 ) ( 3,394 )
Proceeds from sale of business, net of cash divested — 629
Net cash used in investing activities ( 107,497 ) ( 22,351 )
Cash from financing activities
Proceeds from stock option exercises 3,913 2,185
Tax withholding for net share settlement ( 35,101 ) ( 19,766 )
Net cash used in financing activities ( 31,188 ) ( 17,581 )
Net increase (decrease) in cash, cash equivalents and restricted cash 12,908 ( 10,832 )
Cash, cash equivalents and restricted cash
Beginning of period 49,759 71,019
End of period $ 62,667 $ 60,187
Cash, cash equivalents and restricted cash at end of period:
Cash and cash equivalents $ 62,417 $ 59,937
Restricted cash included in prepaid expenses and other current assets
250 250
Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows $ 62,667 $ 60,187
Supplemental disclosure of cash flow information
Cash paid for amounts included in the measurement of lease liabilities included in operating cash flows 4,421 7,253
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
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APPFOLIO, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
1. Nature of Business
AppFolio, Inc. ("we," "us" or "our") is a leading provider of cloud business management solutions for the real estate industry. Our solutions are designed to enable our property manager customers to digitally transform their businesses, address critical business operations and deliver a better customer experience. Digital transformation is effectively a requirement for business success in the modern world, and the way we work and live requires powerful software solutions.
2. Summary of Significant Accounting Policies
Basis of Presentation and Significant Accounting Policies
The accompanying unaudited Condensed Consolidated Financial Statements were prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, these Condensed Consolidated Financial Statements should be read in conjunction with our audited consolidated financial statements and the related notes included in our Annual Report, which was filed with the SEC on February 1, 2024. The year-end condensed balance sheet was derived from our audited consolidated financial statements. Our unaudited interim Condensed Consolidated Financial Statements include, in the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair statement of our Condensed Consolidated Financial Statements. The operating results for the three and nine months ended September 30, 2024 are not necessarily indicative of the results expected for the full year ending December 31, 2024.

Reclassification
We reclassified certain amounts in our Condensed Consolidated Statements of Cash Flows within the cash flows from operating activities section in the prior year to conform to the current year's presentation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue, expenses, other income, and provision for income taxes during the reporting period. Assets and liabilities which are subject to judgment and use of estimates include the fair value of financial instruments, capitalized software development costs, period of benefit associated with deferred costs, incremental borrowing rate used to measure operating lease liabilities, the recoverability of goodwill and long-lived assets, income taxes, useful lives associated with property and equipment and intangible assets, contingencies, assumptions underlying performance-based compensation (whether cash or stock-based), and assumptions underlying stock-based compensation. Actual results could differ from those estimates and any such differences may have a material impact on our Condensed Consolidated Financial Statements.
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Net Income (Loss) per Common Share
Net income (loss) per common share was the same for shares of our Class A and Class B common stock because they are entitled to the same liquidation and dividend rights and are therefore combined in the table below. The following table sets forth the computation of basic and diluted net income (loss) per common share (in thousands):
Three Months Ended
September 30, 		Nine Months Ended
September 30,
2024 2023 2024 2023
Basic net income (loss) per share:
Numerator
Net income (loss) $ 33,006 $ 26,445 $ 101,334 $ ( 27,566 )
Less: undistributed earnings to participating securities — 5 8 —
Net income (loss) attributable to common stockholders $ 33,006 $ 26,440 $ 101,326 $ ( 27,566 )
Denominator — —
Weighted average common shares outstanding 36,306 35,697 36,214 35,574
Less: Weighted average unvested restricted shares subject to repurchase — 6 3 7
Weighted average common shares outstanding; basic 36,306 35,691 36,211 35,567
Net income (loss) per common share; basic $ 0.91 $ 0.74 $ 2.80 $ ( 0.78 )
Diluted net income (loss) per share:
Numerator
Net income (loss) attributable to common stockholders $ 33,006 $ 26,440 $ 101,326 $ ( 27,566 )
Denominator
Weighted average common shares outstanding; basic 36,306 35,691 36,211 35,567
Add: Weighted average dilutive options outstanding 41 306 64 —
Add: Weighted average dilutive RSUs outstanding 409 485 477 —
Weighted average common shares outstanding; diluted 36,756 36,482 36,752 35,567
Net income (loss) per common share; diluted $ 0.90 $ 0.72 $ 2.76 $ ( 0.78 )
Potentially dilutive securities that are not included in the calculation of diluted net income (loss) per share because doing so would be antidilutive are as follows (in thousands):
Three Months Ended
September 30, 		Nine Months Ended
September 30,
2024 2023 2024 2023
Unvested Restricted Stock Awards — 6 — 6
Options — 120 — 418
Restricted Stock Units 4 — 17 1,214
Total potentially dilutive securities 4 126 17 1,638

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3. Investment Securities and Fair Value Measurements
Investment Securities
Investment securities classified as available-for-sale consisted of the following as of September 30, 2024 and December 31, 2023 (in thousands):
September 30, 2024
Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value
U.S. government and agency securities 268,440 513 ( 2 ) 268,951
Total available-for-sale investment securities $ 268,440 $ 513 $ ( 2 ) $ 268,951
December 31, 2023
Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value
U.S. government and agency securities 162,062 193 ( 59 ) 162,196
Total available-for-sale investment securities $ 162,062 $ 193 $ ( 59 ) $ 162,196
As of September 30, 2024, the decline in fair value below amortized cost basis was not considered other than temporary as it is more likely than not we will hold the securities until maturity or recovery of the cost basis. No allowance for credit losses for available-for-sale investment securities was recorded as of September 30, 2024 or December 31, 2023.
The fair values of available-for-sale investment securities, by remaining contractual maturity, are as follows (in thousands):
September 30, 2024 December 31, 2023
Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value
Due in one year or less $ 268,440 $ 268,951 $ 162,062 $ 162,196
Total available-for-sale investment securities $ 268,440 $ 268,951 $ 162,062 $ 162,196
During the nine months ended September 30, 2024 and 2023, we had sales and maturities of investment securities, as follows (in thousands):
Nine Months Ended September 30, 2024
Gross Realized Gains Gross Realized Losses Gross Proceeds from Sales Gross Proceeds from Maturities
U.S. government and agency securities — — — 163,755
Total $ — $ — $ — $ 163,755
Nine Months Ended September 30, 2023
Gross Realized Gains Gross Realized Losses Gross Proceeds from Sales Gross Proceeds from Maturities
Corporate bonds $ 3 $ — $ 1,013 $ 16,497
U.S. government and agency securities — — — 77,755
Total $ 3 $ 1,013 $ 94,252
The tables above do not include our non-marketable debt securities of $ 1.3 million, which are recorded in Other long term assets in the Condensed Consolidated Balance Sheet as of September 30, 2024.
Fair Value Measurements
Recurring Fair Value Measurements
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The following tables present our financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2024 and December 31, 2023 by level within the fair value hierarchy (in thousands):
September 30, 2024
Level 1 Level 2 Total Fair
Value
Cash equivalents:
Money market funds $ 44,707 $ — $ 44,707
Available-for-sale investment securities:
U.S. government and agency securities — 268,951 268,951
Total $ 44,707 $ 268,951 $ 313,658
December 31, 2023
Level 1 Level 2 Total Fair
Value
Cash equivalents:
Money market funds $ 37,100 $ — $ 37,100
Available-for-sale investment securities:
U.S. government and agency securities — 162,196 162,196
Total $ 37,100 $ 162,196 $ 199,296
The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities approximate their fair value because of the short maturity of these items.
Fair value for our Level 1 investment securities is based on market prices for identical assets. Our Level 2 securities were priced by a pricing vendor. The pricing vendor utilizes the most recent observable market information in pricing these securities or, if specific prices are not available for these securities, other observable inputs like market transactions involving comparable securities are used.
4. Capitalized Software Development Costs, net
Capitalized software development costs were as follows (in thousands):
September 30,
2024 		December 31,
2023
Capitalized software development costs, gross $ 124,075 $ 126,606
Less: Accumulated amortization ( 107,745 ) ( 105,044 )
Capitalized software development costs, net $ 16,330 $ 21,562
Capitalized software development costs were $ 1.9 million and $ 1.6 million for the three months ended September 30, 2024 and 2023, respectively, and $ 4.6 million and $ 3.9 million for the nine months ended September 30, 2024 and 2023, respectively. Amortization expense with respect to capitalized software development costs totaled $ 2.9 million and $ 4.4 million for the three months ended September 30, 2024 and 2023, respectively, and $ 9.8 million and $ 15.2 million for the nine months ended September 30, 2024 and 2023, respectively. We disposed of fully amortized capitalized software development costs of $ 3.2 million and $ 2.8 million, during the three months ended September 30, 2024 and 2023, respectively, and $ 7.1 million and $ 6.3 million, during the nine months ended September 30, 2024 and 2023, respectively.
Future amortization expense with respect to capitalized software development costs as of September 30, 2024 is estimated as follows (in thousands):
Years Ending December 31,
2024 $ 2,551
2025 7,583
2026 3,965
2027 2,231
Total amortization expense $ 16,330
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5. Accrued Employee Expenses
Accrued employee expenses consisted of the following (in thousands):
September 30,
2024 		December 31,
2023
Accrued vacation $ 13,772 $ 12,399
Accrued bonuses 7,256 14,795
Accrued payroll, severance and related personnel cost 12,597 8,373
Total accrued employee expenses $ 33,625 $ 35,567
In the third quarter of 2023, we accrued $ 10.3 million of severance and related personnel costs associated with our workforce reduction. Refer to Note 12, Workforce Reduction for additional information.

6. Other Current Liabilities
Other Current Liabilities consisted of the following (in thousands):
September 30,
2024 		December 31,
2023
Insurance reserves $ 3,543 $ 4,174
Operating lease liabilities-current 3,141 3,626
Other 7,980 3,535
Total other current liabilities $ 14,664 $ 11,335
For additional information, refer to Note 8, Commitments and Contingencies and Note 7, Leases.
7. Leases
Operating leases for our corporate offices have remaining lease terms ranging from seven years to nine years , some of which include options to extend the leases for up to ten years . These options to extend have not been recognized as part of our operating lease right-of-use assets and lease liabilities as it is not reasonably certain that we will exercise these options. Our lease agreements do not contain any residual value guarantees or material restrictive covenants. Certain leases contain provisions for property-related costs that are variable in nature for which we are responsible, including common area maintenance, which are expensed as incurred.
The components of lease expense recognized in the Condensed Consolidated Statements of Operations were as follows (in thousands):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2024 2023 2024 2023
Operating lease cost $ 1,024 $ 1,027 $ 3,167 $ 3,303
Variable lease cost 335 372 989 1,393
Total lease cost $ 1,359 $ 1,399 $ 4,156 $ 4,696
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Lease-related assets and liabilities were as follows (in thousands):
September 30,
2024 		December 31,
2023
Assets
Operating lease right-of-use assets $ 17,744 $ 19,285
Liabilities
Other current liabilities $ 3,141 $ 3,626
Operating lease liabilities 38,402 41,114
Total lease liabilities $ 41,543 $ 44,740
In January 2023, we entered into an amendment to the lease agreement for our San Diego facility. We remeasured the lease liability and recorded a reduction to the lease liability and right-of-use asset using the discount rate at the modification date, which resulted in a gain of $ 2.4 million in the Condensed Consolidated Statements of Operations.
In June 2023, we entered into a second amendment to reduce the rentable square footage and our future rental payment obligations under the San Diego Lease pursuant to which we made a one-time payment of $ 2.9 million. We again remeasured the lease liability and recorded a reduction to the lease liability using the discount rate at the modification date. As a result, we recorded a gain of $ 1.9 million in the Consolidated Statements of Operations.
In July 2023, we entered into an agreement to sublet one of our office spaces in Santa Barbara through December 31, 2031 (the "Santa Barbara 90 Sublease"). The total rental commitment over the term of the Santa Barbara 90 Sublease is $ 6.1 million. We performed impairment testing in accordance with ASC 360, and no impairment related to the right-of-use assets was recorded for the three months ended September 30, 2023.
Future minimum lease payments under non-cancellable leases as of September 30, 2024 were as follows (in thousands):
Years ending December 31,
2024 $ 526
2025 6,168
2026 6,345
2027 6,528
2028 6,717
Thereafter 24,373
Total future minimum lease payments 50,657
Less: imputed interest ( 9,114 )
Total $ 41,543
8. Commitments and Contingencies
Legal Liability to Landlord Insurance
We have a wholly owned subsidiary, Terra Mar Insurance Company, Inc., which was established in connection with reinsuring liability to landlord insurance policies offered to our customers by our third-party service provider. We assume a 100 % quota share of the liability to landlord insurance policies placed with our customers by our third-party service provider. We accrue for reported claims, and include an estimate of losses incurred but not reported by our property manager customers, in cost of revenue because we bear the risk related to all such claims. Our estimated liability for reported claims and incurred but not reported claims as of September 30, 2024 and December 31, 2023 was $ 3.5 million and $ 4.2 million, respectively, and is included in Other current liabilities on our Condensed Consolidated Balance Sheets.
Included in Prepaid expenses and other current assets as of September 30, 2024 and December 31, 2023 are $ 3.8 million and $ 5.1 million, respectively, of deposits held with a third party related to requirements to maintain collateral for this insurance service.
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Legal Proceedings
From time to time, we are involved in various other investigative inquiries, legal proceedings and disputes arising from or related to matters incident to the ordinary course of our business activities, including actions with respect to intellectual property, employment, labor, regulatory and contractual matters. Although the ultimate outcome of such investigative inquiries, legal proceedings and other disputes cannot be predicted with certainty, we do not believe that any such pending investigative inquiries, legal proceedings and other disputes, if determined adversely to us, would, individually or taken together, have a material adverse effect on our business, operating results, financial condition or cash flows.

Indemnification
In the ordinary course of business, we may provide indemnification of varying scope and terms to customers, business partners, investors, directors, officers, and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of any applicable agreements, intellectual property infringement claims made by third parties, and other liabilities relating to or arising from our services or our acts or omissions. These indemnification provisions may survive termination of the underlying agreement and the maximum potential amount of future payments we could be required to make under these indemnification provisions may not be subject to maximum loss clauses and is indeterminable. We have not incurred any costs as a result of such indemnification obligations and have not recorded any liabilities related to such obligations in the Condensed Consolidated Financial Statements.
9. Stock-Based Compensation
Stock Options
A summary of activity in connection with our stock options for the nine months ended September 30, 2024, is as follows (number of shares in thousands):
Number of
Shares 		Weighted
Average
Exercise
Price per Share 		Weighted
Average
Remaining
Contractual Life
in Years
Options outstanding as of December 31, 2023 381 $ 51.49 3.4
Options exercised ( 250 ) 15.64
Options cancelled/forfeited ( 1 ) 3.28
Options outstanding as of September 30, 2024 130 $ 120.72 7.8
Our stock-based compensation expense for stock options were not material for the periods presented.
As of September 30, 2024, the total estimated remaining stock-based compensation expense for the aforementioned stock options was $ 5.4 million, which is expected to be recognized over a weighted average period of 3.3 years.
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Restricted Stock Units
A summary of activity in connection with our restricted stock units ("RSUs") for the nine months ended September 30, 2024, is as follows (number of shares in thousands):
Number of Shares Weighted Average Grant Date Fair Value per Share
Unvested as of December 31, 2023 943 $ 121.61
Granted 323 214.65
Vested ( 324 ) 128.23
Forfeited ( 41 ) 135.58
Unvested as of September 30, 2024 901 $ 151.95
Unvested RSUs as of September 30, 2024 were composed of 0.8 million RSUs with only service conditions and 0.1 million performance share units ("PSUs") with both service conditions and performance conditions. RSUs granted with only service conditions generally vest over a four-year period, assuming continued employment through the applicable vesting date. The number of PSUs granted, as included in the above table, assumes achievement of the performance metric at 100 % of the performance target. The unvested PSUs as of September 30, 2024, are subject to vesting based on the achievement of pre-established performance metrics for the year ending December 31, 2024 and will vest over a three year period, assuming continued employment through each vesting date. The actual number of shares to be issued at the end of the performance period will range from 0 % to 170 % of the target number of shares depending on achievement relative to the performance metric over the applicable period.
We recognized stock-based compensation expense for the RSUs and PSUs of $ 15.9 million and $ 14.8 million for the three months ended September 30, 2024 and 2023, respectively, and $ 43.4 million and $ 39.0 million for the nine months ended September 30, 2024 and 2023, respectively. As of September 30, 2024, the total estimated remaining stock-based compensation expense for the aforementioned RSUs and PSUs was $ 107.2 million, which is expected to be recognized over a weighted average period of 2.1 years.
10. Income Taxes

In determining the interim benefit from income taxes for the three and nine months ended September 30, 2024, we utilized the annual estimated effective tax rate applied to the actual year-to-date income and added the tax effects of any discrete items in the reporting period in which they occur. In determining the interim benefit from income taxes for the three and nine months ended September 30, 2023, we utilized the discrete effective tax rate method, as allowed by Accounting Standards Codification (“ASC”) 740-270-30-18, “Income Taxes – Interim Reporting.”

For the three and nine months ended September 30, 2024, we recorded income tax expense of $ 13.6 million and $ 21.8 million, respectively, representing an effective tax rate of 29.1 % and 17.7 %, respectively. For the three months ended September 30, 2024, our effective tax rate differs from the U.S. federal statutory rate of 21% primarily due to the change in valuation allowance against deferred tax assets, state income taxes and non-deductible officers' compensation partially offset by excess tax benefits from stock-based compensation. For the nine months ended September 30, 2024, our effective tax rate differs from the U.S. federal statutory rate of 21% primarily due to excess tax benefits from stock-based compensation.

We assess our ability to realize our deferred tax assets on a quarterly basis and we establish a valuation allowance if it is more-likely-than-not that some portion of the deferred tax assets will not be realized. We weigh all available positive and negative evidence, including our earnings history and results of recent operations, scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategies. Due to a history of cumulative losses, including permanent adjustments, and assessing all available positive and negative evidence, we have determined that it is more likely than not that our federal and state deferred tax assets would not be realized. Accordingly, we have been maintaining full valuation allowance against our deferred tax assets. However, based on our current and projected future earnings, we believe that there is reasonable possibility that sufficient positive evidence of sustained profitability may be achieved during the current year to reach a conclusion that part or all of our deferred tax assets may become realizable, resulting in a possible release of all or a portion of the valuation allowance. Such valuation allowance release may result in a material increase to our deferred tax assets and a corresponding decrease in income tax expense. The exact timing and amount of the valuation allowance release are subject to our projection of earnings and level of profitability.
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There were no material changes to our unrecognized tax benefits during the three and nine months ended September 30, 2024, and we do not expect to have any significant changes to unrecognized tax benefits through the remainder of the year.
11. Revenue and Other Information
The following table presents our revenue categories for the three and nine months ended September 30, 2024 and 2023 (in thousands):
Three Months Ended
September 30, 		Nine Months Ended
September 30,
2024 2023 2024 2023
Core solutions $ 46,030 $ 39,756 $ 132,974 $ 115,440
Value Added Services 157,726 123,188 451,677 326,108
Other 1,977 2,496 5,887 7,067
Total revenue $ 205,733 $ 165,440 $ 590,538 $ 448,615
Our revenue is generated primarily from customers in the United States. All of our property and equipment is located in the United States.
12. Workforce Reduction
During the three months ended September 30, 2023, we announced a plan to reduce our workforce by 149 employees in order to scale the business more efficiently. Impacted employees were notified in August 2023. There were no workforce reductions during the three and nine months ended September 30, 2024.
The following table presents the total severance and related personnel costs by function, for the three and nine months ended September 30, 2023 (in thousands):
Severance and Related Personnel Cost
Cost of revenue $ 2,367
Sales and marketing 3,795
Research and product development 3,407
General and administrative 2,514
Total (1)
$ 12,083
(1) Total severance and related personnel costs include $ 1.8 million of accelerated stock-based compensation expense recognized during the three months ended September 30, 2023.
The following is a summary of changes in the accrued severance and related personnel cost, within Accrued Employee Expenses on the Condensed Consolidated Balance Sheets (in thousands):
Accrued Severance and Related Personnel Cost
Balance as of December 31, 2022 $ —
Severance and related personnel cost 10,278
Cash Payments ( 1,801 )
Balance as of September 30, 2023 $ 8,477
For the balance as of September 30, 2023, $ 7.6 million of accrued severance was paid in the fourth quarter of 2023, and the remainder was paid in 2024.
13. Subsequent Event

On October 22, 2024, we acquired all of the outstanding shares of Move EZ, Inc., a concierge platform providing moving and home services throughout the resident onboarding process, for approximately $ 80 million in cash, subject to customary adjustment.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition, results of operations and liquidity 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.
Overview
We are a technology leader powering the future of the real estate industry. Our solutions are designed to enable our property manager customers to digitally transform their businesses, address critical business operations and deliver a better customer experience. Our products assist our customers with an interconnected and growing network of stakeholders in their business ecosystems, including property owners, real estate investment managers, rental prospects, residents, and service providers, and provide key functionality related to critical transactions across the real estate lifecycle, including screening potential tenants, sending and receiving payments and 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 network of stakeholders 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 continue to evolve our compensation and employee reward practices.
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 active or committed units under management at the period end date. We had 8.5 million and 7.8 million property management units under management as of September 30, 2024 and 2023, 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 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 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 from the use of our payment services, tenant screening services, and risk mitigation services.
In addition, we charge our customers for assistance onboarding onto our core solutions and for certain other non-recurring services. We generally invoice for these other services in advance of the services being completed and recognize revenue in the period the service is rendered. 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, 2024 and 2023, we had 20,403 and 19,418 property management customers, respectively.
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Costs and Operating Expenses
Cost of Revenue (Exclusive of Depreciation and Amortization). 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 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 includes 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. 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 expanding 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. 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, and administrative organizations (including salaries, performance-based compensation, benefits, and stock-based compensation). In addition, general and administrative expense includes fees for third-party professional services (including audit, legal, compliance, and tax services), regulatory fees, other corporate expenses, impairment of long-lived assets, gains on lease modifications, 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.
Interest Income, Net. Interest income, net 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
September 30, 		Change Nine Months Ended
September 30, 		Change
2024 2023 Amount % 2024 2023 Amount %
(dollars in thousands)
Core solutions $ 46,030 $ 39,756 $ 6,274 16 % $ 132,974 $ 115,440 $ 17,534 15 %
Value Added Services 157,726 123,188 34,538 28 % 451,677 326,108 125,569 39 %
Other 1,977 2,496 (519) (21) % 5,887 7,067 (1,180) (17) %
Total revenue $ 205,733 $ 165,440 $ 40,293 24 % $ 590,538 $ 448,615 $ 141,923 32 %

The increase in revenue for the three and nine months ended September 30, 2024, compared to the same period in the prior year, was primarily attributable to an increase in the usage of our payments, tenant screening, and risk mitigation services. During the three and nine- month periods ended September 30, 2024, we also experienced growth of 9% in the number of property management units under management compared to the same periods in the prior year, which drove growth in users of our subscription and usage-based services.
Our payment services experienced increased usage during the comparative periods as residents and property managers transacted more business online.
We expect total revenue for the year ending December 31, 2024 to increase compared to the year ended December 31, 2023 as we continue to add new customers and property management units under management, along with increased adoption and utilization of our Value Added Services.

Cost of Revenue (Exclusive of Depreciation and Amortization)
Three Months Ended
September 30, 		Change Nine Months Ended
September 30, 		Change
2024 2023 Amount % 2024 2023 Amount %
(dollars in thousands)
Cost of revenue (exclusive of depreciation and amortization) $ 71,631 $ 62,739 $ 8,892 14 % $ 205,878 $ 176,801 $ 29,077 16 %
Percentage of revenue 34.8 % 37.9 % 34.9 % 39.4 %
Stock-based compensation, included above $ 1,126 $ 1,149 $ (23) (2) % $ 3,261 $ 2,905 $ 356 12 %
Percentage of revenue 0.5 % 0.7 % 0.6 % 0.6 %

For the three and nine months ended September 30, 2024, the cost of revenue (exclusive of depreciation and amortization) increased, primarily due to higher expenditures related to third-party service providers for delivering our Value Added Services, which increased by $10.4 million and $30.6 million, respectively, compared to the same period in the prior year. The increases in expenditures related to third-party service providers were (1) driven by greater adoption and utilization of our Value Added Services and (2) partially offset by decreases of $2.5 million and $2.8 million for the three and nine months ended September 30, 2024, respectively, in personnel-related costs, including stock-based and performance-based compensation. The decreases included $2.4 million in severance and related personnel costs we incurred from the workforce reduction in the third quarter of 2023.
We expect cost of revenue (exclusive of depreciation and amortization) for the year ending December 31, 2024, to decrease as a percentage of revenue compared to the year ended December 31, 2023, primarily due to increased revenue from eCheck transaction fees, product mix, and continued leverage from headcount efficiencies.
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Sales and Marketing
Three Months Ended
September 30, 		Change Nine Months Ended
September 30, 		Change
2024 2023 Amount % 2024 2023 Amount %
(dollars in thousands)
Sales and marketing $ 25,406 $ 29,701 $ (4,295) (14) % $ 77,161 $ 86,101 $ (8,940) (10) %
Percentage of revenue 12.3 % 18.0 % 13.1 % 19.2 %
Stock-based compensation, included above $ 2,071 $ 2,041 $ 30 1 % $ 5,284 $ 4,902 $ 382 8 %
Percentage of revenue 1.0 % 1.2 % 0.9 % 1.1 %
Sales and marketing expense for the three and nine months ended September 30, 2024 decreased, compared to the same period in the prior year, primarily due to reductions of $3.7 million and $7.2 million, respectively, in personnel-related costs, including stock-based and performance-based compensation. The reductions were driven by reduced headcount and $3.8 million in severance and related personnel costs we incurred from the workforce reduction in the third quarter of 2023.
We expect sales and marketing expense for the year ending December 31, 2024 to decrease as a percentage of revenue compared to the year ended December 31, 2023, as we continue to leverage headcount efficiencies.
Research and Product Development
Three Months Ended
September 30, 		Change Nine Months Ended
September 30, 		Change
2024 2023 Amount % 2024 2023 Amount %
(dollars in thousands)
Research and product development $ 40,662 $ 41,592 $ (930) (2) % $ 118,079 $ 116,517 $ 1,562 1 %
Percentage of revenue 19.8 % 25.1 % 20.0 % 26.0 %
Stock-based compensation, included above $ 7,471 $ 6,064 $ 1,407 23 % $ 19,625 $ 15,851 $ 3,774 24 %
Percentage of revenue 3.6 % 3.7 % 3.3 % 3.5 %
Research and product development expense decreased slightly for the three months ended September 30, 2024, compared to the same period in the prior year, primarily due to a $1.5M reduction in personnel-related costs, including stock-based and performance-based compensation. This included $3.4 million in severance and related personnel costs we incurred from the workforce reduction in the third quarter of 2023.
Research and product development expense increased for the nine months ended September 30, 2024, compared to the same period in the prior year, primarily due to a $3.2 million increase in allocated shared and other costs, driven by higher technology costs. This increase in allocated shared and other costs was partially offset by a $1.6 million reduction in personnel-related costs, including stock-based and performance-based compensation. This reduction included $3.4 million in severance and related personnel costs we incurred from the workforce reduction in the third quarter of 2023.
We expect research and product development expenses for the year ending December 31, 2024 to decrease as a percentage of revenue compared to the year ended December 31, 2023, as we continue to leverage headcount efficiencies.
General and Administrative
Three Months Ended
September 30, 		Change Nine Months Ended
September 30, 		Change
2024 2023 Amount % 2024 2023 Amount %
(dollars in thousands)
General and administrative $ 21,139 $ 23,907 $ (2,768) (12) % $ 62,525 $ 74,417 $ (11,892) (16) %
Percentage of revenue 10.3 % 14.5 % 10.6 % 16.6 %
Stock-based compensation, included above $ 5,367 $ 6,003 $ (636) (11) % $ 16,133 $ 16,274 $ (141) (1) %
Percentage of revenue 2.6 % 3.6 % 2.7 % 3.6 %
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General and administrative expense decreased for the three months ended September 30, 2024, compared to the same period in the prior year, primarily due to a $3.4 million reduction in personnel-related costs, including stock-based and performance-based compensation. The reduction included $2.5 million in severance and related personnel costs we incurred from the workforce reduction in the third quarter of 2023.
General and administrative expense decreased for the nine months ended September 30, 2024, compared to the same period in the prior year, primarily due to a $18.8 million reduction in personnel-related costs, including stock-based and performance-based compensation. which was partially offset by a $6.9 million increase in allocated shared and other costs, The decrease in personnel-related costs was primarily due to severance costs associated with our former Chief Executive Officer's separation in the first quarter of 2023 and the severance related costs we incurred from the workforce reduction in the third quarter of 2023. The increase in allocated shared and other costs was primarily due to a $4.3 million decrease in gains related to lease modifications recognized in the nine months ended September 30, 2023, and an increase in allocated shared and other costs of $2.6 million, driven by expenses to support our growth.
We expect general and administrative expenses for the year ending December 31, 2024 to decrease as a percentage of revenue compared to the year ended December 31, 2023, as we continue to leverage headcount efficiencies.
Depreciation and Amortization
Three Months Ended
September 30, 		Change Nine Months Ended
September 30, 		Change
2024 2023 Amount % 2024 2023 Amount %
(dollars in thousands)
Depreciation and amortization $ 4,327 $ 7,568 $ (3,241) (43) % $ 14,209 $ 22,055 $ (7,846) (36) %
Percentage of revenue 2.1 % 4.6 % 2.4 % 4.9 %
Depreciation and amortization expense for the three and nine months ended September 30, 2024 decreased, compared to the same period in the prior year, primarily due to decreased amortization expense associated with capitalized software development and intangible balances.
We expect depreciation and amortization expenses for the year ending December 31, 2024 to decrease as a percentage of revenue compared to the year ended December 31, 2023 due to a decrease in amortization of accumulated capitalized software development costs and intangible assets balances.
Interest Income, Net
Three Months Ended
September 30, 		Change Nine Months Ended
September 30, 		Change
2024 2023 Amount % 2024 2023 Amount %
(dollars in thousands)
Interest income, net $ 4,014 $ 1,788 $ 2,226 124 % $ 10,482 $ 4,627 $ 5,855 127 %
Percentage of revenue 2.0 % 1.1 % 1.8 % 1.0 %

Interest income for the three and nine months ended September 30, 2024 increased, compared to the same period in the prior year, primarily due to higher interest rates and purchases of available-for-sale investment securities.
Provision for (benefit from) Income Taxes
Three Months Ended
September 30, 		Change Nine Months Ended
September 30, 		Change
2024 2023 Amount % 2024 2023 Amount %
(dollars in thousands)
Income (loss) before provision for income taxes $ 46,582 $ 1,472 $ 45,110 3,065 % $ 123,168 $ (22,932) $ 146,100 (637)%
Provision for (benefit from) income taxes $ 13,576 $ (24,973) $ 38,549 * $ 21,834 $ 4,634 $ 17,200 *
Effective tax rate 29.1 % (1,696.5) % 17.7 % (20.2) %
*Percentage not meaningful
For the three months ended September 30, 2024, our effective tax rate differed from the U.S. federal statutory rate of 21% primarily due to a change in valuation allowance against deferred tax assets, state income taxes and non-deductible
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officers' compensation partially offset by excess tax benefits from stock-based compensation. For the nine months ended September 30, 2024, our effective tax rate differed from the U.S. federal statutory rate of 21% primarily due to excess tax benefits from stock-based compensation. Our effective tax rates for the three and nine months ended September 30, 2023 differed from the U.S. federal statutory rate of 21% primarily due to the change in valuation allowance against deferred tax assets, non-deductible officers' compensation and state income taxes, partially offset by tax benefits from stock-based compensation research and development tax credits.
Our effective tax rates for the three and nine months ended September 30, 2024, as compared to the same periods in 2023, are significantly different primarily due to the substantial increase in our pre-tax income in the current year and changes in discrete tax benefits year over year.
Liquidity and Capital Resources
Our principal sources of liquidity continue to be cash, cash equivalents, and investment securities totaling $331.4 million, 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.
Capital Requirements
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, 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,
2024 2023
Net cash provided by operating activities $ 151,593 $ 29,100
Net cash used in investing activities (107,497) (22,351)
Net cash used in financing activities (31,188) (17,581)
Net increase (decrease) in cash, cash equivalents and restricted cash $ 12,908 $ (10,832)
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.
The net increase in cash provided by operating activities for the nine months ended September 30, 2024, compared to the same period in the prior year, was primarily due to an increase in cash collections from customers.
Investing Activities
Cash used in investing activities is generally composed of purchases of investment securities, maturities of investment securities, purchases of property and equipment, and additions to capitalized software development.
The net increase in cash used in investing activities for the nine months ended September 30, 2024, compared to the same period in the prior year, was primarily due to higher purchases of available-for-sale investment securities.
Financing Activities
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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.
The net increase in cash used in financing activities for the nine months ended September 30, 2024, compared to the same period in the prior year, was primarily due to an increase in net share settlements for employee tax withholdings associated with the vesting of equity awards.
Critical Accounting Policies and Estimates
Our Condensed Consolidated Financial Statements and the related notes are prepared in accordance with GAAP. The preparation of our Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting period.
There have been no material 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Investment Securities
As of September 30, 2024, we had $269.0 million of investment securities consisting of United States government and agency securities. The primary objective of investing in securities is to support our liquidity and capital needs. We did not purchase these investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure.
Our investment securities are exposed to market risk due to interest rate fluctuations. While fluctuations in interest rates do not impact our interest income from our investment securities as all of these securities have fixed interest rates, changes in interest rates may impact the fair value of the investment securities. Since our investment securities are held as available for sale, all changes in fair value impact our other comprehensive (loss) income unless an investment security is considered impaired in which case changes in fair value are reported in other expense. As of September 30, 2024, a hypothetical 100 basis point decrease in interest rates would have resulted in an increase in the fair value of our investment securities of approximately $1.1 million and a hypothetical 100 basis point increase in interest rates would have resulted in a decrease in the fair value of our investment securities of approximately $1.1 million. This estimate is based on a sensitivity model which measures an instant change in interest rates by 100 basis points at September 30, 2024.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the supervision and participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were designed at the reasonable assurance level and were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For information regarding legal proceedings, refer to Note 8, Commitments and Contingencies of our Condensed Consolidated Financial Statements.
Item 1A. Risk Factors
An investment in our Class A common stock involves risks. Before making an investment decision, you should carefully consider all of the information in this Quarterly Report, including in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Condensed Consolidated Financial Statements and related notes. In addition, you should carefully consider the risks and uncertainties described in the section entitled “Risk Factors” in our Annual Report, which was filed with the SEC on February 1, 2024. If any of the identified risks are realized, our business, financial condition, operating results and prospects could be materially and adversely affected. In that case, the trading price of our Class A common stock may decline. In addition, other risks of which we are currently unaware, or which we do not currently view as material, could have a material adverse effect on our business, financial condition, operating results and prospects. As of the date of this Quarterly Report, there have been no material changes to the risk factors previously disclosed under the section entitled "Risk Factors" in Part I, Item IA of our 2023 Annual Report.

Item 5. Other Information

None.
Item 6. Exhibits
Exhibit
Number 		Description of Document
31.1
31.2
32.1*
101.INS
Inline XBRL Instance Document
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
* The certifications attached as Exhibit 32.1 accompany this Quarterly Report pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the registrant for purposes of Section 18 of the Exchange Act, and are not to be incorporated by reference into any of the registrant’s filings under the Securities Act or the Exchange Act, whether made before or after the date of this Quarterly Report, irrespective of any general incorporation language contained in any such filing.
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AppFolio, Inc.
Date: October 24, 2024 By: /s/ Shane Trigg
Shane Trigg
Chief Executive Officer
(Principal Executive Officer)
Date: October 24, 2024 By: /s/ Fay Sien Goon
Fay Sien Goon
Chief Financial Officer
(Principal Financial and Accounting Officer)



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