What changed in this filing

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Item 1. Business

2021-03-01 compared with 2020-03-02 · 211 added, 183 removed, 70 unchanged (85% of the section changed)

1 unchanged sentence

and its consolidated subsidiaries.

Our mission is to revolutionize vertical industry businesses by providing great software and services.

To that end, today we offer industry-specific, cloud-based business software solutions, services and data analytics to the real estate market, which represents over 90% of our revenue, and, to a lesser extent, to the legal market.

Although specific functionality varies by product, our core solutions address common business operations and interactions of businesses in our targeted verticals.

In addition to our core solutions, we offer a range of optional, but often business-critical, Value+ services.

Our Value+ services are built to enhance, automate and streamline processes and support workflows essential to our customers' businesses.

Our real estate software solutions provide our property management customers (including third-party property managers and owner-operators who manage single- and mutli- family residences, community associations, commercial properties, and student housing, as well as mixed real estate portfolios) with a system of record to automate essential business processes, a system of engagement to enhance business interactions between our customers and their clients and other stakeholders, and a system of intelligence designed to leverage data to predict and optimize business workflows in order to enable superior customer experiences and increase efficiency across our customers' businesses.

AppFolio provides innovative software, services and data analytics to the real estate industry.

Our industry-specific, cloud-based solutions are used primarily by property managers, and also by numerous other constituencies in the property management business ecosystem.

These other constituencies include property owners, rental prospects, tenants and service providers, whom we refer to collectively as "users".

Although specific functionality varies by product, our core solutions are designed to enable our customers to digitally transform their businesses, address critical business operations and enable exceptional customer service.

In addition to our core solutions, we offer an array of optional, but often business-critical, Value+ services that are designed to enhance, automate and streamline processes and workflows that are essential to our customers' businesses.

Our Value+ services are generally available on an as-needed basis and enable our customers to adapt our offerings to their specific operational requirements.

Our solutions and services are designed to be a system of record to automate essential business processes, a system of engagement to enhance business interactions between our customers and their business ecosystems and a system of intelligence designed to leverage data to predict and optimize business workflows in order to enable exceptional customer experiences and increase efficiency across our customers' businesses.

Our mobile-optimized software solutions are designed for use across multiple devices and operating systems.

Our software solutions are all offered as a service for our customers and hosted using a modern cloud-based architecture.

This architecture leads to rich data sets that have a consistent schema across our customer base and enables us to deploy data-powered products and services for our customers.

We also provide software solutions to the legal market that enable law firms to administer their practice and manage their caseloads more efficiently by centralizing case details in a single system of record and system of engagement.

Many companies face a common set of challenges that divert limited time and resources away from serving their clients and growing their businesses.

In certain industries, day-to-day operations may be managed through inefficient manual processes and disparate software point solutions.

This lack of automation and integrated technology results in a significant administrative burden on these businesses, particularly in industries that involve unique workflows, relationships among multiple industry participants, significant data inputs and management, and compliance or regulatory requirements.

While larger enterprises and consumers have been experiencing a transformational shift into the digital age, the legacy systems and manual business processes currently used by many other businesses are lagging behind in terms of technological sophistication and ease of use.

For the years ended December 31, 2019 , 2018 and 2017 , our revenue was $256.0 million , $190.1 million and $143.8 million , respectively.

During each of these years we have derived more than 90% of our revenue from our solutions serving the real estate market, primarily property management companies.

Our revenue has limited seasonality as discussed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Annual Report, within the section entitled "Quarterly Revenue and Cost Trends."

We sell our software solutions and services through our direct sales organization and from within our software applications.

We offer our core solutions to customers on a subscription basis, with subscription fees that scale to the size and type of their businesses.

Customers who adopt our Value+ services pay either subscription fees or usage-based fees, depending on the Value+ service.

We do not separately charge customers for ongoing training and support, which we believe is critical to retaining customers and increasing adoption and utilization of our Value+ services.

We also charge one-time fees in connection with certain services.

We evaluate the success of our business during the periods presented based on factors such as the development and launch of new and innovative core functionality and Value+ services, enhancements to user experience, customer satisfaction, growth in our revenue and customer base, fluctuations in costs and operating expenses as a percentage of revenue, operating loss or income and cash flows from operating activities.

We have managed, and plan to continue to manage, our business towards the achievement of long-term growth that we believe will positively impact long-term stockholder value, and not towards the realization of short-term financial or business metrics, or short-term stockholder value.

We have invested, and intend to continue to invest, in our business to capitalize on our market opportunity.

Our business, including our core functionality and Value+ services, as well as our customers and other stakeholders in the vertical markets we serve, is subject to constantly evolving laws, rules and regulations, any or all of which may impede our growth or diminish our existing business.

Despite our significant efforts to monitor and comply with this evolving legal and regulatory landscape, we may be unable to do so, and new or existing laws, rules and regulations may lead to increased litigation, investigation or other legal proceedings and related costs, diversion of management resources, and limitations on our ability to conduct our business, any of which may negatively impact our ability to meet our long term corporate objectives.

Real Estate Market

In 2008, we entered the real estate market with our first product, AppFolio Property Manager ("APM"), a property management solution designed to address the unique operational and business requirements of property management companies.

Recognizing that our customers and their stakeholders would benefit from additional business critical services, we launched a series of Value+ services beginning in 2009.

Our first Value+ service assisted our customers in the marketing of their rental properties by offering property level website design and hosting services.

In 2010, we commenced the roll out of our electronic payment services, thereby facilitating the payment of rent via ACH by tenants.

In 2011, we launched tenant screening services, further assisting our customers with the leasing process.

In 2012, we introduced our legal liability to landlord insurance program, which protects property owners and managers from certain defined losses.

In 2013, we expanded our electronic payment services by allowing residents to pay rent by electronic cash payment ("ECP") and credit or debit card.

In 2014, we launched a tenant-facing contact center solution to assist our property managers with resolving incoming maintenance requests.

In 2015, we expanded the marketing services offered to our property management customers with a premium leads service built on technology acquired with our acquisition of RentLinx LLC ("Rentlinx") and expanded our electronic payment services to facilitate payments made between our customers and property owners and vendors.

In 2016, we introduced a tenant debt collection Value+ service to assist our property managers with running a more efficient business with the collection of past due rents.

In 2017, we expanded our insurance services to enable tenants to purchase renters insurance from within APM, protecting both our property management customers and their tenants.

In 2018, we acquired substantially all of the assets of WegoWise, Inc.

("WegoWise"), a provider of cloud-based utility analytics software solutions, and began offering AppFolio Utility Management as a Value+ service to our property management customers in mid-2019.

In 2018, we also released AppFolio Property Manager PLUS, ("APM PLUS"), a new tier of APM designed for larger businesses with more complex needs.

APM PLUS builds upon the functionality of APM and additionally offers data analytics, configurable workflows, and revenue management and optimization functionality for our customers.

In January 2019, we acquired Dynasty Marketplace, Inc., ("Dynasty"), a provider of advanced artificial intelligence ("AI") solutions for the real estate market, and began offering an AI Leasing Assistant, Lisa, as a Value+ service to our property management customers in mid-2019.

In April 2019, we launched AppFolio Investment Management, which enables real estate investment managers to better manage their investor relationships by increasing transparency and streamlining certain business processes.

Our Real Estate Solutions

Although specific functionality varies by product, our core real estate solutions address common business operations and interactions of property managers by providing key functionality, including accounting, document management, real-time interactive search, data analytics and communication options.

Our optional, but often business-critical Value+ services, which make up a significant portion of our revenue, enable our customers to adapt our platform to their specific operational requirements.

Many of the software solutions and Value+ services we offer in the real estate market are subject to certain legal, regulatory and other requirements and, despite our significant efforts to comply with all such requirements, there can be no guarantee that our efforts will be sufficient or that existing laws, rules or other requirements will not be interpreted, revised, augmented or rewritten in a way that adversely affects our real estate solutions and Value+ services, which comprise a significant majority of our business.

Our software solutions are offered as a service, are hosted using a modern cloud-based architecture, and in part, use artificial intelligence technologies.

This architecture leads to rich data sets that have a consistent schema across our customer and user base and enables us to deploy data-powered products and services for our customers and users.

For the years ended December 31, 2020, 2019 and 2018, our revenue was $310.1 million, $256.0 million and $190.1 million, respectively, of which $284.7 million, $231.1 million and $172.4 million, respectively, were derived from our software services and data analytics offered to the real estate vertical.

See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Annual Report, within the section entitled "Quarterly Results of Operations" for additional details regarding seasonality of revenue.

During certain periods covered by this Annual Report, we also provided software solutions and services to the legal vertical.

As previously disclosed, we completed our divestiture of MyCase, Inc.

on September 30, 2020.

For additional details, see Note 1, Nature of Business and Note 3, Divestitures and Business Combinations of our Consolidated Financial Statements in this Annual Report.

The Challenges We Address

We believe that many companies face a common set of challenges that divert limited time and resources away from serving their customers and growing their businesses.

Significant administrative burdens from inefficient manual processes and the use of disparate technologies or loosely integrated solutions only exacerbate those challenges.

This is particularly evident in businesses that involve unique workflows, relationships among multiple users, significant data inputs and management, and compliance or regulatory requirements.

Our platform is designed to provide our customers an intuitive, reliable and integrated solution that brings innovative technology and services to their specific workflows, meets their key operational requirements and enables delivery of exceptional customer experiences.

We rely on partners and third party service providers to deliver certain aspects of our solutions, and we strive to provide a seamlessly integrated experience for our customers.

We believe our customer-centric culture fosters a focus on customer satisfaction which leads to long-term customer retention and our long-term success.

We believe our solutions and services offer customers the ability to capitalize on the power of fully integrated business management software to interact with their business ecosystems, and to mine the data and insights gleaned from these relationships, which is integral to our customers' ability to grow their businesses and compete effectively.

Growth Strategy

Our growth strategy is to provide increasingly valuable industry-specific business management software, services and data analytics to new and existing customers and their business ecosystems.

We believe our customer-centric culture and market validation techniques that direct our product strategy are key to our success.

Key components of our growth strategy include:

Maintain Product and Technology Leadership .

We have made, and will continue to make, significant investments in research and new product development to expand our platform capabilities as we deem appropriate in our target markets.

We intend to continue using our market validation techniques and close relationships with our customers and users as a key source of feedback to inform and direct our product strategy.

We may also choose to acquire rather than build certain technology capabilities, or to partner with third parties to deliver key functionality to serve the needs of our customers and their business ecosystems.

Keep Our Existing Customers and Users Happy.

We believe customer success is essential to our long-term success.

We place significant emphasis on customer service, which we believe leads to long-term customer relationships, to differentiate our software, services and data analytics from competing products.

This emphasis will continue to be a critical component of our growth strategy in the future.

We believe that maintaining our focus on customer success will lead to new product innovation, the referral of new customers from existing satisfied customers, and greater adoption and utilization of our solutions and services.

Acquire New Customers.

We believe new customer acquisition is essential to our long-term success.

We expect to continue to grow our base of customers with our investments in the development of increasingly valuable business management capabilities for our target markets, sales and marketing programs, including evolving industry thought leadership and education, and the referral power of satisfied customers.

Expand Adoption and Use By Existing Customers.

We have made, and will continue to make, significant investments in our solutions and services that expand functionality and enhance or add new capabilities to meet the current and evolving needs of our customers.

We expect our satisfied customers will expand their usage of our Value+ services to adapt our platform to their specific operational requirements.

In addition, as our customers grow, we expect they will continue to use our solutions and services to manage their larger businesses.

Enter New Adjacent Markets.

We expect to continue to evaluate and expand into adjacent markets based on our market validation strategy and targeted customer feedback in a manner consistent with our strategic plan.

We believe that, while we are continuously developing our solutions and services within one market, we can apply certain relevant product enhancements and key learnings from that market as we extend our solutions and services into successive adjacent markets.

Expand into New Verticals.

We expect to continue to review potential opportunities to expand into additional vertical markets in a manner consistent with our strategic plan.

We believe our expansion into and success from adjacent markets may present opportunities to enter new verticals.

Any new vertical must also fit within our overall business strategy, including our management team's assessment of available alternatives, such as the number and size of potential adjacent market opportunities, and the relative risk and return of these opportunities.

The growth strategy that our management and board of directors have developed reflects our customer-centric and long-term growth view of our business, rather than the realization of short-term financial or business metrics, or short-term value.

If opportunities arise that might cause us to sacrifice our performance with respect to short-term financial or business metrics, but that we believe are in the best interests of our stockholders in the long term, we will take those opportunities.

The technology surrounding our business management solutions and services is constantly evolving, and our growth strategy is thus subject to a variety of risks and uncertainties.

Please refer to Item 1A., "Risk Factors", for a more complete discussion of these and other risk-related issues.

AppFolio Property Manager - Core Solution

APM is a cloud-based software solution that provides property management customers of various sizes innovative tools and services designed to streamline their property management businesses.

Our software solution serves a variety of property types, including single- and multi-family residential, commercial, community association, and student housing, and is continuously evolving to help our customers more effectively market, manage, and grow their businesses.

Human Capital

We believe our people are at the heart of our success and our customers’ success.

We endeavor to not only attract and retain talented employees, but also to provide a challenging and rewarding environment to motivate and develop our valuable human capital.

We look to our talented employees to lead and foster various initiatives that support our company culture including those related to diversity, equity and inclusion.

In addition, we rely heavily on our talented team to execute our growth plans and achieve our long-term strategic objectives.

We believe that our company culture, driven by a dedication to the following six core values, provides us with a competitive advantage:

• Simpler Is Better

• Great, Innovative Products Are Key To A Great Business

• Great People Make A Great Company

• Listening To Customers Is In Our DNA

• Small, Focused Teams Keep Us Agile

• We Do The Right Thing;

It’s Good For Business

At December 31, 2020, we had 1,335 full-time employees and also routinely engage temporary employees and consultants.

We consider our relationship with our employees and consultants to be strong.

None of our employees are represented by a labor union or covered by a collective bargaining agreement.

We must continue to attract and retain highly qualified and motivated personnel across our organization to execute our growth plan and achieve our strategic objectives.

If we fail to do so, our business and operating results may suffer.

Please refer to Item 1A., "Risk Factors", for a more complete discussion of these and other related risks.

Compensation and Benefits

We provide competitive compensation and benefits for our employees.

Our compensation packages may include base salary, commission or annual performance-based bonuses, and stock-based compensation.

We also offer general employee medical, dental, and vision insurance, health savings and flexible spending accounts, mental health resources, paid time off, paid family leave, life and disability insurance, and 401(k) plan matching contributions.

These programs and our overall compensation packages seek to attract and retain talented employees.

Health, Safety and Wellness

We take the health and welfare of our employees very seriously, and have encouraged safe practices designed to stem the infection and spread of COVID-19 within our workforce and beyond and to maintain the mental health and well-being of our employees.

Beginning in March 2020, in an effort to protect our employees and comply with applicable government orders, we restricted non-essential employee travel and transitioned our employees to a remote work environment.

We currently expect the majority of our employees will continue working remotely at least through the second quarter of 2021.

We are committed to our employees returning to the workplace in the long-term, and have recently constructed a new office space in Santa Barbara, California, extended the lease for our office in Richardson, Texas and are seeking new office space to lease in San Diego, California to accommodate our employees' return to the workplace in the future.

Workplace Awards

By attracting and retaining a team of people who are inspired by these values, focusing on building an outstanding culture, and offering opportunities for professional and personal growth, AppFolio has been recognized as a 2020 Best Place to Work and Highest Rated Company for Work-Life Balance During COVID-19 by Glassdoor, a 2020 Best Workplace for Women by Fortune, and a 2020 Best Workplace for Parents by Great Place to Work.

Property Management Market

In 2008, we introduced AppFolio Property Manager ("APM"), a property management solution designed to address the unique operational and business requirements of property management companies and their business ecosystems.

Recognizing that our customers and their business ecosystems would benefit from additional business critical services, we launched a series of Value+ services beginning in 2009.

Our Value+ services are tailored to the specific workflows of property management businesses and generally fall into the categories of marketing and leasing, electronic payment services, business optimization and risk mitigation.

In 2018, we introduced AppFolio Property Manager PLUS, ("APM PLUS"), a tier of APM designed for larger businesses with more complex needs.

APM PLUS builds upon the functionality of APM and additionally offers data analytics, configurable workflows, and revenue management and optimization functionality for our customers.

APM and APM PLUS serve our property management customers, including third-party property managers and owner operators, who typically manage single- and multi-family residential, and others who manage community association, and commercial properties.

Our solutions and services also serve other constituencies in the property management market, including property owners, rental prospects, tenants and service providers.

Our Property Management Solutions

AppFolio Property Manager - Core Solutions

Core functionality addresses key operational issues, including accounting and business analytics and management, marketing and leasing functionality, and communications with key stakeholders.

APM PLUS, builds upon the functionality of APM and additionally offers data analytics, configurable workflows, and revenue management and optimization functionality for our large and more complex property management customers.

APM PLUS builds upon the functionality of APM and additionally offers data analytics, configurable workflows, and revenue management and optimization functionality for our larger and more complex property management customers.

AppFolio Property Manager - Value+ Services

In addition to our core solution, we offer a range of optional, but often business-critical, Value+ services built to enhance, automate and streamline property management processes and support workflows essential to our customers' businesses.

Our Value+ services generally fall into the categories of marketing and leasing, electronic payment services, resident services, business optimization and risk mitigation.

Value+ services are integrated with APM and APM PLUS so customers and their stakeholders may benefit from added efficiency and ease of use.

Our Value+ services build on functionality and workflows in our core solutions and generally fall into the categories of marketing and leasing, electronic payment services, business optimization and risk mitigation.

Although many of our Value+ services are enabled by third party partners, we prioritize a seamless experience for our customers and users which increases their efficiency and ease of use of APM and APM PLUS.

Utilization and adoption of our Value+ services is typically higher for residential properties than community association or commercial properties because of the unique and complex needs of the residential rental lifecycle.

We have generally organized our Value+ services below in the manner in which they are experienced throughout the rental lifecycle.

We deliver and maintain professionally designed and architected Websites that showcase our customers’ businesses.

Our websites are fully-integrated with APM functionality, including vacancy postings, electronic payment services, owner portals, and maintenance requests.

Property managers can track and analyze site traffic and lead generation and identify prospects by evaluating guest cards that are completed by prospective tenants who visit the websites in connection with posted vacancies.

Features include search engine optimized content including floor plans, video walkthroughs, professional photography and video production, and branding and logo creation.

Our accounting features include Electronic Payment Services that allow property managers to streamline their payables and receivables online.

Our customers can collect rental application fees, rent payments and other tenant charges through a secure online portal, mobile app, and ECP, as well as receive owner contributions.

They can quickly and conveniently pay owners, vendors and their own management company as well.

Tenant Screening Services include background screening and credit checks for use in connection with the rental application process.

Our websites are fully integrated with our property manager functionality, including vacancy postings, electronic payment services, owner portals, tenant portals and maintenance requests.

Property managers can track and analyze site traffic and lead generation by evaluating completed guest cards from rental prospects who visit the websites in connection with posted vacancies.

Features include search engine optimized content, integrations with leading 3D tour providers, professional photography sourcing, and logo creation.

Our Premium Leads functionality allow customers to upgrade property listings to premium status and syndicate them to dozens of pay-to-list websites, including featured placement on many sites.

Customers also receive advance call tracking and pay only for the verified leads they receive through the Value+ service.

Our Artificial Intelligence Leasing Assistant works 24/7 as part of a customers' leasing team to provide tailored text message or email responses to rental prospects in real-time, and leverages integrated reporting to track leasing performance with accurate data to drive increased occupancy rates and operational efficiency.

Our Tenant Screening Services include background screening, credit checks, and income verification for use in connection with the rental application process.

In addition to obtaining an applicant's credit history, property managers have the option of leveraging an automated nationwide eviction and criminal records search, as well as accessing and/or contributing to rental payments history data, to better identify qualified tenants and reduce risk.

Through wholly-owned subsidiaries, we offer two insurance options, Liability to Landlord Insurance and Renters Insurance , that can be tailored to help property managers protect their properties and meet renters’ needs.

Our accounting features include Electronic Payment Services that allow property managers to streamline their payables and receivables through a variety of online payment options.

Customers can collect funds through a secure online portal, mobile application and via electronic cash payments from various users, including:

rental application fees, security deposits, rent payments and other tenant charges;

contributions from property owners;

and periodic dues from those living in community associations.

Customers can also electronically send funds to various users, including:

distributions to property owners;

payments to service providers;

and payment to their own management company.

Customers can also use our automated accounts payable solution to automate their accounts payable and expense recording process with smart bill entry, powered in part by artificial intelligence technology.

Through partnerships and wholly-owned subsidiaries, we make available two insurance options, Liability to Landlord Insurance and Renters Insurance , that can be tailored to help property managers protect their properties and meet renters’ needs.

Property managers can instantly enroll residents in liability to landlord insurance, which offers owners and investors increased protection against tenant-caused damage.

Renters have the option of purchasing renters insurance through an online portal to protect their personal belongings, as well as the property itself, from certain unexpected damages.

Our Maintenance Contact Center is built into our customers APM maintenance workflow and is staffed 24/7/365 by trained agents, each acting as an extension of our property management customers’ teams to resolve or route incoming maintenance requests.

With our Utility Management functionality, our customers are able to automate utility bill processing and resident billing, and manage utility-related operating and capital expenditures.

Our Maintenance Contact Center functionality is built into our customers maintenance workflow and is staffed 24/7/365 by trained agents, each acting as an extension of our property management customers’ teams to resolve or route incoming maintenance requests.

Contact center agents are able to enter non-emergency work orders directly into APM’s property maintenance software for a property manager’s approval, and to dispatch vendors immediately in case of an emergency.

Premium Leads allow customers to upgrade property listings to premium status and syndicate them to dozens of pay-to-list websites, including featured placement on many sites.

Customers also receive advance call tracking and pay only for the verified leads they receive through the Value+ service.

With Tenant Debt Collections , our customers can electronically send past due tenant debt from their APM database to a national fully-licensed third party debt collection agency to attempt to recover uncollected revenue.

With our Tenant Debt Collections functionality, our customers can electronically send past due tenant debt from their APM database to a national fully-licensed third party debt collection agency to attempt to recover uncollected revenue.

This Value+ service also includes reporting unpaid balances to three major credit bureaus.

With Utility Management , our customers are able to automate utility bill processing and resident billing, and manage utility-related operating and capital expenditures.

Our AI Leasing Assistant , Lisa, works 24/7 as part of the leasing team to provide tailored text message or email responses to prospective renters in real-time, and leverages integrated reporting to track leasing performance with accurate data to drive increased occupancy rates and operational efficiency.

AppFolio Investment Management - Core Solution

AppFolio Investment Management is a cloud-based software solution for real estate investment managers of various sizes providing innovative tools and services designed to streamline their real estate investment management businesses.

With our Mailing Services functionality, our customers with community association units can streamline the mailing of required home owner association documentation.

Investment Management Market

In April 2019, we launched AppFolio Investment Management, which is designed to enable real estate investment managers to better manage their investor relationships by increasing transparency and streamlining certain business processes.

AppFolio Investment Management - Core Solutions

AppFolio Investment Management is a cloud-based software solution for real estate investment managers of various sizes that provides innovative tools and services designed to streamline their real estate investment management businesses.

Core functionality addresses key operational issues, including management of investor relationships by increasing transparency and streamlining communications with key stakeholders.

Seasonality in Real Estate

We experience limited seasonality in our Value+ services revenue, primarily with respect to certain leasing-related services we provide to our property management customers, including our tenant screening services and new tenant applications which

impact electronic payment services revenue.

Our property management customers historically have processed fewer applications for new tenants during the fourth quarter.

As a result of this seasonal decline in activity, we have typically experienced overall slower sequential revenue growth or a sequential decline in revenue in the fourth quarter of each of our most recent fiscal years.

We expect this seasonality to continue in the foreseeable future.

We entered the legal market with the acquisition of MyCase in 2012.

In 2013, we introduced website design and hosting services, our first Value+ service for our legal market customers, designed to assist small law firms with the marketing of their practices, electronic storage of case information and communications.

In 2016, we launched electronic payments services for the legal market, which streamlined the billing and receivables process through MyCase.

Similar to our offerings in the real estate market, our software solutions and Value+ services in the legal market are subject to strict legal, regulatory and other requirements.

AppFolio Investment Management - Value+ Solutions

We deliver and maintain professionally designed and architected Websites tailored to fit our customers’ businesses.

Investment managers can track and analyze site traffic and lead generation.

Features include search engine optimized content and logo creation.

Regulatory Environment

Our software, services, and data analytics are subject to certain legal, regulatory and other requirements.

These laws are complex and evolving.

federal and state laws govern many of our business activities, including, without limitation, the processing of payments, tenant screening, the sale and solicitation of insurance, and handling of consumer information.

Despite our significant efforts to comply with all applicable requirements, there can be no guarantee that our efforts will be sufficient or that existing laws, rules or other requirements will not be interpreted, revised, augmented or rewritten in a way that adversely affects our regulated business activities, which comprise a significant majority of our overall business.

Please refer to Item 1A., "Risk Factors", for a more complete discussion of these and other risk-related issues.

Our Legal Solutions

MyCase - Core Solution

MyCase is a cloud-based software solution for the legal market that provides small law firms innovative tools and services designed to streamline their legal practice and manage their caseload.

MyCase core functionality addresses key operational issues, including managing calendars, contacts and documents, time tracking, billing and collections, communicating with clients and securely sharing sensitive and privileged materials.

MyCase is continuously evolving to help our customers more effectively market, manage and grow their firms.

MyCase - Value+ Services

In addition to our core solution for MyCase, we offer the following optional Value+ services to our legal customers.

We deliver and maintain professionally designed and architected Websites that practitioners and their clients can utilize to access case and matter information, communicate internally and externally, and manage bills.

Our websites are fully-integrated with the MyCase platform and designed to improve the effectiveness of law firm marketing, streamline daily business tasks, and increase mobile presence.

Our Electronic Payment Services allow practitioners to streamline billing and receivables online.

Our customers can quickly and conveniently bill their clients and receive payments electronically through MyCase's secure online portal.

Our Customers

We define our customer base as the number of customers paying for subscriptions to our core solutions.

No individual customer represented 10% or more of our total revenue for fiscal 2019 .

Over 90% of our annual revenue is derived from the software solutions, services and data analytics we offer to the real estate market.

The significant majority of our customers in the real estate market use our property management solutions.

We believe our customer-centric culture fosters a focus on customer satisfaction which leads to long-term customer retention and our long-term success.

We define customers as those paying for a subscription to our core solutions.

Our solutions and services are primarily used by our customers, and also by numerous other constituencies in the business ecosystems we serve.

In the property management market, these other constituencies include property owners, rental prospects, tenants, and service providers.

We generate a portion of our revenue from these users.

As of December 31, 2020, we had 15,724 property management customers.

As of December 31, 2019 , we also had 10,971 small law firm customers that directly and indirectly account for less than 10% of our annual revenue.

No individual customer represented 10% or more of our total revenue for fiscal 2020.

Sales and Marketing

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We participate in and drive industry thought leadership and education with both online and offline activities, and we use a variety of inbound and outbound marketing techniques to promote our business software solutions, services and data analytics.

Our real estate business development team acts in partnership with our marketing and sales teams to reach potential customers and generate sales opportunities and speed the time from evaluation to close.

Our real estate sales representatives assist prospective customers as they evaluate our software solutions.

Our interactive sales methodology allows our sales team to quickly build relationships, assess our customers’ business challenges, and demonstrate the benefits of our core functionality and Value+

Throughout the customer relationship, we continue to promote adoption and usage of our Value+ services through a variety of channels, including email, webinars, training, sales outreach and from within our software solution via in-app messaging.

Our business development team acts in partnership with our marketing and sales teams to reach potential customers, generate sales opportunities and accelerate the time from evaluation to close.

Our sales representatives assist prospective customers as they evaluate our software solutions.

Our interactive sales methodology allows our sales team to quickly build relationships, assess our customers’ business challenges, and demonstrate the benefits of our core functionality and, where applicable, Value+ services.

Throughout the customer relationship, we continue to promote adoption and usage of our Value+ services by customers and users through a variety of channels, including email, webinars, training, sales outreach and from within our software solution via in-app messaging.

As we serve larger and more complex real estate customers, we have invested in additional headcount to manage and grow these customer relationships over time.

Prospective law firm customers either sign up for a free trial on a self-service basis or speak to our business development representatives or legal sales representatives as they evaluate our software solutions.

Customer Service

Our success is based on long-term customer retention, not a one-time sale, and we partner with our customers throughout the life of our relationship.

We design our software solutions to be simple and easy to implement, use and manage, and offer unlimited training and support at no extra charge.

We pride ourselves on being customer-centric and strive to educate our customers on the core functionality and Value+ services they can use to improve business efficiency and productivity.

Our onboarding team strives to ensure that customers are prepared to run their businesses on our platform and provide a seamless onboarding experience.

We believe our success is tied to long-term customer relationships, not a one-time sale.

We pride ourselves on being customer-centric and strive to educate our customers on the solutions and services capabilities they can use to improve business efficiency and productivity.

Our solutions are designed to be easy to use and manage, and we offer training and support at no extra charge.

Our dedicated onboarding team works to ensure that customers are prepared to run their businesses on our platform and provide a seamless onboarding experience.

As a result of our assistance with data migration matters, we are able to provide valuable insights into data integrity and work with our customers to help resolve any issues in their underlying business processes.

We also assist our customers with the configuration of our platform for particular property types or cases, as appropriate.

We provide a dedicated team throughout the onboarding process and beyond, and we share insights on best practices in both of our targeted verticals.

In addition, certain team members are focused on guiding our customers through the adoption and utilization of our Value+ services.

We also assist our customers with the configuration of our software solutions for particular property types or investment structures as appropriate.

We share insights on best practices for the markets we serve and dedicate resources to guide our customers through the adoption and utilization of our Value+ services.

Technology and Operations

Data Security and Availability

We use Ruby-on-Rails as our primary web application framework .

We take great care to keep these application frameworks and the rest of our software stack current in order to mitigate known security vulnerabilities.

Our software solutions run on a combination of both public and private cloud infrastructure across five distinct geographic U.S.

regions, consisting of both our own servers and Amazon’s Elastic Compute Cloud platform.

Our servers are located in state-of-the-art data centers operated by third-party service providers, including Amazon Web Services.

Physical security at these facilities includes a variety of access controls, including electronic keycards, pin codes, biometric hand scans and mantraps, and policing by high resolution, motion sensitive video surveillance.

These facilities provide redundant power and a system of heating, ventilating and air conditioning, as well as fire-threat detection and suppression.

In order to ensure that no data is ever lost and that customer requests can be satisfied, production assets are securely backed up to external environments.

Our operators monitor our systems to ensure high performance and availability and our architecture allows our operators significant flexibility in achieving these goals.

In particular, our operators have fine-grained control over the specific server and region on which each customer's data resides, and can easily move customer data between five geographic regions in order to avoid service disruption or to increase service performance.

Sensitive customer data is encrypted during transmission and before being written to disk, including passwords, Social Security, and tax identification numbers.

We regularly evaluate our Internet security, including through third-party penetration testing.

Our software solutions are powered by a highly scalable computing platform, and are designed with a strong focus on data security and availability.

We use Ruby-on-Rails as our primary web application framework, and we take great care to keep this application framework and the rest of our software stack current in order to mitigate known security vulnerabilities.

Our computing platform and cloud infrastructure are primarily powered by Amazon Web Service’ Elastic Compute Cloud (EC2) platform.

In order to ensure that data is not lost and that customer requests can be satisfied, production assets are securely replicated and regularly backed up to multiple geographic regions.

Our operators monitor our production infrastructure to ensure high performance and availability, and our architecture allows our operators significant flexibility in achieving these goals.

In particular, our operators have fine-grained control over the specific server and region on which each customer's data resides, and can move customer data between different geographic regions in order to avoid service disruption or to increase service performance.

Sensitive customer data, including passwords, Social Security, and tax identification numbers, is encrypted during transmission, and before being written to disk.

We regularly evaluate our product and infrastructure security, including through third-party penetration testing.

In addition, our software solutions allow our customers to define roles that provide different levels of access to users, allowing them to view and modify specific items depending on their role.

Supervisors can distribute work to on-site staff in a secure and controlled environment, while leadership retains visibility across the entire system.

Our customers may also elect to further secure their account through two-factor authentication.

Some sensitive customer actions require secondary verification via two-factor authentication, and any customer can enable two-factor authentication for logging into their account.

Notwithstanding the foregoing, there can be no assurance that the significant data security measures we employ will prevent malicious or unauthorized access to our systems and information.

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Research and Product Development

We entrust product design, development and testing to our team of engineers, who coordinate closely with our product management team to launch core functionality, products and Value+ services.

Our engineers are organized in small teams to foster agility and continued innovation in responding to the evolving needs of our customers.

We leverage a collaborative, team-based and test-driven approach to engineering in order to release new functionality frequently.

We believe that it is easier for our customers to adjust to continuous updates to our software solutions, which incrementally change and improve their user experience, than it is to adapt to infrequent, but more drastic upgrades.

We rely heavily on input from our customers and prospective customers in developing products that meet their needs and in anticipating developments in their respective industries.

We rely heavily on input from our customers and prospective customers in developing products that meet their needs and in anticipating developments in their businesses.

Our product management team leads our research and market validation efforts and provides guidance to management and our engineering team based on our collective domain expertise and in-depth knowledge and understanding of our customers.

As a result, our product management team engages regularly with customers, partners, and other industry participants, as well as our customer service and sales and marketing organizations.

Our product management team manages our development projects generally and serves to align separate functions within the company with a single strategic vision.

Nevertheless, the software industry in general, and our targeted markets in particular, are characterized by rapid technological advances, changing industry standards, evolving customer requirements and intense competition, and we cannot be certain that our research and product development strategies will be successful in each and every market we serve.

Please refer to Item 1A., "Risk Factors", for a more complete discussion of these and other risk-related issues.

Our Culture and Employees

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 hire quality individuals but also to nurture and develop our valuable human resources.

We believe in the strong team we have cultivated, particularly in our deep bench of leaders who continue to execute our strategic plans and encourage innovation across the organization.

We further believe that our company culture, driven by a dedication to the following six core values, provides us with a significant competitive advantage:

Simpler Is Better

Great, Innovative Products Are Key To A Great Business

Great People Make A Great Company

Listening To Customers Is In Our DNA

Small, Focused Teams Keep Us Agile

We Do The Right Thing Because It’s Good For Business

By recruiting people who are inspired by these values, focusing on building an outstanding culture and offering opportunities for professional and personal growth, AppFolio has been recognized as a Best Place to Work by Glassdoor 2020 and honored by Great Place to Work as Best Workplace for Women and Parents, Best Place to Work in Texas, and Best Small & Medium Workplace for 2019.

At December 31, 2019 , we had 1,240 employees, and we consider our relationship with them to be very good.

We also hire temporary employees and consultants, and we feel similarly about our relationships with them.

None of our employees is represented by a labor union or covered by a collective bargaining agreement.

We must continue to attract and retain highly qualified and motivated personnel across our organization to execute our growth plan and achieve our strategic objectives.

If we fail to do so, our business and operating results may suffer.

Please refer to Item 1A., "Risk Factors", for a more complete discussion of these and other risk-related issues.

Our Growth Strategy

We have managed, and plan to continue to manage, our business towards the achievement of long-term growth that we believe will positively impact long-term stockholder value, rather than the realization of short-term financial or business metrics, or short-term stockholder value.

Our growth strategy is to provide increasingly valuable business management software solutions, services and analytics to our customers and their key stakeholders.

The technology surrounding business management software solutions, services and analytics are constantly evolving, and our growth strategy is thus subject to a variety of risks and uncertainties.

Our product team manages our development projects generally and serves to align separate functions within the company with a single strategic vision.

We entrust product design, development and testing to our engineering and product teams, who coordinate closely to launch new capabilities and services.

Our engineers work in small teams generally aligned with specific customer segments or product capabilities to foster agility and continued innovation in responding to the evolving needs of our customers.

We leverage a collaborative, team-based and test-driven approach to engineering in order to release new capabilities frequently.

We believe that it is easier for our customers to adjust to continuous updates to our platform, which incrementally change and improve their user experience, than it is to adapt to infrequent, but more drastic upgrades.

The software industry in general is characterized by rapid technological advances, changing industry standards, evolving customer requirements and intense competition, and we cannot be certain that our research and product development strategies will be successful in every market we seek to serve.

Please refer to Item 1A., "Risk Factors", for a more complete discussion of these and other risk-related issues.

Notwithstanding those risks and uncertainties, key components of our growth strategy include:

Maintain Product and Technology Leadership.

We have made, and will continue to make, significant investments in research and new product development to expand our software solutions, services and data analytics capabilities as we deem appropriate in our target markets.

We intend to continue using our market validation techniques and close relationships with our customers as a key source of feedback to inform and direct our product roadmap.

We may also choose to acquire rather than build certain technology solutions, or to partner with third parties to deliver key functionality to serve our existing or prospective customers.

Keep Our Existing Customers Happy .

We believe customer success is essential to our long-term success.

We place significant emphasis on close relationships with our customers and on customer service to differentiate our software

solutions from competing products.

This emphasis will continue to be a critical component of our business strategy in the future.

We believe that maintaining our focus on our customers will drive product innovation, leading to greater adoption and utilization of our software solutions over time.

Expand Adoption and Use By Existing Customers .

We have made, and will continue to make, significant investments that expand our core functionality and/or add new Value+ services to meet the current and evolving needs and requirements of our customers and their key stakeholders.

We expect our customers will continue to use our technology to manage their businesses and increasingly adopt and use additional Value+ services.

Acquire New Customers .

We expect to grow our customer base with our sales and marketing programs, including evolving industry thought leadership and education, and the referral power of satisfied customers.

Enter New Adjacent Markets .

We expect to continue to evaluate and expand into adjacent markets based on our market validation strategy and target customer feedback in a manner consistent with our strategic plan.

We believe that, while we are continuously developing our software solutions within one market, we can apply certain relevant product enhancements and learnings from that market as we extend our platform into each successive adjacent market.

Expand into New Verticals.

We expect to continue to review potential opportunities to expand into additional vertical markets in a manner consistent with our strategic plan.

The overall market for business management software is global, highly competitive and continually evolving to respond to changes in technology, operational requirements, and ever-changing laws and regulations.

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• On-premise or cloud-based horizontal business management software providers that offer broad solutions across multiple verticals.

We also see competition from numerous cloud-based solutions providers that focus almost exclusively on one or more point solutions.

We also experience competition from numerous cloud-based solutions providers that focus almost exclusively on one or more point solutions.

For example, in the real estate vertical, we compete with payment solutions providers, listing services, tenant screening applications and specialists in lease forms.

In the legal vertical, we compete with time tracking, legal billing and payment services.

Continued consolidation among cloud-based solution providers could lead to significantly increased competition.

We believe the principal competitive factors in each of our vertical markets include the following:

Continued consolidation among cloud-based solution providers could significantly increase competition.

We believe the principal competitive factors include the following:

• breadth and depth of functionality in software solutions and applications;

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• ability to innovate and respond to customer needs rapidly;

▪ domain expertise with respect to our targeted verticals;

• domain expertise;

• ability to leverage a common technology platform and business strategy.

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We rely on a combination of patents, copyrights, trademarks, trade secrets, confidentiality procedures and contractual restrictions to establish and protect our proprietary rights in our core solutions and Value+ services.

At January 31, 2020, we had twelve issued United States patents that directly relate to our technology and expire between 2026 and 2033.

We hold eleven United States patents that directly relate to our technology and expire between 2026 and 2033.

We also maintain one issued United States patent that relates directly to web-based legal workflow software, which was exclusively licensed to MyCase, Inc.

in connection with our divestiture from the legal vertical in September 2020.

For additional details regarding our divestiture, see Note 1, Nature of Business and Note 3, Divestitures and Acquisitions of our Consolidated Financial Statements in this Annual Report.

We may pursue additional patent protection to the extent we believe it would be beneficial and cost effective.

We have registered “AppFolio” and "MyCase" and certain other marks as trademarks in the United States and several other jurisdictions.

We have registered “AppFolio” and certain other marks as trademarks in the United States and several other jurisdictions.

We have also acquired certain marks and filed trademark applications and renewals in the United States and certain other jurisdictions, and will pursue additional trademark registrations to the extent we believe it would be beneficial and cost effective.

We are the registered holder of a variety of domestic and international domain names that include “appfolioinc.com,” “appfolio.com,” “mycase.com” and similar variations.

We are the registered holder of a variety of domestic and international domain names that include “appfolioinc.com,” “appfolio.com,” “appfolioinvestmentmanagement.com” and similar variations.

We also license software from third parties for use in our solutions, including open source software and other software available on standard commercial terms.

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Despite our precautions, it may be possible for unauthorized third parties to copy our software solutions and use information that we regard as proprietary to create products and services that compete with ours.

Trends and Uncertainties Related to the COVID-19 Pandemic

The COVID-19 pandemic has created and may continue to create significant uncertainty and volatility in a wide variety of industries and markets, including the global real estate market, and has prompted many federal, state, local, and foreign governments to implement various lock-down measures in an attempt to contain the spread and mitigate the impact of the disease.

The initial implementation of such lock-down measures, and their re-introduction in response to a nation-wide resurgence of COVID-19 cases in late-2020, resulted in business closures, work stoppages, slowdowns and delays, work-from-home policies, travel restrictions and the cancellation or postponement of events.

Despite recent approval and initial distribution of vaccines, both the pandemic and the containment and mitigation measures have had and are likely to continue to have an adverse impact on the global and U.S.

economies, the severity and duration of which are uncertain.

It is likely that government stabilization efforts will only partially mitigate the consequences to the economy.

As such, both the pandemic and containment and mitigation measures may adversely affect our business, operations and financial condition by, among other things, reducing demand for our core solutions and/or Value+ services, impairing the productivity of our workforce, and reducing our access to capital.

The extent to which the COVID-19 pandemic will impact our business, financial conditions, and results of operations in the future is highly uncertain and will be affected by a number of factors.

These include the duration and extent of the pandemic, the duration and extent of imposed or recommended containment and mitigation measures, the extent, duration, and effective execution of government stabilization and recovery efforts, including those from the successful distribution of effective vaccines.

We currently expect the majority of our employees will continue working remotely at least through the second quarter of 2021.

Our workforce has continued to effectively develop and support our product and service offerings notwithstanding the current environment.

We take the health and welfare of our people very seriously, and have encouraged safe practices designed to stem the infection and spread of COVID-19 within our workforce and beyond and to maintain the mental health and well-being of our employees.

However, if the COVID-19 pandemic requires remote working conditions for a prolonged period of time, it could have an adverse impact on the productivity of our employees, which would harm our business and impede our ability to achieve our strategic plan.

For example, certain of our employees with younger children have been required to respond to ongoing school closures and adapt to a distance learning environment, and may be required to continue to do so for the foreseeable future.

Further, we have a limited history of remote work and the long-term impact on, and the resulting types of continuing investments necessary for, our employee base is uncertain.

Moreover, the COVID-19 pandemic may have long-term effects on the nature of the office environment and remote working.

This may present operational and workplace culture challenges that may adversely affect our business.

However, we are committed to our employees returning to the workplace in the long-term, and have recently constructed a new office space in Santa Barbara, California, extended the lease for our office in Richardson, Texas and are seeking new office space to lease in San Diego, California to accommodate our employees' return to the workplace in the future.

We began fiscal year 2020 with healthy demand for our products and services, many of which are designed to enable our customers to manage their businesses virtually.

During the twelve months ended December 31, 2020, we experienced some variability in demand for certain Value+ services after lock-down measures were implemented.

We expect demand variability for our products and services could continue as a result of the COVID-19 pandemic, although it is presently unclear whether the cumulative impacts will be positive or negative.

For example, the economic downturn resulting from the COVID-19 pandemic caused an increase in residential rental defaults and deferrals.

Together with eviction moratoriums in some jurisdictions, this adversely affected the rental income of certain customers.

Although the impact has not been material to date, a prolonged downturn in economic conditions could have a material adverse effect on our customers and demand for our services.

We continue to actively communicate with and listen to our customers to best ensure that we are responding to their needs in the current environment with innovative solutions that will not only be beneficial now but also over the long-term as well.

However, our ability to interact with customers has been impacted by the current environment.

We believe that our inability to meet in-person with current or prospective customers, as well as the cancellation or postponement of Company-sponsored events or third-party events at which our products are featured, may have a negative impact on our business.

We continue to monitor developments related to COVID-19 and remain flexible in our response to the challenges presented by the pandemic.

To mitigate the adverse impact COVID-19 may have on our business and operations, we have implemented a number of measures to protect the health and safety of our employees, as well as to strengthen our financial position.

These efforts include eliminating, reducing, or deferring non-essential expenditures, as well as complying with local and state government recommendations to protect our workforce.

The impact of the COVID-19 pandemic may also exacerbate other risks discussed in this Annual Report.

Refer to Item 1A.

"Risk Factors" in this Annual Report for a complete description of the material risks that we currently face.

Corporate Information

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References to our website address in this Annual Report are inactive textual references only.

“AppFolio,” “MyCase,” the AppFolio logo, the MyCase logo, and other trademarks and trade names of AppFolio and MyCase appearing in this Annual Report are our property.

“AppFolio,” the AppFolio logo, , and other trademarks and trade names of AppFolio appearing in this Annual Report are our property.

All other trademarks or trade names appearing in this report are the property of their respective owners.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business