Item 1. Business
ITEM 1. BUSINESS
Unless otherwise stated in this Annual Report, references to "AppFolio," "we," "us," and "our" refer to AppFolio, Inc. and its consolidated subsidiaries.
Overview
Founded in 2006, AppFolio 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 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 today requires powerful software solutions.
AppFolio solutions are designed to meet that need in the real estate industry. We help our customers navigate an increasingly interconnected and growing network of stakeholders in their business ecosystems, including property owners, real estate investment managers, rental prospects, residents, and vendors, and provide key functionality related to critical transactions across the real estate lifecycle, including screening potential tenants, sending and receiving payments and providing insurance-related risk mitigation services. AppFolio’s intuitive interface, streamlined workflows, and artificial intelligence ("AI") powered automation services 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.
Our platform, which is designed for use across multiple devices and operating systems, is (i) a system of record to centralize and automate essential business processes, (ii) a system of engagement to enhance business interactions between our customers and their network of stakeholders, and (iii) a system of intelligence to leverage data to predict and optimize business workflows in order to enable exceptional customer experiences and increase efficiency across our customers' businesses. Our solutions are offered as a service, and are hosted using a public cloud service provider.
We rely on strategic partners and third-party service providers to deliver certain aspects of our solutions, and strive to provide a seamlessly integrated experience for our customers and their stakeholders. We believe our customer-centric culture drives a focus on customer satisfaction that leads to long-term retention and, ultimately, to our long-term success.
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Our Core Solutions
Our Platform
AppFolio provides a cloud-based platform on which our customers operate their businesses, leveraging process automation and optimized workflows. The platform is enhanced with AppFolio Realm, a suite of AI-powered tools that assist with Leasing, Maintenance and Accounting and that includes generative AI to answer questions, perform tasks and automate common workflows. The platform also includes AppFolio Stack, our partner ecosystem that allows customers to connect our platform with specialized technology and services offered by third parties. The platform is frequently updated to provide new innovations and respond to market trends and customer needs.
AppFolio Property Manager Core
AppFolio Property Manager Core provides the basic functionality required to operate a property management business. Centered on accounting, AppFolio Property Manager Core serves as our customers’ system of record. All critical transactions are completed and recorded in the system, giving our customers access to the data they need. It also serves as their system of engagement as they interact with key stakeholders in their business ecosystem, including residents living at their properties, owners and investors owning those properties, and vendors providing products and services to the properties. Both aspects of the system are inherently interconnected so that day-to-day interactions, such as residents paying rent through the AppFolio Property Manager mobile app, are instantly reflected in the system of record. AppFolio Property Manager Core is best suited for small property management companies that need a system that is comprehensive yet easy to use.
AppFolio Property Manager Plus
AppFolio Property Manager Plus includes the functionality of AppFolio Property Manager Core and adds an expanded set of functionalities designed to meet the needs of more complex, growing property management businesses. This includes support for affordable housing management, student housing management, more complex accounting needs, deeper leasing insights, bulk actions to support larger scale operations, role-based permissions to allow managing a larger team, Stack integrations to extend our platform's functionality, and enhanced customer support.
AppFolio Property Manager Max
AppFolio Property Manager Max includes the functionality of AppFolio Property Manager Plus and adds functionality designed to meet the needs of even larger property management businesses. This includes an end-to-end leasing funnel with built-in Customer Relationship Management ("CRM") functionality, increased customization with user-defined fields, full access to the customer database through an application programming interface, and dedicated customer success management.
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Value Added Services
AppFolio Property Manager offers Value Added Services that supplement our core services and are often mission-critical for enhancing, automating and streamlining business-critical processes and workflows. These 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. We strive for a seamless experience for our customers that increases their efficiency while not sacrificing ease of use, whether services are offered by AppFolio or by a third-party partner. Utilization and adoption of our Value Added 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 empower our customers and their network of stakeholders with a wide variety of Value Added Services, primarily:
• Payments. Our electronic payment services allow property managers to streamline their receivables and payables through a variety of online payment options. Property managers can collect funds through our secure online portal, our mobile application and/or via electronic cash payments from various stakeholders, including applicants, residents, vendors, and property owners. Types of funds that may be collected include rental application fees, security deposits, rent payments, and other tenant charges; contributions from property owners; and periodic dues from those living in community associations. Property managers can also electronically send funds to various stakeholders, including property owners, vendors, and even to their own management company.
• Screening. Our tenant screening services include background screening, credit checks, income verification, and a streamlined rental history verification process for use in connection with the rental application process.
• Risk Mitigation. Through our FolioGuard™ brand, we offer risk mitigation products for residents and property managers. FolioGuard Smart Ensure is a software tool that allows property management customers to enforce insurance coverage requirements within their leases by tracking coverage of their units and adding uncovered units to a qualifying liability to landlord insurance policy via a licensed insurance broker. FolioGuard Renters Insurance provided by AppFolio Insurance Services, Inc., a wholly-owned subsidiary of AppFolio, protects the personal belongings of renters, as well as the property itself, from certain unexpected damages.
We experience some seasonality in our Value Added Services revenue. See Item 7, " Management's Discussion and Analysis of Financial Condition and Results of Operations " for additional details regarding seasonality of revenue.
Our Growth Strategy
Our growth strategy involves providing valuable business management solutions to new and existing customers in the real estate industry. Our goal is to leverage our growing footprint to expand our share of the property management industry segment. Key components of our near and extended term growth strategy include:
Differentiate to Win. We will strive to continue to create a differentiated product experience that solves customer needs and creates new revenue streams for AppFolio. Advanced technologies, such as Realm and its generative AI capabilities, are designed to unlock increased productivity and efficiency gains for customers. Continued innovation in onboarding tools, processes, and workflows are designed to remove barriers for customers to switch to AppFolio, while accelerating use and adoption. Through new, complementary products and services, our goal is to extend value throughout the property technology ecosystem, for both property managers and residents.
Unlock Upmarket Customers. We will continue to focus on attracting larger operators with complex and diversified property portfolios, who derive value from managing their entire portfolio on a single platform. Through our AppFolio Stack marketplace, we extend the value of our platform by integrating with external partners who offer a diversified suite of everyday services.
Elevate the Customer. We believe our growing customer base needs differentiated service experiences that are easy, and accessible. We will focus the efforts of our customer-facing teams on driving use and adoption of our products and services, helping customers to achieve success on our platform. We will gain leverage in our service experience through self-service and automation, as well as through our solution partners who will enable us to quickly expand the AppFolio service offering. Additionally, we will empower our customers and their networks of stakeholders through the continued development and adoption of Value Added Services in such areas as payments, screening, and risk mitigation .
Scale the Business. We strive to operate with high efficiency across our organization. We will continue our efforts to efficiently and effectively scale our capabilities, processes, and systems to adapt and grow with our business, and continually align the value of our offerings to the size, scale, and complexity of our customers, while upholding a rigorous standard of privacy, protection, compliance, and ethics.
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Great People and Culture. Our goal is to empower AppFolio employees to deliver exceptional value for customers and shareholders through continuous innovation, excellence, and meaningful work. We will continue to streamline our people processes, programs, and systems to fuel high performance. We believe fostering a connected and inclusive workplace is fundamental to AppFolio’s success.
Our Customers
We define customers as those paying for a subscription to our core solutions. As of December 31, 2023, we had 19,737 property management customers.
Customer Service
We believe our success is tied to long-term customer relationships, not a one-time sale. Our team is structured to deliver continuous service; this includes ongoing live and on-demand training, a library of resources, and personalized account management. We regularly measure our Net Promoter Score and solicit customer feedback in a variety of ways in an effort to continue to better serve our customers. We utilize a tiered engagement model to align the value we deliver with the value we capture from our customers, including add-on offerings such as tailored training and certification programs.
Onboarding consists of a dedicated team that works to ensure that customers are prepared to run their businesses on our platform. 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 products for particular property types, 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 Added Services.
Sales and Marketing
We leverage a modern and scalable marketing approach along with marketing automation technology to attract and engage prospects and build brand recognition as an industry leader. We participate in industry thought leadership and education, and we use a variety of inbound and outbound marketing techniques to promote AppFolio solutions.
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 products. 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 Added Services.
Technology and Operations
Our products are powered by a highly scalable computing platform and are designed with a strong focus on data security and availability. We take great care to keep our 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 Services 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.
We monitor our production infrastructure to ensure high performance and availability, and our architecture allows our operators significant flexibility in achieving these goals. In particular, we have fine-grained control over the specific server and region on which each customer's data resides, and can move such data between different geographic regions in order to avoid service disruption or to increase service performance.
All sensitive data in our systems, including passwords, Social Security numbers, 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 products 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 staff in a secure and controlled environment, while leadership retains visibility across the entire system. Some sensitive customer actions require secondary verification via two-factor authentication, and any customer can enable two-factor authentication for logging into their account.
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Research and Product Development
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. We perform research and market validation efforts to guide our product roadmap. 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 to adapt to infrequent, but more drastic, upgrades.
Competition
The overall market for business management solutions in the real estate and other industries is global, highly competitive, and continually evolving to respond to changes in technology, operational requirements, and ever-changing laws and regulations. We believe our competitors primarily fall into the following categories:
• On-premise or cloud-based vertical real estate business management service providers that serve companies of all sizes in our markets; and
• On-premise or cloud-based horizontal business management service providers that offer broad solutions across multiple industries.
We also experience competition from numerous cloud-based solution providers that focus almost exclusively on one or more point solutions in the real estate industry or in other industries. Continued consolidation among cloud-based point solution providers could significantly increase competition.
Some of our competitors may have greater financial, technical and other resources, greater name recognition and larger sales and marketing budgets; therefore, we may not always compare favorably with respect to some or all of the foregoing factors. Further, the barrier to entry for competition in one or more areas we serve may be low, which could lead to competition from new entrants who solve similar problems in different ways.
Intellectual Property
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 Added Services. We may pursue additional patent protection to the extent we believe it would be beneficial and cost-effective.
We control access to our proprietary technology by entering into confidentiality and invention assignment agreements with our employees and contractors, and confidentiality agreements with third parties. We also limit access to certain confidential information or trade secret information, including our source code, to those who have a need for such access. Despite our precautions, it may be possible for unauthorized third parties to copy our products and use information that we regard as proprietary to create products and services that compete with ours.
Human Capital
We believe our people are at the heart of our success and our customers' success. We drive our success by investing in our people, and cultivating an exceptional work destination where they want to be and stay. Our company culture, driven by the following six core values, fuels our purpose and results:
• Great people make a great company.
• Listening to customers is in our DNA.
• Innovation powers success.
• Simpler is better.
• Do the right thing; it’s good for business.
• Build trust every day.
As of December 31, 2023, we had 1,504 employees. We routinely engage temporary employees and consultants. We consider our relationships with our employees and consultants to be strong. To maintain this strong relationship and attract new talent, our human capital management efforts focus on the following initiatives:
Diversity, Equity, and Inclusion. Diversity is core to our values and, we believe, necessary to drive innovation and collective growth. Our commitment to diversity, equity and inclusion starts at the leadership level and cascades to our talented employees. Through employee-led resource groups, we strive to cultivate an environment where individual uniqueness is valued, fostering a sense of belonging. Our commitment to transparency, open communication, and regular listening forums ensures that every employee's voice is not only heard but actively contributes to our inclusive culture.
When we conducted a voluntary survey of our workforce in 2023, of those who elected to share, approximately 57% identified as men, 42% identified as women, and 1% identified as outside of the gender binary. Additionally, approximately
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63% identified as White, 14% identified as Asian, 11% identified as Hispanic or Latino, 7% identified as two or more races, 4% identified as Black, and less than 1% identified as American Indian, Alaska Native, Native Hawaiian or Pacific Islander.
Employee Development. We invest significant resources to develop the talent needed to remain at the forefront of innovation and make us an employer of choice. Employees throughout our organization have access to tailored training and learning programs designed both for our entire employee base as well as for distinct employee audiences. Our quarterly engagement survey provides a platform for employees to provide anonymous feedback directly to their managers and our executives.
Societal Impact. We create a culture of impact by striving to be a force for good for our customers, communities, and each other. We encourage employee volunteerism through our employee-led Give Back Committee and company-wide benefit of eight hours of paid volunteer time off annually. Our corporate philanthropy program “AppFolio Gives Back” supports housing affordability, an ongoing challenge in the real estate industry, through a combination of employee fundraising, team volunteering, and a corporate matching gift program.
Environmental Stewardship. We believe in a culture of environmental stewardship and strive to create environmentally friendly workplaces. We maintain sustainability requirements that all contractors who work in or around our buildings are required to follow. Examples of these requirements include recycling of all demolished or removed materials whenever possible, installation of energy efficient HVAC units, low power LED lighting and fixtures, and native, drought resistant landscaping.
Compensation and Benefits. We build a culture of high performance that recognizes and rewards those who deliver meaningful results. Our compensation and benefits programs support the wellness of our employees and their families so they feel they can live their best lives both at work and at home. Our competitive compensation packages may include base salary, commission or annual performance-based bonuses, and stock-based compensation. We also offer paid parental leave, paid sabbaticals, paid leave to care for family members, and access to fertility networks and discounts on fertility care. We review our programs periodically to ensure they remain competitive.
Health, Safety, and Wellness. We are committed to providing a safe workplace for our employees and assisting them in maintaining a healthy work-life balance. We regularly solicit feedback to assess the well-being and needs of our employees and offer resources focused on mental health and physical wellness. Our office locations are intentional spaces where we fuel innovation, collaboration, and celebrate successes together . We have also embraced a hybrid work model, where many of our employees work out of one of our offices several days a week and others work remotely.
Available Information
Copies of the reports, proxy statements and other information may also be obtained, free of charge, electronically through our corporate website, at www.appfolioinc.com, as soon as reasonably practical after we file such material with, or furnish it to, the SEC.