UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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x ☒ | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended September 30, 2017March 31, 2020
OR
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| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
Commission File Number 1-10485
TYLER TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
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TYLER TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
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DELAWAREDelaware | | 75-2303920 |
(State or other jurisdiction of incorporation or organization)
| | (I.R.S. employer identification no.)
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5101 TENNYSON PARKWAY | PLANO TEXAS | Texas | 75024 (Address
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(Address of principal executive offices) | (City) | (State) | (Zip code) (972) 713-3700
(Registrant’s telephone number, including area code)
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(972) 713-3700
(Registrant’s telephone number, including area code)
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Title of each class | Trading symbol | Name of each exchange on which registered |
COMMON STOCK, $0.01 PAR VALUE | TYL | New York Stock Exchange |
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 x☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer," "accelerated filer,” "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer | | x☒ | | Accelerated filer | | ☐ |
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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. | | | | | | ☐
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No x☒
The number of shares of common stock of registrant outstanding on October 24, 2017April 27, 2020 was 37,568,139.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
TYLER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
| | | | Three months ended September 30, | | Nine months ended September 30, | | | Three Months Ended March 31, | |
| | 2017 | | 2016 | | 2017 | | 2016 | | | 2020 | | 2019 | |
Revenues: | | | | | | | | | Revenues: | | | | | |
Software licenses and royalties | | $ | 19,842 |
| | $ | 19,930 |
| | $ | 55,172 |
| | $ | 54,331 |
| Software licenses and royalties | | $ | 18,737 | | | $ | 21,793 | | |
Subscriptions | | 44,840 |
| | 36,869 |
| | 125,889 |
| | 104,926 |
| Subscriptions | | 81,723 | | | 67,275 | | |
Software services | | 47,479 |
| | 44,738 |
| | 139,869 |
| | 133,208 |
| Software services | | 52,133 | | | 48,443 | | |
Maintenance | | 92,285 |
| | 83,000 |
| | 268,556 |
| | 237,775 |
| Maintenance | | 114,365 | | | 100,152 | | |
Appraisal services | | 6,290 |
| | 6,541 |
| | 19,268 |
| | 20,083 |
| Appraisal services | | 5,763 | | | 5,214 | | |
Hardware and other | | 3,410 |
| | 3,419 |
| | 14,057 |
| | 12,439 |
| Hardware and other | | 3,820 | | | 4,189 | | |
Total revenues | | 214,146 |
| | 194,497 |
|
| 622,811 |
|
| 562,762 |
| Total revenues | | 276,541 | | | 247,066 | | |
| | | | | | | | | | | | | |
Cost of revenues: | | | | | | | | | Cost of revenues: | | | | | |
Software licenses and royalties | | 826 |
| | 623 |
| | 2,204 |
| | 1,927 |
| Software licenses and royalties | | 740 | | | 818 | | |
Acquired software | | 5,473 |
| | 5,598 |
| | 16,243 |
| | 16,737 |
| Acquired software | | 8,027 | | | 6,682 | | |
Software services, maintenance and subscriptions | | 98,036 |
| | 88,623 |
| | 287,748 |
| | 260,610 |
| Software services, maintenance and subscriptions | | 131,779 | | | 117,160 | | |
Appraisal services | | 4,089 |
| | 4,053 |
| | 12,568 |
| | 12,473 |
| Appraisal services | | 4,385 | | | 3,452 | | |
Hardware and other | | 2,293 |
| | 2,120 |
| | 10,408 |
| | 8,481 |
| Hardware and other | | 2,479 | | | 2,906 | | |
Total cost of revenues | | 110,717 |
| | 101,017 |
| | 329,171 |
| | 300,228 |
| Total cost of revenues | | 147,410 | | | 131,018 | | |
| | | | | | | | | | | | | |
Gross profit | | 103,429 |
| | 93,480 |
| | 293,640 |
| | 262,534 |
| Gross profit | | 129,131 | | | 116,048 | | |
| | | | | | | | | | |
Selling, general and administrative expenses | | 44,656 |
| | 42,007 |
| | 131,249 |
| | 124,998 |
| Selling, general and administrative expenses | | 67,485 | | | 57,766 | | |
Research and development expense | | 11,834 |
| | 11,070 |
| | 35,307 |
| | 31,362 |
| Research and development expense | | 22,361 | | | 18,941 | | |
Amortization of customer and trade name intangibles | | 3,492 |
| | 3,458 |
| | 10,413 |
| | 10,273 |
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Amortization of other intangibles | | Amortization of other intangibles | | 5,392 | | | 4,850 | | |
| | | | | | | | | | | | | |
Operating income | | 43,447 |
| | 36,945 |
| | 116,671 |
| | 95,901 |
| Operating income | | 33,893 | | | 34,491 | | |
| | | | | | | | | | |
Other income (expense), net | | 75 |
| | (526 | ) | | (216 | ) | | (1,713 | ) | |
Other income, net | | Other income, net | | 990 | | | 586 | | |
Income before income taxes | | 43,522 |
| | 36,419 |
| | 116,455 |
| | 94,188 |
| Income before income taxes | | 34,883 | | | 35,077 | | |
Income tax provision | | 5,259 |
| | 989 |
| | 14,308 |
| | 15,527 |
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Income tax (benefit) provision | | Income tax (benefit) provision | | (12,667) | | | 7,729 | | |
Net income | | $ | 38,263 |
| | $ | 35,430 |
| | $ | 102,147 |
| | $ | 78,661 |
| Net income | | $ | 47,550 | | | $ | 27,348 | | |
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Earnings per common share: | | | | | | | | | Earnings per common share: | | | | | |
Basic | | $ | 1.02 |
| | $ | 0.97 |
| | $ | 2.74 |
| | $ | 2.16 |
| Basic | | $ | 1.20 | | | $ | 0.71 | | |
Diluted | | $ | 0.97 |
| | $ | 0.91 |
| | $ | 2.60 |
| | $ | 2.02 |
| Diluted | | $ | 1.16 | | | $ | 0.69 | | |
See accompanying notes.
TYLER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and share amounts)
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| | September 30, 2017 (unaudited) | | December 31, 2016 |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 124,603 |
| | $ | 36,151 |
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Accounts receivable (less allowance for losses of $4,491 in 2017 and $3,396 in 2016) | | 206,444 |
| | 200,334 |
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Short-term investments | | 39,911 |
| | 20,273 |
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Prepaid expenses | | 23,219 |
| | 21,039 |
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Income tax receivable | | 3,362 |
| | 2,895 |
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Other current assets | | 2,182 |
| | 2,268 |
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Total current assets | | 399,721 |
| | 282,960 |
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Accounts receivable, long-term | | 3,867 |
| | 2,480 |
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Property and equipment, net | | 149,142 |
| | 124,268 |
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Other assets: | | | | |
Goodwill | | 655,068 |
| | 650,237 |
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Other intangibles, net | | 245,520 |
| | 267,259 |
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Non-current investments and other assets | | 39,800 |
| | 30,741 |
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Total assets | | $ | 1,493,118 |
| | $ | 1,357,945 |
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LIABILITIES AND SHAREHOLDERS' EQUITY | | | | |
Current liabilities: | | | | |
Accounts payable | | $ | 4,563 |
| | $ | 7,295 |
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Accrued liabilities | | 57,583 |
| | 55,989 |
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Deferred revenue | | 297,163 |
| | 298,217 |
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Total current liabilities | | 359,309 |
| | 361,501 |
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Revolving line of credit | | — |
| | 10,000 |
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Deferred revenue, long-term | | 1,468 |
| | 2,140 |
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Deferred income taxes | | 54,563 |
| | 68,779 |
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Commitments and contingencies | |
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Shareholders' equity: | | | | |
Preferred stock, $10.00 par value; 1,000,000 shares authorized; none issued | | — |
| | — |
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Common stock, $0.01 par value; 100,000,000 shares authorized; 48,147,969 shares issued and outstanding as of September 30, 2017 and December 31, 2016 | | 481 |
| | 481 |
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Additional paid-in capital | | 604,324 |
| | 556,663 |
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Accumulated other comprehensive loss, net of tax | | (46 | ) | | (46 | ) |
Retained earnings | | 538,023 |
| | 435,876 |
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Treasury stock, at cost; 10,596,386 and 11,381,733 shares in 2017 and 2016, respectively | | (65,004 | ) | | (77,449 | ) |
Total shareholders' equity | | 1,077,778 |
| | 915,525 |
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Total liabilities and shareholders' equity | | $ | 1,493,118 |
| | $ | 1,357,945 |
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| | | | | | | | | | | | | | |
| | March 31, 2020 (unaudited) | | December 31, 2019 |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 301,985 | | | $ | 232,682 | |
Accounts receivable (less allowance for losses and sales adjustments of $6,470 in 2020 and $5,738 in 2019) | | 318,144 | | | 374,089 | |
Short-term investments | | 38,250 | | | 39,399 | |
Prepaid expenses | | 33,964 | | | 24,717 | |
Income tax receivable | | 16,657 | | | 6,482 | |
Other current assets | | 3,220 | | | 2,328 | |
Total current assets | | 712,220 | | | 679,697 | |
| | | | |
Accounts receivable, long-term | | 21,394 | | | 22,432 | |
Operating lease right-of-use assets | | 17,992 | | | 18,992 | |
Property and equipment, net | | 175,460 | | | 171,861 | |
Other assets: | | | | |
Goodwill | | 840,028 | | | 840,117 | |
Other intangibles, net | | 366,506 | | | 378,914 | |
Non-current investments and other assets | | 85,776 | | | 79,601 | |
Total assets | | $ | 2,219,376 | | | $ | 2,191,614 | |
| | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | |
Current liabilities: | | | | |
Accounts payable | | $ | 12,958 | | | $ | 14,977 | |
Accrued liabilities | | 59,765 | | | 75,234 | |
Operating lease liabilities | | 6,373 | | | 6,387 | |
Current income tax payable | | — | | | — | |
Deferred revenue | | 365,959 | | | 412,495 | |
| | | | |
Total current liabilities | | 445,055 | | | 509,093 | |
| | | | |
Revolving line of credit | | — | | | — | |
Deferred revenue, long-term | | 167 | | | 199 | |
Deferred income taxes | | 45,774 | | | 48,442 | |
Operating lease liabilities, long-term | | 15,548 | | | 16,822 | |
| | | | |
Commitments and contingencies | | — | | | — | |
| | | | |
Shareholders' equity: | | | | |
Preferred stock, $10.00 par value; 1,000,000 shares authorized; NaN issued | | — | | | — | |
Common stock, $0.01 par value; 100,000,000 shares authorized; 48,147,969 shares issued and outstanding as of March 31, 2020 and December 31, 2019 | | 481 | | | 481 | |
Additional paid-in capital | | 798,089 | | | 739,478 | |
Accumulated other comprehensive loss, net of tax | | (46) | | | (46) | |
Retained earnings | | 964,886 | | | 917,336 | |
Treasury stock, at cost; 8,397,086 and 8,839,352 shares in 2020 and 2019, respectively | | (50,578) | | | (40,191) | |
Total shareholders' equity | | 1,712,832 | | | 1,617,058 | |
Total liabilities and shareholders' equity | | $ | 2,219,376 | | | $ | 2,191,614 | |
See accompanying notes.
TYLER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| | | | Nine months ended September 30, | | | Three Months Ended March 31, | |
| | 2017 | | 2016 | | | 2020 | | 2019 |
Cash flows from operating activities: | | | | | Cash flows from operating activities: | | | | |
Net income | | $ | 102,147 |
| | $ | 78,661 |
| Net income | | $ | 47,550 | | | $ | 27,348 | |
Adjustments to reconcile net income to cash provided by operations: | | | | | |
Adjustments to reconcile net income to cash provided by operating activities: | | Adjustments to reconcile net income to cash provided by operating activities: | |
Depreciation and amortization | | 40,096 |
| | 37,521 |
| Depreciation and amortization | | 19,985 | | | 17,308 | |
Share-based compensation expense | | 27,368 |
| | 21,348 |
| Share-based compensation expense | | 17,302 | | | 14,416 | |
| Operating lease right-of-use assets expense | | Operating lease right-of-use assets expense | | 1,457 | | | 1,165 | |
Deferred income tax benefit | | (14,216 | ) | | (11,289 | ) | Deferred income tax benefit | | (2,668) | | | (4,785) | |
Changes in operating assets and liabilities, exclusive of effects of acquired companies: | | | | | Changes in operating assets and liabilities, exclusive of effects of acquired companies: | |
Accounts receivable | | (7,097 | ) | | (14,641 | ) | Accounts receivable | | 56,982 | | | 9,622 | |
Income taxes | | (467 | ) | | 1,769 |
| |
Income tax receivable | | Income tax receivable | | (10,175) | | | 12,425 | |
Prepaid expenses and other current assets | | (2,706 | ) | | 1,169 |
| Prepaid expenses and other current assets | | (11,186) | | | (3,862) | |
Accounts payable | | (2,733 | ) | | (917 | ) | Accounts payable | | (2,020) | | | (1,501) | |
Operating lease liabilities | | Operating lease liabilities | | (1,743) | | | (1,272) | |
Accrued liabilities | | 1,318 |
| | 8,515 |
| Accrued liabilities | | (12,210) | | | (3,760) | |
Deferred revenue | | (1,329 | ) | | 17,918 |
| Deferred revenue | | (46,568) | | | (43,147) | |
Net cash provided by operating activities | | 142,381 |
| | 140,054 |
| Net cash provided by operating activities | | 56,706 | | | 23,957 | |
| | | | | | | | |
Cash flows from investing activities: | | | | | Cash flows from investing activities: | | | | |
Additions to property and equipment | | (37,734 | ) | | (29,529 | ) | Additions to property and equipment | | (9,349) | | | (12,320) | |
Purchase of marketable security investments | | (49,905 | ) | | (13,127 | ) | Purchase of marketable security investments | | (27,271) | | | (3,590) | |
Proceeds from marketable security investments | | 21,175 |
| | 9,256 |
| Proceeds from marketable security investments | | 18,237 | | | 20,276 | |
Purchase of investment in common shares | | Purchase of investment in common shares | | (10,000) | | | — | |
Proceeds from the sale of investment in preferred shares | | Proceeds from the sale of investment in preferred shares | | 15,000 | | | — | |
Investment in software | | Investment in software | | (1,315) | | | (690) | |
Cost of acquisitions, net of cash acquired | | (9,761 | ) | | (9,394 | ) | Cost of acquisitions, net of cash acquired | | (261) | | | (199,130) | |
Decrease (increase) in other | | 418 |
| | (52 | ) | |
(Increase) decrease in other | | (Increase) decrease in other | | (48) | | | 564 | |
Net cash used by investing activities | | (75,807 | ) | | (42,846 | ) | Net cash used by investing activities | | (15,007) | | | (194,890) | |
| | | | | | | | |
Cash flows from financing activities: | | | | | Cash flows from financing activities: | | | | |
Decrease in net borrowings on revolving line of credit | | (10,000 | ) | | (32,000 | ) | |
Increase in net borrowings on revolving line of credit | | Increase in net borrowings on revolving line of credit | | — | | | 85,000 | |
Purchase of treasury shares | | (7,032 | ) | | (94,499 | ) | Purchase of treasury shares | | (15,482) | | | (17,786) | |
Payment of contingent consideration | | Payment of contingent consideration | | (5,619) | | | — | |
Proceeds from exercise of stock options | | 33,568 |
| | 15,089 |
| Proceeds from exercise of stock options | | 46,236 | | | 6,528 | |
Contributions from employee stock purchase plan | | 5,342 |
| | 4,429 |
| Contributions from employee stock purchase plan | | 2,469 | | | 2,349 | |
Net cash provided (used) by financing activities | | 21,878 |
| | (106,981 | ) | |
Net cash provided by financing activities | | Net cash provided by financing activities | | 27,604 | | | 76,091 | |
| | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | 88,452 |
| | (9,773 | ) | Net increase (decrease) in cash and cash equivalents | | 69,303 | | | (94,842) | |
Cash and cash equivalents at beginning of period | | 36,151 |
| | 33,087 |
| Cash and cash equivalents at beginning of period | | 232,682 | | | 134,279 | |
Cash and cash equivalents at end of period | | $ | 124,603 |
| | $ | 23,314 |
| Cash and cash equivalents at end of period | | $ | 301,985 | | | $ | 39,437 | |
See accompanying notes.
TYLER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Treasury Stock | | | | Total Shareholders' Equity |
| Shares | | Amount | | | | | | | | Shares | | Amount | | |
Balance at December 31, 2019 | 48,148 | | | $ | 481 | | | $ | 739,478 | | | $ | (46) | | | $ | 917,336 | | | (8,839) | | | $ | (40,191) | | | $ | 1,617,058 | |
Net income | — | | | — | | | — | | | — | | | 47,550 | | | — | | | — | | | 47,550 | |
Exercise of stock options and vesting of restricted stock units | — | | | — | | | 38,942 | | | — | | | — | | | 498 | | | 7,294 | | | 46,236 | |
Employee taxes paid for withheld shares upon equity award settlement | — | | | — | | | — | | | — | | | — | | | (7) | | | (2,301) | | | (2,301) | |
Stock compensation | — | | | — | | | 17,302 | | | — | | | — | | | — | | | — | | | 17,302 | |
Issuance of shares pursuant to employee stock purchase plan | — | | | — | | | 2,367 | | | — | | | — | | | 10 | | | 102 | | | 2,469 | |
Treasury stock purchases | — | | | — | | | — | | | — | | | — | | | (59) | | | (15,482) | | | (15,482) | |
Balance at March 31, 2020 | 48,148 | | | $ | 481 | | | $ | 798,089 | | | $ | (46) | | | $ | 964,886 | | | (8,397) | | | $ | (50,578) | | | $ | 1,712,832 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Treasury Stock | | | | Total Shareholders' Equity |
| Shares | | Amount | | | | | | | | Shares | | Amount | | |
Balance at December 31, 2018 | 48,148 | | | $ | 481 | | | $ | 731,435 | | | $ | (46) | | | $ | 771,925 | | | (9,872) | | | $ | (178,949) | | | $ | 1,324,846 | |
Retained earnings adjustment-adoption of Topic 842 Leases, net of taxes | — | | | — | | | — | | | — | | | (1,116) | | | — | | | — | | | (1,116) | |
Net income | — | | | — | | | — | | | — | | | 27,348 | | | — | | | — | | | 27,348 | |
Exercise of stock options and vesting of restricted stock units | — | | | — | | | (14,405) | | | — | | | — | | | 111 | | | 20,933 | | | 6,528 | |
Employee taxes paid for withheld shares for taxes upon equity award | — | | | — | | | — | | | — | | | — | | | (7) | | | (1,337) | | | (1,337) | |
Stock compensation | — | | | — | | | 14,416 | | | — | | | — | | | — | | | — | | | 14,416 | |
Issuance of shares pursuant to employee stock purchase plan | — | | | — | | | (373) | | | — | | | — | | | 15 | | | 2,722 | | | 2,349 | |
Treasury stock purchases | — | | | — | | | — | | | — | | | — | | | (72) | | | (14,289) | | | (14,289) | |
Balance at March 31, 2019 | 48,148 | | | $ | 481 | | | $ | 731,073 | | | $ | (46) | | | $ | 798,157 | | | (9,825) | | | $ | (170,920) | | | $ | 1,358,745 | |
Tyler Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Tables in thousands, except per share data)
(1) Basis of Presentation
We prepared the accompanying condensed consolidated financial statements following the requirements of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States, or GAAP, for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted for interim periods. Balance sheet amounts are as of September 30, 2017,March 31, 2020, and December 31, 2016,2019, and operating result amounts are for the three and nine months ended September 30, 2017,March 31, 2020, and 2016,2019, respectively, and include all normal and recurring adjustments that we considered necessary for the fair summarized presentation of our financial position and operating results. As these are condensed financial statements, one should also read the financial statements and notes included in our latest Form 10-K for the year ended December 31, 2016.2019. Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year. Certain amounts for the previous year have been reclassified to conform to the current year presentation.
Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions, and other events and circumstances from non-owner sources and includes all components of net income (loss) and other comprehensive income (loss). We had no items of other comprehensive income (loss) for the three and nine months ended September 30, 2017March 31, 2020, and 2016.2019.
Certain amounts
(2) Accounting Standards and Significant Accounting Policies
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Except for the previousaccounting policies for ASU 2016-13, Financial Instruments - Credit Losses, (“ASU 2016-13”), there have been no changes to our significant accounting policies described in the Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 19, 2020, that have had a material impact on our condensed consolidated financial statements and related notes.
Impact of the COVID-19 Pandemic
In March 2020, the World Health Organization declared the outbreak of COVID -19 a pandemic, which continues to spread throughout the U.S. and the world and has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. While we are unable to accurately predict the full impact that COVID-19 will have on our results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and containment measures and associated compliance, we do expect the current environment will negatively impact our revenues and other financial results for fiscal 2020. However, for the first quarter of 2020, we did not experience a material negative impact on our financial results associated with the pandemic.
Because an increasing portion of our revenues are recurring, the effect of COVID-19 on our results of operations may also not be fully reflected for some time. We expect to see some impact on our business in the near term, with possible delays in government procurement processes and delays in implementations caused by travel restrictions, closed offices, or clients shifting focus to more pressing issues. We are working to address those challenges through adapting the way we do business – encouraging web and video conferencing, conducting sales demonstrations and delivering professional services remotely.
Our priorities during this crisis are protecting the health and safety of our employees and our clients. Our IT systems and applications support a remote workforce. Prior to the pandemic, many of our employees worked remotely. In response to the pandemic, we encouraged all employees who are able to do so to work from home, equipping them with resources necessary to continue uninterrupted. We were able to transition the vast majority of our employees to this work-from-home posture. This reduces the number of team members in our offices to those uniquely needed for essential on-site services, such as network operations support staff, and allows for “social distancing” as directed by the Centers for Disease Control ("CDC").
The pandemic has delayed some government procurement processes and is expected to impact our ability to complete certain implementations, negatively impacting our revenue. It could also negatively impact the timing of client payments to us.We continue to monitor these trends in order to respond to the ever-changing impact of COVID-19 on our clients and Tyler’s operations.
Recurring revenues, from subscriptions and maintenance revenues, for the three months ended March 31, 2020, comprise 71% of our total consolidated revenue, and include newer transaction-based revenue streams such as e-filing and online payments. As of March 31, 2020, we had $392.6 million in cash and investments and 0 outstanding borrowings under our credit facility. We also have substantial additional liquidity available through our undrawn $400.0 million credit facility, which can be expanded through an accordion feature. For the first quarter of 2020, the negative impact of the COVID-19 pandemic was not material to our operating results. No asset impairments were recorded as of the balance sheet date as no triggering events or changes in circumstances occurred as of period-end to require such an impairment; however, due to significant uncertainty surrounding the pandemic, management’s judgment regarding this could change in the future.
USE OF ESTIMATES
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include revenue recognition, determining the nature and timing of satisfaction of performance obligations, determining the standalone selling price ("SSP") of performance obligations, variable consideration, and other obligations such as returns and refunds; loss contingencies; the estimated useful life of deferred commissions; the carrying amount and estimated useful lives of intangible assets; the carrying amount of operating lease right-of-use assets and operating lease liabilities; determining share-based compensation expense; the valuation allowance for receivables; and determining the potential outcome of future tax consequences of events that have been recognized on our consolidated financial statements or tax returns. Actual results could differ from estimates.
REVENUE RECOGNITION
Nature of Products and Services:
We earn revenue from software licenses, royalties, subscription-based services, software services, post-contract customer support (“PCS” or “maintenance”), hardware, and appraisal services. Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We determine revenue recognition through the following steps:
•Identification of the contract, or contracts with a customer
•Identification of the performance obligations in the contract
•Determination of the transaction price
•Allocation of the transaction price to the performance obligations in the contract
•Recognition of revenue when, or as, we satisfy a performance obligation
Most of our software arrangements with customers contain multiple performance obligations that range from software licenses, installation, training, and consulting to software modification and customization to meet specific customer needs (services), hosting, and PCS. For these contracts, we account for individual performance obligations separately when they are distinct. We evaluate whether separate performance obligations can be distinct or should be accounted for as one performance obligation. Arrangements that include software services, such as training or installation, are evaluated to determine whether the customer can benefit from the services either on their own or together with other resources readily available to the customer and whether the services are separately identifiable from other promises in the contract. The transaction price is allocated to the distinct performance obligations on a relative SSP basis. We determine the SSP based on our overall pricing objectives, taking into consideration market conditions and other factors, including the value of our contracts, the applications sold, customer demographics, and the number and types of users within our contracts. Revenue is recognized net of allowances for sales adjustments and any taxes collected from customers, which are subsequently remitted to governmental authorities.
Significant Judgments:
Our contracts with customers often include multiple performance obligations to a customer. When a software arrangement (license or subscription) includes both software licenses and software services, judgment is required to determine whether the software license is considered distinct and accounted for separately, or not distinct and accounted for together with the software services and recognized over time.
The transaction price is allocated to the separate performance obligations on a relative SSP basis. We determine the SSP based on our overall pricing objectives, taking into consideration market conditions and other factors, including the value of our contracts, the applications sold, customer demographics, and the number and types of users within our contracts.We use a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there is a discount to be allocated based on the relative SSP of the various products and services. In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine SSP using the expected cost-plus margin approach.
For arrangements that involve significant production, modification or customization of the software, or where software services otherwise cannot be considered distinct, we recognize revenue as control is transferred to the customer over time using progress-to-completion methods. Depending on the contract, we measure progress-to-completion primarily using labor hours incurred, or value added. The progress-to-completion method generally results in the recognition of reasonably consistent profit margins over the life of a contract because we can provide reasonably dependable estimates of contract billings and contract costs. We use the level of profit margin that is most likely to occur on a contract. If the most likely profit margin cannot be precisely determined, the lowest probable level of profit margin in the range of estimates is used until the results can be estimated more precisely. These arrangements are often implemented over an extended time period and occasionally require us to revise total cost estimates. Amounts recognized in revenue are calculated using the progress-to-completion measurement after giving effect to any changes in our cost estimates. Changes to total estimated contract costs, if any, are recorded in the period they are determined. Estimated losses on uncompleted contracts are recorded in the period in which we first determine that a loss is apparent.
Typically, the structure of our arrangements does not give rise to variable consideration. However, in those instances whereby variable consideration exists, we include in our estimates additional revenue for variable consideration when we believe we have an enforceable right, the amount can be estimated reliably and its realization is probable.
Refer to Note 13 - "Disaggregation of Revenue" for further information, including the economic factors that affect the nature, amount, timing, and uncertainty of revenue and cash flows of our various revenue categories.
Contract Balances:
Accounts receivable and allowance for losses and sales adjustments
Timing of revenue recognition may differ from the timing of invoicing to customers. We record an unbilled receivable when revenue is recognized prior to invoicing, or deferred revenue when revenue is recognized subsequent to invoicing. For multi-year agreements, we generally invoice customers annually at the beginning of each annual coverage period. We record an unbilled receivable related to revenue recognized for on-premises licenses as we have an unconditional right to invoice and receive payment in the future related to those licenses.
At March 31, 2020, and December 31, 2019, total current and long-term accounts receivable, net of allowance for losses and sales adjustments, was $339.5 million and $396.5 million, respectively. We have recorded unbilled receivables of $134.5 million and $134.0 million at March 31, 2020, and December 31, 2019, respectively. Included in unbilled receivables are retention receivables of $12.5 million and $13.1 million at March 31, 2020, and December 31, 2019, respectively, which become payable upon the completion of the contract or completion of our fieldwork and formal hearings. Unbilled receivables expected to be collected within one year have been reclassifiedincluded with accounts receivable, current portion in the accompanying condensed consolidated balance sheets. Unbilled receivables and retention receivables expected to conformbe collected past one year have been included with accounts receivable, long-term portion in the accompanying condensed consolidated balance sheets.
We maintain allowances for losses and sales adjustments, which losses are recorded against revenue at the time of the loss is incurred. Since most of our clients are domestic governmental entities, we rarely incur a loss resulting from the inability of a client to make required payments. Events or changes in circumstances that indicate the carrying amount for the allowances for losses and sales adjustments may require revision, include, but are not limited to, managing our client’s expectations regarding the scope of the services to be delivered and defects or errors in new versions or enhancements of our software products. Our allowance for losses and sales adjustments of $6.5 million at March 31, 2020, does not include provisions for credit losses. As of January 1, 2020, we adopted ASU 2016-13 Financial Instruments - Credit Losses and primarily evaluated our historical experience with credit losses related to trade and other receivables. Because we have not experienced any historical credit losses with the majority of our clients, we have no basis to record a reserve for credit losses as defined by the standard.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, (“ASU 2016-13”). ASU 2016-13 changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, available for-sale debt securities, held-to-maturity debt securities and loans, and requires entities to use a new forward-looking expected loss model that will result in the earlier recognition of an allowance for losses. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for a fiscal year beginning after December 15, 2018, including interim periods within that fiscal year. Entities apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. As of January 1, 2020, we adopted the new standard with no material impact of credit losses to our trade and other receivables, held-to-maturity debt securities and retained earnings included in our condensed consolidated financial statements.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Accounting for Income Taxes
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, ("ASU 2019-12") which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current year presentation.guidance to promote consistency among reporting entities. The new standard is effective for fiscal years beginning after December 15, 2020. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The Company does not expect adoption of this standard to have a material effect on the Company’s consolidated financial statements.
(2)(3) Acquisitions
On August 2, 2017,February 28, 2019, we acquired all of the capital stock of Digital Health Department,MP Holdings Parent, Inc. dba MicroPact ("DHD"MicroPact"), a company that provides environmental health software, offeringleading provider of commercial off-the-shelf solutions, including entellitrak®, a software-as-a-service (SaaS) solutionlow-code application development platform for case management and business process management used extensively in the public health compliance and inspections processes. The total purchase price, netsector. In the three months ended March 31, 2020, we paid $5.6 million in contingent consideration. As of debt assumed, was $3.9 million, of which $3.7 million was paid in cash and $0.2 million wasMarch 31, 2020, we have no contingent consideration accrued as of September 30, 2017.it relates to acquisitions completed in prior periods.
On May 30, 2017, we acquired all of the capital stock of Modria.com, Inc., a company that specializes in online dispute resolution for government and commercial entities. The total purchase price, net of debt assumed, was $7.0 million, of which $6.1 million was paid in cash and $0.9 million was accrued as of September 30, 2017.
As of September 30, 2017, the purchase price allocations for DHD and Modria.com are not yet complete. The preliminary estimates of fair value assumed at each acquisition date for intangibles, liabilities, deferred revenue, and related deferred taxes are subject to change as valuations are finalized. The impact of both acquisitions on our operating results is not material.
(3)(4) Shareholders’ Equity
The following table details activity in our common stock:
| | | | Nine months ended September 30, | | Three Months Ended March 31, | | | |
| | 2017 | | 2016 | | 2020 | | | 2019 | | | |
| | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | |
Purchases of treasury shares | | (42 | ) | | $ | (6,171 | ) | | (758 | ) | | $ | (94,499 | ) | Purchases of treasury shares | | (59) | | | $ | (15,482) | | | (72) | | | $ | (14,289) | | | |
Stock option exercises | | 787 |
| | 33,568 |
| | 564 |
| | 15,089 |
| Stock option exercises | | 481 | | | 46,236 | | | 94 | | | 6,564 | | | |
Employee stock plan purchases | | 40 |
| | 5,342 |
| | 34 |
| | 4,429 |
| Employee stock plan purchases | | 10 | | | 2,469 | | | 15 | | | 2,349 | | | |
Restricted stock units vested, net of withheld shares upon award settlement | | Restricted stock units vested, net of withheld shares upon award settlement | | 10 | | | $ | (2,301) | | | 10 | | | $ | (1,373) | | | |
As of September 30, 2017,March 31, 2020, we hadhave authorization from our board of directors to repurchase up to 2.02.6 million additional shares of Tylerour common stock.
(5) Deferred Commissions
(4)Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for initial contracts are deferred and then amortized commensurate with the recognition of associated revenue over a period of benefit that we have determined to be three to seven years. Deferred commissions were $30.9 million and $29.8 million as of March 31, 2020, and December 31, 2019, respectively. Amortization expense was $3.9 million for the three months ended March 31, 2020, and $3.8 million for the three months ended March 31, 2019. There were 0 indicators of impairment in relation to the costs capitalized for the periods presented. Deferred commissions have been included with prepaid expenses for the current portion and non-current other assets for the long-term portion in the accompanying condensed consolidated balance sheets. Amortization expense related to deferred commissions is included in Selling, general and administrative expenses in the accompanying condensed consolidated statements of income.
(6) Other Assets
As of September 30, 2017,March 31, 2020, we have $61.7$90.6 million in investment grade corporate and municipal bonds and asset backed securities with maturity dates ranging from 2017ranging through 2021.2023. We intend to hold these securitiesbonds to maturity and have classified them as such. We believe cost approximates fair value because of the relatively short duration of these investments. The fair values of these securities are considered Level II as they are based on inputs from quoted prices in markets that are not active or other observable market data. These investments are presented at amortized cost are included in short-termShort-term investments and non-currentNon-current investments and other assets.assets in the accompanying condensed consolidated balance sheets. As of March 31, 2020, we have an accrued interest receivable balance of $493,000 and is included in Account receivables, net. We do not measure an allowance for credit losses for accrued interest receivables. We record any losses within the maturity period of the investment and any write-offs to accrued interest receivables are recorded as a reduction to interest income in the period of the loss. During the three months ended March 31, 2020, we have recorded no credit losses. Interest income and amortization of discounts and premiums are included in Other income (expense), net in the accompanying condensed consolidated statements of income.
We have a $15.0During the three months ended March 31, 2020, we sold our $15 million investment in convertible preferred stock representing a 20% interest in Record Holdings Pty Limited ("Record Holdings"), a privately held Australian company specializing in digitizing the spoken word in court and legal proceedings.proceedings, to BFTR, LLC, a wholly owned subsidiary of Bison Capital Partners V L.P. During the same period, we purchased $10 million in common stock representing a 18% interest in BFTR, LLC. The investment in convertible preferredcommon stock is accounted under the cost method because the Company doeswe do not have the ability to exercise significant influence over the investee and the securities do not have readily determinable fair values. Our investment is carried at cost less any impairment write-downs. Annually, the Company’sour cost method investments are assessed for impairment. The Company doesWe do not reassess the fair value of cost method investments if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investments. This investment is included in non-currentNon-current investments and other assets.assets in the accompanying condensed consolidated balance sheets.
(5)(7) Revolving Line of Credit
On November 16, 2015,September 30, 2019, we entered into a $300.0$400 million Credit Agreementcredit agreement with various lender parties and Wells Fargo Bank, National Association, as Administrative Agent (the “Credit Facility”). The Credit Facility provides for a revolving credit line up to $300.0$400 million, including a $10.0$25 million sublimit for letters of credit. The Credit Facility matures on November 16, 2020. Borrowings under the Credit Facility may be used for general corporate purposes, including working capital requirements, acquisitions and share repurchases.
September 30, 2024.
Borrowings under the Credit Facility bear interest at a rate of either (1) Wells Fargo Bank’s prime rate (subject to certain higher rate determinations) plus a margin of 0.25%0.125% to 1.00%0.75% or (2) the 30, 60, 90one-, two-, three-, or 180 daysix-month LIBOR rate plus a margin of 1.25%1.125% to 2.00%1.75%. As of September 30, 2017,March 31, 2020, the interest rates were 4.50%3.38% under the Wells Fargo Bank's prime rate and 2.49%approximately 2.12% under athe 30-day LIBOR contract. The Credit Facility is secured by substantially all of our assets.option. The Credit Facility requires us to maintain certain financial ratios and other financial conditions and prohibits us from making certain investments, advances, cash dividends or loans, and limits incurrence of additional indebtedness and liens. As of September 30, 2017,March 31, 2020, we were in compliance with those covenants.
As of September 30, 2017,March 31, 2020, we had no0 outstanding borrowings and two outstanding letters of credit totaling $2.2 million. Available borrowing capacity under the Credit Facility, and available borrowing capacity was $297.8$400.0 million.
(6)(8) Income Tax Provision
For the three and nine months ended September 30, 2017, weWe had an effective income tax ratesrate of 12.1% and 12.3%, respectively, compared to 2.7% and 16.5%negative 36.3% for the three and nine months ended September 30, 2016, respectively. March 31, 2020, compared to 22.0% for the three months ended March 31, 2019. The change in the effective tax rate for the three months ended March 31, 2020, as compared to the same period in 2019, was principally driven by an increase in the excess tax benefits related to stock incentive awards.
The effective income tax rates for the periods presented were different from the statutory United States federal income tax rate of 35% principally21% due to excess tax benefits related to stock option exercises.incentive awards, state income taxes, non-deductible business expenses, and the tax benefit of research tax credits. The excess tax benefits related to stock option exercisesincentive awards realized were $9.0 million and $27.6was $22.1 million for the three and nine months ended September 30, 2017, respectively,March 31, 2020, compared to $13.3 million and $20.8$1.7 million for the three and nine months ended September 30, 2016, respectively. The change in the effective income tax rates for the three and nine months ended September 30, 2017 as compared to the prior year periods is mainly due to the change in excess tax benefits related to stock option exercises realized.March 31, 2019. Excluding the excess tax benefits, the effective rates were 32.8% and 36.0%rate was 27.0% for the three and nine months ended September 30, 2017, respectively,March 31, 2020, compared to 39.3% and 38.5%26.8% for the three and nine months ended September 30, 2016, respectively. Other differences from our federal statutory income tax rate included state income taxes, non-deductible business expenses, tax credits, and the tax benefit of the domestic production activities deduction.March 31, 2019.
We made tax payments of $29.0 million$176,000 and $25.0 million$88,000 in the ninethree months ended September 30, 2017,March 31, 2020, and September 30, 2016,2019, respectively.
The Coronavirus Aid, Relief and Economic Security ("CARES") Act, which was signed into law on March 27, 2020, provides an estimated $2.2 trillion to fight the COVID-19 pandemic and stimulate the U.S. economy. The assistance includes tax relief and government loans, and investments and grants for entities in affected industries (e.g., health care, airlines). The business tax provisions of the CARES Act include temporary changes to income and non-income based tax laws, including the ability to utilize net operating losses, interest expense deductions, alternative minimum tax credit refunds, charitable contributions, and depreciation of qualified improvement property. Measures not related to income-based taxes include (1) allowing an employer to pay its share of Social Security payroll taxes that would otherwise be due from the date of enactment through December 31, 2020, over the following two years and (2) allowing eligible employers subject to closure due to the COVID-19 pandemic to receive a 50% credit on qualified wages against their employment taxes each quarter, with any excess credits eligible for refunds.
We evaluated the CARES Act provisions and the enactment resulted in no income tax adjustments. We do not believe that the income tax implications will be significant to our overall income tax liability.
(7)
(9) Earnings Per Share
The following table details the reconciliation of basic earnings per share to diluted earnings per share:
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three Months Ended March 31, | |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2020 | | 2019 | |
Numerator for basic and diluted earnings per share: | | | | | | | | | Numerator for basic and diluted earnings per share: | | | | | |
Net income | | $ | 38,263 |
| | $ | 35,430 |
| | $ | 102,147 |
| | $ | 78,661 |
| Net income | | $ | 47,550 | | | $ | 27,348 | | |
Denominator: | | |
| | |
| |
|
| |
|
| Denominator: | | | | | |
Weighted-average basic common shares outstanding | | 37,391 |
| | 36,433 |
| | 37,238 |
| | 36,438 |
| Weighted-average basic common shares outstanding | | 39,500 | | | 38,308 | | |
Assumed conversion of dilutive securities: | | | | | |
| |
| Assumed conversion of dilutive securities: | | | | | |
Stock options | | 1,951 |
| | 2,629 |
| | 2,028 |
| | 2,576 |
| |
Stock awards | | Stock awards | | 1,644 | | | 1,277 | | |
Denominator for diluted earnings per share - Adjusted weighted-average shares | | 39,342 |
| | 39,062 |
| | 39,266 |
| | 39,014 |
| Denominator for diluted earnings per share - Adjusted weighted-average shares | | 41,144 | | | 39,585 | | |
Earnings per common share: | | |
| | |
| |
|
| |
|
| Earnings per common share: | | | | | |
Basic | | $ | 1.02 |
| | $ | 0.97 |
| | $ | 2.74 |
| | $ | 2.16 |
| Basic | | $ | 1.20 | | | $ | 0.71 | | |
Diluted | | $ | 0.97 |
| | $ | 0.91 |
| | $ | 2.60 |
| | $ | 2.02 |
| Diluted | | $ | 1.16 | | | $ | 0.69 | | |
For the three and nine months ended September 30, 2017,March 31, 2020, and March 31, 2019, stock optionsawards representing the right to purchase common stock of approximately 1,499,00079,000 shares and 1,303,0001,253,000 shares, respectively, were not included in the computation of diluted earnings per share because their inclusion would have had an anti-dilutiveantidilutive effect. For
(10) Leases
We lease office facilities for use in our operations, as well as transportation and other equipment. Most of our leases are non-cancelable operating lease agreements and they expire from one year to eight years. Some of these leases include options to extend for up to 10 years. We had no finance leases and no related party lease agreements as of March 31, 2020. Operating lease costs were approximately $2.6 million for the three and nine months ended September 30, 2016, stock options representingMarch 31, 2020, and $2.1 million for the three months ended March 31, 2019.
The components of operating lease expense were as follows:
| | | | | | | | | | | | | | | | | | | | | |
Lease Costs | | Financial Statement Classification | | Three Months Ended March 31, | | | |
| | | | 2020 | | 2019 | |
Operating lease cost | | Selling, general and administrative expenses | | $ | 1,666 | | | $ | 1,370 | | |
Short-term lease cost | | Selling, general and administrative expenses | | 574 | | | 570 | | |
Variable lease cost | | Selling, general and administrative expenses | | 394 | | | 163 | | |
Net lease cost | | | | $ | 2,634 | | | $ | 2,103 | | |
As of March 31, 2020, Right-of-use ("ROU") lease assets and lease liabilities for our operating leases were recorded in the condensed consolidated balance sheet as follows:
| | | | | | | | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
Assets: | | | | |
Operating lease right-of-use assets | | $ | 17,992 | | | $ | 18,992 | |
Liabilities: | | | | |
Operating leases, short-term | | 6,373 | | | 6,387 | |
Operating leases, long-term | | 15,548 | | | 16,822 | |
Total lease liabilities | | $ | 21,921 | | | $ | 23,209 | |
Supplemental information related to leases was as follows:
| | | | | | | | | | | | | | |
Other Information | | Three Months Ended March 31, | | |
| | 2020 | | 2019 |
Cash flows: | | | | |
Cash paid amounts included in the measurement of lease liabilities: | | | | |
Operating cash outflows from operating leases | | $ | 1,873 | | | $ | 1,530 | |
| | | | |
Right-of-use assets obtained in exchange for lease obligations (non-cash): | | | | |
Operating leases | | $ | 457 | | | $ | 431 | |
| | | | |
Lease term and discount rate: | | | | |
Weighted average remaining lease term (years) | | 4 | | 5 |
Weighted average discount rate | | 4.00 | % | | 4.00 | % |
As of March 31, 2020, maturities of lease liabilities were as follows:
| | | | | | | | |
Year ending December 31, | | Amount |
2020 (Remaining 2020) | | $ | 5,845 | |
2021 | | 6,340 | |
2022 | | 4,021 | |
2023 | | 2,989 | |
2024 | | 2,545 | |
Thereafter | | 2,133 | |
Total lease payments | | 23,873 | |
Less: Interest | | (1,952) | |
Present value of operating lease liabilities | | $ | 21,921 | |
Rental Income from third parties
We own office buildings in Bangor, Falmouth and Yarmouth, Maine; Lubbock and Plano, Texas; Troy, Michigan; Latham, New York; and Moraine, Ohio. We lease space in some of these buildings to third-party tenants. The property we lease to others under operating leases consists primarily of specific facilities where one tenant obtains substantially all of the economic benefit from the asset and has the right to direct the use of the asset. These non-cancelable leases expire between 2020 and 2025, and some have options to extend the lease for up to five years. We determine if an arrangement is a lease at inception. None of our leases allow the lessee to purchase common stock of approximately 741,000 sharesthe leased asset.
Rental income from third-party tenants for the three months ended March 31, 2020, totaled $274,000 and 769,000 shares, respectively, were notfor the three months ended March 31, 2019, totaled $284,000. Rental income is included in Hardware and other revenue on the computationcondensed consolidated statements of diluted earnings per share because their inclusion would haveincome. Future minimum operating rental income based on contractual agreements is as follows:
| | | | | | | | |
Year ending December 31, | | Amount |
| | |
2020 (Remaining 2020) | | $ | 1,009 | |
2021 | | 1,372 | |
2022 | | 1,402 | |
2023 | | 1,432 | |
2024 | | 1,462 | |
Thereafter | | 857 | |
Total | | $ | 7,534 | |
As of March 31, 2020, we had an anti-dilutive effect. no additional significant operating or finance leases that had not yet commenced.
(8)(11) Share-Based Compensation
The following table summarizes share-based compensation expense related to share-based awards recorded in the condensed consolidated statements of income, pursuant to Accounting Standards Codification (“ASC”)ASC 718, Stock Compensation:Compensation:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | | | | | |
| | 2020 | | 2019 | | | | |
Cost of software services, maintenance and subscriptions | | $ | 4,252 | | | $ | 3,798 | | | | | |
Selling, general and administrative expenses | | 13,050 | | | 10,618 | | | | | |
Total share-based compensation expense | | $ | 17,302 | | | $ | 14,416 | | | | | |
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Cost of software services, maintenance and subscriptions | | $ | 2,524 |
| | $ | 1,779 |
| | $ | 6,874 |
| | $ | 4,668 |
|
Selling, general and administrative expenses | | 7,267 |
| | 5,877 |
| | 20,494 |
| | 16,680 |
|
Total share-based compensation expense | | $ | 9,791 |
| | $ | 7,656 |
| | $ | 27,368 |
| | $ | 21,348 |
|
(9)(12) Segment and Related Information
We provide integrated information management solutions and services for the public sector, with a focus on local governments.
We provide our software systems and services and appraisal services through four7 business units, which focus on the following products:
•financial management, education and planning, regulatory and maintenance software solutions;
•financial management, municipal courts, planning, regulatory and maintenance and land and vital records management software solutions;
•courts and justice and public safety software solutions;
•data and insights solutions;
•case management and business management solutions; and
•appraisal and tax software solutions, and property appraisal services.services and land and vital records management software solutions.
In accordance with ASC 280-10, Segment Reporting, the financial management, education and planning, regulatory and maintenance software solutions unit; financial management, municipal courts, planning, regulatory and maintenance, and land and vital records management software solutions unit; and the courts and justice and public safety software solutions unitunit; the data and insights solutions unit; and case management and business management solutions units meet the criteria for aggregation and are presented in one1 reportable segment, the Enterprise Software (“ES”) segment. The ES segment provides municipal and county governments and schoolspublic sector entities with software systems and services to meet their information technology and automation needs for mission-critical “back-office” functions.functions such as: financial management and education, courts and justice, public safety, planning, regulatory and maintenance, and data and insights. The Appraisal and Tax (“A&T”) segment provides systems and software that automate the appraisal and assessment of real and personal property, land and vital records management as well as property appraisal outsourcing services for local governments and taxing authorities. Property appraisal outsourcing services include: the physical inspection of commercial and residential properties; data collection and processing; computer analysis for property valuation; preparation of tax rolls; community education; and arbitration between taxpayers and the assessing jurisdiction.
We evaluate performance based on several factors, of which the primary financial measure is business segment operating income. We define segment operating income for our business units as income before non-cash amortization of intangible assets associated with their acquisitions, interest expense and income taxes. Segment operating income includes intercompany transactions. The majority of intercompany transactions relate to contracts involving more than one unit and are valued based on the contractual arrangement. Segment operating income for corporateCorporate primarily consists of compensation costs for the executive management team and certain accounting and administrative staff and share-based compensation expense for the entire company. Corporate segment operating income also includes revenues and expenses related to a company-wide user conference. Due to the shelter-in-place orders caused by the COVID pandemic, we cancelled our company-wide user conference for the current year.
As of January 1, 2020, the land and vital records management business unit, which was previously reported in the ES segment, was moved to the A&T segment. These changes were made to reflect changes in the way in which management makes operating decisions, allocates resources, and manages the growth and profitability of the Company. Prior year amounts for the ES and A&T segments have been adjusted to reflect the segment change.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
For the three months ended March 31, 2020 | | | | | | | | |
| | Enterprise Software | | Appraisal and Tax | | Corporate | | Totals |
Revenues | | | | | | | | |
Software licenses and royalties | | $ | 15,951 | | | $ | 2,786 | | | $ | — | | | $ | 18,737 | |
Subscriptions | | 76,644 | | | 5,079 | | | — | | | 81,723 | |
Software services | | 44,949 | | | 7,184 | | | — | | | 52,133 | |
Maintenance | | 104,841 | | | 9,524 | | | — | | | 114,365 | |
Appraisal services | | — | | | 5,763 | | | — | | | 5,763 | |
Hardware and other | | 3,791 | | | 27 | | | 2 | | | 3,820 | |
Intercompany | | 4,001 | | | 18 | | | (4,019) | | | — | |
Total revenues | | $ | 250,177 | | | $ | 30,381 | | | $ | (4,017) | | | $ | 276,541 | |
Segment operating income | | $ | 60,472 | | | $ | 6,908 | | | $ | (20,068) | | | $ | 47,312 | |
| | For the three months ended September 30, 2017 | | | | | | | | | |
For the three months ended March 31, 2019 | | For the three months ended March 31, 2019 | |
| | Enterprise Software | | Appraisal and Tax | | Corporate | | Totals | | Enterprise Software | | Appraisal and Tax | | Corporate | | Totals |
Revenues | | | | | | | | | Revenues | | | | | | | | |
Software licenses and royalties | | $ | 18,223 |
| | $ | 1,619 |
| | $ | — |
| | $ | 19,842 |
| Software licenses and royalties | | $ | 18,522 | | | $ | 3,271 | | | $ | — | | | $ | 21,793 | |
Subscriptions | | 42,826 |
| | 2,014 |
| | — |
| | 44,840 |
| Subscriptions | | 63,255 | | | 4,020 | | | — | | | 67,275 | |
Software services | | 42,295 |
| | 5,184 |
| | — |
| | 47,479 |
| Software services | | 40,456 | | | 7,987 | | | — | | | 48,443 | |
Maintenance | | 86,576 |
| | 5,709 |
| | — |
| | 92,285 |
| Maintenance | | 91,188 | | | 8,964 | | | — | | | 100,152 | |
Appraisal services | | — |
| | 6,290 |
| | — |
| | 6,290 |
| Appraisal services | | — | | | 5,214 | | | — | | | 5,214 | |
Hardware and other | | 3,412 |
| | — |
| | (2 | ) | | 3,410 |
| Hardware and other | | 4,130 | | | 62 | | | (3) | | | 4,189 | |
Intercompany | | 2,660 |
| | — |
| | (2,660 | ) | | — |
| Intercompany | | 3,484 | | | 69 | | | (3,553) | | | — | |
Total revenues | | $ | 195,992 |
| | $ | 20,816 |
| | $ | (2,662 | ) | | $ | 214,146 |
| Total revenues | | $ | 221,035 | | | $ | 29,587 | | | $ | (3,556) | | | $ | 247,066 | |
Segment operating income | | $ | 60,511 |
| | $ | 5,479 |
| | $ | (13,578 | ) | | $ | 52,412 |
| Segment operating income | | $ | 55,474 | | | $ | 7,095 | | | $ | (16,546) | | | $ | 46,023 | |
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | | | | | |
Reconciliation of reportable segment operating income to the Company's consolidated totals: | | 2020 | | 2019 | | | | |
Total segment operating income | | $ | 47,312 | | | $ | 46,023 | | | | | |
Amortization of acquired software | | (8,027) | | | (6,682) | | | | | |
Amortization of customer and trade name intangibles | | (5,392) | | | (4,850) | | | | | |
Other income, net | | 990 | | | 586 | | | | | |
Income before income taxes | | $ | 34,883 | | | $ | 35,077 | | | | | |
(13) Disaggregation of Revenue
The tables below show disaggregation of revenue into categories that reflect how economic factors affect the nature, amount, timing, and uncertainty of revenue and cash flows.
Timing of Revenue Recognition
Timing of revenue recognition by revenue category during the period is as follows:
| | | | | | | | | | | | | | | | | | | | |
For the three months ended March 31, 2020 | | | | | | |
| | Products and services transferred at a point in time | | Products and services transferred over time | | Total |
Revenues | | | | | | |
Software licenses and royalties | | $ | 16,066 | | | $ | 2,671 | | | $ | 18,737 | |
Subscriptions | | — | | | 81,723 | | | 81,723 | |
Software services | | — | | | 52,133 | | | 52,133 | |
Maintenance | | — | | | 114,365 | | | 114,365 | |
Appraisal services | | — | | | 5,763 | | | 5,763 | |
Hardware and other | | 3,820 | | | — | | | 3,820 | |
Total | | $ | 19,886 | | | $ | 256,655 | | | $ | 276,541 | |
|
| | | | | | | | | | | | | | | | |
For the nine months ended September 30, 2017 | | | | | | | | |
| | Enterprise Software | | Appraisal and Tax | | Corporate | | Totals |
Revenues | | | | | | | | |
Software licenses and royalties | | $ | 50,151 |
| | $ | 5,021 |
| | $ | — |
| | $ | 55,172 |
|
Subscriptions | | 120,191 |
| | 5,698 |
| | — |
| | 125,889 |
|
Software services | | 125,658 |
| | 14,211 |
| | — |
| | 139,869 |
|
Maintenance | | 253,048 |
| | 15,508 |
| | — |
| | 268,556 |
|
Appraisal services | | — |
| | 19,268 |
| | — |
| | 19,268 |
|
Hardware and other | | 9,435 |
| | — |
| | 4,622 |
| | 14,057 |
|
Intercompany | | 7,309 |
| | — |
| | (7,309 | ) | | — |
|
Total revenues | | $ | 565,792 |
| | $ | 59,706 |
| | $ | (2,687 | ) | | $ | 622,811 |
|
Segment operating income | | $ | 166,692 |
| | $ | 14,103 |
| | $ | (37,468 | ) | | $ | 143,327 |
|
| | | | | | | | | | | | | | | | | | | | |
For the three months ended March 31, 2019 | | | | | | |
| | Products and services transferred at a point in time | | Products and services transferred over time | | Total |
Revenues | | | | | | |
Software licenses and royalties | | $ | 16,910 | | | $ | 4,883 | | | $ | 21,793 | |
Subscriptions | | — | | | 67,275 | | | 67,275 | |
Software services | | — | | | 48,443 | | | 48,443 | |
Maintenance | | — | | | 100,152 | | | 100,152 | |
Appraisal services | | — | | | 5,214 | | | 5,214 | |
Hardware and other | | 4,189 | | | — | | | 4,189 | |
Total | | $ | 21,099 | | | $ | 225,967 | | | $ | 247,066 | |
Recurring Revenue
The majority of our revenue is comprised of recurring revenues from maintenance and subscriptions. Virtually all of our on-premises software clients contract with us for maintenance and support, which provides us with a significant source of recurring revenue. We generally provide maintenance and support for our on-premises clients under annual, or in some cases, multi-year contracts. The contract terms for subscription arrangements range from one to 10 years but are typically contracted for initial periods of three to five years, providing a significant source of recurring revenues on an annual basis. Non-recurring revenues are derived from all other revenue categories.
Recurring revenues and non-recurring revenues recognized during the period are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
For the three months ended March 31, 2020 | | | | | | | | |
| | Enterprise Software | | Appraisal and Tax | | Corporate | | Totals |
| | | | | | | | |
Recurring revenues | | $ | 181,485 | | | $ | 14,603 | | | $ | — | | | $ | 196,088 | |
Non-recurring revenues | | 64,691 | | | 15,760 | | | 2 | | | 80,453 | |
Intercompany | | 4,001 | | | 18 | | | (4,019) | | | — | |
Total revenues | | $ | 250,177 | | | $ | 30,381 | | | $ | (4,017) | | | $ | 276,541 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
For the three months ended March 31, 2019 | | | | | | | | |
| | Enterprise Software | | Appraisal and Tax | | Corporate | | Totals |
| | | | | | | | |
Recurring revenues | | $ | 154,443 | | | $ | 12,984 | | | $ | — | | | $ | 167,427 | |
Non-recurring revenues | | 63,108 | | | 16,534 | | | (3) | | | 79,639 | |
Intercompany | | 3,484 | | | 69 | | | (3,553) | | | — | |
Total revenues | | $ | 221,035 | | | $ | 29,587 | | | $ | (3,556) | | | $ | 247,066 | |
|
| | | | | | | | | | | | | | | | |
For the three months ended September 30, 2016 | | | | | | | | |
| | Enterprise Software | | Appraisal and Tax | | Corporate | | Totals |
Revenues | | | | | | | | |
Software licenses and royalties | | $ | 18,492 |
| | $ | 1,438 |
| | $ | — |
| | $ | 19,930 |
|
Subscriptions | | 35,169 |
| | 1,700 |
| | — |
| | 36,869 |
|
Software services | | 40,608 |
| | 4,130 |
| | — |
| | 44,738 |
|
Maintenance | | 78,292 |
| | 4,708 |
| | — |
| | 83,000 |
|
Appraisal services | | — |
| | 6,541 |
| | — |
| | 6,541 |
|
Hardware and other | | 3,428 |
| | — |
| | (9 | ) | | 3,419 |
|
Intercompany | | 1,971 |
| | — |
| | (1,971 | ) | | — |
|
Total revenues | | $ | 177,960 |
| | $ | 18,517 |
| | $ | (1,980 | ) | | $ | 194,497 |
|
Segment operating income | | $ | 52,372 |
| | $ | 4,713 |
| | $ | (11,084 | ) | | $ | 46,001 |
|
(14) Deferred Revenue and Performance Obligations
Total deferred revenue, including long-term, by segment is as follows:
| | | | | | | | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
Enterprise Software | | $ | 333,314 | | | $ | 375,838 | |
Appraisal and Tax | | 31,205 | | | 35,487 | |
Corporate | | 1,607 | | | 1,369 | |
Totals | | $ | 366,126 | | | $ | 412,694 | |
Changes in total deferred revenue, including long-term, were as follows:
| | | | | | | | |
| | Three months ended March 31, 2020 |
Balance as of December 31, 2019 | | $ | 412,694 | |
Deferral of revenue | | 198,324 | |
Recognition of deferred revenue | | (244,892) | |
| | |
| | |
| | |
| | |
| | |
Balance as of March 31, 2020 | | $ | 366,126 | |
Transaction Price Allocated to the Remaining Performance Obligations
The aggregate amount of transaction price allocated to the remaining performance obligations represents contracted revenue that has not yet been recognized ("backlog"), which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. Backlog as of March 31, 2020, was $1.50 billion, of which we expect to recognize approximately 48% as revenue over the next 12 months and the remainder thereafter.
|
| | | | | | | | | | | | | | | | |
For the nine months ended September 30, 2016 | | | | | | | | |
| | Enterprise Software | | Appraisal and Tax | | Corporate | | Totals |
Revenues | | | | | | | | |
Software licenses and royalties | | $ | 50,585 |
| | $ | 3,746 |
| | $ | — |
| | $ | 54,331 |
|
Subscriptions | | 99,470 |
| | 5,456 |
| | — |
| | 104,926 |
|
Software services | | 121,372 |
| | 11,836 |
| | — |
| | 133,208 |
|
Maintenance | | 223,802 |
| | 13,973 |
| | — |
| | 237,775 |
|
Appraisal services | | — |
| | 20,083 |
| | — |
| | 20,083 |
|
Hardware and other | | 9,406 |
| | 16 |
| | 3,017 |
| | 12,439 |
|
Intercompany | | 4,743 |
| | — |
| | (4,743 | ) | | — |
|
Total revenues | | $ | 509,378 |
| | $ | 55,110 |
| | $ | (1,726 | ) | | $ | 562,762 |
|
Segment operating income | | $ | 139,151 |
| | $ | 13,534 |
| | $ | (29,774 | ) | | $ | 122,911 |
|
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
Reconciliation of reportable segment operating income to the Company's consolidated totals: | | 2017 | | 2016 | | 2017 | | 2016 |
Total segment operating income | | $ | 52,412 |
| | $ | 46,001 |
| | $ | 143,327 |
| | $ | 122,911 |
|
Amortization of acquired software | | (5,473 | ) | | (5,598 | ) | | (16,243 | ) | | (16,737 | ) |
Amortization of customer and trade name intangibles | | (3,492 | ) | | (3,458 | ) | | (10,413 | ) | | (10,273 | ) |
Other expense, net | | 75 |
| | (526 | ) | | (216 | ) | | (1,713 | ) |
Income before income taxes | | $ | 43,522 |
| | $ | 36,419 |
| | $ | 116,455 |
| | $ | 94,188 |
|
(10)(15) Commitments and Contingencies
Other than routine litigation incidental to our business, there are no0 material legal proceedings pending to which we are party or to which any of our properties are subject.
(16) Subsequent Events
(11) New Accounting PronouncementsThere have been no material events and transactions that occurred subsequent to March 31, 2020.
Revenue from Contracts with Customers. On May 28, 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, “Revenue from Contracts with Customers.” This ASU is the result of a convergence project between the FASB and the International Accounting Standards Board. The core principle behind ASU No. 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for delivering those goods and services. This model involves a five-step process that includes identifying the contract with the customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations in the contract and recognizing revenue when (or as) the entity satisfies the performance obligations. The ASU allows two methods of adoption: a full retrospective approach where three years of financial information are presented in accordance with the new standard, and a modified retrospective approach where the ASU is applied to the most current period presented in the financial statements. We currently anticipate adopting the standard using the full retrospective method to restate each prior reporting period presented. Our ability to adopt using the full retrospective method is dependent on system readiness, including software procured from third-party providers, and the completion of our analysis of information necessary to restate prior period financial statements. The new standard requires application no later than annual reporting periods beginning after December 15, 2017, including interim reporting periods therein; however, public entities are permitted to elect to early adopt the new standard. We will adopt the new standard in fiscal year 2018.
We anticipate this standard will have a material impact on our consolidated financial statements. While we are continuing to assess all potential impacts of the standard, we currently believe the most significant impact relates to our accounting for software license fees and incremental cost of obtaining a contract. Specifically, under the new standard we expect software license fees under perpetual agreements will no longer be subject to 100% discount allocations from other elements in the contract. Discounts in arrangements will be allocated across all deliverables increasing license revenues and decreasing revenues allocated to other performance obligations. In addition, in most cases, net license fees (total license fees less any allocated discounts) will be recognized at the point in time that control of the software license transfers to the customer versus our current policy of recognizing revenue only to the extent billable per the contractual terms. Time-based license fees currently recognized over the license term will no longer be recognized over the period of the license and will instead be recognized at the point in time that control of the software license transfers to the customer. We expect revenue related to our software as a service (“SaaS”) offerings, post-contract customer support ("PCS") renewals and professional services to remain substantially unchanged. Due to the complexity of certain contracts, the actual revenue recognition treatment required under the standard will be dependent on contract-specific terms and may vary in some instances from recognition at the time of billing. Application of the new standard requires that incremental costs directly related to obtaining a contract (typically sales commissions plus any associated fringe benefits) must be recognized as an asset and expensed on a systematic basis that is consistent with the transfer to the customer of the goods and services to which the asset relates, unless that life is less than one year. Currently, we defer sales commissions and recognize expense over the relevant initial contractual term. With the adoption of the new standard, we expect amortization periods to extend past the initial term.
Leases. On February 25, 2016, the FASB issued its new lease accounting guidance in ASU No. 2016-02, “Leases (Topic 842).” Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date:
A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and
A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.
Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach.
The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods therein. Early application is permitted for all business entities upon issuance. We are assessing the financial impact of adopting the new standard; however, we are currently unable to provide a reasonable estimate regarding the financial impact. We expect to adopt the new standard in fiscal year 2019.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS
This document contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are not historical in nature and typically address future or anticipated events, trends, expectations or beliefs with respect to our financial condition, results of operations or business. Forward-looking statements often contain words such as “believes,” “expects,” “anticipates,” “foresees,” “forecasts,” “estimates,” “plans,” “intends,” “continues,” “may,” “will,” “should,” “projects,” “might,” “could” or other similar words or phrases. Similarly, statements that describe our business strategy, outlook, objectives, plans, intentions or goals also are forward-looking statements. We believe there is a reasonable basis for our forward-looking statements, but they are inherently subject to risks and uncertainties and actual results could differ materially from the expectations and beliefs reflected in the forward-looking statements. We presently consider the following to be among the important factors that could cause actual results to differ materially from our expectations and beliefs: (1) the effects of the COVID-19 pandemic, including its potential effects on the economic environment, our customers and our operations, as well as any changes to federal, state or local government laws, regulations or orders in connection with the pandemic; (2) changes in the budgets or regulatory environments of our clients, primarily local and state governments, that could negatively impact information technology spending; (2)(3) our ability to protect client information from security breaches and provide uninterrupted operations of data centers; (3)(4) our ability to achieve growth or operational synergies through the integration of acquired businesses, while avoiding unanticipated costs and disruptions to existing operations; (4)(5) material portions of our business require the Internet infrastructure to be adequately maintained; (5)(6) our ability to achieve our financial forecasts due to various factors, including project delays by our clients, reductions in transaction size, fewer transactions, delays in delivery of new products or releases or a decline in our renewal rates for service agreements; (6)(7) general economic, political and market conditions; (7)(8) technological and market risks associated with the development of new products or services or of new versions of existing or acquired products or services; (8)(9) competition in the industry in which we conduct business and the impact of competition on pricing, client retention and pressure for new products or services; (9)(10) the ability to attract and retain qualified personnel and dealing with the loss or retirement of key members of management or other key personnel; and (10)(11) costs of compliance and any failure to comply with government and stock exchange regulations. A detailed discussion of these factors and other risks that affect our business are described in Item 1A, “Risk Factors.” We expressly disclaim any obligation to publicly update or revise our forward-looking statements.
GENERAL
We provide integrated information management solutions and services for the public sector, with a focus on local governments. We develop and market a broad line of software products and services to address the IT needs of cities, counties, schools and other local governmentpublic sector entities. In addition, we provide professional IT services to our clients, including software and hardware installation, data conversion, training, and for certain clients, product modifications, along with continuing maintenance and support for clients using our systems. We also provide subscription-based services thatsuch as software as a service (“SaaS”), which primarily utilize the Tyler private cloud, such as e-filing,and electronic document filing solutions (“e-filing”), which simplifiessimplify the filing and management of court related documents. Revenues for e-filing are derived from transaction fees and, in some cases, fixed fee arrangements. Other transaction-based fees primarily relate to online payment services. We also provide property appraisal outsourcing services for taxing jurisdictions.
Our products generally automate sixseven major functional areas: (1) financial management and education, (2) courts and justice, (3) public safety (4) property appraisal and tax, (5) planning, regulatory and maintenance and (6) land and vital records management, (7) data and insights and (8) case management and business process management. We report our results in two segments. The Enterprise Software (“ES”) segment provides municipal and county governments and schoolspublic sector entities with software systems and services to meet their information technology and automation needs for mission-critical “back-office” functions.functions such as: financial management; courts and justice processes; public safety; planning, regulatory and maintenance; and data analytics. The Appraisal and Tax (“A&T”) segment provides systems and software that automate the appraisal and assessment of real and personal property, land and vital records management as well as property appraisal outsourcing services for local governments and taxing authorities. Property appraisal outsourcing services include: the physical inspection of commercial and residential properties; data collection and processing; computer analysis for property valuation; preparation of tax rolls; community education; and arbitration between taxpayers and the assessing jurisdiction.
As of January 1, 2020, the land and vital records management business unit, which was previously reported in the ES segment, was moved to the A&T segment. These changes were made to reflect changes in the way in which management makes operating decisions, allocates resources, and manages the growth and profitability of the Company. Prior year amounts for the ES and A&T segments have been adjusted to reflect the segment change.
Our total employee count increased to 4,0395,449 at September 30, 2017,March 31, 2020, from 3,7755,053 at September 30, 2016.March 31, 2019.
For the three months ended March 31, 2020, total revenues increased 11.9% compared to the prior year period.
Subscriptions revenue grew 21.5% for the three months ended March 31, 2020, due to an ongoing shift toward cloud-based, software as a service business, as well as continued growth in our e-filing revenues from courts. Excluding the impact of recent acquisitions, subscriptions revenue increased 18.3% for the three months ended March 31, 2020.
Our backlog at March 31, 2020, was $1.50 billion, a 19.2% increase from last year.
Impact of the COVID-19 Pandemic
In March 2020, the World Health Organization declared the outbreak of COVID -19 a pandemic, which continues to spread throughout the U.S. and the world and has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. While we are unable to accurately predict the full impact that COVID-19 will have on our results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and containment measures and associated compliance, we do expect the current environment will negatively impact our revenues and other financial results for fiscal 2020. However, for the first quarter of 2020, we did not experience a material negative impact on our financial results associated with the pandemic.
Because an increasing portion of our revenues are recurring, the effect of COVID-19 on our results of operations may also not be fully reflected for some time. We expect to see some impact on our business in the near term, with possible delays in government procurement processes and delays in implementations caused by travel restrictions, closed offices, or clients shifting focus to more pressing issues. We are working to address those challenges through adapting the way we do business – encouraging web and video conferencing, conducting sales demonstrations and delivering professional services remotely.
Our priorities during this crisis are protecting the health and safety of our employees and our clients. Our IT systems and applications support a remote workforce. Prior to the pandemic, many of our employees worked remotely. In response to the pandemic, we encouraged all employees who are able to do so to work from home, equipping them with resources necessary to continue uninterrupted. We were able to transition the vast majority of our employees to this work-from-home posture. This reduces the number of team members in our offices to those uniquely needed for essential on-site services, such as network operations support staff, and allows for “social distancing” as directed by the Centers for Disease Control ("CDC").
The pandemic has delayed some government procurement processes and is expected to impact our ability to complete certain implementations, negatively impacting our revenue. It could also negatively impact the timing of client payments to us.We continue to monitor these trends in order to respond to the ever-changing impact of COVID-19 on our clients and Tyler’s operations.
Recurring revenues, from subscriptions and maintenance revenues, for the three months ended March 31, 2020, comprise 71% of our total consolidated revenue, and include newer transaction-based revenue streams such as e-filing and online payments. As of March 31, 2020, we had $392.6 million in cash and investments and no outstanding borrowings under our credit facility. We also have substantial additional liquidity available through our undrawn $400.0 million credit facility, which can be expanded through an accordion feature. For the first quarter of 2020, the negative impact of the COVID-19 pandemic was not material to our operating results. No asset impairments were recorded as of the balance sheet date as no triggering events or changes in circumstances had occurred as of period-end to require such an impairment; however, due to significant uncertainty surrounding the situation, management’s judgment regarding this could change in the future.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements. These condensed consolidated financial statements have been prepared following the requirements of accounting principles generally accepted in the United States (“GAAP”) for the interim period and require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition and amortization and potential impairment of intangible assets and goodwill and share-based compensation expense. As these are condensed financial statements, one should also read expanded information about our critical accounting policies and estimates provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our Form 10-K for the year ended December 31, 2016. There2019. Except for the accounting policies for credit losses updated as a result of adopting ASU No. 2016-13 - Financial Instruments - Credit losses, there have been no material changes to our critical accounting policies and estimates from the information provided in our Form 10-K for the year ended December 31, 2016.2019.
ANALYSIS OF RESULTS OF OPERATIONS
|
| | | | | | | | | | | | |
| | Percent of Total Revenues |
| | Third Quarter | | Nine Months Ended |
| | 2017 | | 2016 | | 2017 | | 2016 |
Revenues: | | | | | | | | |
Software licenses and royalties | | 9.3 | % | | 10.2 | % | | 8.9 | % | | 9.7 | % |
Subscriptions | | 20.9 |
| | 19.0 |
| | 20.2 |
| | 18.6 |
|
Software services | | 22.2 |
| | 23.0 |
| | 22.5 |
| | 23.7 |
|
Maintenance | | 43.1 |
| | 42.7 |
| | 43.1 |
| | 42.3 |
|
Appraisal services | | 2.9 |
| | 3.4 |
| | 3.1 |
| | 3.5 |
|
Hardware and other | | 1.6 |
| | 1.7 |
| | 2.2 |
| | 2.2 |
|
Total revenues | | 100.0 |
| | 100.0 |
| | 100.0 |
| | 100.0 |
|
Cost of revenues: | | |
| | | | | | |
Software licenses, royalties and acquired software | | 2.9 |
| | 3.2 |
| | 3.0 |
| | 3.3 |
|
Software services, maintenance and subscriptions | | 45.8 |
| | 45.6 |
| | 46.2 |
| | 46.3 |
|
Appraisal services | | 1.9 |
| | 2.1 |
| | 2.0 |
| | 2.2 |
|
Hardware and other | | 1.1 |
| | 1.0 |
| | 1.7 |
| | 1.6 |
|
Selling, general and administrative expenses | | 20.9 |
| | 21.6 |
| | 21.1 |
| | 22.2 |
|
Research and development expense | | 5.5 |
| | 5.7 |
| | 5.7 |
| | 5.6 |
|
Amortization of customer and trade name intangibles | | 1.6 |
| | 1.8 |
| | 1.7 |
| | 1.8 |
|
Operating income | | 20.3 |
| | 19.0 |
| | 18.7 |
| | 17.0 |
|
Other (expense), net | | — |
| | (0.3 | ) | | — |
| | (0.3 | ) |
Income before income taxes | | 20.3 |
| | 18.7 |
| | 18.7 |
| | 16.7 |
|
Income tax provision | | 2.5 |
| | 0.5 |
| | 2.3 |
| | 2.8 |
|
Net income | | 17.8 | % | | 18.2 | % | | 16.4 | % | | 13.9 | % |
| | | | | | | | | | | | | | | | | | |
| | Percent of Total Revenues | | | | | | |
| | Three Months Ended | | | | | | |
| | 2020 | | 2019 | | | | |
Revenues: | | | | | | | | |
Software licenses and royalties | | 6.8 | % | | 8.8 | % | | | | |
Subscriptions | | 29.5 | | | 27.2 | | | | | |
Software services | | 18.8 | | | 19.6 | | | | | |
Maintenance | | 41.4 | | | 40.6 | | | | | |
Appraisal services | | 2.1 | | | 2.1 | | | | | |
Hardware and other | | 1.4 | | | 1.7 | | | | | |
Total revenues | | 100.0 | | | 100.0 | | | | | |
Cost of revenues: | | | | | | | | |
Software licenses, royalties and acquired software | | 3.2 | | | 3.0 | | | | | |
Software services, maintenance and subscriptions | | 47.7 | | | 47.4 | | | | | |
Appraisal services | | 1.6 | | | 1.4 | | | | | |
Hardware and other | | 0.9 | | | 1.2 | | | | | |
Selling, general and administrative expenses | | 24.4 | | | 23.4 | | | | | |
Research and development expense | | 8.1 | | | 7.7 | | | | | |
Amortization of customer and trade name intangibles | | 1.9 | | | 2.0 | | | | | |
Operating income | | 12.2 | | | 13.9 | | | | | |
Other income, net | | 0.4 | | | 0.2 | | | | | |
Income before income taxes | | 12.6 | | | 14.1 | | | | | |
Income tax (benefit) provision | | (4.6) | | | 3.1 | | | | | |
Net income | | 17.2 | % | | 11.0 | % | | | | |
Revenues
On February 28, 2019, we acquired all of the capital stock of MP Holdings Parent, Inc. dba MicroPact ("MicroPact"), a leading provider of commercial off-the-shelf solutions, including entellitrak®, a low-code application development platform for case management and business process management used extensively in the public sector. The following table details revenue for MicroPact for the quarter ended March 31, 2020 and 2019, respectively, which is included in our condensed consolidated statements of income from the date of acquisition:
| | | | | | | | | | | | | | |
| | Three Months Ended | | |
| | 2020 | | 2019 |
Revenues: | | | | |
Software licenses and royalties | | $ | 1,410 | | | $ | 714 | |
Subscriptions | | 2,488 | | | 630 | |
Software services | | 5,145 | | | 1,707 | |
Maintenance | | 9,645 | | | 2,392 | |
Appraisal services | | — | | | — | |
Hardware and other | | 18 | | | 13 | |
Total revenues | | $ | 18,706 | | | $ | 5,456 | |
Software licenses and royalties
The following table sets forth a comparison of our software licenses and royalties revenue for the periods presented as of September 30:March 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | Change | | | | | | | | | | |
| | 2020 | | 2019 | | $ | | % | | | | | | | | |
ES | | $ | 15,951 | | | $ | 18,522 | | | $ | (2,571) | | | (14) | % | | | | | | | | |
A&T | | 2,786 | | | 3,271 | | | (485) | | | (15) | | | | | | | | | |
Total software licenses and royalties revenue | | $ | 18,737 | | | $ | 21,793 | | | $ | (3,056) | | | (14) | % | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter | | Change | | Nine Months Ended | | Change |
($ in thousands) | | 2017 | | 2016 | | $ | | % | | 2017 | | 2016 | | $ | | % |
ES | | $ | 18,223 |
| | $ | 18,492 |
| | $ | (269 | ) | | (1 | )% | | $ | 50,151 |
| | $ | 50,585 |
| | $ | (434 | ) | | (1 | )% |
A&T | | 1,619 |
| | 1,438 |
| | 181 |
| | 13 |
| | 5,021 |
| | 3,746 |
| | 1,275 |
| | 34 |
|
Total software licenses and royalties revenue | | $ | 19,842 |
| | $ | 19,930 |
| | $ | (88 | ) | | (0.4 | )% | | $ | 55,172 |
| | $ | 54,331 |
| | $ | 841 |
| | 2 | % |
Software licenses and royalties revenue decreased 0.4% and increased 2%14% for the three and nine months ended September 30, 2017, respectively,March 31, 2020, compared to the prior year period. The decline for the three months ended September 30, 2017 was primarily due to an increase in the number of new software clients choosing our subscription-based option, rather than purchasing the software under a traditional perpetual software arrangement. The increase in software licenses and royalties revenue for the ninethree months ended September 30, 2017March 31, 2020, is primarily attributed to additionsa shift in the mix of new software contracts toward more subscription agreements compared to our implementation staff, which increased our capacitythe prior year. Our total new contract value mix for the three months ended March 31, 2020, was approximately 27% perpetual software license arrangements and approximately 73% subscription-based arrangements compared to deliver backlog.
total new contract value mix for the three months ended March 31, 2019, of approximately 46% perpetual software license arrangements and approximately 54% subscription-based arrangements.
Although the mix of new contracts between subscription-based and perpetual license arrangements variesmay vary from quarter to quarter and year to year, we expect our longer-term software license growth rate to continue to be negatively impacted byslow as a growing number of customers choosingclients choose our subscription-based options, rather than purchasing the software under a traditional perpetual software license arrangement. Subscription-based arrangements generally do not result in lower software license revenue in the initial year as compared to perpetual software license arrangements but generate higher overall revenue over the term of the contract. Our new client mix for the nine months ended September 30, 2017 was approximately 51% selecting perpetual software license arrangements and approximately 49% selecting subscription-based arrangements compared to a client mix for the nine months ended September 30, 2016 of approximately 68% selecting perpetual software license arrangements and approximately 32% selecting subscription-based arrangements. 94 and 291 new clients entered into subscription-based software arrangements for the three and nine months ended September 30, 2017, respectively, compared to 50 and 189 new clients for the three and nine months ended September 30, 2016, respectively. Since September 30, 2016, we added 352 new SaaS clients and 75 existing on-premises clients converted to our SaaS model.
Subscriptions
The following table sets forth a comparison of our subscriptions revenue for the periods presented as of September 30:March 31:
| | | | | | | | | | | | | | | | | | | | Three Months Ended | | | Change | |
| | Third Quarter | | Change | | Nine Months Ended | | Change | | | 2020 | | 2019 | | $ | | % | |
($ in thousands) | | 2017 | | 2016 | | $ | | % | | 2017 | | 2016 | | $ | | % | |
ES | | $ | 42,826 |
| | $ | 35,169 |
| | $ | 7,657 |
| | 22 | % | | $ | 120,191 |
| | $ | 99,470 |
| | $ | 20,721 |
| | 21 | % | ES | | $ | 76,644 | | | $ | 63,255 | | | $ | 13,389 | | | 21 | % | |
A&T | | 2,014 |
| | 1,700 |
| | 314 |
| | 18 |
| | 5,698 |
| | 5,456 |
| | 242 |
| | 4 |
| A&T | | 5,079 | | | 4,020 | | | 1,059 | | | 26 | | |
Total subscriptions revenue | | $ | 44,840 |
| | $ | 36,869 |
| | $ | 7,971 |
| | 22 | % | | $ | 125,889 |
| | $ | 104,926 |
| | $ | 20,963 |
| | 20 | % | Total subscriptions revenue | | $ | 81,723 | | | $ | 67,275 | | | $ | 14,448 | | | 21 | % | |
Subscriptions revenue primarily consists of revenue derived from our SaaS arrangements, which generally utilize the Tyler private cloud. As part of our subscription-based services, we also provide e-filing arrangements that simplify the filing and management of court related documents for courts and law offices. E-filing revenue is derived from transaction fees and fixed fee arrangements.
Subscriptions revenue grew 22% and 20%21% for the three and nine months ending September 30, 2017, respectively,March 31, 2020, compared to the prior year. New SaaS clients as well as existing clients who converted to our SaaS model provided the majority of the subscriptions revenue increase. In the three and nine months ending September 30, 2017, respectively,March 31, 2020, we added 94 and 291131 new SaaS clients and 15 and 6919 existing on-premises clients converted to our SaaS model. Since September 30, 2016,March 31, 2019, we have added 352599 new SaaS clients and 75while 84 existing on-premises clients converted to our SaaS model. Also, e-filing services and transaction-based fees from online payments contributed approximately $2.4 million and $5.6$2.8 million to the subscriptions revenue increase for the three and nine months ended September 30, 2017, respectively,March 31, 2020 due to the addition of new e-filing clients, as well as increased volumes as the result of several existing clients mandating e-filing.online payments from utility billings.
Software services
The following table sets forth a comparison of our software services revenue for the periods presented as of September 30:March 31:
| | | | | | | | | | | | | | | | | | | | Three Months Ended | | | Change | |
| | Third Quarter | | Change | | Nine Months Ended | | Change | | | 2020 | | 2019 | | $ | | % | |
($ in thousands) | | 2017 | | 2016 | | $ | | % | | 2017 | | 2016 | | $ | | % | |
ES | | $ | 42,295 |
| | $ | 40,608 |
| | $ | 1,687 |
| | 4 | % | | $ | 125,658 |
| | $ | 121,372 |
| | $ | 4,286 |
| | 4 | % | ES | | $ | 44,949 | | | $ | 40,456 | | | $ | 4,493 | | | 11 | % | |
A&T | | 5,184 |
| | 4,130 |
| | 1,054 |
| | 26 |
| | 14,211 |
| | 11,836 |
| | 2,375 |
| | 20 |
| A&T | | 7,184 | | | 7,987 | | | (803) | | | (10) | | |
Total software services revenue | | $ | 47,479 |
| | $ | 44,738 |
| | $ | 2,741 |
| | 6 | % | | $ | 139,869 |
| | $ | 133,208 |
| | $ | 6,661 |
| | 5 | % | Total software services revenue | | $ | 52,133 | | | $ | 48,443 | | | $ | 3,690 | | | 8 | % | |
Software services revenue primarily consists of professional services billeddelivered in connection with implementing our software, converting client data, training client personnel, custom development activities and consulting. New clients who purchaseacquire our proprietary software licenses, as well as those entering into a new SaaS arrangement, generally also contract with us to provide the related software services. Existing clients also periodically purchase additional training, consulting and minor programming services. ForSoftware services revenue increased 8% for the three and nine months ended September 30, 2017, respectively, software services revenue grew 6% and 5%March 31, 2020, compared to the prior year period. This growthFor the three months ended, the increase is primarily due to additionshigher new contract volume and the addition of professional services staff to our implementation and support staff which increasedgrow our capacity to deliver backlog, partially offset by clients converting from on-premises license arrangements to SaaS and partially duesome delays caused by the disruptions related to completing recognition of a majority of the acquisition-related deferred service revenue that was fair valued at rates below Tyler's average service rate in prior periods.COVID-19. Our implementation and support staff has grown by 290 employees since March 31, 2019.
Maintenance
The following table sets forth a comparison of our maintenance revenue for the periods presented as of September 30:March 31:
| | | | | | | | | | | | | | | | | | | | Three Months Ended | | | Change | |
| | Third Quarter | | Change | | Nine Months Ended | | Change | | | 2020 | | 2019 | | $ | | % | |
($ in thousands) | | 2017 | | 2016 | | $ | | % | | 2017 | | 2016 | | $ | | % | |
ES | | $ | 86,576 |
| | $ | 78,292 |
| | $ | 8,284 |
| | 11 | % | | $ | 253,048 |
| | $ | 223,802 |
| | $ | 29,246 |
| | 13 | % | ES | | $ | 104,841 | | | $ | 91,188 | | | $ | 13,653 | | | 15 | % | |
A&T | | 5,709 |
| | 4,708 |
| | 1,001 |
| | 21 |
| | 15,508 |
| | 13,973 |
| | 1,535 |
| | 11 |
| A&T | | 9,524 | | | 8,964 | | | 560 | | | 6 | | |
Total maintenance revenue | | $ | 92,285 |
| | $ | 83,000 |
| | $ | 9,285 |
| | 11 | % | | $ | 268,556 |
| | $ | 237,775 |
| | $ | 30,781 |
| | 13 | % | Total maintenance revenue | | $ | 114,365 | | | $ | 100,152 | | | $ | 14,213 | | | 14 | % | |
We provide maintenance and support services for our software products and certain third-party software. Maintenance revenue grew 11% and 13%14% for the three and nine months ended September 30, 2017, respectively,March 31, 2020, compared to the prior year.year period. Maintenance revenue increased mainly due to contributions of maintenance revenue from recent acquisitions of $6.7 million. The remainder of the increase is attributed to annual maintenance rate increases and growth in our installed customer base from new software license sales. In addition, the increase issales partially dueoffset by clients converting from on-premises license arrangements to completing recognition of a majority of the acquisition-related deferred maintenance revenue that was fair valued at rates below Tyler's average maintenance rate in prior periods.SaaS.
Appraisal services
The following table sets forth a comparison of our appraisal services revenue for the periods presented as of September 30:March 31:
| | | | | | | | | | | | | | | | | | | | Three Months Ended | | | Change | |
| | Third Quarter | | Change | | Nine Months Ended | | Change | | | 2020 | | 2019 | | $ | | % | |
($ in thousands) | | 2017 | | 2016 | | $ | | % | | 2017 | | 2016 | | $ | | % | |
ES | | $ | — |
| | $ | — |
| | $ | — |
| | — | % | | $ | — |
| | $ | — |
| | $ | — |
| | — | % | ES | | $ | — | | | $ | — | | | $ | — | | | — | % | |
A&T | | 6,290 |
| | 6,541 |
| | (251 | ) | | (4 | ) | | 19,268 |
| | 20,083 |
| | (815 | ) | | (4 | ) | A&T | | 5,763 | | | 5,214 | | | 549 | | | 11 | | |
Total appraisal services revenue | | $ | 6,290 |
| | $ | 6,541 |
| | $ | (251 | ) | | (4 | )% | | $ | 19,268 |
| | $ | 20,083 |
| | $ | (815 | ) | | (4 | )% | Total appraisal services revenue | | $ | 5,763 | | | $ | 5,214 | | | $ | 549 | | | 11 | % | |
Appraisal services revenue for the three and nine months ended September 30, 2017, respectively, decreasedMarch 31, 2020, increased by 4% . The decline is mainly11%, compared to the prior year primarily due to the successful completionaddition of several largenew revaluation contracts started during the fourth quarter of 2019, offset somewhat by delays to several ongoing projects in mid-2017.as a result of shelter-in-place orders and social distancing restrictions related to COVID-19. The appraisal services business is somewhat cyclical and driven in part by statutory revaluation cycles in various states.
Cost of Revenues and Gross Margins
The following table sets forth a comparison of the key components of our cost of revenues for the periods presented as of September 30:March 31:
| | | | | | | | | | | | | | | | | | | | Three Months Ended | | | Change | |
| | Third Quarter | | Change | | Nine Months Ended | | Change | | | 2020 | | 2019 | | $ | | % | |
($ in thousands) | | 2017 | | 2016 | | $ | | % | | 2017 | | 2016 | | $ | | % | |
Software licenses and royalties | | $ | 826 |
| | $ | 623 |
| | $ | 203 |
| | 33 | % | | $ | 2,204 |
| | $ | 1,927 |
| | $ | 277 |
| | 14 | % | Software licenses and royalties | | $ | 740 | | | $ | 818 | | | $ | (78) | | | (10) | % | |
Acquired software | | 5,473 |
| | 5,598 |
| | (125 | ) | | (2 | ) | | 16,243 |
| | 16,737 |
| | (494 | ) | | (3 | ) | Acquired software | | 8,027 | | | 6,682 | | | 1,345 | | | 20 | | |
Software services, maintenance and subscriptions | | 98,036 |
| | 88,623 |
| | 9,413 |
| | 11 |
| | 287,748 |
| | 260,610 |
| | 27,138 |
| | 10 |
| Software services, maintenance and subscriptions | | 131,779 | | | 117,160 | | | 14,619 | | | 12 | | |
Appraisal services | | 4,089 |
| | 4,053 |
| | 36 |
| | 1 |
| | 12,568 |
| | 12,473 |
| | 95 |
| | 1 |
| Appraisal services | | 4,385 | | | 3,452 | | | 933 | | | 27 | | |
Hardware and other | | 2,293 |
| | 2,120 |
| | 173 |
| | 8 |
| | 10,408 |
| | 8,481 |
| | 1,927 |
| | 23 |
| Hardware and other | | 2,479 | | | 2,906 | | | (427) | | | (15) | | |
Total cost of revenues | | $ | 110,717 |
| | $ | 101,017 |
| | $ | 9,700 |
| | 10 | % | | $ | 329,171 |
| | $ | 300,228 |
| | $ | 28,943 |
| | 10 | % | Total cost of revenues | | $ | 147,410 | | | $ | 131,018 | | | $ | 16,392 | | | 13 | % | |
The following table sets forth a comparison of gross margin percentage by revenue type for the periods presented as of September 30:March 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | | | | | | | |
| | 2020 | | 2019 | | Change | | | | | | |
Software licenses, royalties and acquired software | | 53.2 | % | | 65.6 | % | | (12.4) | % | | | | | | |
Software services, maintenance and subscriptions | | 46.9 | | | 45.7 | | | 1.2 | | | | | | | |
Appraisal services | | 23.9 | | | 33.8 | | | (9.9) | | | | | | | |
Hardware and other | | 35.1 | | | 30.6 | | | 4.5 | | | | | | | |
Overall gross margin | | 46.7 | % | | 47.0 | % | | (0.3) | % | | | | | | |
|
| | | | | | | | | | | | | | | | | | |
| | Third Quarter | | | | Nine Months Ended | | |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
Software licenses, royalties and acquired software | | 68.3 | % | | 68.8 | % | | (0.5 | )% | | 66.6 | % | | 65.6 | % | | 1.0 | % |
Software services, maintenance and subscriptions | | 46.9 |
| | 46.2 |
| | 0.7 |
| | 46.1 |
| | 45.2 |
| | 0.9 |
|
Appraisal services | | 35.0 |
| | 38.0 |
| | (3.0 | ) | | 34.8 |
| | 37.9 |
| | (3.1 | ) |
Hardware and other | | 32.8 |
| | 38.0 |
| | (5.2 | ) | | 26.0 |
| | 31.8 |
| | (5.8 | ) |
Overall gross margin | | 48.3 | % | | 48.1 | % | | 0.2 | % | | 47.1 | % | | 46.7 | % | | 0.4 | % |
Software licenses, royalties and acquired software. Amortization expense for acquired software comprises the majority of costs of software licenses, royalties and acquired software. We do not have any direct costs associated with royalties. In the three and nine months ended September 30, 2017, respectively,March 31, 2020, our software licenses, royalties and acquired software gross margin decreased slightly by 0.5% and increased 1.0%12.4% compared to the prior year period. The slight decline for the three months ended September 30, 2017 isperiod due to higher third-partylower revenue from software costs compared to prior period. The increase for the nine months ended September 30, 2017 is due to higher incremental margins on software license revenues, in part due to slightly lowerlicenses and increased amortization expense for acquired software resulting from acquisitions.
Software services, maintenance and subscriptions. Cost of software services, maintenance and subscriptions primarily consists of personnel costs related to installation of our software, conversion of client data, training client personnel and support activities and various other services such as custom client development and on-goingongoing operation of SaaS and e-filing arrangements. The software services, maintenance and subscription gross margin in the three and nine months ended September 30, 2017, respectively, was 0.7% and 0.9% higher thanMarch 31, 2020, increased 1.2% from the comparable prior year period. Our implementation and support staff has grown by 208290 employees since September 30, 2016. Many of these additions occurred in earlyMarch 31, 2019, as we accelerated hiring to mid-2016ensure that we are well-positioned to deliver our current backlog and are contributing to revenue in 2017.anticipated new business. Costs related to maintenance and various other services such as SaaS and e-filing typically grow at a slower rate than related revenue due to leverage in the utilization of support and maintenance staff and economies of scale. Reduced recognition of acquisition-related deferred revenue associated with software services and maintenance obligations completed in prior periods also resulted in higher gross margins.
Appraisal services. Appraisal services revenue comprisedwas approximately 2.9%2.1% of total revenue.revenue for the three months ended March 31, 2020. The appraisal services gross margin for the three and nine months ended September 30, 2017, respectively,March 31, 2020, decreased 3.0% and 3.1%9.9% compared to the same period in 2016,2019. During the three months ended March 31, 2020, appraisal services gross margin decreased due to additional resources broughtstaffing increases resulting from new revaluation projects, as well as lower staff utilization in to meet the deadline for completionMarch 2020 as a result of fieldwork for a large revaluation project. A high proportion of the costs ofCOVID-19 shelter-in place orders. The appraisal services revenue are variable, as we often hire temporary employees to assistbusiness is somewhat cyclical and driven in appraisal projects.
part by statutory revaluation cycles in various states.
For the three and nine months ended September 30, 2017, respectively,March 31, 2020, our overall gross margin increased 0.2% and 0.4%decreased 0.3% compared to the prior year period. OurThe decrease in overall margins is attributed to lower margins from software licenses due to lower software license revenue and higher amortization expense for acquired software resulting from acquisitions as well as staffing increases attributed to appraisal services. The decrease in overall gross margin is offset by a higher revenue mix for subscription revenues compared to the prior year period resulting in an increase for the nine month period was mainlyin incremental margin related to software services, maintenance and subscriptions. Costs related to maintenance and various other services such as SaaS and e-filing typically grow at a slower rate than related revenue due to a product mix that included more higher-margin recurring revenues from subscriptionsleverage in the utilization of support and maintenance staff and improved margin on revenues from software licenses offset by the lower-margin revenues from appraisal services as described above.economies of scale.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses consist primarily of salaries, employee benefits, travel, share-based compensation expense, commissions and related overhead costs for administrative and sales and marketing employees, as well as professional fees, trade show activities, advertising costs and other marketing related costs.
The following table sets forth a comparison of our SG&A expenses for the periods presented as of September 30:March 31:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter | | Change | | Nine Months Ended |
| Change |
($ in thousands) | | 2017 | | 2016 | | $ | | % | | 2017 |
| 2016 |
| $ |
| % |
Selling, general and administrative expenses | | $ | 44,656 |
| | $ | 42,007 |
| | $ | 2,649 |
| | 6 | % | | $ | 131,249 |
| | $ | 124,998 |
| | $ | 6,251 |
| | 5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | Change | | | | | | | | | | |
| | 2020 | | 2019 | | $ | | % | | | | | | | | |
Selling, general and administrative expenses | | $ | 67,485 | | | $ | 57,766 | | | $ | 9,719 | | | 17 | % | | | | | | | | |
SG&A as a percentage of revenues was 20.9% and 21.1%24% for the three and nine months ended September 30, 2017, respectively,March 31, 2020, compared to 21.6% and 22.2%23% for the three and nine months ended September 30, 2016, respectively.March 31, 2019. SG&A expense increased approximately 6% and 5%17% for the three and nine months ended September 30, 2017, respectively.March 31, 2020. This increase is mainly due to compensation costs related to higher stockshare-based compensation expense, increased staffing levels, and increased staff levels.an increase in commission expense as a result of higher sales. We have added 72 SG&A employees, mainly to our sales and finance teams, since March 31, 2019. For the three and nine months ended September 30, 2017, respectively,March 31, 2020, stock compensation expense rose $1.4$2.4 million and $3.8 million, respectively, compared to the same period in 2016,2019, mainly due to increasesan increase in share-based awards issued in connection with our stock compensation plan coupled with the higher fair value of each share-based award due to the increase in our stock price over the last few years.price.
Research and Development Expense
The following table sets forth a comparison of our research and development expense for the periods presented as of September 30:March 31:
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter | | Change | | Nine Months Ended | | Change |
($ in thousands) | | 2017 | | 2016 | | $ | | % | | 2017 | | 2016 | | $ | | % |
Research and development expense | | $ | 11,834 |
| | $ | 11,070 |
| | $ | 764 |
| | 7 | % | | $ | 35,307 |
| | $ | 31,362 |
| | $ | 3,945 |
| | 13 | % |
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| | Three Months Ended | | | | Change | | | | | | | | | | |
| | 2020 | | 2019 | | $ | | % | | | | | | | | |
Research and development expense | | $ | 22,361 | | | $ | 18,941 | | | $ | 3,420 | | | 18 | % | | | | | | | | |
Research and development expense consists mainly of costs associated with development of new products and technologies from which we do not currently generate significant revenue, as well as costs related to the ongoing development efforts for Microsoft Dynamics AX. Our contractual research and development commitment to develop public sector functionality for Microsoft Dynamics AX was amended in March 2016, which significantly reduced our development commitment through March 2018. However, we will continue to provide sustained engineering and technical support for the public-sector functionality within Dynamics AX. License and maintenance royalties for all applicable domestic and international sales of Dynamics AX to public sector entities will continue under the terms of the contract.revenue.
Research and development expense in the three and nine months ended September 30, 2017, respectively,March 31, 2020, increased 7% and 13%18% compared to the prior period mainly due to research and development efforts related toa number of new Tyler product development initiatives primarily inacross our public safety solutions, offsetproduct suites, as well as investments related to recently acquired businesses. To support these initiatives, our research and development staff has grown by reduced development efforts for Microsoft Dynamics AX. As a result of the Microsoft Dynamics AX amendment, we are redeploying certain development resources to enhance functionality on several existing solutions and these costs are being recorded in cost of revenues – software services, maintenance and subscriptions.65 since March 31, 2019.
Amortization of Customer and Trade NameOther Intangibles
Acquisition intangibles are composedcomprised of the excess of the purchase price over the fair value of net tangible assets acquired that is primarily allocated to acquired software and customer and trade name intangibles. The remaining excess purchase price is allocated to goodwill that is not subject to amortization. Amortization expense related to acquired software is included with cost of revenues while amortization expense of customer and trade name intangibles is recorded as operating expense.
The increase in amortization of other intangibles is primarily attributed to the recent acquisitions closed in 2019.
The following table sets forth a comparison of amortization of customer and trade name intangibles for the periods presented as of September 30:March 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | Change | | | | | | | | | | |
| | 2020 | | 2019 | | $ | | % | | | | | | | | |
Amortization of other intangibles | | $ | 5,392 | | | $ | 4,850 | | | $ | 542 | | | 11 | % | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter | | Change | | Nine Months Ended | | Change |
($ in thousands) | | 2017 | | 2016 | | $ | | % | | 2017 | | 2016 | | $ | | % |
Amortization of customer and trade name intangibles | | $ | 3,492 |
| | $ | 3,458 |
| | $ | 34 |
| | 1 | % | | $ | 10,413 |
| | $ | 10,273 |
| | $ | 140 |
| | 1 | % |
Other Income, (Expense), Net
The following table sets forth a comparison of our other expense,income, net, for the periods presented as of September 30:March 31:
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| | Three Months Ended | | | | Change | | | | | | | | | | |
| | 2020 | | 2019 | | $ | | % | | | | | | | | |
Other income, net | | $ | 990 | | | $ | 586 | | | $ | 404 | | | 69 | | | | | | | | | |
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| | Third Quarter | | Change | | Nine Months Ended | | Change |
($ in thousands) | | 2017 | | 2016 | | $ | | % | | 2017 | | 2016 | | $ | | % |
Other income (expense), net | | $ | 75 |
| | $ | (526 | ) | | $ | 601 |
| | (114 | )% | | $ | (216 | ) | | $ | (1,713 | ) | | $ | 1,497 |
| | (87 | )% |
Other income, (expense), net, is comprised of interest income from invested cash net of interest expense and non-usage and other fees associated with our revolving credit agreement, as well as interestagreement. The increase in other income, from invested cash. Other income (expense), net, decreased in the three and nine months ended September 30, 2017,March 31, 2020, compared to the prior period dueis attributed to significantly lower debt levels in the current period, as we repaid all borrowings under the revolving line of credit in January 2017, and correspondinglyincreased interest income from higher levels of invested cash, investments.offset somewhat by lower interest rates.
Income Tax Provision
The following table sets forth a comparison of our income tax provision for the periods presented as of September 30:March 31:
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| | Three Months Ended | | | | Change | | | | | | | | | | |
| | 2020 | | 2019 | | $ | | % | | | | | | | | |
Income tax (benefit) provision | | $ | (12,667) | | | $ | 7,729 | | | $ | (20,396) | | | NM | | | | | | | | |
| | | | | | | | | | | | | | | | |
Effective income tax rate | | (36.3) | % | | 22.0 | % | | | | | | | | | | | | | | |
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| | Third Quarter | | Change | | Nine Months Ended | | Change |
($ in thousands) | | 2017 | | 2016 | | $ | | % | | 2017 | | 2016 | | $ | | % |
Income tax provision | | $ | 5,259 |
| | $ | 989 |
| | $ | 4,270 |
| | 432 | % | | $ | 14,308 |
| | $ | 15,527 |
| | $ | (1,219 | ) | | (8 | )% |
| | | | | | | | | | | | | | | | |
Effective income tax rate | | 12.1 | % | | 2.7 | % | | | | | | 12.3 | % | | 16.5 | % | | | | |
The change in effective tax rate for the three months ended March 31, 2020, as compared to the same period in 2019, was principally driven by an increase in the excess tax benefits related to stock incentive awards. The effective income tax rates for the three and nine months ended September 30, 2017March 31, 2020 and 2016,2019, respectively, were different from the statutory United States federal income tax rate of 35% principally21% due to excess tax benefits related to stock option exercises.incentive awards, state income taxes, non-deductible business expenses, and the tax benefit of research tax credits. The excess tax benefits related to stock option exercisesincentive awards realized were $9.0 million and $27.6$22.1 million for the three and nine months ended September 30, 2017, respectively,March 31, 2020, compared to $13.3 million and $20.8$1.7 million for the three and nine months ended September 30, 2016, respectively. The change in the effective income tax rates for the three and nine months ended September 30, 2017 as compared to the prior year periods is mainly due to the change in excess tax benefits related to stock option exercises realized.March 31, 2019. Excluding the excess tax benefits, the effective rates were 32.8% and 36.0%rate was 27.0% for the three and nine months ended September 30, 2017, respectively,March 31, 2020, compared to 39.3% and 38.5%26.8% for the three and nine months ended September 30, 2016, respectively. Other differencesMarch 31, 2019.
The Coronavirus Aid, Relief and Economic Security ("CARES") Act, which was signed into law on March 27, 2020, provides an estimated $2.2 trillion to fight the COVID-19 pandemic and stimulate the US economy. The assistance includes tax relief and government loans, and investments and grants for entities in affected industries (e.g., health care, airlines). The business tax provisions of the Act include temporary changes to income and non-income based tax laws, including the ability to utilize net operating losses, interest expense deductions, alternative minimum tax credit refunds, charitable contributions, and depreciation of qualified improvement property. Measures not related to income-based taxes include (1) allowing an employer to pay its share of Social Security payroll taxes that would otherwise be due from the federal statutorydate of enactment through December 31, 2020, over the following two years and (2) allowing eligible employers subject to closure due to the COVID-19 pandemic to receive a 50% credit on qualified wages against their employment taxes each quarter, with any excess credits eligible for refunds. We evaluated the CARES Act provisions and the enactment resulted in no income tax rate included stateadjustments. We do not believe that the income taxes, non-deductible business expenses, tax credits, and theimplications will be significant to our overall income tax benefit of the domestic production activities deduction.liability.
FINANCIAL CONDITION AND LIQUIDITY
As of September 30, 2017,March 31, 2020, we had cash and cash equivalents of $124.6$302.0 million compared to $36.2$232.7 million at December 31, 2016.2019. We also had $61.7$90.6 million invested in investment grade corporate and municipal bonds and asset-backed securities as of September 30, 2017.March 31, 2020. These investments mature from 2017ranging through 20212023, and we intend to hold these investments until maturity. As of September 30, 2017,March 31, 2020, we had two outstanding letters of credit totaling $2.2 million. We do not believe the letters of credit will be required to be drawn upon. These letters of credit expire through mid-2018. We believe our cash from operating activities, revolving line of credit, cash on hand and access to the capital markets provides us with sufficient flexibility to meet our long-term financial needs.
The following table sets forth a summary of cash flows for the ninethree months ended September 30:March 31:
| | | | | | | | | 2020 | | 2019 |
($ in thousands) | | 2017 | | 2016 | |
Cash flows provided (used) by: | | | | | Cash flows provided (used) by: | | | | |
Operating activities | | $ | 142,381 |
| | $ | 140,054 |
| Operating activities | | $ | 56,706 | | | $ | 23,957 | |
Investing activities | | (75,807 | ) | | (42,846 | ) | Investing activities | | (15,007) | | | (194,890) | |
Financing activities | | 21,878 |
| | (106,981 | ) | Financing activities | | 27,604 | | | 76,091 | |
Net increase (decrease) in cash and cash equivalents | | $ | 88,452 |
| | $ | (9,773 | ) | Net increase (decrease) in cash and cash equivalents | | $ | 69,303 | | | $ | (94,842) | |
Net cash provided by operating activities continues to be our primary source of funds to finance operating needs and capital expenditures. Other potential capital resources include cash on hand, public and private issuances of debt or equity securities, and bank borrowings. It is possible that our ability to access the capital and credit markets in the future may be limited by economic conditions or other factors. We currently believe that cash provided by operating activities, cash on hand and available credit are sufficient to fund our working capital requirements, capital expenditures, income tax obligations, and share repurchases for at least the next twelve months.
For the ninethree months ended September 30, 2017,March 31, 2020, operating activities provided cash of $142.4$56.7 million. Operating activities that provided cash were primarily comprised of net income of $102.1$47.6 million, non-cash depreciation and amortization charges of $40.1$20.0 million, and non-cash share-based compensation expense of $27.4$17.3 million and a non-cash decrease in operating lease right-of-use assets of $1.5 million. Working capital, excluding cash, increased approximately $27.2$29.6 million mainly due to higher accounts receivable related to annual maintenance and subscription billings as well as milestone billings for several contracts, timing of income tax payments, the changesdecline in deferred revenue balances, the timing of payments related to bonuses and prepaid commissions, and the deferred taxes associated with stock option activity during the period. These increases were offset slightly by timingcollections of payments for wages.
In general, changes in deferred revenueannual maintenance renewals and subscription renewal billings that are cyclical and primarily driven by the timing of our maintenance renewal billings. Our renewal dates occur throughout the year, but our largest renewal billing cycles occurbilled in the second and fourth quarters. In addition, subscription renewals are billed throughout the year.quarter.
Our days sales outstanding (“DSO”) was 87104 days at September 30, 2017,March 31, 2020, compared to 93117 days at December 31, 2016,2019 and 87104 days at September 30, 2016. OurMarch 31, 2019. The decrease in DSO compared to December 31, 2019, is primarily attributed to our maintenance billing cycle typically peakspeaking at its highest level in June and second highest level in December of each year and is followed by collections in the subsequent quarter. DSO is calculated based on quarter-end accounts receivable divided by the quotient of annualized quarterly revenues divided by 360 days.
Investing activities used cash of $75.8$15.0 million in the ninethree months ending September 30, 2017.March 31, 2020. Approximately $37.7$9.3 million was invested in property and equipment. We purchased an office buildingequipment, including $4.8 million related to real estate. In addition, approximately $1.3 million of software development was capitalized in Latham, New York, for approximately $2.9 million and paid $12.9the quarter. Proceeds of $15 million for constructionthe sale of the investment in convertible preferred stock representing a 20% interest in Record Holdings to expandBFTR, LLC, a buildingwholly owned subsidiary of Bison Capital Partners V.L.P. During the same period, we purchased $10 million in Yarmouth, Maine.common stock representing a 18% interest in BFTR, LLC. The remaining additions were for computer equipment and furniture and fixtures in support of internal growth, particularly with respect to data centers supporting growth in our cloud-based offerings.
Investing activities used cash of $194.9 million in the three months ending March 31, 2019. On August 2, 2017,February 28, 2019, we acquired all of the capital stock of Digital Health Department, Inc., a company that provides environmental health software, offering a software-as-a-service (SaaS) solution for public health compliance and inspections processes.MicroPact. The total purchase price, net of debt assumed,cash acquired of $2.0 million, was $3.9approximately $204.2 million, including $197.5 million paid in cash, accrued contingent consideration of $7.0 million and $1.7 million accrued for certain holdbacks. On February 1, 2019, we acquired all the assets of MyCivic. The purchase price was $3.7 million of which $3.7$3.6 million was paid in cash and $0.2 millionapproximately $90,000 was accrued as of September 30, 2017. On May 30, 2017, we also acquired all of thefor a working capital stock of Modria.com, Inc., a company that specializes in online dispute resolution for government and commercial entities. The total purchase price, net of debt assumed, was $7.0 million, of which $6.1 million was paid in cash and $0.9 million was accrued as of September 30, 2017. The impact of these acquisitions on our operating results is not material.
Investing activities used cash of $42.8 million in the nine months ending September 30, 2016.holdback. Approximately $29.5$12.3 million was invested in property and equipment. We purchased an office building in Falmouth, Maine, that was previously leased from an entity owned by an executives’ father and brother, for approximately $9.7 million and paid $4.6 million for construction to expand a building in Yarmouth, Maine. In the nine months ending September 30, 2016, we made a small acquisition for approximately $7.4 million and paid $2.0equipment, including $8.7 million related to real estate. Approximately $690,000 of software development was capitalized in the working capital holdbackquarter. The remaining additions were for computer equipment and furniture and fixtures in connectionsupport of internal growth, particularly with the NWS acquisition.respect to data centers supporting growth in our cloud-based offerings.
Financing activities provided cash of $21.9$27.6 million in the ninethree months ended September 30, 2017,March 31, 2020, and were comprised of purchases of treasury shares, proceeds from stock option exercises and employee stock purchase plan activity. We paid $5.6 million in contingent consideration resulting from the MicroPact acquisition. During the ninethree months ended September 30, 2017,March 31, 2020, we purchased 42,000repurchased approximately 59,000 shares of our common stock for an aggregate purchase price of $6.2$15.5 million, atwith an average price paid per share of $147.30.
$263.28.
Financing activities usedprovided cash of $107.0$76.1 million in the ninethree months ended September 30, 2016. Cash used by financing activities wasMarch 31, 2019, and were comprised of purchases of treasury shares, net borrowings from our revolving line of credit, and proceeds from stock option exercises and employee stock purchase plan activity. During the ninethree months ended September 30, 2016,March 31, 2019, we purchased 758,000repurchased approximately 72,000 shares of our common stock for an aggregate purchase price of $94.5$14.3 million, atwith an average price paid per share of $124.75.$199.03.
We had authorization fromIn February 2019, our board of directors toauthorized the repurchase up to 2.0of an additional 1.5 million additional shares of Tyler common stock as of September 30, 2017.stock. The repurchase program, which was approved by our board of directors, was originally announced in October 2002 and was amended at various times from 2003 through 2016.2019. As of March 31, 2020, we have authorization from our board of directors to repurchase up to 2.6 million additional shares of Tyler common stock. Our share repurchase program allows us to repurchase shares at our discretion. Market conditions influence the timing of the buybacks and the number of shares repurchased, as well as the volume of employee stock option exercises. Share repurchases are generally funded using our existing cash balances and borrowings under our credit facility and may occur through open market purchases and transactions structured through investment banking institutions, privately negotiated transactions and/or other mechanisms. There is no expiration date specified for the authorization, and we intend to repurchase stock under the plan from time to time.
We made tax payments of $29.0 million$176,000 and $88,000 in the ninethree months ended March 31, 2020, and 2019, respectively.
On September 30, 2017, compared2019, we entered into a $400 million credit agreement with various lender parties and Wells Fargo Bank, National Association, as Administrative Agent (the “Credit Facility”). The Credit Facility provides for a revolving credit line up to tax payments$400 million, including a $25 million sublimit for letters of $25.0 million in the nine months endedcredit. The Credit Facility matures on September 30, 2016.2024.
We anticipate that 20172020 capital spending will be between $36 million and $38 million, including approximately $54.0 million. Capital spending includes approximately $19.4$9 million for the Yarmouth office expansionrelated to real estate and approximately $5.0$7 million for the purchase and renovation of an office building in Latham, New York.capitalized software development. We expect the remainingmajority of the other capital spending will consist primarily of computer equipment and software for infrastructure replacements and expansion. We currently do not expect to capitalize significant amounts related to software development in 2017, but the actual amount and timing of those costs, and whether they are capitalized or expensed, may result in additional capitalized software development. Capital spending is expected to be funded from existing cash balances and cash flows from operations and borrowings under our revolving line of credit.operations.
From time to time we engage in discussions with potential acquisition candidates. In order to consummate anypursue such opportunities, which could require significant commitments of capital, we may be required to incur debt or to issue additional potentially dilutive securities in the future. No assurance can be given as to our future acquisitionsacquisition opportunities and how such acquisitions mayopportunities will be financed.
We lease office facilities, as well as transportation and other equipment used in our operations under non-cancelable operating lease agreements expiring at various dates through 2028.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may affect us due to adverse changes in financial market prices and interest rates.
As of September 30, 2017,March 31, 2020, we had no outstanding borrowings under our Credit Facility and available borrowing capacity under the Credit Facility. LoansAgreement was $400.0 million.
Borrowings under the Credit Facility bear interest at Tyler’s option, at a per annum rate of either (1) the Wells Fargo BankBank’s prime rate (subject to certain higher rate determinations) plus a margin of 0.25%0.125% to 1.00%0.75% or (2) the 30, 60, 90one-, two-, three-, or 180-daysix-month LIBOR rate plus a margin of 1.25%1.125% to 2.00%1.75%.
During the ninethree months ended September 30, 2017,March 31, 2020, our effective average interest rate for borrowings was 2.17%3.83%. As of September 30, 2017,March 31, 2020, our interest rate was 4.50%3.38% under the Wells Fargo Bank prime rate and 2.49%approximately 2.12% under athe 30-day LIBOR contract. The Credit Facility is secured by substantially all of our assets.option.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act) designed to provide reasonable assurance that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms. These include controls and procedures designed to ensure that this information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. Management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2017.March 31, 2020.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the three months ended September 30, 2017,March 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Other than routine litigation incidental to our business, there are no material legal proceedings pending to which we are party or to which any of our properties are subject.
ITEM 1A. Risk Factors
In addition to the other information set forth in this report, one should carefully consider the discussion of various risks and uncertainties contained in Part I, “Item 1A. Risk Factors” in our 20162019 Annual Report on Form 10-K. We believe those risk factors are the most relevant to our business and could cause our results to differ materially from the forward-looking statements made by us. Please note, however, that those are not the only risk factors facing us. Additional risks that we do not consider material, or of which we are not currently aware, may also have an adverse impact on us. Our business, financial condition and results of operations could be seriously harmed if any of these risks or uncertainties actually occurs or materializes. In that event, the market price for our common stock could decline, and our shareholders may lose all or part of their investment. During the three months ended September 30, 2017,March 31, 2020, except for the risk factors described below, there were no material changes in the information regarding risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2016.2019.
COVID-19 will adversely affect our business and results of operations.
We expect that the global emergence of COVID-19 (novel coronavirus) will negatively impact our business and financial results in fiscal year 2020. As the virus has spread, it has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. While we are unable to accurately predict the full impact that COVID-19 will have on our results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and containment measures and associated compliance, we do expect the pandemic will negatively impact our revenues and other financial results. We expect to see some impact on our business in the near term, with possible delays in government procurement processes and delays in implementations caused by travel restrictions, closed offices, or clients shifting focus to more pressing issues.
We expect appraisal and software implementations projects delays as clients put projects on hold or slow projects by extending go-lives dates. While we have the ability to deliver most of our professional services remotely, some of our professional services, including appraisal assessments, are more effective when performed on-site, and certain clients insist on on-site services in any event. In addition, some professional services relate to training and require the availability of the client. We expect a negative impact on our software services revenue and appraisal services and respective margins throughout the fiscal year 2020. Also, we expect software licenses and subscriptions revenues to be negatively affected due to delays in procurement processes. Our clients who are negatively impacted by the virus may request changes to payment terms, negatively impacting the timing of collections of accounts receivables in future periods. For the three months ended March 31, 2020, 71% of our total revenue and earnings are relatively predictable as a result of our subscription and maintenance revenue, which is recurring in nature, and for most of first quarter 2020, our results were not materially impacted by COVID-19; thus, the effect of the COVID-19 pandemic will not be fully reflected in our results of operations and overall financial performance until future periods.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits
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Exhibit 101 | | Instance Document |
Exhibit 101.INS | | Inline XBRL Instance Document - the Instance Document does not appear in the interactive data file because its XBRL tags, including Cover Page XBRL tags, are embedded within the Inline XBRL Document. |
Exhibit 101 | | Schema Document |
Exhibit 101.SCH | | Inline XBRL Taxonomy Extension Schema Document. |
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Exhibit 101101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase DocumentDocument. |
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Exhibit 101101.LAB | | Inline XBRL Extenstion Labels Linkbase DocumentDocument. |
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Exhibit 101101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase DocumentDocument. |
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Exhibit 101101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase DocumentDocument. |
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Exhibit 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| TYLER TECHNOLOGIES, INC. |
By: | /s/ Brian K. Miller |
| Brian K. Miller |
| Executive Vice President and Chief Financial Officer |
| (principal financial officer and an authorized signatory) |
Date: October 25, 2017
April 29, 2020