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 SeptemberJune 30, 20172022
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
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TYLER TECHNOLOGIES, INC.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) | | | | | | | | |
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, 2017July 28, 2022 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 June 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | | | 2022 | | 2021 | | 2022 | | 2021 |
Revenues: | | | | | | | | | Revenues: | | | | | | | | |
Software licenses and royalties | | $ | 19,842 |
| | $ | 19,930 |
| | $ | 55,172 |
| | $ | 54,331 |
| Software licenses and royalties | | $ | 15,009 | | | $ | 17,604 | | | $ | 31,515 | | | $ | 32,537 | |
Subscriptions | | 44,840 |
| | 36,869 |
| | 125,889 |
| | 104,926 |
| Subscriptions | | 255,816 | | | 199,558 | | | 501,259 | | | 302,037 | |
Software services | | 47,479 |
| | 44,738 |
| | 139,869 |
| | 133,208 |
| Software services | | 63,125 | | | 53,337 | | | 124,622 | | | 100,977 | |
Maintenance | | 92,285 |
| | 83,000 |
| | 268,556 |
| | 237,775 |
| Maintenance | | 116,815 | | | 119,621 | | | 233,844 | | | 238,733 | |
Appraisal services | | 6,290 |
| | 6,541 |
| | 19,268 |
| | 20,083 |
| Appraisal services | | 8,812 | | | 6,265 | | | 17,330 | | | 12,730 | |
Hardware and other | | 3,410 |
| | 3,419 |
| | 14,057 |
| | 12,439 |
| Hardware and other | | 9,108 | | | 7,690 | | | 16,222 | | | 11,863 | |
Total revenues | | 214,146 |
| | 194,497 |
|
| 622,811 |
|
| 562,762 |
| Total revenues | | 468,685 | | | 404,075 | | | 924,792 | | | 698,877 | |
| | | | | | | | | | | | | | | | |
Cost of revenues: | | | | | | | | | Cost of revenues: | | | | | | | | |
Software licenses and royalties | | 826 |
| | 623 |
| | 2,204 |
| | 1,927 |
| Software licenses and royalties | | 2,869 | | | 1,368 | | | 5,478 | | | 2,604 | |
Acquired software | | 5,473 |
| | 5,598 |
| | 16,243 |
| | 16,737 |
| |
Software services, maintenance and subscriptions | | 98,036 |
| | 88,623 |
| | 287,748 |
| | 260,610 |
| |
Amortization of acquired software | | Amortization of acquired software | | 14,039 | | | 11,823 | | | 27,260 | | | 19,787 | |
Subscriptions, software services and maintenance | | Subscriptions, software services and maintenance | | 244,192 | | | 199,771 | | | 481,088 | | | 334,091 | |
Appraisal services | | 4,089 |
| | 4,053 |
| | 12,568 |
| | 12,473 |
| Appraisal services | | 5,976 | | | 4,429 | | | 11,912 | | | 9,046 | |
Hardware and other | | 2,293 |
| | 2,120 |
| | 10,408 |
| | 8,481 |
| Hardware and other | | 8,161 | | | 4,623 | | | 13,188 | | | 7,081 | |
Total cost of revenues | | 110,717 |
| | 101,017 |
| | 329,171 |
| | 300,228 |
| Total cost of revenues | | 275,237 | | | 222,014 | | | 538,926 | | | 372,609 | |
| | | | | | | | | | | | | | | | |
Gross profit | | 103,429 |
| | 93,480 |
| | 293,640 |
| | 262,534 |
| Gross profit | | 193,448 | | | 182,061 | | | 385,866 | | | 326,268 | |
| | | | | | | | | |
Selling, general and administrative expenses | | 44,656 |
| | 42,007 |
| | 131,249 |
| | 124,998 |
| Selling, general and administrative expenses | | 99,701 | | | 108,922 | | | 197,596 | | | 187,696 | |
Research and development expense | | 11,834 |
| | 11,070 |
| | 35,307 |
| | 31,362 |
| Research and development expense | | 23,386 | | | 23,428 | | | 47,327 | | | 45,241 | |
Amortization of customer and trade name intangibles | | 3,492 |
| | 3,458 |
| | 10,413 |
| | 10,273 |
| |
Amortization of other intangibles | | Amortization of other intangibles | | 13,604 | | | 11,420 | | | 28,318 | | | 16,832 | |
| | | | | | | | | | | | | | | | |
Operating income | | 43,447 |
| | 36,945 |
| | 116,671 |
| | 95,901 |
| Operating income | | 56,757 | | | 38,291 | | | 112,625 | | | 76,499 | |
| | | | | | | | | |
Other income (expense), net | | 75 |
| | (526 | ) | | (216 | ) | | (1,713 | ) | |
Interest expense | | Interest expense | | (6,214) | | | (12,437) | | | (11,018) | | | (12,915) | |
Other income, net | | Other income, net | | 216 | | | 238 | | | 581 | | | 804 | |
Income before income taxes | | 43,522 |
| | 36,419 |
| | 116,455 |
| | 94,188 |
| Income before income taxes | | 50,759 | | | 26,092 | | | 102,188 | | | 64,388 | |
Income tax provision | | 5,259 |
| | 989 |
| | 14,308 |
| | 15,527 |
| Income tax provision | | 10,813 | | | 562 | | | 22,258 | | | 1,882 | |
Net income | | $ | 38,263 |
| | $ | 35,430 |
| | $ | 102,147 |
| | $ | 78,661 |
| Net income | | $ | 39,946 | | | $ | 25,530 | | | $ | 79,930 | | | $ | 62,506 | |
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Earnings per common share: | | | | | | | | | Earnings per common share: | | | | | | | | |
Basic | | $ | 1.02 |
| | $ | 0.97 |
| | $ | 2.74 |
| | $ | 2.16 |
| Basic | | $ | 0.96 | | | $ | 0.63 | | | $ | 1.93 | | | $ | 1.53 | |
Diluted | | $ | 0.97 |
| | $ | 0.91 |
| | $ | 2.60 |
| | $ | 2.02 |
| Diluted | | $ | 0.94 | | | $ | 0.61 | | | $ | 1.88 | | | $ | 1.48 | |
See accompanying notes.
TYLER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Net income | | $ | 39,946 | | | $ | 25,530 | | | $ | 79,930 | | | $ | 62,506 | |
Other comprehensive loss, net of tax: | | | | | | | | |
Securities available-for-sale and transferred securities: | | | | | | | | |
Change in net unrealized holding losses on available-for-sale securities during the period | | (114) | | | — | | | (743) | | | — | |
Reclassification adjustment of unrealized losses on securities transferred from held-to-maturity | | — | | | — | | | (27) | | | — | |
Reclassification adjustment for net loss on sale of available-for-sale securities, included in net income | | 48 | | | — | | | 7 | | | — | |
Other comprehensive loss, net of tax | | (66) | | | — | | | (763) | | | — | |
Comprehensive income | | $ | 39,880 | | | $ | 25,530 | | | $ | 79,167 | | | $ | 62,506 | |
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 |
|
Total liabilities and shareholders' equity | | $ | 1,493,118 |
| | $ | 1,357,945 |
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| | | | | | | | | | | |
| June 30, 2022 (unaudited) | | December 31, 2021 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 253,062 | | | $ | 309,171 | |
Accounts receivable (less allowance for losses and sales adjustments of $12,538 in 2022 and $12,086 in 2021) | 597,560 | | | 521,059 | |
Short-term investments | 34,466 | | | 52,300 | |
Prepaid expenses | 61,938 | | | 55,513 | |
Income tax receivable | 2,552 | | | 18,137 | |
Other current assets | 7,709 | | | 8,151 | |
Total current assets | 957,287 | | | 964,331 | |
Accounts receivable, long-term | 12,665 | | | 13,937 | |
Operating lease right-of-use assets | 40,577 | | | 39,720 | |
Property and equipment, net | 177,907 | | | 181,193 | |
Other assets: | | | |
Software development costs, net | 43,505 | | | 28,489 | |
Goodwill | 2,449,638 | | | 2,359,674 | |
Other intangibles, net | 1,032,786 | | | 1,052,493 | |
Non-current investments | 26,464 | | | 46,353 | |
Other non-current assets | 46,217 | | | 45,971 | |
| $ | 4,787,046 | | | $ | 4,732,161 | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 130,998 | | | $ | 119,988 | |
Accrued liabilities | 133,910 | | | 158,424 | |
Operating lease liabilities | 10,363 | | | 10,560 | |
| | | |
Deferred revenue | 528,588 | | | 510,529 | |
Current portion of term loans | 30,000 | | | 30,000 | |
Total current liabilities | 833,859 | | | 829,501 | |
Revolving credit facility | — | | | — | |
Term loans | 639,464 | | | 718,511 | |
Convertible senior notes due 2026, net | 593,624 | | | 592,765 | |
Deferred revenue, long-term | — | | | 38 | |
Deferred income taxes | 216,947 | | | 228,085 | |
Operating lease liabilities, long-term | 36,018 | | | 36,336 | |
Other long-term liabilities | 8,807 | | | 2,893 | |
Total liabilities | 2,328,719 | | | 2,408,129 | |
Commitments and contingencies | — | | | — | |
Shareholders' equity: | | | |
Preferred stock, $10.00 par value; 1,000,000 shares authorized; none issued | — | | | — | |
Common stock, $0.01 par value; 100,000,000 shares authorized; 48,147,969 shares issued and outstanding as of June 30, 2022 and December 31, 2021 | 481 | | | 481 | |
Additional paid-in capital | 1,128,821 | | | 1,075,650 | |
Accumulated other comprehensive loss, net of tax | (809) | | | (46) | |
Retained earnings | 1,353,544 | | | 1,273,614 | |
Treasury stock, at cost; 6,583,971 and 6,832,640 shares in 2022 and 2021, respectively | (23,710) | | | (25,667) | |
Total shareholders' equity | 2,458,327 | | | 2,324,032 | |
| $ | 4,787,046 | | | $ | 4,732,161 | |
See accompanying notes.
TYLER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| | | | Nine months ended September 30, | | | Six Months Ended June 30, |
| | 2017 | | 2016 | | | 2022 | | 2021 |
Cash flows from operating activities: | | | | | Cash flows from operating activities: | | | | |
Net income | | $ | 102,147 |
| | $ | 78,661 |
| Net income | | $ | 79,930 | | | $ | 62,506 | |
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 | | 75,866 | | | 60,976 | |
Gains from sale of investments | | Gains from sale of investments | | (53) | | | — | |
Share-based compensation expense | | 27,368 |
| | 21,348 |
| Share-based compensation expense | | 51,079 | | | 50,899 | |
| Operating lease right-of-use assets expense | | Operating lease right-of-use assets expense | | 5,104 | | | 4,034 | |
Deferred income tax benefit | | (14,216 | ) | | (11,289 | ) | Deferred income tax benefit | | (19,136) | | | (6,430) | |
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 | | (73,396) | | | (46,312) | |
Income taxes | | (467 | ) | | 1,769 |
| |
Income tax receivable | | Income tax receivable | | 15,586 | | | 7,276 | |
Prepaid expenses and other current assets | | (2,706 | ) | | 1,169 |
| Prepaid expenses and other current assets | | (6,033) | | | (10,434) | |
Accounts payable | | (2,733 | ) | | (917 | ) | Accounts payable | | 9,130 | | | (57,471) | |
Operating lease liabilities | | Operating lease liabilities | | (6,522) | | | (4,361) | |
Accrued liabilities | | 1,318 |
| | 8,515 |
| Accrued liabilities | | (24,723) | | | (30,217) | |
Deferred revenue | | (1,329 | ) | | 17,918 |
| Deferred revenue | | 17,474 | | | 20,868 | |
Other long-term liabilities | | Other long-term liabilities | | 5,914 | | | 22 | |
Net cash provided by operating activities | | 142,381 |
| | 140,054 |
| Net cash provided by operating activities | | 130,220 | | | 51,356 | |
| | | | | | | | |
Cash flows from investing activities: | | | | | Cash flows from investing activities: | | | | |
Additions to property and equipment | | (37,734 | ) | | (29,529 | ) | Additions to property and equipment | | (12,757) | | | (14,223) | |
Purchase of marketable security investments | | (49,905 | ) | | (13,127 | ) | Purchase of marketable security investments | | (4,592) | | | (68,054) | |
Proceeds from marketable security investments | | 21,175 |
| | 9,256 |
| |
Proceeds and maturities from marketable security investments | | Proceeds and maturities from marketable security investments | | 40,595 | | | 91,395 | |
| Investment in software | | Investment in software | | (16,463) | | | (8,947) | |
Cost of acquisitions, net of cash acquired | | (9,761 | ) | | (9,394 | ) | Cost of acquisitions, net of cash acquired | | (117,313) | | | (1,998,902) | |
Decrease (increase) in other | | 418 |
| | (52 | ) | |
Other | | Other | | 152 | | | 39 | |
Net cash used by investing activities | | (75,807 | ) | | (42,846 | ) | Net cash used by investing activities | | (110,378) | | | (1,998,692) | |
| | | | | | | | |
Cash flows from financing activities: | | | | | Cash flows from financing activities: | | | | |
Decrease in net borrowings on revolving line of credit | | (10,000 | ) | | (32,000 | ) | |
Net borrowings on revolving credit facility | | Net borrowings on revolving credit facility | | — | | | 65,000 | |
Payment on term loans | | Payment on term loans | | (80,000) | | | — | |
Proceeds from term loans | | Proceeds from term loans | | — | | | 900,000 | |
Proceeds from issuance of convertible senior notes | | Proceeds from issuance of convertible senior notes | | — | | | 600,000 | |
Payment of debt issuance costs | | Payment of debt issuance costs | | — | | | (27,127) | |
Purchase of treasury shares | | (7,032 | ) | | (94,499 | ) | Purchase of treasury shares | | — | | | (12,975) | |
Proceeds from exercise of stock options | | 33,568 |
| | 15,089 |
| |
| Proceeds from exercise of stock options, net of withheld shares for taxes upon equity award | | Proceeds from exercise of stock options, net of withheld shares for taxes upon equity award | | (4,107) | | | 29,388 | |
Contributions from employee stock purchase plan | | 5,342 |
| | 4,429 |
| Contributions from employee stock purchase plan | | 8,156 | | | 6,200 | |
Net cash provided (used) by financing activities | | 21,878 |
| | (106,981 | ) | |
Net cash (used) provided by financing activities | | Net cash (used) provided by financing activities | | (75,951) | | | 1,560,486 | |
| | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | 88,452 |
| | (9,773 | ) | |
Net decrease in cash and cash equivalents | | Net decrease in cash and cash equivalents | | (56,109) | | | (386,850) | |
Cash and cash equivalents at beginning of period | | 36,151 |
| | 33,087 |
| Cash and cash equivalents at beginning of period | | 309,171 | | | 603,623 | |
Cash and cash equivalents at end of period | | $ | 124,603 |
| | $ | 23,314 |
| Cash and cash equivalents at end of period | | $ | 253,062 | | | $ | 216,773 | |
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 March 31, 2022 | 48,148 | | | $ | 481 | | | $ | 1,098,933 | | | $ | (743) | | | $ | 1,313,598 | | | (6,697) | | | $ | (24,535) | | | $ | 2,387,734 | |
Net income | — | | | — | | | — | | | — | | | 39,946 | | | — | | | — | | | 39,946 | |
Unrealized loss on available-for-sale securities, net of tax | — | | | — | | | — | | | (66) | | | — | | | — | | | — | | | (66) | |
Exercise of stock options and vesting of restricted stock units | — | | | — | | | (288) | | | — | | | — | | | 122 | | | 8,466 | | | 8,178 | |
Employee taxes paid for withheld shares upon equity award settlement | — | | | — | | | — | | | — | | | — | | | (21) | | | (7,743) | | | (7,743) | |
Stock compensation | — | | | — | | | 25,800 | | | — | | | — | | | — | | | — | | | 25,800 | |
Issuance of shares pursuant to employee stock purchase plan | — | | | — | | | 4,376 | | | — | | | — | | | 12 | | | 102 | | | 4,478 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Balance at June 30, 2022 | 48,148 | | | $ | 481 | | | $ | 1,128,821 | | | $ | (809) | | | $ | 1,353,544 | | | (6,584) | | | $ | (23,710) | | | $ | 2,458,327 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Treasury Stock | | Total Shareholders' Equity |
| Shares | | Amount | | | | | Shares | | Amount | |
Balance at March 31, 2021 | 48,148 | | | $ | 481 | | | $ | 941,960 | | | $ | (46) | | | $ | 1,149,132 | | | (7,424) | | | $ | (30,534) | | | $ | 2,060,993 | |
Net income | — | | | — | | | — | | | — | | | 25,530 | | | — | | | — | | | 25,530 | |
| | | | | | | | | | | | | | | |
Exercise of stock options and vesting of restricted stock units | — | | | — | | | (9,544) | | | — | | | — | | | 150 | | | 20,830 | | | 11,286 | |
Employee taxes paid for withheld shares upon equity award settlement | — | | | — | | | — | | | — | | | — | | | (18) | | | (7,052) | | | (7,052) | |
Stock compensation | — | | | — | | | 25,175 | | | — | | | — | | | — | | | — | | | 25,175 | |
Issuance of shares pursuant to employee stock purchase plan | — | | | — | | | 3,094 | | | — | | | — | | | 9 | | | 68 | | | 3,162 | |
Treasury stock purchases | — | | | — | | | — | | | — | | | — | | | (32) | | | (12,975) | | | (12,975) | |
Purchase Consideration for Converted Stock | — | | | — | | | 1,872 | | | — | | | — | | | — | | | — | | | 1,872 | |
Balance at June 30, 2021 | 48,148 | | | $ | 481 | | | $ | 962,557 | | | $ | (46) | | | $ | 1,174,662 | | | (7,315) | | | $ | (29,663) | | | $ | 2,107,991 | |
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, 2021 | 48,148 | | | $ | 481 | | | $ | 1,075,650 | | | $ | (46) | | | $ | 1,273,614 | | | (6,833) | | | $ | (25,667) | | | $ | 2,324,032 | |
| | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | 79,930 | | | — | | | — | | | 79,930 | |
Unrealized gain (loss) on investment securities, net of tax | — | | | — | | | — | | | (763) | | | — | | | — | | | — | | | (763) | |
Exercise of stock options and vesting of restricted stock units | — | | | — | | | (5,897) | | | — | | | — | | | 279 | | | 22,120 | | | 16,223 | |
Employee taxes paid for withheld shares for taxes upon equity award settlement | — | | | — | | | — | | | — | | | — | | | (50) | | | (20,330) | | | (20,330) | |
Stock compensation | — | | | — | | | 51,079 | | | — | | | — | | | — | | | — | | | 51,079 | |
Issuance of shares pursuant to employee stock purchase plan | — | | | — | | | 7,989 | | | — | | | — | | | 20 | | | 167 | | | 8,156 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Balance at June 30, 2022 | 48,148 | | | $ | 481 | | | $ | 1,128,821 | | | $ | (809) | | | $ | 1,353,544 | | | (6,584) | | | $ | (23,710) | | | $ | 2,458,327 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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, 2020 | 48,148 | | | $ | 481 | | | $ | 905,332 | | | $ | (46) | | | $ | 1,112,156 | | | (7,609) | | | $ | (31,812) | | | $ | 1,986,111 | |
Net income | — | | | — | | | — | | | — | | | 62,506 | | | — | | | — | | | 62,506 | |
Exercise of stock options and vesting of restricted stock units | — | | | — | | | (1,623) | | | — | | | — | | | 346 | | | 31,011 | | | 29,388 | |
Employee taxes paid for withheld shares for taxes upon equity award settlement | — | | | — | | | — | | | — | | | — | | | (37) | | | (16,010) | | | (16,010) | |
Stock compensation | — | | | — | | | 50,899 | | | — | | | — | | | — | | | — | | | 50,899 | |
Issuance of shares pursuant to employee stock purchase plan | — | | | — | | | 6,077 | | | — | | | — | | | 17 | | | 123 | | | 6,200 | |
Treasury stock purchases | — | | | — | | | — | | | — | | | — | | | (32) | | | (12,975) | | | (12,975) | |
Purchase Consideration for Converted Stock | — | | | — | | | 1,872 | | | — | | | — | | | — | | | — | | | 1,872 | |
Balance at June 30, 2021 | 48,148 | | | $ | 481 | | | $ | 962,557 | | | $ | (46) | | | $ | 1,174,662 | | | (7,315) | | | $ | (29,663) | | | $ | 2,107,991 | |
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 SeptemberJune 30, 2017,2022, and December 31, 2016,2021, and operating result amounts are for the three and ninesix months ended SeptemberJune 30, 2017,2022, and 2016,2021, 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, 2016.2021. 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). WeDuring the three and six months ended June 30, 2022, we had approximately $66,000 and $763,000 of other comprehensive loss, net of taxes, from our available-for-sale investment holdings and no items of other comprehensive income (loss) forduring the three and ninesix months ended SeptemberJune 30, 20172021.
(2) Accounting Standards and 2016.Significant Accounting Policies
Certain amountsSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Except for the previousJanuary 1, 2022, adoption of ASU 2021-08 - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (ASC 805)(“ASU 2021-08”), 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, 2021, filed with the SEC on February 23, 2022, that have had a material impact on our condensed consolidated financial statements and related notes. See Recently Adopted Accounting Pronouncements below.
USE OF ESTIMATES
The preparation of our financial statements in conformity with 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 of goodwill; 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 those services are highly interdependent or interrelated to the product’s functionality. The transaction price is allocated to the distinct performance obligations on a relative standalone selling price (“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.
For e-filing transaction fees and transaction-based revenues from digital government services and online payments, we have the right to charge the customer an amount that directly corresponds with the value to the customer of our performance to date. Therefore, we recognize revenue for these services over time based on the amount billable to the customer in accordance with the 'as invoiced' practical expedient in ASC 606-10-55-18. In some cases, we are paid on a fixed fee basis and recognize the revenue ratably over the contractual period. 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 15 - “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 June 30, 2022, and December 31, 2021, total current and long-term accounts receivable, net of allowance for losses and sales adjustments, was $610.2 million and $535.0 million, respectively. We have recorded unbilled receivables of $134.5 million and $140.3 million at June 30, 2022 and December 31, 2021, respectively. Included in unbilled receivables are retention receivables of $7.9 million and $7.7 million at June 30, 2022 and December 31, 2021, 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 the loss is incurred. Since most of our clients are domestic governmental entities, we rarely incur a credit 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 $12.5 million and $12.1 million at June 30, 2022, and December 31, 2021, respectively, does not include provisions for credit losses. Because we rarely experience credit losses with our clients, we have not recorded a material reserve for credit losses.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
We assess goodwill for impairment annually, or more frequently whenever events or changes in circumstances indicate its carrying value may not be recoverable. We begin with the qualitative assessment of whether it is more likely than not that a reporting unit's fair value is less than its carrying value before applying the quantitative assessment described below. When testing goodwill for impairment quantitatively, we first compare the fair value of each reporting unit with its carrying amount. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized. The fair values calculated in our impairment tests are determined using discounted cash flow models involving several assumptions (Level 3 inputs). The assumptions that are used are based upon what we believe a hypothetical marketplace participant would use in estimating fair value. We base our fair value estimates on assumptions we believe to be reasonable but are inherently uncertain. We evaluate the reasonableness of the fair value calculations of our reporting units by comparing the total of the fair value of all of our reporting units to our total market capitalization.
Determining the fair value of our reporting units involves the use of significant estimates and assumptions and considerable management judgment. We base our fair value estimates on assumptions we believe to be reasonable at the time, but such assumptions are subject to inherent uncertainty. Changes in market conditions or other factors outside of our control, such as a worsening of expected impact of COVID-19, could cause us to change key assumptions and our judgment about a reporting unit’s prospects. Similarly, in a specific period, a reporting unit could significantly underperform relative to its historical or projected future operating results. Either situation could result in a meaningfully different estimate of the fair value of our reporting units, and a consequent future impairment charge.
We performed our annual assessment during the fourth quarter of 2021, in which our impairment analysis did not result in an impairment charge. Since our assessment and through June 30, 2022, we have had no triggering events or change in circumstances indicating any potential impairment.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In October 2021, the FASB issued ASU 2021-08 - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (ASC 805)(“ASU 2021-08”). ASU 2021-08 requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities (deferred revenue) from acquired contracts using the revenue recognition guidance in Topic 606. Under this "Topic 606 approach," the acquirer applies the revenue model as if it had originated the contracts. This is a departure from the current requirement to measure contract assets and contract liabilities at fair value. ASU 2021-08 is effective for all public business entities in annual and interim periods starting after December 15, 2022, and early adoption is permitted. An entity that early adopts should apply the amendments (1) retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of early application and (2) prospectively to all business combinations that occur on or after the date of initial application. We early adopted as of January 1, 2022. The adoption of ASU 2021-08 resulted in no adjustments to the current year presentation.fair value of the deferred revenue balances assumed in our US eDirect acquisition, completed on February 8, 2022. See Note 3, “Acquisitions,” for further discussion.
(2)(3) Acquisitions
On August 2, 2017,February 8, 2022, we acquired all of the capital stock of Digital Health Department,US eDirect Inc. ("DHD")(US eDirect), a company that provides environmental health software, offering a software-as-a-service (SaaS) solutionmarket-leading provider of technology solutions for public health compliancecampground and inspections processes.outdoor recreation management. The total purchase price, net of debt assumed, cash acquired of $6.4 million, was $3.9approximately $116.7 million, consisting of which $3.7$117.6 million was paid in cash and $0.2approximately $5.5 million was accruedrelated to indemnity holdbacks, subject to certain post-closing adjustments.
We have performed a preliminary valuation analysis of the fair market value of US eDirect's assets and liabilities. The following table summarizes the preliminary allocation of the purchase price as of September 30, 2017.the acquisition date:
| | | | | | | | |
Cash | | $ | 6,361 | |
Accounts receivable | | 1,730 | |
Other current assets | | 594 | |
Other noncurrent assets | | 698 | |
Goodwill and identifiable intangible assets | | 125,751 | |
Accounts payable | | (1,881) | |
Accrued expenses | | (357) | |
Other noncurrent liabilities | | (743) | |
Deferred revenue | | (688) | |
Deferred tax liabilities, net | | (8,428) | |
Total consideration | | $ | 123,037 | |
In connection with this transaction, we acquired alltotal tangible assets of $9.4 million and assumed liabilities of approximately $3.7 million. We recorded goodwill of approximately $91.7 million, none of which is expected to be deductible for tax purposes, and other identifiable intangible assets of approximately $34.1 million. The identifiable intangible assets are attributable to customer relationships, acquired software, and trade name and will be amortized over a weighted average period of approximately 13 years. We recorded net deferred tax liabilities of $8.4 million related to the tax effect of our estimated fair value allocations. Since the acquisition date, we recorded adjustments to the preliminary opening balance sheet attributed to decreases in other current assets, other noncurrent assets, identifiable intangible assets, accrued expenses, and deferred revenue and increases in accounts receivable, accounts payable, and deferred tax liabilities, resulting in a net increase to goodwill of approximately $10.5 million.
The goodwill of approximately $91.7 million arising from this acquisition is primarily attributed to our ability to generate increased revenues, earnings, and cash flow by expanding our addressable market and client base.
The operating results of US eDirect are included with the operating results of the capital stockPlatform Technologies segment since its date of Modria.com, Inc., a company that specializesacquisition. The impact of the US eDirect acquisition on our operating results, assets, and liabilities is not material. For the six months ended June 30, 2022, we incurred fees of approximately $1.0 million for financial advisory, legal, accounting, due diligence, valuation, and other various services necessary to complete acquisitions. These costs were expensed in online dispute resolution for government2022 and commercial entities. The total purchase price, netare included in selling, general and administrative expenses in the accompanying condensed consolidated statements 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.
income.
As of SeptemberJune 30, 2017,2022, the purchase price allocationsallocation for DHD and Modria.com areUS eDirect is not yet complete. Thefinal; therefore, certain preliminary valuation estimates of fair value assumed at eachthe acquisition date for intangibles, liabilities, deferred revenue,intangible assets, receivables, and related deferred taxes are subject to change as valuations are finalized. The impactOur balance sheet as of both acquisitionsJune 30, 2022, reflects the allocation of the purchase price to the net assets acquired based on our operating results is not material.
(3) Shareholders’ Equity
The following table details activity in our common stock:
|
| | | | | | | | | | | | | | |
| | Nine months ended September 30, |
| | 2017 | | 2016 |
| | Shares | | Amount | | Shares | | Amount |
Purchases of treasury shares | | (42 | ) | | $ | (6,171 | ) | | (758 | ) | | $ | (94,499 | ) |
Stock option exercises | | 787 |
| | 33,568 |
| | 564 |
| | 15,089 |
|
Employee stock plan purchases | | 40 |
| | 5,342 |
| | 34 |
| | 4,429 |
|
As of September 30, 2017, we had authorization from our board of directors to repurchase up to 2.0 million additional shares of Tyler common stock.
(4) Other Assets
As of September 30, 2017, we have $61.7 million in investment grade corporate and municipal bonds and asset backed securities with maturity dates ranging from 2017 through 2021. We intend to hold these securities to maturity and have classified them as such. We believe cost approximatestheir estimated fair value becauseat the date of the relatively short duration of these investments.acquisition. The fair valuesvalue of these securities are considered Level II as theythe assets and liabilities acquired are based on valuations using Level 3 unobservable inputs from quoted prices in markets that are not activesupported by little or other observableno market data. These investmentsactivity and that are included in short-term investments and non-current investments and other assets.
We have a $15.0 million investment in convertible preferred stock representing a 20% interest in Record Holdings Pty Limited, a privately held Australian company specializing in digitizing the spoken word in court and legal proceedings. The investment in convertible preferred stock is accounted under the cost method because the Company does not have the abilitysignificant 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’s cost method investments are assessed for impairment. The Company does 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-current investmentsassets or liabilities.
The following unaudited pro forma consolidated operating results information has been prepared as if the acquisition of US eDirect had occurred on January 1, 2021, after giving effect to certain adjustments, including amortization of intangibles, transaction costs, and other assets.tax effects.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Revenues | | $ | 468,685 | | | $ | 409,555 | | | $ | 926,014 | | | $ | 707,967 | |
Net income | | 39,946 | | | 25,991 | | | 68,183 | | | 62,099 | |
Basic earnings per share | | $ | 0.96 | | | $ | 0.64 | | | $ | 1.64 | | | $ | 1.52 | |
Diluted earnings per share | | $ | 0.94 | | | $ | 0.62 | | | $ | 1.61 | | | $ | 1.47 | |
The pro forma information above does not purport to represent what our results of operations actually would have been had such transaction occurred on the date specified or to project our results of operations for any future period.
(4) Debt
The following table summarizes our total outstanding borrowings related to the 2021 Credit Agreement and Convertible Senior Notes:
| | | | | | | | | | | | | | | | | | | | | | | |
| Rate | | Maturity Date | | June 30, 2022 | | December 31, 2021 |
2021 Credit Agreement | | | | | | | |
Revolving credit facility | L + 1.50% | | April 2026 | | $ | — | | | $ | — | |
Term Loan A-1 | L + 1.50% | | April 2026 | | 570,000 | | | 585,000 | |
Term Loan A-2 | L + 1.25% | | April 2024 | | 105,000 | | | 170,000 | |
Convertible Senior Notes due 2026 | 0.25% | | March 2026 | | 600,000 | | | 600,000 | |
Total borrowings | | | | | 1,275,000 | | | 1,355,000 | |
Less: unamortized debt discount and debt issuance costs | | | | | (11,912) | | | (13,724) | |
Total borrowings, net | | | | | 1,263,088 | | | 1,341,276 | |
| | | | | | | |
Less: current portion of debt | | | | | (30,000) | | | (30,000) | |
Carrying value | | | | | $ | 1,233,088 | | | $ | 1,311,276 | |
2021 Credit Agreement
In connection with the completion of Credit
On November 16, 2015,the acquisition of NIC on April 21, 2021, we, as borrower, entered into a $300.0 millionnew $1.4 billion Credit Agreement (the “2021 Credit Agreement”) with the various lender partieslenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent, Swingline Lender, and Issuing Lender. The 2021 Credit Agreement provides for (1) a senior unsecured revolving credit facility in an aggregate principal amount of up to $500 million, including sub-facilities for standby letters of credit and swingline loans (the “Credit“Revolving Credit Facility”), (2) an amortizing five-year term loan in the aggregate amount of $600 million (the “Term Loan A-1”), and (3) a non-amortizing three-year term loan in the aggregate amount of $300 million (the “Term Loan A-2”) and, together (the “Term Loans”). The 2021 Credit Agreement matures on April 20, 2026, and the loans may be prepaid at any time, without premium or penalty, subject to certain minimum amounts and payment of any LIBOR breakage costs. In addition to the required amortization payments on the Term Loan A-1 of 5% annually, certain mandatory quarterly prepayments of the Term Loans and the Revolving Credit Facility provides for a revolving credit line up to $300.0 million, including a $10.0 million sublimit for letterswill be required (i) upon the issuance or incurrence of credit. The Credit Facility matures on November 16, 2020. Borrowingsadditional debt not otherwise permitted under the 2021 Credit Facility may be used for general corporate purposes, including working capital requirements, acquisitionsAgreement and share repurchases.
(ii) upon the occurrence of certain asset sales and insurance and condemnation recoveries, subject to certain thresholds, baskets, and reinvestment provisions as provided in the 2021 Credit Agreement.
Borrowings under the Revolving Credit Facility and the Term Loan A-1 bear interest, at the Company’s option, at a per annum rate of either (1) Wells Fargo Bank’sthe Administrative Agent’s prime commercial lending rate (subject to certain higher rate determinations) (the “Base Rate”) plus a margin of 0.25%0.125% to 1.00%0.75% or (2) the 30, 60, 90one-, three-, six-, or, 180 daysubject to approval by all lenders, twelve-month LIBOR rate plus a margin of 1.25%1.125% to 2.00%1.75%. AsThe Term Loan A-2 bears interest, at the Company’s option, at a per annum rate of September 30, 2017,either (1) the Base Rate plus a margin of 0% to 0.5% or (2) the one-, three-, six-, or, subject to approval by all lenders, twelve-month LIBOR rate plus a margin of 0.875% to 1.5%. The margin in each case is based upon the Company’s total net leverage ratio, as determined pursuant to the 2021 Credit Agreement. The 2021 Credit Agreement has customary benchmark replacement language with respect to the replacement of LIBOR once LIBOR becomes unavailable. In addition to paying interest rates were 4.50%on the outstanding principal of loans under the Wells Fargo Bank's prime rate and 2.49% under a 30-day LIBOR contract. TheRevolving Credit Facility, the Company is secured by substantially allrequired to pay a commitment fee on the average daily unused portion of our assets. Thethe Revolving Credit Facility, initially 0.25% per annum, ranging from 0.15% to 0.3% based upon the Company’s total net leverage ratio.
The 2021 Credit Agreement 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 SeptemberJune 30, 2017,2022, we were in compliance with those covenants.
Convertible Senior Notes due 2026
On March 9, 2021, we issued 0.25% Convertible Senior Notes due 2026 in the aggregate principal amount of $600.0 million (“the Convertible Senior Notes” or “the Notes”). The Convertible Senior Notes were issued pursuant to, and are governed by, an indenture (the “Indenture”), dated as of March 9, 2021, with U.S. Bank National Association, as trustee. The net proceeds from the issuance of the Convertible Senior Notes were $591.4 million, net of initial purchasers’ discounts of $6.0 million and debt issuance costs of $2.6 million.
The Convertible Senior Notes are senior, unsecured obligations and are (i) equal in right of payment with our future senior, unsecured indebtedness; (ii) senior in right of payment to our future indebtedness that is expressly subordinated to the Notes; (iii) effectively subordinated to our future secured indebtedness, to the extent of the value of the collateral securing that indebtedness; and (iv) structurally subordinated to all future indebtedness and other liabilities, including trade payables, and (to the extent we are not a holder thereof) preferred equity, if any, of our subsidiaries.
The Convertible Senior Notes accrue interest at a rate of 0.25% per annum, payable semi-annually in arrears on March 15 and September 15 of each year, beginning on September 15, 2021. The Convertible Senior Notes mature on March 15, 2026, unless earlier repurchased, redeemed, or converted.
Before September 15, 2025, holders of the Convertible Senior Notes have the right to convert their Convertible Senior Notes only upon the occurrence of certain events. Under the terms of the Indenture, the Convertible Senior Notes are convertible into common stock of Tyler Technologies, Inc. (referred to as “our common stock” herein) at the following times or circumstances:
•during any calendar quarter commencing after the calendar quarter ended June 30, 2021, if the last reported sale price per share of our common stock exceeds 130% of the conversion price for each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter;
•during the five consecutive business days immediately after any five consecutive trading day period (such five consecutive trading day period, the “Measurement Period”) if the trading price per $1,000 principal amount of Convertible Senior Notes, as determined following a request by their holder in accordance with the procedures in the indenture, for each trading day of the Measurement Period was less than 98% of the product of the last reported sale price per share of our common stock on such trading day and the conversion rate on such trading day;
•upon the occurrence of certain corporate events or distributions on our common stock, including but not limited to a “Fundamental Change” (as defined in the Indenture);
•upon the occurrence of specified corporate events; or
•on or after September 15, 2025, until the close of business on the second scheduled trading day immediately preceding the maturity date, March 15, 2026.
With certain exceptions, upon a change of control or other fundamental change (both as defined in the Indenture governing the Convertible Senior Notes), the holders of the Convertible Senior Notes may require us to repurchase all or part of the principal amount of the Convertible Senior Notes at a repurchase price equal to 100% of the principal amount of the Convertible Senior Notes, plus any accrued and unpaid interest to, but excluding, the redemption date.
As of June 30, 2022, none of the conditions allowing holders of the Convertible Senior Notes to convert have been met.
From and including September 15, 2025, holders of the Convertible Senior Notes may convert their Convertible Senior Notes at any time at their election until the close of business on the second scheduled trading day immediately before the maturity date. We will settle any conversions of the Convertible Senior Notes either entirely in cash or in a combination of cash and shares of common stock, at our election. However, upon conversion of any Convertible Senior Notes, the conversion value, which will be determined over an “Observation Period” (as defined in the Indenture) consisting of 30 2017,trading days, will be paid in cash up to at least the principal amount of the Notes being converted.
The initial conversion rate is 2.0266 shares of common stock per $1,000 principal amount of Convertible Senior Notes, which represents an initial conversion price of approximately $493.44 per share of common stock. The conversion rate and conversion price will be subject to adjustment upon the occurrence of certain events. In addition, if certain corporate events that constitute a “Make-Whole Fundamental Change” (as defined in the Indenture) occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time.
The Convertible Senior Notes are redeemable, in whole or in part, at our option at any time, and from time to time, on or after March 15, 2024 and on or before the 30th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, up to, but excluding, the redemption date, but only if the last reported sale price per share of our common stock exceeds 130% of the conversion price of the Notes on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date we send the related redemption notice; and (ii) the trading day immediately before the date we send such notice. In addition, calling any Note for redemption constitutes a Make-Whole Fundamental Change with respect to that Note, in which case the conversion rate applicable to the conversion of that Note will be increased in certain circumstances if it is converted after it is called for redemption.
Effective Interest
The weighted average interest rates for the borrowings under the 2021 Credit Agreement and Convertible Senior Notes due 2026 were 2.71% and 0.25%, as of June 30, 2022, respectively. During the six months ended June 30, 2022, the effective interest rates for our borrowings were 2.38% and 0.54% for the 2021 Credit Agreement and the Convertible Senior Notes, respectively. The following sets forth the interest expense recognized related to the borrowings under the 2021 Credit Agreement and Convertible Senior Notes and is included in interest expense in the accompanying condensed consolidated statements of income:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Contractual interest expense - Revolving Credit Facility | $ | (315) | | | $ | (534) | | | $ | (628) | | | $ | (534) | |
Contractual interest expense - Term Loans | (4,375) | | | (2,660) | | | (7,369) | | | (2,660) | |
Contractual interest expense - Convertible Senior Notes | (375) | | | (375) | | | (750) | | | (458) | |
Amortization of debt discount and debt issuance costs | (1,149) | | | (959) | | | (2,271) | | | (1,054) | |
Interest expense and amortization of debt issuance costs - terminated 2019 Credit Agreement and Senior Unsecured Bridge loan facility | — | | | (7,909) | | | — | | | (8,209) | |
Total | $ | (6,214) | | | $ | (12,437) | | | $ | (11,018) | | | $ | (12,915) | |
As of June 30, 2022, we had $600 million in outstanding principal for the Convertible Senior Notes due 2026. Under our 2021 Credit Agreement, we had $675 million in outstanding principal for the unsecured term loans, no outstanding borrowings under the 2021 Revolving Credit Facility, and twoan available borrowing capacity of $500 million as of June 30, 2022. As of June 30, 2022, we had one outstanding lettersstandalone letter of credit totaling $2.2$2.0 million. Available borrowing capacityThe letter of credit, which guarantees our performance under a client contract, renews automatically annually unless canceled in writing, and expires in the third quarter of 2026. For the six months ended June 30, 2022, we repaid $80.0 million of the unsecured term loans under the 2021 Credit Agreement.
In the six months ended June 30, 2022, and 2021, respectively, we made interest payments of $5.7 million and $9.4 million, associated with the 2021 Credit Agreement and the Convertible Senior Notes, including payment of a $6.4 million commitment fee related to the senior unsecured bridge loan facility paid in 2021.
(5) Financial Instruments
The following table presents our financial instruments:
| | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 |
Cash and cash equivalents | | $ | 253,062 | | | $ | 309,171 | |
Held-to-maturity investments | | — | | | 98,653 | |
Available-for-sale investments | | 60,930 | | | — | |
Equity investments | | 10,000 | | | 10,000 | |
Total | | $ | 323,992 | | | $ | 417,824 | |
Cash and cash equivalents consist primarily of money market funds with original maturity dates of three months or less, for which we determine fair value through quoted market prices.
Our available-for-sale securities were historically classified as held-to-maturity. During the fourth quarter of 2021, management determined that our investment portfolio would be transferred from held-to-maturity to available-for-sale, in order to have the flexibility to buy and sell investments and maximize cash liquidity for potential acquisitions or for debt repayments. Accordingly, our investment portfolio is now classified as available-for-sale as of June 30, 2022. Our available-for-sale investments primarily consist of investment grade corporate bonds, municipal bonds, and asset-backed securities with maturity dates through 2027. These investments are presented at fair value and are included in short-term investments and non-current investments in the accompanying condensed consolidated balance sheets. Unrealized gains or losses associated with the investments are included in accumulated other comprehensive loss, net of tax in the accompanying condensed consolidated balance sheets and statements of comprehensive income. For our available-for-sale investments, we do not have the intent to sell, nor is it more likely than not that we would be required to sell before recovery of their cost basis.
As of June 30, 2022, we have an accrued interest receivable balance of approximately $318,000 which is included in accounts receivable, net. We do not measure an allowance for credit losses for accrued interest receivables. We record any losses within the maturity period or at the time of sale 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 and six months ended June 30, 2022, we have recorded no credit losses for accrued interest receivables. Interest income and amortization of discounts and premiums are included in other income, net in the accompanying condensed consolidated statements of income.
The following table presents the components of our available-for-sale investments:
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Amortized cost | $ | 62,016 | | | $ | — | |
Unrealized gains | 39 | | | — | |
Unrealized losses | (1,125) | | | — | |
Estimated fair value | $ | 60,930 | | | $ | — | |
As of June 30, 2022, we have $34.5 million of available-for-sale debt securities with contractual maturities of one year or less and $26.5 million with contractual maturities great than one year.
The following table presents the activity on our available-for-sale investments:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Proceeds from sales and maturities | $ | 17,923 | | | $ | 56,364 | | | $ | 40,595 | | | $ | 91,395 | |
Realized losses on sales, net of tax | (48) | | | — | | | (7) | | | — | |
Our equity investments consist of an 18% interest in BFTR, LLC., a wholly owned subsidiary of Bison Capital Partners V L.P. BFTR, LLC, a privately held Australian company specializing in digitizing the spoken word in court and legal proceedings. The investment in common stock is accounted for under the equity method because we do not have the ability to exercise significant influence over the investee; and as the securities do not have readily determinable fair values, our investment is carried at cost less any impairment write-downs.
(6) Other Comprehensive Income (Loss)
The following tables present the changes in the balances of accumulated other comprehensive loss, net of tax by component:
| | | | | | | | | | | | | | | | | |
| Unrealized Loss On Available-For-Sales Securities | | Other | | Accumulated Other Comprehensive Loss |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Balance as of March 31, 2022 | $ | (743) | | | $ | — | | | $ | (743) | |
Other comprehensive loss before reclassifications | (114) | | | — | | | (114) | |
Reclassification adjustment of unrealized losses on securities transferred from held-to-maturity | — | | | — | | | — | |
Reclassification adjustment for net loss on sale of available-for-sale securities, included in net income | 48 | | | — | | | 48 | |
Other comprehensive loss | (66) | | | — | | | (66) | |
Balance as of June 30, 2022 | $ | (809) | | | $ | — | | | $ | (809) | |
| | | | | | | | | | | | | | | | | |
| Unrealized Loss On Available-For-Sales Securities | | Other | | Accumulated Other Comprehensive Loss |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Balance as of December 31, 2021 | $ | (46) | | | $ | — | | | $ | (46) | |
Other comprehensive loss before reclassifications | (743) | | | — | | | (743) | |
Reclassification adjustment of unrealized losses on securities transferred from held-to-maturity | (27) | | | — | | | (27) | |
Reclassification adjustment for net loss on sale of available-for-sale securities, included in net income | 7 | | | — | | | 7 | |
Other comprehensive loss | (763) | | | — | | | (763) | |
Balance as of June 30, 2022 | $ | (809) | | | $ | — | | | $ | (809) | |
(7) Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market for that asset or liability. Guidance on fair value measurements and disclosures establishes a valuation hierarchy for disclosure of inputs used in measuring fair value defined as follows:
•Level 1—Inputs are unadjusted quoted prices that are available in active markets for identical assets or liabilities.
•Level 2—Inputs include quoted prices for similar assets and liabilities in active markets and quoted prices in non-active markets, inputs other than quoted prices that are observable, and inputs that are not directly observable, but are corroborated by observable market data.
•Level 3—Inputs that are unobservable and are supported by little or no market activity and reflect the use of significant management judgment.
The classification of a financial asset or liability within the hierarchy is determined based on the least reliable level of input that is significant to the fair value measurement. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. We also consider the counterparty and our own non-performance risk in our assessment of fair value.
The following table presents fair values of our financial and debt instruments categorized by their fair value hierarchy as of June 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
Available-for-sale investments | $ | — | | | $ | 60,930 | | | $ | — | | | $ | 60,930 | |
Equity investments | — | | | — | | | 10,000 | | | 10,000 | |
2021 Credit Agreement | | | | | | | |
Revolving Credit Facility | — | | | — | | | — | | | — | |
Term Loan A-1 | — | | | 566,034 | | | — | | | 566,034 | |
Term Loan A-2 | — | | | 103,430 | | | — | | | 103,430 | |
Convertible Senior Notes due 2026 | — | | | 567,006 | | | — | | | 567,006 | |
Assets that are Measured at Fair Value on a Recurring Basis
Cash and cash equivalents, accounts receivable, accounts payable, short-term obligations, and certain other assets at cost approximate fair value because of the short maturity of these instruments.
As of June 30, 2022, we have $60.9 million in available-for-sale investment grade corporate bonds, municipal bonds and asset-backed securities with maturity dates through 2027. The fair values of these securities are considered Level 2 as they are based on inputs from quoted prices in markets that are not active or other observable market data.
Assets that are Measured at Fair Value on a Nonrecurring Basis
As of June 30, 2022, we have an 18% interest in BFTR, LLC. Periodically, our equity method investments are assessed for impairment. We do not reassess the fair value of equity 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. No events or changes in circumstances have occurred during the period that require reassessment. There has been no impairment of our cost method investment for the periods presented. This investment is included in other assets in the accompanying consolidated balance sheets.
We assess goodwill for impairment annually on October 1. In addition, we review goodwill, property and equipment, and other intangibles for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable.During the fourth quarter of 2021, we completed our annual assessment of goodwill which did not result in an impairment charge. Further, we identified no indicators of impairment to long-lived and other assets and therefore, no impairment was recorded as of and for the three and six months ended June 30, 2022.
Financial instruments measured at fair value only for disclosure purposes
The fair value of our borrowing under our 2021 Credit Agreement would approximate book value as of June 30, 2022, because our interest rates reset approximately every 30 days or less.
The carrying amount of the Revolving Credit Facility was $297.8 million.and Term Loans is the par value less the debt discount and debt issuance costs that are amortized to interest expense using the effective interest method over the terms of the Term Loans. Interest expense is included in the accompanying condensed consolidated statements of income.
The fair value of our Convertible Senior Notes due 2026 is determined based on quoted market prices for a similar liability when traded as an asset in an active market, a Level 2 input. See Note 4, “Debt,” for further discussion.
The carrying amount of the Convertible Senior Notes is the par value less the debt discount and debt issuance costs that are amortized to interest expense using the effective interest method over the term of the Convertible Senior Notes. Interest expense is included in the accompanying condensed consolidated statements of income.
The following table presents the fair value and carrying value, net, of the 2021 Credit Agreement and our Convertible Notes due 2026):
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value at | | Carrying Value at |
| June 30, 2022 | | December 31, 2021 | | June 30, 2022 | | December 31, 2021 |
2021 Credit Agreement | | | | | | | |
Revolving Credit Facility | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Term Loan A-1 | 566,034 | | | 580,515 | | | 566,034 | | | 580,515 | |
Term Loan A-2 | 103,430 | | | 167,997 | | | 103,430 | | | 167,996 | |
Convertible Notes due 2026 | 567,006 | | | 736,662 | | | 593,624 | | | 592,765 | |
| $ | 1,236,470 | | | $ | 1,485,174 | | | $ | 1,263,088 | | | $ | 1,341,276 | |
(8) Income Tax Provision
For the three and nine months ended September 30, 2017, weWe had an effective income tax ratesrate of 12.1%21.3% and 12.3%, respectively, compared to 2.7% and 16.5%21.8% for the three and ninesix months ended SeptemberJune 30, 2016,2022, respectively, compared to 2.2% and 2.9% for the three and six months ended June 30, 2021, respectively. The increase in the effective tax rates for the three and six months ended June 30, 2022, respectively, as compared to the same period in 2021, was principally driven by a decrease in the excess tax benefits related to stock incentive awards and an increase in reserves for state income tax benefits which are no longer more likely than not to be realized.
The effective income tax rates for the periods presented were different from the statutory United States federal income tax rate of 35% principally21% primarily due to excess tax benefits related to stock option exercises.incentive awards and the tax benefit of research tax credits, offset by state income taxes, non-deductible business expenses, and reserves for unrecognized state income tax benefits. The excess tax benefits related to stock option exercisesincentive awards realized were $9.0$1.7 million and $27.6$4.7 million for the three and ninesix months ended SeptemberJune 30, 2017,2022, respectively, as compared to $13.3$6.4 million and $20.8$15.2 million for the three and ninesix months ended SeptemberJune 30, 2016,2021, 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. Excluding the excess tax benefits, the effective rates were 32.8%tax rate was 24.6% and 36.0%26.4% for the three and ninesix months ended SeptemberJune 30, 2017,2022, respectively, compared to 39.3%26.7% and 38.5%26.5% for the three and ninesix months ended SeptemberJune 30, 2016,2021, 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.
We made tax payments of $29.0$24.3 million and $25.0 million$967,000 in the ninesix months ended SeptemberJune 30, 2017,2022, and September2021, respectively.
(9) Shareholders’ Equity
The following table details activity in our common stock ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount |
Purchases of treasury shares | | — | | | $ | — | | | (32) | | | $ | (12,975) | | | — | | | $ | — | | | (32) | | | $ | (12,975) | |
Stock option exercises | | 51 | | | 8,178 | | | 89 | | | 11,286 | | | 101 | | | 16,223 | | | 210 | | | 29,388 | |
Employee stock plan purchases | | 12 | | | 4,478 | | | 9 | | | 3,162 | | | 20 | | | 8,156 | | | 17 | | | 6,200 | |
Restricted stock units vested, net of withheld shares upon award settlement | | 50 | | | (7,743) | | | 43 | | | (7,052) | | | 128 | | | (20,330) | | | 99 | | | (16,010) | |
As of June 30, 2016, respectively.2022, we have authorization from our board of directors to repurchase up to 2.4 million additional shares of our common stock.
(10) Share-Based Compensation
(7)The following table summarizes share-based compensation expense related to share-based awards recorded in the condensed consolidated statements of income, pursuant to ASC 718, Stock Compensation:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Subscriptions, software services and maintenance | | $ | 6,867 | | | $ | 5,909 | | | $ | 13,639 | | | $ | 10,909 | |
Selling, general and administrative expenses | | 18,933 | | | 19,266 | | | 37,440 | | | 39,990 | |
Total share-based compensation expense | | $ | 25,800 | | | $ | 25,175 | | | $ | 51,079 | | | $ | 50,899 | |
(11) 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 June 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2022 | | 2021 | | 2022 | | 2021 |
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 | $ | 39,946 | | | $ | 25,530 | | | $ | 79,930 | | | $ | 62,506 | |
Denominator: | | |
| | |
| |
|
| |
|
| Denominator: | | | | | | | |
Weighted-average basic common shares outstanding | | 37,391 |
| | 36,433 |
| | 37,238 |
| | 36,438 |
| Weighted-average basic common shares outstanding | 41,500 | | | 40,765 | | | 41,499 | | | 40,761 | |
Assumed conversion of dilutive securities: | | | | | |
| |
| Assumed conversion of dilutive securities: | | | | |
Stock options | | 1,951 |
| | 2,629 |
| | 2,028 |
| | 2,576 |
| |
Stock awards | | Stock awards | 821 | | | 1,329 | | | 950 | | | 1,387 | |
Convertible Senior Notes | | Convertible Senior Notes | — | | | — | | | — | | | — | |
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 | 42,321 | | | 42,094 | | | 42,449 | | | 42,148 | |
Earnings per common share: | | |
| | |
| |
|
| |
|
| Earnings per common share: | | | | | | | |
Basic | | $ | 1.02 |
| | $ | 0.97 |
| | $ | 2.74 |
| | $ | 2.16 |
| Basic | $ | 0.96 | | | $ | 0.63 | | | $ | 1.93 | | | $ | 1.53 | |
Diluted | | $ | 0.97 |
| | $ | 0.91 |
| | $ | 2.60 |
| | $ | 2.02 |
| Diluted | $ | 0.94 | | | $ | 0.61 | | | $ | 1.88 | | | $ | 1.48 | |
For the three and ninesix months ended SeptemberJune 30, 2017,2022, and 2021, stock optionsawards, representing the right to purchase common stock of approximately 1,499,000486,000 shares and 1,303,000350,000 shares and 191,000 shares and 166,000 shares, respectively, were not included in the computation of diluted earnings per share because their inclusion would have had an anti-dilutiveantidilutive effect. For
We have used the threeif-converted method for calculating any potential dilutive effect of the Convertible Senior Notes due 2026 on our diluted net income per share. Under the if-converted method, the Notes are assumed to be converted at the beginning of the period and nine months ended September 30, 2016, stock options representing the rightresulting common shares are included in the denominator of the diluted earnings per share calculation for the entire period being presented and interest expense, net of tax, recorded in connection with the Convertible Senior Notes is not added back to purchasethe numerator, only in the periods in which such effect is dilutive. The approximately 1.2 million remaining resulting common stock of approximately 741,000 shares and 769,000 shares, respectively, wererelated to the Notes are not included in the computationdilutive weighted-average common shares outstanding calculation for the three and six months ended June 30, 2022, and 2021, as their effect would be anti-dilutive given none of diluted earnings per share because their inclusion wouldthe conversion features have had an anti-dilutive effect.
(8) Share-Based Compensation
The following table summarizes share-based compensation expensebeen triggered. See Note 4, "Debt"for discussion on the conversion features related to share-based awardsthe Convertible Senior Notes.
(12) 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 with original maturities between one to 10 years from the execution date. Some of these leases include options to extend for up to five years. We have no finance leases and no related party lease agreements as of June 30, 2022. Right-of-use lease assets and lease liabilities for our operating leases were recorded in the condensed consolidated balance sheets.
The components of operating lease expense were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Lease Costs | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Operating lease cost | | $ | 2,586 | | | $ | 4,388 | | | $ | 6,008 | | | $ | 6,110 | |
Short-term lease cost | | 488 | | | 731 | | | 994 | | | 1,212 | |
Variable lease cost | | 204 | | | 496 | | | 574 | | | 927 | |
Net lease cost | | $ | 3,278 | | | $ | 5,615 | | | $ | 7,576 | | | $ | 8,249 | |
Supplemental information related to leases is as follows:
| | | | | | | | | | | | | | |
Other Information | | Six Months Ended June 30, |
| | 2022 | | 2021 |
Cash flows: | | | | |
Cash amounts paid included in the measurement of lease liabilities: | | | | |
Operating cash outflows from operating leases | | $ | 7,238 | | | $ | 6,203 | |
| | | | |
Right-of-use assets obtained in exchange for lease obligations (non-cash): | | | | |
Operating leases | | $ | 6,606 | | | $ | 2,961 | |
| | | | |
Lease term and discount rate: | | | | |
Weighted average remaining lease term (years) | | 5.8 | | 3.9 |
Weighted average discount rate | | 1.64 | % | | 2.51 | % |
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 2022 and 2027, and some have options to extend the lease for up to 10 years. We determine if an arrangement is a lease at inception. None of our leases allow the lessee to purchase the leased asset.
Rental income from third-party tenants for the three and six months ended June 30, 2022 totaled $493,000 and $798,000, respectively, and for the three and six months ended June 30, 2021 totaled $296,000 and $590,000, respectively. Rental income is included in hardware and other revenue in the condensed consolidated statements of income. As of June 30, 2022, future minimum operating rental income pursuantbased on contractual agreements is as follows:
| | | | | | | | |
Year ending December 31, | | Amount |
2022 (Remaining) | | $ | 914 | |
2023 | | 1,858 | |
2024 | | 1,898 | |
2025 | | 1,363 | |
2026 | | 408 | |
Thereafter | | 131 | |
Total | | $ | 6,572 | |
(13) Commitments and Contingencies
Litigation
Other than routine litigation incidental to Accounting Standards Codification (“ASC”) 718, Stock Compensation:our business, there are no material legal proceedings pending to which we are party or to which any of our properties are subject.
|
| | | | | | | | | | | | | | | | |
| | 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)(14) Segment and Related Information
We provide integrated information management solutions and services for the public sector, with a focus on local governments.sector.
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;
•appraisal and tax software solutions, and property appraisal services.
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 courtsproperty appraisal services;
•development platform solutions including case management and justicebusiness process management; and public safety software solutions unit meet the criteria for aggregation
•NIC digital government and are presentedpayments solutions.
In accordance with ASC 280-10, Segment Reporting, we report our results in one2 reportable segments. The Enterprise Software ("ES") 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. The Appraisalbusiness units presented in the ES reportable segment are the following: financial management, education and Tax (“A&T”planning, regulatory, and maintenance software solutions; financial management, municipal courts, planning, regulatory, and maintenance software solutions; courts and justice and public safety software solutions; data and insights solutions; and appraisal and tax software solutions, land and vital records management software solutions, and property appraisal services. The Platform Technologies ("PT") reportable segment provides systemspublic sector entities with software solutions to perform transaction processing, streamline data processing, and software that automateimprove operations and workflows. The business units presented in the appraisalPT reportable segment are the following: NIC digital government and assessment of realpayments solutions and personal property 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.development platform solutions.
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. SegmentCorporate segment operating income for corporateloss primarily consists of compensation costs for the executive management team, and certain accounting and administrativeshared services 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.
|
| | | | | | | | | | | | | | | | |
For the three months ended September 30, 2017 | | | | | | | | |
| | Enterprise Software | | Appraisal and Tax | | Corporate | | Totals |
Revenues | | | | | | | | |
Software licenses and royalties | | $ | 18,223 |
| | $ | 1,619 |
| | $ | — |
| | $ | 19,842 |
|
Subscriptions | | 42,826 |
| | 2,014 |
| | — |
| | 44,840 |
|
Software services | | 42,295 |
| | 5,184 |
| | — |
| | 47,479 |
|
Maintenance | | 86,576 |
| | 5,709 |
| | — |
| | 92,285 |
|
Appraisal services | | — |
| | 6,290 |
| | — |
| | 6,290 |
|
Hardware and other | | 3,412 |
| | — |
| | (2 | ) | | 3,410 |
|
Intercompany | | 2,660 |
| | — |
| | (2,660 | ) | | — |
|
Total revenues | | $ | 195,992 |
| | $ | 20,816 |
| | $ | (2,662 | ) | | $ | 214,146 |
|
Segment operating income | | $ | 60,511 |
| | $ | 5,479 |
| | $ | (13,578 | ) | | $ | 52,412 |
|
|
| | | | | | | | | | | | | | | | |
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 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 |
|
|
| | | | | | | | | | | | | | | | |
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) CommitmentsAs of January 1, 2022, the appraisal and Contingencies
Other than routine litigation incidentaltax software solutions, land and vital records management software solutions, and property appraisal service business unit, which was previously reported in the Appraisal & Tax ("A&T") reportable segment, was moved to our business, there are no material legal proceedings pendingthe ES reportable segment and the NIC digital government and payments solutions and development platform solutions moved to the PT reportable segment to reflect changes in the way in which we are party or to which anymanagement makes operating decisions, allocates resources, and manages the growth and profitability of our properties are subject.
(11) New Accounting Pronouncements
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 isCompany. As the result of the changes in our reportable segments, the former A&T and NIC reportable segments are no longer considered separate segments. Prior year amounts for the ES and PT reportable segments have been adjusted to reflect the segment change.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
For the three months ended June 30, 2022 | | Enterprise Software | | Platform Technologies | | Corporate | | Totals |
Revenues | | | | | | | | |
Software licenses and royalties | | $ | 14,623 | | | $ | 386 | | | $ | — | | | $ | 15,009 | |
Subscriptions | | 128,694 | | | 127,122 | | | — | | | 255,816 | |
Software services | | 41,841 | | | 21,284 | | | — | | | 63,125 | |
Maintenance | | 110,760 | | | 6,055 | | | — | | | 116,815 | |
Appraisal services | | 8,812 | | | — | | | — | | | 8,812 | |
Hardware and other | | 5,498 | | | — | | | 3,610 | | | 9,108 | |
Intercompany | | 5,342 | | | — | | | (5,342) | | | — | |
Total revenues | | $ | 315,570 | | | $ | 154,847 | | | $ | (1,732) | | | $ | 468,685 | |
Segment operating income (loss) | | $ | 102,090 | | | $ | 36,301 | | | $ | (53,991) | | | $ | 84,400 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
For the three months ended June 30, 2021 | | Enterprise Software | | Platform Technologies | | Corporate | | Totals |
Revenues | | | | | | | | |
Software licenses and royalties | | $ | 16,239 | | | $ | 1,365 | | | $ | — | | | $ | 17,604 | |
Subscriptions | | 102,617 | | | 96,941 | | | — | | | 199,558 | |
Software services | | 42,478 | | | 10,859 | | | — | | | 53,337 | |
Maintenance | | 109,815 | | | 9,806 | | | — | | | 119,621 | |
Appraisal services | | 6,265 | | | — | | | — | | | 6,265 | |
Hardware and other | | 4,748 | | | 3 | | | 2,939 | | | 7,690 | |
Intercompany | | 5,621 | | | — | | | (5,621) | | | — | |
Total revenues | | $ | 287,783 | | | $ | 118,974 | | | $ | (2,682) | | | $ | 404,075 | |
Segment operating income (loss) | | $ | 100,067 | | | $ | 26,021 | | | $ | (64,554) | | | $ | 61,534 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
For the six months ended June 30, 2022 | | Enterprise Software | | Platform Technologies | | Corporate | | Totals |
Revenues | | | | | | | | |
Software licenses and royalties | | $ | 30,728 | | | $ | 787 | | | $ | — | | | $ | 31,515 | |
Subscriptions | | 249,010 | | | 252,249 | | | — | | | 501,259 | |
Software services | | 84,490 | | | 40,132 | | | — | | | 124,622 | |
Maintenance | | 221,455 | | | 12,389 | | | — | | | 233,844 | |
Appraisal services | | 17,330 | | | — | | | — | | | 17,330 | |
Hardware and other | | 12,612 | | | — | | | 3,610 | | | 16,222 | |
Intercompany | | 10,931 | | | — | | | (10,931) | | | — | |
Total revenues | | $ | 626,556 | | | $ | 305,557 | | | $ | (7,321) | | | $ | 924,792 | |
Segment operating income (loss) | | $ | 208,619 | | | $ | 67,034 | | | $ | (107,450) | | | $ | 168,203 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
For the six months ended June 30, 2021 | | Enterprise Software | | Platform Technologies | | Corporate | | Totals |
Revenues | | | | | | | | |
Software licenses and royalties | | $ | 30,611 | | | $ | 1,926 | | | $ | — | | | $ | 32,537 | |
Subscriptions | | 201,946 | | | 100,091 | | | — | | | 302,037 | |
Software services | | 84,895 | | | 16,082 | | | — | | | 100,977 | |
Maintenance | | 219,284 | | | 19,449 | | | — | | | 238,733 | |
Appraisal services | | 12,730 | | | — | | | — | | | 12,730 | |
Hardware and other | | 8,906 | | | 18 | | | 2,939 | | | 11,863 | |
Intercompany | | 10,897 | | | — | | | (10,897) | | | — | |
Total revenues | | $ | 569,269 | | | $ | 137,566 | | | $ | (7,958) | | | $ | 698,877 | |
Segment operating income (loss) | | $ | 198,920 | | | $ | 29,244 | | | $ | (115,046) | | | $ | 113,118 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
Reconciliation of reportable segment operating income to the Company's consolidated totals: | | 2022 | | 2021 | | 2022 | | 2021 |
Total segment operating income | | $ | 84,400 | | | $ | 61,534 | | | $ | 168,203 | | | $ | 113,118 | |
Amortization of acquired software | | (14,039) | | | (11,823) | | | (27,260) | | | (19,787) | |
Amortization of customer and trade name intangibles | | (13,604) | | | (11,420) | | | (28,318) | | | (16,832) | |
Interest expense | | (6,214) | | | (12,437) | | | (11,018) | | | (12,915) | |
Other income, net | | 216 | | | 238 | | | 581 | | | 804 | |
Income before income taxes | | $ | 50,759 | | | $ | 26,092 | | | $ | 102,188 | | | $ | 64,388 | |
(15) 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 June 30, 2022 | | Products and services transferred at a point in time | | Products and services transferred over time | | Total |
Revenues | | | | | | |
Software licenses and royalties | | $ | 12,683 | | | $ | 2,326 | | | $ | 15,009 | |
Subscriptions | | — | | | 255,816 | | | 255,816 | |
Software services | | — | | | 63,125 | | | 63,125 | |
Maintenance | | — | | | 116,815 | | | 116,815 | |
Appraisal services | | — | | | 8,812 | | | 8,812 | |
Hardware and other | | 9,108 | | | — | | | 9,108 | |
Total | | $ | 21,791 | | | $ | 446,894 | | | $ | 468,685 | |
| | | | | | | | | | | | | | | | | | | | |
For the three months ended June 30, 2021 | | Products and services transferred at a point in time | | Products and services transferred over time | | Total |
Revenues | | | | | | |
Software licenses and royalties | | $ | 14,755 | | | $ | 2,849 | | | $ | 17,604 | |
Subscriptions | | — | | | 199,558 | | | 199,558 | |
Software services | | — | | | 53,337 | | | 53,337 | |
Maintenance | | — | | | 119,621 | | | 119,621 | |
Appraisal services | | — | | | 6,265 | | | 6,265 | |
Hardware and other | | 7,690 | | | — | | | 7,690 | |
Total | | $ | 22,445 | | | $ | 381,630 | | | $ | 404,075 | |
| | | | | | | | | | | | | | | | | | | | |
For the six months ended June 30, 2022 | | Products and services transferred at a point in time | | Products and services transferred over time | | Total |
Revenues | | | | | | |
Software licenses and royalties | | $ | 26,752 | | | $ | 4,763 | | | $ | 31,515 | |
Subscriptions | | — | | | 501,259 | | | 501,259 | |
Software services | | — | | | 124,622 | | | 124,622 | |
Maintenance | | — | | | 233,844 | | | 233,844 | |
Appraisal services | | — | | | 17,330 | | | 17,330 | |
Hardware and other | | 16,222 | | | — | | | 16,222 | |
Total | | $ | 42,974 | | | $ | 881,818 | | | $ | 924,792 | |
| | | | | | | | | | | | | | | | | | | | |
For the six months ended June 30, 2021 | | Products and services transferred at a point in time | | Products and services transferred over time | | Total |
Revenues | | | | | | |
Software licenses and royalties | | $ | 26,813 | | | $ | 5,724 | | | $ | 32,537 | |
Subscriptions | | — | | | 302,037 | | | 302,037 | |
Software services | | — | | | 100,977 | | | 100,977 | |
Maintenance | | — | | | 238,733 | | | 238,733 | |
Appraisal services | | — | | | 12,730 | | | 12,730 | |
Hardware and other | | 11,863 | | | — | | | 11,863 | |
Total | | $ | 38,676 | | | $ | 660,201 | | | $ | 698,877 | |
Recurring Revenue
The majority of our revenue is comprised of revenues from maintenance and subscriptions, which we consider to be recurring revenue. Virtually all of our on-premises software clients contract with us for maintenance and support, which provides us with a convergence project betweensignificant 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. We consider all other revenue categories to be non-recurring revenues.
Recurring revenues and non-recurring revenues recognized during the FASBperiod are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
For the three months ended June 30, 2022 | | Enterprise Software | | Platform Technologies | | Corporate | | Totals |
Recurring revenues | | $ | 239,454 | | | $ | 133,177 | | | $ | — | | | $ | 372,631 | |
Non-recurring revenues | | 70,774 | | | 21,670 | | | 3,610 | | | 96,054 | |
Intercompany | | 5,342 | | | — | | | (5,342) | | | — | |
Total revenues | | $ | 315,570 | | | $ | 154,847 | | | $ | (1,732) | | | $ | 468,685 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
For the three months ended June 30, 2021 | | Enterprise Software | | Platform Technologies | | Corporate | | Totals |
Recurring revenues | | $ | 212,432 | | | $ | 106,747 | | | $ | — | | | $ | 319,179 | |
Non-recurring revenues | | 69,730 | | | 12,227 | | | 2,939 | | | 84,896 | |
Intercompany | | 5,621 | | | — | | | (5,621) | | | — | |
Total revenues | | $ | 287,783 | | | $ | 118,974 | | | $ | (2,682) | | | $ | 404,075 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
For the six months ended June 30, 2022 | | Enterprise Software | | Platform Technologies | | Corporate | | Totals |
Recurring revenues | | $ | 470,465 | | | $ | 264,638 | | | $ | — | | | $ | 735,103 | |
Non-recurring revenues | | 145,160 | | | 40,919 | | | 3,610 | | | 189,689 | |
Intercompany | | 10,931 | | | — | | | (10,931) | | | — | |
Total revenues | | $ | 626,556 | | | $ | 305,557 | | | $ | (7,321) | | | $ | 924,792 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
For the six months ended June 30, 2021 | | Enterprise Software | | Platform Technologies | | Corporate | | Totals |
Recurring revenues | | $ | 421,230 | | | $ | 119,540 | | | $ | — | | | $ | 540,770 | |
Non-recurring revenues | | 137,142 | | | 18,026 | | | 2,939 | | | 158,107 | |
Intercompany | | 10,897 | | | — | | | (10,897) | | | — | |
Total revenues | | $ | 569,269 | | | $ | 137,566 | | | $ | (7,958) | | | $ | 698,877 | |
(16) Deferred Revenue and Performance Obligations
Total deferred revenue, including long-term, by segment is as follows:
| | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 |
Enterprise Software | | $ | 497,846 | | | $ | 479,048 | |
Platform Technologies | | 28,538 | | | 29,705 | |
Corporate | | 2,204 | | | 1,814 | |
Totals | | $ | 528,588 | | | $ | 510,567 | |
Changes in total deferred revenue, including long-term, were as follows:
| | | | | | | | |
| | Six months ended June 30, 2022 |
Balance as of December 31, 2021 | | $ | 510,567 | |
Deferral of revenue | | 611,953 | |
Recognition of deferred revenue | | (593,932) | |
Balance as of June 30, 2022 | | $ | 528,588 | |
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 June 30, 2022, was $1.85 billion, of which we expect to recognize approximately 47% as revenue over the next 12 months 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 goodsremainder thereafter.
(17) Deferred Commissions
Sales commissions earned by our sales force are considered incremental 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 costrecoverable costs of obtaining a contract. Specifically,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 generally three to seven years. Deferred commissions were $40.4 million and $38.1 million as of June 30, 2022, and December 31, 2021, respectively. Amortization expense was $3.7 million and $7.2 million for the three and six months ended June 30, 2022, respectively, and $3.2 million and $6.3 million for the three and six months ended June 30, 2021, respectively. There were no 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.
(18) Subsequent Events
In July 2022, we repaid $100 million of the unsecured term loans 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.2021 Credit Agreement.
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) disruption to our business and harm to our competitive position resulting from cyber-attacks and security vulnerabilities (4) our ability to protect client information from security breaches and provide uninterrupted operations of data centers; (3)(5) our ability to achieve growth or operational synergies through the integration of acquired businesses, while avoiding unanticipated costs and disruptions to existing operations; (4)(6) material portions of our business require the Internet infrastructure to be adequately maintained; (5)(7) 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)(8) general economic, political and market conditions; (7)conditions, including inflation and changes in interest rates; (9) 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)(10) 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)(11) 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)(12) 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.”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.sector. 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 that utilize the Tyler private cloud such as e-filing,software as a service (“SaaS”) and electronic document filing solutions (“e-filing”), which simplifiessimplify the filing and management of court related documents. We alsoAdditionally, we provide property appraisal outsourcing services for taxing jurisdictions.
Our products generally automate sixnine 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.management, (7) data and insights, (8) development platform technologies, and (9) NIC digital government and payments. We report our results in two reportable segments. The Enterprise Software (“ES”)ES reportable 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, data and insights, appraisal and tax software solutions, land and vital records management software solutions, and property appraisal services. The Appraisal and Tax (“A&T”Platform Technologies ("PT") reportable segment provides systemspublic sector entities with software solutions to perform transaction processing, streamline data processing, and software that automateimprove operations and workflows such as the NIC digital government and payments solutions and development platform solutions.
As of January 1, 2022, the appraisal and assessment of realtax software solutions, land and personal property as well asvital records management software solutions, and property appraisal outsourcing services for local governments and taxing authorities. Property appraisal outsourcing services include:service business unit, which was previously reported in 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 taxpayersAppraisal & Tax ("A&T") reportable segment, was moved to the ES reportable segment and the assessing jurisdiction.NIC digital government and payments solutions and development platform solutions moved to the PT reportable segment to reflect changes in the way in which management makes operating decisions, allocates resources, and manages the growth and profitability of the Company. As the result of the changes in our reportable segments, the former A&T and NIC reportable segments are no longer considered separate segments. Prior year amounts for the ES and PT reportable segments have been adjusted to reflect the segment change.
Our total employee count increased to 4,0397,143 at SeptemberJune 30, 2017,2022, including 93 employees from 3,775acquisitions completed in 2021 and 2022, from 6,593 at SeptemberJune 30, 2016.2021.
On February 8, 2022, we acquired US eDirect Inc. (US eDirect), a market-leading provider of technology solutions for campground and outdoor recreation management. The total purchase price, net of cash acquired of $6.4 million, was approximately $116.7 million, consisting of $117.6 million paid in cash, and approximately $5.5 million related to indemnity holdbacks, subject to certain post-closing adjustments.
For the three and six months ended June 30, 2022, total revenues increased 16.0% and 32.3%, respectively, compared to the prior year period. Excluding the impact of 2021 and 2022 acquisitions, revenue increased 6.0% and 6.5% for the three and six months ended June 30, 2022, respectively, compared to the prior year period. Revenues from acquisitions completed in 2021 and 2022 accounted for 10.0% and 25.8% of the increase in revenues for the three and six months ended June 30, 2022, respectively.
Subscriptions revenue grew 28.2% and 66.0% for the three and six months ended June 30, 2022, respectively, compared to the prior year period, primarily due the impact of the NIC acquisition, as well as an ongoing shift toward SaaS arrangements, along with growth in our transaction-based revenues such as e-filing and online payment services. Excluding the impact of 2021 and 2022 acquisitions, subscriptions revenue increased 10.0% and 12.3% for the three and six months ended June 30, 2022, respectively, compared to the prior year period. Subscription revenues from acquisitions completed in 2021 and 2022 contributed 18.2% and 53.7% for the three and six months period ended June 30, 2022, respectively.
Our backlog as of June 30, 2022, was $1.85 billion, a 13.9% increase from last year.
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”)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,”Operations”, included in our Form 10-K for the year ended December 31, 2016. There2021. Except for the accounting policies for business combinations as a result of adopting Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (ASC 805)(“ASU 2021-08”), 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, 2016.2021.
ANALYSIS OF RESULTS OF OPERATIONS | | | | | | | | | | | | | | | | | | | | | | | |
| Percent of Total Revenues |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Revenues: | | | | | | | |
Software licenses and royalties | 3.2 | % | | 4.4 | % | | 3.4 | % | | 4.7 | % |
Subscriptions | 54.6 | | | 49.4 | | | 54.2 | | | 43.2 | |
Software services | 13.5 | | | 13.1 | | | 13.5 | | | 14.4 | |
Maintenance | 24.9 | | | 29.6 | | | 25.3 | | | 34.2 | |
Appraisal services | 1.9 | | | 1.6 | | | 1.9 | | | 1.8 | |
Hardware and other | 1.9 | | | 1.9 | | | 1.8 | | | 1.7 | |
Total revenues | 100.0 | | | 100.0 | | | 100.0 | | | 100.0 | |
Cost of revenues: | | | | | | | |
Software licenses, royalties and acquired software | 3.6 | | | 3.3 | | | 3.5 | | | 3.2 | |
Subscriptions, software services and maintenance | 52.1 | | | 49.4 | | | 52.0 | | | 47.8 | |
Appraisal services | 1.3 | | | 1.1 | | | 1.3 | | | 1.3 | |
Hardware and other | 1.7 | | | 1.1 | | | 1.4 | | | 1.0 | |
Selling, general and administrative expenses | 21.3 | | | 27.0 | | | 21.4 | | | 26.9 | |
Research and development expense | 5.0 | | | 5.8 | | | 5.1 | | | 6.5 | |
Amortization of customer and trade name intangibles | 2.9 | | | 2.8 | | | 3.1 | | | 2.4 | |
Operating income | 12.1 | | | 9.5 | | | 12.2 | | | 10.9 | |
Interest expense | (1.3) | | | (3.1) | | | (1.2) | | | (1.8) | |
Other income, net | — | | | 0.1 | | | 0.1 | | | 0.1 | |
Income before income taxes | 10.8 | | | 6.5 | | | 11.1 | | | 9.2 | |
Income tax provision | 2.3 | | | 0.1 | | | 2.4 | | | 0.3 | |
Net income | 8.5 | % | | 6.4 | % | | 8.7 | % | | 8.9 | % |
Revenues Acquisitions
On February 8, 2022, we acquired US eDirect Inc. (US eDirect), a market-leading provider of technology solutions for campground and outdoor recreation management. The impact of the US eDirect acquisition on our operating results is not considered material. US eDirect is operated as a part of the NIC division and the results of NIC and US eDirect, from their respective dates of acquisition, are included with the operating results of the PT segment.
On April 21, 2021, we acquired NIC, which became a direct subsidiary of the Company and NIC’s subsidiaries became indirect subsidiaries of the Company. NIC is a leading digital government solutions and payment company that serves federal, state and local government agencies.
|
| | | | | | | | | | | | |
| | 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 | % |
The following table details revenue for NIC for the three and six months ended June 30, 2022, which is presented in our condensed consolidated statements of income from the date of acquisition and included in the operating results of the PT reportable segment.
Revenues | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Revenues: | | | | | | | |
Software licenses and royalties | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Subscriptions | 123,433 | | | 93,281 | | | 244,815 | | | 93,281 | |
Software services | 15,778 | | | 5,643 | | | 28,887 | | | 5,643 | |
Maintenance | 203 | | | 155 | | | 405 | | | 155 | |
Appraisal services | — | | | — | | | — | | | — | |
Hardware and other | — | | | — | | | — | | | — | |
Total revenues | $ | 139,414 | | | $ | 99,079 | | | $ | 274,107 | | | $ | 99,079 | |
Software licenses and royalties
The following table sets forth a comparison of our software licenses and royalties revenue for the periods presented as of SeptemberJune 30:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Change | | Six Months Ended | | Change |
| | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
ES | | $ | 14,623 | | | $ | 16,239 | | | $ | (1,616) | | | (10) | % | | $ | 30,728 | | | $ | 30,611 | | | $ | 117 | | | — | % |
PT | | 386 | | | 1,365 | | | (979) | | | (72) | | | 787 | | | 1,926 | | | (1,139) | | | (59) | |
Total software licenses and royalties revenue | | $ | 15,009 | | | $ | 17,604 | | | $ | (2,595) | | | (15) | % | | $ | 31,515 | | | $ | 32,537 | | | $ | (1,022) | | | (3) | % |
Software licenses and royalties revenue decreased 0.4%15% and increased 2%3% for the three and ninesix months ended SeptemberJune 30, 2017,2022, respectively, compared to the prior year period.periods. The declinedecrease in software licenses and royalties revenue for the three months ended SeptemberJune 30, 2017 was primarily due2022, is attributed to an increase in the number of new softwaremore clients choosing our subscription-based option,SaaS offering rather than purchasing the software under a traditional perpetual software arrangement. The increase in software licenses and royalties revenueOur total new client mix for the ninesix months ended SeptemberJune 30, 2017 is attributed2022, was approximately 22% perpetual software license arrangements and approximately 78% subscription-based arrangements, compared to additions to our implementation staff, which increased our capacity to deliver backlog.
total new client mix for the six months ended June 30, 2021, of approximately 36% perpetual software license arrangements and approximately 64% subscription-based arrangements.
Although the mix of new contracts between subscription-basedSaaS-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 bydecline as a growing number of customers choosingclients choose our subscription-basedSaaS-based options, rather than purchasing the software under a traditional perpetual software license arrangement. Subscription-basedarrangement and the Company begins transitioning to cloud-based only offerings. SaaS-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 SeptemberJune 30:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Change | | Six Months Ended | | Change |
| | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
ES | | $ | 128,694 | | | $ | 102,617 | | | $ | 26,077 | | | 25 | % | | $ | 249,010 | | | $ | 201,946 | | | $ | 47,064 | | | 23 | % |
PT | | 127,122 | | | 96,941 | | | 30,181 | | | 31 | | | 252,249 | | | 100,091 | | | 152,158 | | | 152 | |
Total subscriptions revenue | | $ | 255,816 | | | $ | 199,558 | | | $ | 56,258 | | | 28 | % | | $ | 501,259 | | | $ | 302,037 | | | $ | 199,222 | | | 66 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter | | Change | | Nine Months Ended | | Change |
($ in thousands) | | 2017 | | 2016 | | $ | | % | | 2017 | | 2016 | | $ | | % |
ES | | $ | 42,826 |
| | $ | 35,169 |
| | $ | 7,657 |
| | 22 | % | | $ | 120,191 |
| | $ | 99,470 |
| | $ | 20,721 |
| | 21 | % |
A&T | | 2,014 |
| | 1,700 |
| | 314 |
| | 18 |
| | 5,698 |
| | 5,456 |
| | 242 |
| | 4 |
|
Total subscriptions revenue | | $ | 44,840 |
| | $ | 36,869 |
| | $ | 7,971 |
| | 22 | % | | $ | 125,889 |
| | $ | 104,926 |
| | $ | 20,963 |
| | 20 | % |
Subscriptions revenue primarily consists of revenue derived from ouronline payments and SaaS arrangements, which utilize the Tyler private cloud. As partarrangements. Other sources of our subscription-based services we also provideare derived from digital government services and 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%28% and 20%66% for the three and ninesix months ending SeptemberJune 30, 2017,2022, respectively, compared to the prior year.period, primarily due to the inclusion of NIC’s revenues from the date of acquisition. Excluding the impact of revenue from 2021 and 2022 acquisitions of $36.4 million and $162.2 million for the three and six months ended June 30, 2022, respectively, subscriptions revenue increased 10.0% and 12.3% for the three and six months ended June 30, 2022, respectively. 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 ninesix months ending SeptemberJune 30, 2017,2022, respectively, we added 94167 and 291316 new SaaS clients and 1596 and 69184 existing on-premises clients converted to our SaaS model. Since SeptemberJune 30, 2016,2021, we have added 352595 new SaaS clients and 75while 322 existing on-premises clients converted to our SaaS model.offerings. Also e-filing servicesexcluding the impact of revenue from 2021 and 2022 acquisitions, transaction-based fees contributed approximately $2.4$4.6 million and $5.6$7.3 million to the increase in subscriptions revenue increase for the three and ninesix months ended SeptemberJune 30, 2017,2022, respectively, 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 e-filing and utility billings.
Software services
The following table sets forth a comparison of our software services revenue for the periods presented as of SeptemberJune 30:
| | | | | | | | | | | | | | | | | | | | Three Months Ended | | Change | | Six Months Ended | | Change |
| | Third Quarter | | Change | | Nine Months Ended | | Change | | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
($ in thousands) | | 2017 | | 2016 | | $ | | % | | 2017 | | 2016 | | $ | | % | |
ES | | $ | 42,295 |
| | $ | 40,608 |
| | $ | 1,687 |
| | 4 | % | | $ | 125,658 |
| | $ | 121,372 |
| | $ | 4,286 |
| | 4 | % | ES | | $ | 41,841 | | | $ | 42,478 | | | $ | (637) | | | (1) | % | | $ | 84,490 | | | $ | 84,895 | | | $ | (405) | | | — | % |
A&T | | 5,184 |
| | 4,130 |
| | 1,054 |
| | 26 |
| | 14,211 |
| | 11,836 |
| | 2,375 |
| | 20 |
| |
PT | | PT | | 21,284 | | | 10,859 | | | 10,425 | | | 96 | | | 40,132 | | | 16,082 | | | 24,050 | | | 150 | |
Total software services revenue | | $ | 47,479 |
| | $ | 44,738 |
| | $ | 2,741 |
| | 6 | % | | $ | 139,869 |
| | $ | 133,208 |
| | $ | 6,661 |
| | 5 | % | Total software services revenue | | $ | 63,125 | | | $ | 53,337 | | | $ | 9,788 | | | 18 | % | | $ | 124,622 | | | $ | 100,977 | | | $ | 23,645 | | | 23 | % |
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 18% and 23% for the three and ninesix months ended SeptemberJune 30, 2017,2022, respectively, software services revenue grew 6% and 5% compared to the prior year period. This growthExcluding the impact of revenue from 2021 and 2022 acquisitions of $3.7 million and $17.0 million for the three and six months ended June 30, 2022, respectively, software services increased 11.3% and 6.6% for the three and six months ended June 30, 2022, respectively. That increase for three months ended June 30, 2022 in software services revenue is primarily dueattributed to additions tohigher revenues generated by the COVID pandemic-related rent relief services, partially offset by more clients selecting our implementation and support staffcloud solutions instead of our on-premises license arrangements which increased our capacity to deliver backlog and partially due 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.typically require more professional services.
Maintenance
The following table sets forth a comparison of our maintenance revenue for the periods presented as of SeptemberJune 30:
| | | | | | | | | | | | | | | | | | | | Three Months Ended | | Change | | Six Months Ended | | Change |
| | Third Quarter | | Change | | Nine Months Ended | | Change | | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
($ in thousands) | | 2017 | | 2016 | | $ | | % | | 2017 | | 2016 | | $ | | % | |
ES | | $ | 86,576 |
| | $ | 78,292 |
| | $ | 8,284 |
| | 11 | % | | $ | 253,048 |
| | $ | 223,802 |
| | $ | 29,246 |
| | 13 | % | ES | | $ | 110,760 | | | $ | 109,815 | | | $ | 945 | | | 1 | % | | $ | 221,455 | | | $ | 219,284 | | | $ | 2,171 | | | 1 | % |
A&T | | 5,709 |
| | 4,708 |
| | 1,001 |
| | 21 |
| | 15,508 |
| | 13,973 |
| | 1,535 |
| | 11 |
| |
PT | | PT | | 6,055 | | | 9,806 | | | (3,751) | | | (38) | | | 12,389 | | | 19,449 | | | (7,060) | | | (36) | |
Total maintenance revenue | | $ | 92,285 |
| | $ | 83,000 |
| | $ | 9,285 |
| | 11 | % | | $ | 268,556 |
| | $ | 237,775 |
| | $ | 30,781 |
| | 13 | % | Total maintenance revenue | | $ | 116,815 | | | $ | 119,621 | | | $ | (2,806) | | | (2) | % | | $ | 233,844 | | | $ | 238,733 | | | $ | (4,889) | | | (2) | % |
We provide maintenance and support services for our software products and certain third-party software. Maintenance revenue grew 11% and 13%decreased 2% for both the three and ninesix months ended SeptemberJune 30, 2017, respectively,2022, compared to the prior year. Maintenanceyear period. For the three months ended June 30, 2022, maintenance revenue increaseddecreased mainly due to attrition related to a legacy case management solution and clients converting from on-premises license arrangements to SaaS, partially offset by annual maintenance rate increases and growth in our installed customer base frommaintenance associated with new software license sales. In addition, the increase is partially due 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.
Appraisal services
The following table sets forth a comparison of our appraisal services revenue for the periods presented as of SeptemberJune 30:
| | | | | | | | | | | | | | | | | | | | Three Months Ended | | Change | | Six Months Ended | | Change |
| | Third Quarter | | Change | | Nine Months Ended | | Change | | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
($ in thousands) | | 2017 | | 2016 | | $ | | % | | 2017 | | 2016 | | $ | | % | |
ES | | $ | — |
| | $ | — |
| | $ | — |
| | — | % | | $ | — |
| | $ | — |
| | $ | — |
| | — | % | ES | | $ | 8,812 | | | $ | 6,265 | | | $ | 2,547 | | | 41 | % | | $ | 17,330 | | | $ | 12,730 | | | $ | 4,600 | | | 36 | % |
A&T | | 6,290 |
| | 6,541 |
| | (251 | ) | | (4 | ) | | 19,268 |
| | 20,083 |
| | (815 | ) | | (4 | ) | |
PT | | PT | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total appraisal services revenue | | $ | 6,290 |
| | $ | 6,541 |
| | $ | (251 | ) | | (4 | )% | | $ | 19,268 |
| | $ | 20,083 |
| | $ | (815 | ) | | (4 | )% | Total appraisal services revenue | | $ | 8,812 | | | $ | 6,265 | | | $ | 2,547 | | | 41 | % | | $ | 17,330 | | | $ | 12,730 | | | $ | 4,600 | | | 36 | % |
Appraisal services revenue for the three and ninesix months ended SeptemberJune 30, 2017,2022, increased by 41% and 36%, respectively, decreased by 4% . The decline is mainlycompared to the prior year primarily due to the successful completionramp-up of appraisal services for several largenew revaluation projectscontracts which started in mid-2017.recent quarters. 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 SeptemberJune 30:
| | | | | | | | | | | | | | | | | | | | Three Months Ended | | Change | | Six Months Ended | | Change |
| | Third Quarter | | Change | | Nine Months Ended | | Change | | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
($ in thousands) | | 2017 | | 2016 | | $ | | % | | 2017 | | 2016 | | $ | | % | |
Software licenses and royalties | | $ | 826 |
| | $ | 623 |
| | $ | 203 |
| | 33 | % | | $ | 2,204 |
| | $ | 1,927 |
| | $ | 277 |
| | 14 | % | Software licenses and royalties | | $ | 2,869 | | | $ | 1,368 | | | $ | 1,501 | | | 110 | % | | $ | 5,478 | | | $ | 2,604 | | | $ | 2,874 | | | 110 | % |
Acquired software | | 5,473 |
| | 5,598 |
| | (125 | ) | | (2 | ) | | 16,243 |
| | 16,737 |
| | (494 | ) | | (3 | ) | Acquired software | | 14,039 | | | 11,823 | | | 2,216 | | | 19 | | | 27,260 | | | 19,787 | | | 7,473 | | | 38 | |
Software services, maintenance and subscriptions | | 98,036 |
| | 88,623 |
| | 9,413 |
| | 11 |
| | 287,748 |
| | 260,610 |
| | 27,138 |
| | 10 |
| |
Subscriptions, software services, and maintenance | | Subscriptions, software services, and maintenance | | 244,192 | | | 199,771 | | | 44,421 | | | 22 | | | 481,088 | | | 334,091 | | | 146,997 | | | 44 | |
Appraisal services | | 4,089 |
| | 4,053 |
| | 36 |
| | 1 |
| | 12,568 |
| | 12,473 |
| | 95 |
| | 1 |
| Appraisal services | | 5,976 | | | 4,429 | | | 1,547 | | | 35 | | | 11,912 | | | 9,046 | | | 2,866 | | | 32 | |
Hardware and other | | 2,293 |
| | 2,120 |
| | 173 |
| | 8 |
| | 10,408 |
| | 8,481 |
| | 1,927 |
| | 23 |
| Hardware and other | | 8,161 | | | 4,623 | | | 3,538 | | | 77 | | | 13,188 | | | 7,081 | | | 6,107 | | | 86 | |
Total cost of revenues | | $ | 110,717 |
| | $ | 101,017 |
| | $ | 9,700 |
| | 10 | % | | $ | 329,171 |
| | $ | 300,228 |
| | $ | 28,943 |
| | 10 | % | Total cost of revenues | | $ | 275,237 | | | $ | 222,014 | | | $ | 53,223 | | | 24 | % | | $ | 538,926 | | | $ | 372,609 | | | $ | 166,317 | | | 45 | % |
The following table sets forth a comparison of gross margin percentage by revenue type for the periods presented as of SeptemberJune 30:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change |
Software licenses, royalties and acquired software | | (12.7) | % | | 25.1 | % | | (37.8) | % | | (3.9) | % | | 31.2 | % | | (35.1) | % |
Subscriptions, software services and maintenance | | 44.0 | | | 46.4 | | | (2.4) | | | 44.0 | | | 47.9 | | | (3.9) | |
Appraisal services | | 32.2 | | | 29.3 | | | 2.9 | | | 31.3 | | | 28.9 | | | 2.4 | |
Hardware and other | | 10.4 | | | 39.9 | | | (29.5) | | | 18.7 | | | 40.3 | | | (21.6) | |
Overall gross margin | | 41.3 | % | | 45.1 | % | | (3.8) | % | | 41.7 | % | | 46.7 | % | | (5.0) | % |
|
| | | | | | | | | | | | | | | | | | |
| | 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. InThe gross margin for software licenses, royalties and acquired software is negative 12.7% and negative 3.9% for the three and ninesix months ended SeptemberJune 30, 2017,2022, respectively, ourand 25.1% and 31.2% for three and six months ended June 30, 2021, respectively. Excluding the impact of amortization expense of acquired software, the margin is 80.9% and 82.6% for the three and six months ended June 30, 2022, respectively, and 92.2% and 92.0% for three and six months ended June 30, 2021, respectively. The decline in software licenses, royalties and acquired software gross margin decreased slightly by 0.5% and increased 1.0% compared to the prior year period. The slight decline for the three months ended September 30, 2017periods is 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 forrelated to acquired software resulting from recent acquisitions.
Subscriptions, software services maintenance and subscriptions. maintenance. Cost of subscriptions, software services maintenance and subscriptionsmaintenance 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 subscriptions, software services, maintenance and subscriptionmaintenance gross margin in the three and ninesix months ended SeptemberJune 30, 2017,2022, decreased 2.4% and 3.9%, respectively, was 0.7% and 0.9% higher thanfrom the comparable prior year period. Ourperiod, primarily due to the inclusion of NIC’s revenues, which historically have lower margins than Tyler. Excluding the impact from 2021 and 2022 acquisitions, the gross margins were 44.6% and 46.2% for the three and six months ended June 30, 2022, respectively. The decrease of 1.8% and 1.7% for the three and six months ended June 30, 2022, respectively, from the comparable prior periods is due to several factors, including lower maintenance revenue resulting from attrition related to a legacy case management solution; a post-COVID return of low-margin revenues such as billable travel; higher personnel costs related to inflation, as well as an increase in professional services employees to enable delivery of our growing backlog and anticipated growth who are not yet billable; and higher hosting costs related to our accelerated shift to the cloud. Excluding employees added through acquisitions, our implementation and support staff has grown by 208239 employees since SeptemberJune 30, 2016. Many of these additions occurred in early to mid-2016 and are contributing to revenue in 2017. 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.2021.
Appraisal services. Appraisal services revenue comprisedwas approximately 2.9%1.9% of total revenue.revenue for the three and six months ended June 30, 2022, respectively. The appraisal services gross margin for the three and ninesix months ended SeptemberJune 30, 2017,2022, increased 2.9% and 2.4%, respectively, decreased 3.0% and 3.1% compared to the same period in 2016,2021. The increase in margin is primarily due to additional resources brought incost savings attributed to meet the deadline for completion of fieldwork for a large revaluation project. A high proportion of the costs oflower travel expenses associated with appraisal projects. 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.
Overall Gross Margin. For the three and ninesix months ended SeptemberJune 30, 2017, respectively,2022, our overall gross margin increased 0.2%decreased 3.8% and 0.4%5.0%, respectively, compared to the prior year period. Ourperiod, primarily due to the inclusion of NIC’s revenues, which historically have lower margins than Tyler. Excluding the impact from 2021 and 2022 acquisitions, overall gross margins were 42.3% and 44.2% for the three and six months ended June 30, 2022, respectively. For the three months ended June 30, 2022, the decrease in overall gross margin increase forcompared to the nine monthprior year period was mainlyis due to a product mix that included more higher-margin recurring revenues from subscriptions and maintenance and improved margin on revenueslower revenue from software licenses offset byand maintenance, higher personnel costs related to inflation, and "bubble costs" related to the lower-margin revenuestransition from appraisal services as described above.
our proprietary data centers to Amazon Web Services ("AWS").
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 SeptemberJune 30:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | | Six Months Ended | | Change |
| | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
Selling, general and administrative expenses | | $ | 99,701 | | | $ | 108,922 | | | $ | (9,221) | | | (8) | % | | $ | 197,596 | | | $ | 187,696 | | | $ | 9,900 | | | 5 | % |
SG&A as a percentage of revenues was 20.9%21.3% and 21.1%21.4% for the three and ninesix months ended SeptemberJune 30, 2017,2022, respectively, compared to 21.6%27.0% and 22.2%26.9% for the three and ninesix months ended SeptemberJune 30, 2016,2021, respectively. Excluding the impact of SG&A expense increased approximately 6%from 2021 and 5%2022 acquisitions of $6.1 million and $23.8 million for the three and ninesix months ended SeptemberJune 30, 2017, respectively. This increase is mainly due to compensation costs related to higher stock compensation expense2022, respectively, SG&A decreased 14.1% and increased staff levels. For7.4% for the three and ninesix months ended Septemberending June 30, 2017, respectively, stock compensation expense rose $1.4 million and $3.8 million,2022, respectively, compared to the same periodprior year period. The decrease in 2016, mainlySG&A as a percentage of revenues is primarily attributed to lower transaction expense related to acquisitions completed in 2022 compared to those completed in 2021 and the decline in stock compensation expense due to increasesthe lower fair value of each share-based award issued in connection with our stock price over the last few years.compensation plan. The decline in SG&A is partially offset by increased staff levels and other administrative expenses compared to prior periods.
Research and Development Expense
The following table sets forth a comparison of our research and development expense for the periods presented as of SeptemberJune 30:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Change | | Six Months Ended | | Change |
| | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
Research and development expense | | $ | 23,386 | | | $ | 23,428 | | | $ | (42) | | | — | % | | $ | 47,327 | | | $ | 45,241 | | | $ | 2,086 | | | 5 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | % |
Research and development ("R&D") 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.
Research and developmentrevenue. R&D expense in the three and ninesix months ended SeptemberJune 30, 2017,2022, remained flat and increased 5%, respectively, compared to the prior period. Excluding the impact of R&D expense from 2021 and 2022 acquisitions of $224,000 and $1.1 million for the three and six months ended June 30, 2022, respectively, R&D expense decreased 1.1% and increased 7%2.2% for the three and 13%six months ending June 30, 2022, respectively, compared to prior periodyear period. The decline in R&D expense for the three months ended June 30. 2022, is mainly attributed to a shift of some development resources to certain projects which meet the criteria for capitalization. The increase in R&D expense for the six months ended June 30, 2022, is mainly due to research and development efforts related toa number of new Tyler product development initiatives primarily inacross our public safety solutions,product suites somewhat offset by reduced development efforts for Microsoft Dynamics AX. As a resultshift of the Microsoft Dynamics AX amendment, we are redeploying certainsome development resources to enhance functionality on several existing solutions and these costs are being recorded in cost of revenues – software services, maintenance and subscriptions.certain projects which meet the criteria for capitalization.
Amortization of CustomerOther Intangibles
The following table sets forth a comparison of amortization of customer and Trade Name Intangiblestrade name intangibles for the periods presented as of June 30:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Change | | Six Months Ended | | Change |
| 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
Amortization of other intangibles | $ | 13,604 | | | $ | 11,420 | | | $ | 2,184 | | | 19 | % | | $ | 28,318 | | | $ | 16,832 | | | $ | 11,486 | | | 68 | % |
Acquisition intangibles are composedcomprised of the excess of the purchase price over the fair value of net tangible assets acquired that isare 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. For the three and six months ended June 30, 2022, amortization expense increased compared to the prior period due to acquisitions completed in 2021 and 2022.
The following table sets forth a comparison of amortization of customer and trade name intangibles for the periods presented as of September 30:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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), NetInterest Expense
The following table sets forth a comparison of our otherinterest expense net for the periods presented as of SeptemberJune 30:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Change | | Six Months Ended | | Change |
| 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
Interest expense | $ | (6,214) | | | $ | (12,437) | | | $ | 6,223 | | | (50) | % | | $ | (11,018) | | | $ | (12,915) | | | $ | 1,897 | | | (15) | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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), netInterest expense is primarily comprised of interest expense and non-usage and other fees associated with our revolving credit agreement,borrowings. The change in interest expense in the three and six months ended June 30, 2022, compared to the prior period is attributable to the prior year period including $6.4 million of expense related to the senior unsecured bridge loan facility commitment fee paid in 2021 and lower levels of borrowings in the current year related to the 2021 Credit Agreement, offset by an increase in interest rates compared to prior year periods.
Other Income, Net
The following table sets forth a comparison of our other income, net, for the periods presented as well asof June 30:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Change | | Six Months Ended | | Change |
| 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
Other income, net | $ | 216 | | | $ | 238 | | | $ | (22) | | | (9) | % | | $ | 581 | | | $ | 804 | | | $ | (223) | | | (28) | % |
Other income, net, is primarily comprised of interest income from invested cash. OtherThe change in other income, (expense), net, decreased in the three and ninesix months ended SeptemberJune 30, 2017,2022, 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 correspondingly higher levels of cash investments.invested cash.
Income Tax Provision
The following table sets forth a comparison of our income tax provision for the periods presented as of SeptemberJune 30:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Change | | Six Months Ended | | Change |
| 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
Income tax provision | $ | 10,813 | | | $ | 562 | | | $ | 10,251 | | | 1,824% | | $ | 22,258 | | | $ | 1,882 | | | $ | 20,376 | | | 1,083 | |
| | | | | | | | | | | | | | | |
Effective income tax rate | 21.3 | % | | 2.2 | % | | | | | | 21.8 | % | | 2.9 | % | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 increase in effective tax rate for the three and six months ended June 30, 2022, as compared to the same period in 2021, was principally driven by a decrease in excess tax benefits related to stock incentive awards. The effective income tax rates for the three and ninesix months ended SeptemberJune 30, 20172022 and 2016, respectively,2021, were different from the statutory United States federal income tax rate of 35% principally21% primarily due to excess tax benefits related to stock option exercises.incentive awards and the tax benefit of research tax credits, offset by state income taxes, non-deductible business expenses, and reserves for unrecognized state income tax benefits. The excess tax benefits related to stock option exercisesincentive awards realized were $9.0$1.7 million and $27.6$4.7 million for the three and ninesix months ended SeptemberJune 30, 2017,2022, respectively, compared to $13.3$6.4 million and $20.8$15.2 million for the three and ninesix months ended SeptemberJune 30, 2016,2021, 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. Excluding the excess tax benefits, the effective rates were 32.8%tax rate was 24.6% and 36.0%26.4% for the three and ninesix months ended SeptemberJune 30, 2017,2022, respectively, compared to 39.3%26.7% and 38.5%26.5% for the three and ninesix months ended SeptemberJune 30, 2016,2021, respectively. Other differences from the 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.
FINANCIAL CONDITION AND LIQUIDITY
As of SeptemberJune 30, 2017,2022, we had cash and cash equivalents of $124.6$253.1 million compared to $36.2$309.2 million at December 31, 2016.2021. We also had $61.7$60.9 million invested in investment grade corporate and municipal bonds and asset-backed securities as of SeptemberJune 30, 2017.2022. These investments mature from 2017have varying maturity dates through 20212027 and we intend to hold these investments until maturity.are held as available-for-sale. As of SeptemberJune 30, 2017,2022, we had two outstanding letters of credit totaling $2.2 million. We do not believe the letters of credit will be required to be drawn upon. These letters of credit expire through mid-2018. We believe our cash from operating activities, revolving line of credit facility, cash on hand, and access to the capital markets provides us with sufficient flexibility to meet our long-term financial needs.
The following table sets forth a summary of cash flows for the ninesix months ended SeptemberJune 30:
|
| | | | | | | | |
($ in thousands) | | 2017 | | 2016 |
Cash flows provided (used) by: | | | | |
Operating activities | | $ | 142,381 |
| | $ | 140,054 |
|
Investing activities | | (75,807 | ) | | (42,846 | ) |
Financing activities | | 21,878 |
| | (106,981 | ) |
Net increase (decrease) in cash and cash equivalents | | $ | 88,452 |
| | $ | (9,773 | ) |
| | | | | | | | | | | | | | |
| | 2022 | | 2021 |
Cash flows provided (used) by: | | | | |
Operating activities | | $ | 130,220 | | | $ | 51,356 | |
Investing activities | | (110,378) | | | (1,998,692) | |
Financing activities | | (75,951) | | | 1,560,486 | |
Net decrease in cash and cash equivalents | | $ | (56,109) | | | $ | (386,850) | |
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 ninesix months ended SeptemberJune 30, 2017,2022, operating activities provided cash of $142.4$130.2 million. Operating activities that provided cash were primarily comprised of net income of $102.1$79.9 million, non-cash depreciation and amortization charges of $40.1$75.9 million, and non-cash share-based compensation expense of $27.4$51.1 million and a non-cash decrease in operating lease right-of-use assets of $5.1 million. Working capital, excluding cash, increased approximately $27.2$81.7 million mainly due to higher accounts receivable relatedbecause of an increase in unbilled receivables attributed to annualrevenues recognized prior to billings and our maintenance and subscription billings as well as milestone billings for several contracts,billing cycle peaking in June, the timing of income taxbonuses payments, the changes in deferred revenue balancestiming of payments of payroll related taxes, and the deferred taxes associated with stock option activity during the period. These increases were offset slightly by an increase in deferred revenue during the period, the timing of payments for wages.
to and receipts from our government partners and end-user consumers, and the timing of income tax payments. In general, changes in deferred revenue 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 occur in the second and fourth quarters. In addition, subscription renewals are billed throughout the year.
Our days sales outstanding (“DSO”) was 87115 days at SeptemberJune 30, 2017,2022, compared to 93108 days at December 31, 2016,2021, and 87131 days at SeptemberJune 30, 2016. Our2021. The increase in DSO compared to December 31, 2021, is primarily attributed to our maintenance billing cycle, which typically peaks 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. The decrease in DSO compared to June 30, 2021, is attributed to improved collection efforts.
Investing activities used cash of $75.8$110.4 million in the ninesix months ending SeptemberJune 30, 2017. Approximately $37.7 million was invested in property and equipment. We purchased an office building in Latham, New York, for approximately $2.9 million and paid $12.9 million for construction to expand a building in Yarmouth, Maine. 2022. On August 2, 2017,February 8, 2022, we acquired all of the capital stock of Digital Health Department,US eDirect Inc. (US eDirect), a company that provides environmental health software, offering a software-as-a-service (SaaS) solutionmarket-leading provider of technology solutions for public health compliancecampground and inspections processes.outdoor recreation management. The total purchase price, net of debt assumed, cash acquired of $6.4 million, was $3.9approximately $116.7 million, consisting of which $3.7$117.6 million was paid in cash, and $0.2approximately $5.5 million was accrued as of September 30, 2017. On May 30, 2017, we also 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 $7.0related to indemnity holdbacks, subject to certain post-closing adjustments. In addition, approximately $16.5 million of which $6.1 million was paidsoftware development costs were capitalized. The remaining additions were for computer equipment and furniture and fixtures in cash and $0.9 million was accrued assupport of September 30, 2017. The impact of these acquisitions oninternal growth, particularly with respect to data centers supporting growth in our operating results is not material.cloud-based offerings.
InvestingFinancing activities used cash of $42.8$76.0 million in the nine months ending September 30, 2016. Approximately $29.5 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 $2.0 million related to the working capital holdback in connection with the NWS acquisition.
Financing activities provided cash of $21.9 million in the ninesix months ended SeptemberJune 30, 2017,2022, primarily attributable to repayment of $80.0 million of the unsecured term loans and were comprised of purchases of treasury shares, proceedsoffset by payments received from stock option exercises and employee stock purchase plan activity. Duringactivity, net of withheld shares for taxes upon equity award.
In February 2019, our board of directors authorized the nine months ended September 30, 2017, we purchased 42,000repurchase of an additional 1.5 million shares of our common stock for an aggregate purchase price of $6.2 million at an average price paid per share of $147.30.
Financing activities used cash of $107.0 million in the nine months ended September 30, 2016. Cash used by financing activities was 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 nine months ended September 30, 2016, we purchased 758,000 shares of our common stock for an aggregate purchase price of $94.5 million at an average price paid per share of $124.75.
We had authorization from our board of directors to repurchase up to 2.0 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 June 30, 2022, we have authorization from our board of directors to repurchase up to 2.4 million additional shares of our 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$24.3 million and $967,000 in the six months ended June 30, 2022, and 2021, respectively.
As of June 30, 2022, we had $600 million in outstanding principal for the nineConvertible Senior Notes due 2026. Under our 2021 Credit Agreement, we had $675 million in outstanding principal for the unsecured term loans, no outstanding borrowings under the 2021 Revolving Credit Facility, and an available borrowing capacity of $500 million as of June 30, 2022. As of June 30, 2022, we had one outstanding standalone letter of credit totaling $2.0 million. The letter of credit, which guarantees our performance under a client contract, renews automatically annually unless canceled in writing, and expires in the third quarter of 2026. For the six months ended SeptemberJune 30, 2017, compared2022, we repaid $80.0 million of the unsecured term loans under 2021 Credit Agreement.
Subsequent to taxJune 30, 2022, we repaid $100 million of the unsecured term loans under the 2021 Credit Agreement in July 2022.
In the six months ended June 30, 2022, and 2021, respectively, we made interest payments of $25.0$5.7 million inand $9.4 million, associated with the nine months ended September 30, 2016.
We anticipate that 2017 capital spending will be approximately $54.0 million. Capital spending includes approximately $19.42021 Credit Agreement and the Convertible Senior Notes, including payment of a $6.4 million for the Yarmouth office expansion and approximately $5.0 million for the purchase and renovation of an office building in Latham, New York. We expect the remaining capital spending will consist primarily of computer equipment and software for infrastructure replacements and expansion. We currently do not expect to capitalize significant amountscommitment fee related to software developmentthe senior unsecured bridge loan facility paid in 2017, but2021.
See Note 4, "Debt", to the actual amountCondensed Consolidated Financial Statements for discussions of the 2021 Credit Agreement 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, cash flows from operations and borrowings under our revolving line of credit.Convertible Senior Notes.
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 anticipate that 2022 capital spending will be between $58 million and $62 million, including approximately $34 million of capitalized software development. We expect the majority of the other capital spending will consist of computer equipment and software for infrastructure replacements and expansion. Capital spending is expected to be funded from existing cash balances and cash flows from operations.
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 2027.
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 SeptemberJune 30, 2017,2022, we had no$675.0 million of outstanding borrowings under theour 2021 Credit Facility. LoansAgreement and available borrowing capacity under the 2021 Credit Agreement was $500.0 million.
Borrowings under the Revolving Credit Facility and the Term Loan A-1 bear interest, at Tyler’sthe Company’s option, at a per annum rate of either (1) the Wells Fargo BankAdministrative Agent’s prime commercial lending rate (subject to certain higher rate determinations) (the “Base Rate”) plus a margin of 0.25%0.125% to 1.00%0.75% or (2) the 30, 60, 90one-, three-, six-, or, 180-daysubject to approval by all lenders, twelve-month LIBOR rate plus a margin of 1.25%1.125% to 2.00%1.75%. The Term Loan A-2 bears interest, at the Company’s option, at a per annum rate of either (1) the Base Rate plus a margin of 0% to 0.5% or (2) the one-, three-, six-, or, subject to approval by all lenders, twelve-month LIBOR rate plus a margin of 0.875% to 1.5%.
During the ninesix months ended SeptemberJune 30, 2017, our2022, the effective average interest rate for our borrowings was 2.17%2.38%. As of September 30, 2017, our interest rate was 4.50%Based on the aggregate outstanding principal balance under the Wells Fargo Bank prime rate and 2.49% under2021 Credit Agreement as of June 30, 2022, of $675.0 million, each quarter point change in interest rates would result in a 30-day LIBOR contract. The Credit Facility is secured by substantially all of our assets.$1.7 million change in annual interest expense.
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 SeptemberJune 30, 2017.2022.
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 SeptemberJune 30, 2017,2022, 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 20162021 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 SeptemberJune 30, 2017,2022, 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, 2016.2021.
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.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 101101.SCH | | Instance DocumentInline XBRL Taxonomy Extension Schema Document. | |
Exhibit 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
Exhibit 101101.LAB | | Schema DocumentInline XBRL Extension Labels Linkbase Document. | |
Exhibit 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
Exhibit 101101.PRE | | CalculationInline XBRL Taxonomy Extension Presentation Linkbase DocumentDocument. | |
Exhibit 104 | |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101101). | | Labels Linkbase Document |
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Exhibit 101 | | Definition Linkbase Document |
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Exhibit 101 | | Presentation Linkbase Document |
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
July 29, 2022