UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended ~~September 30, 2020~~March 31, 2021


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

Commission File Number 1-10485

TYLER TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)


Delaware						75-2303920
(State or other jurisdiction of incorporation or organization)						(I.R.S. employer identification no.)


5101 TENNYSON PARKWAY	PLANO	Texas	75024
(Address of principal executive offices)	(City)	(State)	(Zip code)

(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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data file required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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):

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

☐

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

The number of shares of common stock of registrant outstanding on ~~November 2, 2020~~May 4, 2021 was ~~40,326,928.~~40,738,702.

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

TYLER TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2020		2019		2020		2019			2021		2020
Revenues:	Revenues:									Revenues:
Software licenses and royalties	Software licenses and royalties	$	19,937	$	25,379	$	55,699	$	67,847	Software licenses and royalties	$	14,933	$	18,737
Subscriptions	Subscriptions	89,290		75,272		256,651		216,022		Subscriptions	102,479		81,723
Software services	Software services	47,946		54,997		143,733		160,841		Software services	47,640		52,133
Maintenance	Maintenance	117,979		109,833		349,104		316,674		Maintenance	119,112		114,365
Appraisal services	Appraisal services	5,394		6,008		15,853		17,455		Appraisal services	6,465		5,763
Hardware and other	Hardware and other	5,200		3,911		12,338		18,751		Hardware and other	4,173		3,820
Total revenues	Total revenues	285,746		275,400		833,378		797,590		Total revenues	294,802		276,541

Cost of revenues:	Cost of revenues:									Cost of revenues:
Software licenses and royalties	Software licenses and royalties	1,177		971		3,047		2,680		Software licenses and royalties	1,236		740
Acquired software	Acquired software	7,965		7,975		23,998		22,645		Acquired software	7,964		8,027
Subscriptions, software services and maintenance	Subscriptions, software services and maintenance	125,881		128,545		381,947		371,464		Subscriptions, software services and maintenance	134,320		131,779
Appraisal services	Appraisal services	3,434		4,096		11,795		11,306		Appraisal services	4,617		4,385
Hardware and other	Hardware and other	3,780		3,096		8,748		14,870		Hardware and other	2,458		2,479
Total cost of revenues	Total cost of revenues	142,237		144,683		429,535		422,965		Total cost of revenues	150,595		147,410

Gross profit	Gross profit	143,509		130,717		403,843		374,625		Gross profit	144,207		129,131

Selling, general and administrative expenses	Selling, general and administrative expenses	66,819		63,888		196,825		187,481		Selling, general and administrative expenses	78,774		67,485
Research and development expense	Research and development expense	21,642		21,130		65,952		60,172		Research and development expense	21,813		22,361
Amortization of other intangibles	Amortization of other intangibles	5,392		5,646		16,176		15,762		Amortization of other intangibles	5,412		5,392

Operating income	Operating income	49,656		40,053		124,890		111,210		Operating income	38,208		33,893

Other income, net	Other income, net	280		499		1,740		838		Other income, net	88		990
Income before income taxes	Income before income taxes	49,936		40,552		126,630		112,048		Income before income taxes	38,296		34,883
Income tax provision (benefit)	Income tax provision (benefit)	10,652		162		(14,096)		12,311		Income tax provision (benefit)	1,320		(12,667)
Net income	Net income	$	39,284	$	40,390	$	140,726	$	99,737	Net income	$	36,976	$	47,550

Earnings per common share:	Earnings per common share:									Earnings per common share:
Basic	Basic	$	0.98	$	1.04	$	3.52	$	2.58	Basic	$	0.91	$	1.20
Diluted	Diluted	$	0.94	$	1.00	$	3.39	$	2.49	Diluted	$	0.88	$	1.16

See accompanying notes.

TYLER TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value and share amounts)


		September 30, 2020 (unaudited)		December 31, 2019			March 31, 2021 (unaudited)		December 31, 2020
ASSETS	ASSETS					ASSETS
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	518,685	$	232,682	Cash and cash equivalents	$	1,250,752	$	603,623
Accounts receivable (less allowance for losses and sales adjustments of $9,760 in 2020 and $4,302 in 2019)		362,667		374,089
Accounts receivable (less allowance for losses and sales adjustments of $8,198 in 2021 and $9,255 in 2020)						Accounts receivable (less allowance for losses and sales adjustments of $8,198 in 2021 and $9,255 in 2020)	330,824		382,319
Short-term investments	Short-term investments	55,595		39,399		Short-term investments	59,030		72,187
Prepaid expenses	Prepaid expenses	29,743		24,717		Prepaid expenses	38,106		30,864
Income tax receivable	Income tax receivable	20,752		6,482		Income tax receivable	17,066		21,598
Other current assets	Other current assets	3,157		2,328		Other current assets	4,574		2,479
Total current assets	Total current assets	990,599		679,697		Total current assets	1,700,352		1,113,070

Accounts receivable, long-term	Accounts receivable, long-term	24,459		22,432		Accounts receivable, long-term	23,802		21,417
Operating lease right-of-use assets	Operating lease right-of-use assets	15,321		18,992		Operating lease right-of-use assets	19,192		18,734
Property and equipment, net	Property and equipment, net	170,833		171,861		Property and equipment, net	169,295		168,004
Other assets:	Other assets:					Other assets:
Software development costs, net						Software development costs, net	12,190		9,121
Goodwill	Goodwill	840,028		840,117		Goodwill	851,629		838,428
Other intangibles, net	Other intangibles, net	341,999		378,914		Other intangibles, net	308,614		322,068
Non-current investments	Non-current investments	75,278		42,235		Non-current investments	112,910		82,640
Other non-current assets	Other non-current assets	33,646		37,366		Other non-current assets	33,806		33,792
Total assets	Total assets	$	2,492,163	$	2,191,614	Total assets	$	3,231,790	$	2,607,274

LIABILITIES AND SHAREHOLDERS' EQUITY	LIABILITIES AND SHAREHOLDERS' EQUITY					LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	11,073	$	14,977	Accounts payable	$	12,386	$	14,011
Accrued liabilities	Accrued liabilities	81,688		75,234		Accrued liabilities	86,522		83,084
Operating lease liabilities	Operating lease liabilities	5,780		6,387		Operating lease liabilities	5,913		5,904
Current income tax payable		0		0

Deferred revenue	Deferred revenue	436,504		412,495		Deferred revenue	420,535		461,278

Total current liabilities	Total current liabilities	535,045		509,093		Total current liabilities	525,356		564,277

Revolving line of credit	Revolving line of credit	0		0		Revolving line of credit	0		0
Convertible senior notes, net						Convertible senior notes, net	591,483		0
Deferred revenue, long-term	Deferred revenue, long-term	118		199		Deferred revenue, long-term	83		100
Deferred income taxes	Deferred income taxes	45,985		48,442		Deferred income taxes	37,239		40,507
Operating lease liabilities, long-term	Operating lease liabilities, long-term	12,870		16,822		Operating lease liabilities, long-term	16,636		16,279

Commitments and contingencies	Commitments and contingencies	0		0		Commitments and contingencies	0		0

Shareholders' equity:	Shareholders' equity:					Shareholders' equity:
Preferred stock, $10.00 par value; 1,000,000 shares authorized; NaN issued	Preferred stock, $10.00 par value; 1,000,000 shares authorized; NaN issued	0		0		Preferred stock, $10.00 par value; 1,000,000 shares authorized; NaN issued	0		0
Common stock, $0.01 par value; 100,000,000 shares authorized; 48,147,969 shares issued and outstanding as of September 30, 2020 and December 31, 2019		481		481
Common stock, $0.01 par value; 100,000,000 shares authorized; 48,147,969 shares issued and outstanding as of March 31, 2021 and December 31, 2020						Common stock, $0.01 par value; 100,000,000 shares authorized; 48,147,969 shares issued and outstanding as of March 31, 2021 and December 31, 2020	481		481
Additional paid-in capital	Additional paid-in capital	872,963		739,478		Additional paid-in capital	941,960		905,332
Accumulated other comprehensive loss, net of tax	Accumulated other comprehensive loss, net of tax	(46)		(46)		Accumulated other comprehensive loss, net of tax	(46)		(46)
Retained earnings	Retained earnings	1,058,062		917,336		Retained earnings	1,149,132		1,112,156
Treasury stock, at cost; 7,832,824 and 8,839,352 shares in 2020 and 2019, respectively		(33,315)		(40,191)
Treasury stock, at cost; 7,424,104 and 7,608,627 shares in 2021 and 2020, respectively						Treasury stock, at cost; 7,424,104 and 7,608,627 shares in 2021 and 2020, respectively	(30,534)		(31,812)
Total shareholders' equity	Total shareholders' equity	1,898,145		1,617,058		Total shareholders' equity	2,060,993		1,986,111
Total liabilities and shareholders' equity	Total liabilities and shareholders' equity	$	2,492,163	$	2,191,614	Total liabilities and shareholders' equity	$	3,231,790	$	2,607,274

See accompanying notes.

TYLER TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


		Nine Months Ended September 30,					Three Months Ended March 31,
		2020		2019			2021		2020
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net income	Net income	$	140,726	$	99,737	Net income	$	36,976	$	47,550
Adjustments to reconcile net income to cash provided by operating activities:	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	Depreciation and amortization	60,746		56,547		Depreciation and amortization	21,100		19,985
Share-based compensation expense	Share-based compensation expense	54,112		44,369		Share-based compensation expense	25,724		17,302

Operating lease right-of-use assets expense	Operating lease right-of-use assets expense	4,233		3,979		Operating lease right-of-use assets expense	1,546		1,457
Deferred income tax benefit	Deferred income tax benefit	(2,458)		(10,329)		Deferred income tax benefit	(3,267)		(2,668)
Changes in operating assets and liabilities, exclusive of effects of acquired companies:	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	Accounts receivable	9,394		(35,544)		Accounts receivable	49,317		56,982
Income tax receivable	Income tax receivable	(14,270)		4,553		Income tax receivable	4,533		(10,175)
Prepaid expenses and other current assets	Prepaid expenses and other current assets	(7,333)		(7,630)		Prepaid expenses and other current assets	(9,261)		(11,186)
Accounts payable	Accounts payable	(3,904)		1,548		Accounts payable	(2,292)		(2,020)
Operating lease liabilities	Operating lease liabilities	(5,121)		(4,530)		Operating lease liabilities	(1,639)		(1,743)
Accrued liabilities	Accrued liabilities	6,276		(1,379)		Accrued liabilities	(8,965)		(12,210)
Deferred revenue	Deferred revenue	23,927		27,206		Deferred revenue	(42,069)		(46,568)
Net cash provided by operating activities	Net cash provided by operating activities	266,328		178,527		Net cash provided by operating activities	71,703		56,706

Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Additions to property and equipment	Additions to property and equipment	(19,064)		(28,833)		Additions to property and equipment	(6,564)		(9,349)
Purchase of marketable security investments	Purchase of marketable security investments	(111,329)		(27,322)		Purchase of marketable security investments	(52,755)		(27,271)
Proceeds from marketable security investments	Proceeds from marketable security investments	61,794		56,854		Proceeds from marketable security investments	35,031		18,237
Purchase of investment in common shares	Purchase of investment in common shares	(10,000)		0		Purchase of investment in common shares	0		(10,000)
Proceeds from the sale of investment in preferred shares	Proceeds from the sale of investment in preferred shares	15,000		0		Proceeds from the sale of investment in preferred shares	0		15,000
Investment in software	Investment in software	(4,316)		(3,540)		Investment in software	(3,476)		(1,315)
Cost of acquisitions, net of cash acquired	Cost of acquisitions, net of cash acquired	(261)		(199,870)		Cost of acquisitions, net of cash acquired	(12,049)		(261)
Decrease (increase) in other	Decrease (increase) in other	13		(493)		Decrease (increase) in other	119		(48)
Net cash used by investing activities	Net cash used by investing activities	(68,163)		(203,204)		Net cash used by investing activities	(39,694)		(15,007)

Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Increase in net borrowings on revolving line of credit	Increase in net borrowings on revolving line of credit	0		0		Increase in net borrowings on revolving line of credit	0		0
Proceeds from issuance of convertible senior notes						Proceeds from issuance of convertible senior notes	600,000		0
Payment of debt issuance costs						Payment of debt issuance costs	(6,020)		0
Purchase of treasury shares	Purchase of treasury shares	(15,484)		(17,786)		Purchase of treasury shares	0		(15,482)
Payment of contingent consideration	Payment of contingent consideration	(5,619)		0		Payment of contingent consideration	0		(5,619)
Proceeds from exercise of stock options	Proceeds from exercise of stock options	100,732		62,295		Proceeds from exercise of stock options	18,102		46,236
Contributions from employee stock purchase plan	Contributions from employee stock purchase plan	8,209		7,327		Contributions from employee stock purchase plan	3,038		2,469
Net cash provided by financing activities	Net cash provided by financing activities	87,838		51,836		Net cash provided by financing activities	615,120		27,604

Net increase in cash and cash equivalents	Net increase in cash and cash equivalents	286,003		27,159		Net increase in cash and cash equivalents	647,129		69,303
Cash and cash equivalents at beginning of period	Cash and cash equivalents at beginning of period	232,682		134,279		Cash and cash equivalents at beginning of period	603,623		232,682
Cash and cash equivalents at end of period	Cash and cash equivalents at end of period	$	518,685	$	161,438	Cash and cash equivalents at end of period	$	1,250,752	$	301,985

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				Common Stock					Additional Paid-in Capital				Accumulated Other Comprehensive Income (Loss)			Retained Earnings				Treasury Stock					Total Shareholders' Equity
		Shares	Amount								Shares			Amount				Shares				Amount									Shares							Amount
Balance at June 30, 2020		48,148	$	481			$	843,998				$	(46)	$	1,018,778	(7,917)					$	(33,883)		$	1,829,328
Balance at December 31, 2020																						Balance at December 31, 2020	48,148			$	481		$	905,332			$	(46)		$	1,112,156			(7,609)		$	(31,812)		$	1,986,111
Net income	Net income	—	—		—				—			39,284		—		—			39,284			Net income	—			—		—				—			36,976				—		—			36,976
Exercise of stock options and vesting of restricted stock units	Exercise of stock options and vesting of restricted stock units	—	—		7,578				—			—		75		817			8,395			Exercise of stock options and vesting of restricted stock units	—			—		7,921				—			—				196		10,181			18,102
Employee taxes paid for withheld shares upon equity award settlement	Employee taxes paid for withheld shares upon equity award settlement	—	—		—				—			—		(1)		(316)			(316)			Employee taxes paid for withheld shares upon equity award settlement	—			—		—				—			—				(19)		(8,958)			(8,958)
Stock compensation	Stock compensation	—	—		18,424				—			—		—		—			18,424			Stock compensation	—			—		25,724				—			—				—		—			25,724
Issuance of shares pursuant to employee stock purchase plan	Issuance of shares pursuant to employee stock purchase plan	—	—		2,963				—			—		11		69			3,032			Issuance of shares pursuant to employee stock purchase plan	—			—		2,983				—			—				8		55			3,038
Treasury stock purchases	Treasury stock purchases	—	—		—				—			—		—		(2)			(2)			Treasury stock purchases	—			—		—				—			—				0		0			0
Balance at September 30, 2020		48,148	$	481	$	872,963			$	(46)		$	1,058,062	(7,832)		$	(33,315)		$	1,898,145
Balance at March 31, 2021																						Balance at March 31, 2021	48,148			$	481	$	941,960			$	(46)		$	1,149,132			(7,424)		$	(30,534)		$	2,060,993


		Common Stock			Additional Paid-in Capital				Accumulated Other Comprehensive Income (Loss)			Retained Earnings		Treasury Stock					Total Shareholders' Equity				Common Stock					Additional Paid-in Capital				Accumulated Other Comprehensive Income (Loss)			Retained Earnings				Treasury Stock					Total Shareholders' Equity
		Shares	Amount								Shares			Amount				Shares				Amount									Shares							Amount
Balance at June 30, 2019		48,148	$	481			$	715,920				$	(46)	$	830,156	(9,582)					$	(124,881)		$	1,421,630
Balance at December 31, 2019																						Balance at December 31, 2019	48,148			$	481		$	739,478			$	(46)		$	917,336			(8,839)		$	(40,191)		$	1,617,058
Net income	Net income	—	—		—				—			40,390		—		—			40,390			Net income	—			—		—				—			47,550				—		—			47,550
Exercise of stock options and vesting of restricted stock units	Exercise of stock options and vesting of restricted stock units	—	—		(38,160)				—			—		396		78,323			40,163			Exercise of stock options and vesting of restricted stock units	—			—		38,942				—			—				498		7,294			46,236
Employee taxes paid for withheld shares upon equity award settlement	Employee taxes paid for withheld shares upon equity award settlement	—	—		—				—			—		(1)		(191)			(191)			Employee taxes paid for withheld shares upon equity award settlement	—			—		—				—			—				(7)		(2,301)			(2,301)
Stock compensation	Stock compensation	—	—		14,887				—			—		—		—			14,887			Stock compensation	—			—		17,302				—			—				—		—			17,302
Issuance of shares pursuant to employee stock purchase plan	Issuance of shares pursuant to employee stock purchase plan	—	—		(61)				—			—		15		2,779			2,718			Issuance of shares pursuant to employee stock purchase plan	—			—		2,367				—			—				10		102			2,469
Treasury stock purchases	Treasury stock purchases	—	—		—				—			—		—		—			0			Treasury stock purchases	—			—		—				—			—				(59)		(15,482)			(15,482)
Balance at September 30, 2019		48,148	$	481	$	692,586			$	(46)		$	870,546	(9,172)		$	(43,970)		$	1,519,597
Balance at March 31, 2020																						Balance at March 31, 2020	48,148			$	481	$	798,089			$	(46)		$	964,886			(8,397)		$	(50,578)		$	1,712,832

~~TYLER TECHNOLOGIES, INC.~~

~~CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY~~

~~(In thousands)~~

~~(Unaudited)~~

Common Stock Additional
Paid-in
Capital Accumulated Other
Comprehensive
Income (Loss) Retained
Earnings Treasury Stock Total
Shareholders'
Equity
Shares Amount Shares Amount
Balance at December 31, 2019 48,148 $ 481 $ 739,478 $ (46) $ 917,336 (8,839) $ (40,191) $ 1,617,058
Net income — — — — 140,726 — — 140,726
Exercise of stock options and vesting of restricted stock units — — 74,162 — — 1,055 26,570 100,732
Employee taxes paid for withheld shares for taxes upon equity award settlement — — — — (20) (7,208) (7,208)
Stock compensation — — 54,112 — — — — 54,112
Issuance of shares pursuant to employee stock purchase plan — — 5,211 — — 31 2,998 8,209
Treasury stock purchases — — — — — (59) (15,484) (15,484)
Balance at September 30, 2020 48,148 $ 481 $ 872,963 $ (46) $ 1,058,062 (7,832) $ (33,315) $ 1,898,145

Common Stock Additional
Paid-in
Capital Accumulated Other
Comprehensive
Income (Loss) Retained
Earnings Treasury Stock Total
Shareholders'
Equity
Shares Amount Shares Amount
Balance at December 31, 2018 48,148 $ 481 $ 731,435 $ (46) $ 771,925 (9,872) $ (178,949) $ 1,324,846
Retained earnings adjustment-adoption of Topic 842 Leases, net of taxes
— — — — (1,116) — — (1,116)
Net income — — — — 99,737 — — 99,737
Exercise of stock options and vesting of restricted stock units — — (82,449) — — 746 144,744 62,295
Employee taxes paid for withheld shares for taxes upon equity award settlement — — — — — (17) (3,572) (3,572)
Stock compensation — — 44,369 — — — — 44,369
Issuance of shares pursuant to employee stock purchase plan — — (769) — — 43 8,096 7,327
Treasury stock purchases — — — — — (72) (14,289) (14,289)
Balance at September 30, 2019 48,148 $ 481 $ 692,586 $ (46) $ 870,546 (9,172) $ (43,970) $ 1,519,597

Tyler Technologies, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Tables in thousands, except per share data)

(1) Basis of Presentation

We prepared the accompanying condensed consolidated financial statements following the requirements of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States, or GAAP, for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted for interim periods. Balance sheet amounts are as of ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, and operating result amounts are for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021, and 2020, ~~and 2019,~~ respectively, and include all normal and recurring adjustments that we considered necessary for the fair summarized presentation of our financial position and operating results. As these are condensed financial statements, one should also read the financial statements and notes included in our latest Form 10-K for the year ended December 31, ~~2019.~~2020. Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year. Certain amounts for the previous year have been reclassified to conform to the current year presentation.

Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions, and other events and circumstances from non-owner sources and includes all components of net income (loss) and other comprehensive income (loss). We had no items of other comprehensive income (loss) for the three ~~and nine~~ months ended ~~September 30, 2020,~~March 31, 2021, and ~~2019.~~2020.

(2) Accounting Standards and Significant Accounting Policies

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Except for the ~~accounting policies~~January 1, 2021, adoption of ASU No. 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity ("ASU ~~2016-13,~~ ~~Financial Instruments - Credit Losses,~~ ~~(“ASU 2016-13”~~2020-06"), there have been no changes to our significant accounting policies described in the Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020, filed with the SEC on February 19, ~~2020,~~2021, that have had a material impact on our condensed consolidated financial statements and related notes. See recently adopted accounting pronouncements below.

~~Impact~~Impacts of the COVID-19 Pandemic

~~In March 2020, the World Health Organization declared the outbreak of a COVID-19~~The pandemic ~~which~~ continues to ~~spread throughout the U.S.~~delay some government procurement processes and ~~the world and has resulted in authorities implementing numerous measures~~is expected to ~~contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns.~~ ~~While we~~ are unable to accurately predict the full impact that COVID-19 will have on our results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and containment measures and associated compliance, we do expect the current environment will negatively impact our ~~revenues and other financial results for fiscal 2020.~~

ability to complete certain implementations, negatively impacting our revenue. Because an increasing portion of our revenues are recurring, the effect of COVID-19 on our results of operations may also not be fully reflected for some time. We expect to see some impact on our business in the near term with delays in government procurement processes and uncertainty around public sector budgets, as well as delays in implementations caused by travel restrictions, closed offices, or clients shifting focus to more pressing issues. We are working to address those challenges through adapting the way we do business – encouraging web and video conferencing, conducting sales demonstrations and delivering professional services remotely.

Our priorities during this crisis are protecting the health and safety of our employees and our clients. Our IT systems and applications support a remote workforce. Prior to the pandemic, many of our employees worked remotely. In response to the pandemic, we encouraged all employees who are able to do so to work from home, equipping them with resources necessary to continue uninterrupted. We were able to transition the vast majority of our employees to this work-from-home posture. This reduces the number of team members in our offices to those uniquely needed for essential on-site services, such as network operations support staff, and allows for “social distancing” as directed by the Centers for Disease Control ("CDC").

~~The pandemic has delayed some government procurement processes and is expected to impact our ability to complete certain implementations, negatively impacting our revenue.~~ It could also negatively impact the timing of client payments to us. We continue to monitor these trends in order to respond to the ever-changing impact of COVID-19 on our clients and Tyler’s operations.

For the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, the impact of the COVID-19 pandemic resulted in lower revenues from software licenses and software ~~services, appraisal services, and other revenues.~~services. Lower software licenses compared to prior periods are attributed to slower sales cycles as government procurement processes are delayed and contract signings have been pushed to future periods. ~~Software services and appraisal~~The software services revenue ~~declines are~~decline is attributed to delays in implementations caused by travel restrictions ~~and shelter-in-place orders~~ in effect during the period. ~~Other revenues were lower compared to prior periods primarily as a result of the cancellation of our 2020 Connect user conference.~~ Lower revenues compared to prior periods were partially offset by cost savings attributed to lower spend on travel, user conferences and trade show expenses, health claims and other employee-related expenses. ~~If and as~~As travel restrictions ~~and shelter-in-place orders~~ are relaxed, we expect software services and appraisal services revenues to increase as the limited number of our clients who require that all or a portion of their services be delivered onsite will be able to receive those services. Also, we are adapting ~~by changing~~ the way we do business by encouraging web and video conferencing, conducting virtual sales demonstrations and delivering professional services remotely, which result in increases in staff utilization rates and billable time.

Recurring revenues from subscriptions and maintenance comprised ~~73%~~75% of our total consolidated revenue for the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, and include transaction-based revenue streams such as e-filing and online payments. On March 9, 2021, we issued 0.25% Convertible Senior Notes due 2026 (the "Convertible Senior Notes") in the aggregate principal amount of $600 million. The net proceeds from the issuance of the Convertible Senior Notes of $594 million were used as one of the funding sources to complete the acquisition of NIC Inc ("NIC"), see Note 16 Subsequent Events. As of ~~September 30, 2020,~~March 31, 2021, we had ~~$649.6 million~~$1.4 billion in cash and investments and 0 outstanding borrowings under our credit facility. ~~We also have substantial additional liquidity available through our undrawn $400.0 million~~

On April 21, 2021, Tyler Technologies, Inc ("the Company") consummated the acquisition of NIC contemplated by the Agreement and Plan of Merger dated February 9, 2021. In connection with the completion of the acquisition, the Company, as borrower, entered into a new $1.4 billion Credit Agreement with the various lenders consisting of a revolving credit facility ~~which can be expanded through an accordion feature. During~~of up to $500 million and aggregate term loans totaling $900 million. On the ~~second quarter~~April 21, 2021, the Company paid approximately $2.3 billion in cash for the purchase of ~~2020, we completed our annual assessment~~NIC. The proceeds from the term loans and a portion of ~~goodwill which did not result in an impairment charge. Since our assessment in~~ the ~~second quarter~~proceeds from the revolving credit facility were used as sources of ~~2020, we~~funding for the purchase of NIC. For more information on the acquisition of NIC and New Credit Agreement, see Note 16 Subsequent Events.

We have recorded no impairment to goodwill ~~as no triggering events~~ or ~~changes in circumstances occurred as of period-end. No impairments of~~ other assets ~~were recorded~~ as of the balance sheet date, as no triggering events or changes in circumstances indicating a potential impairment have occurred as of period-end to require such an impairment; however, due to significant uncertainty surrounding the pandemic and market conditions, management’s judgment regarding this could change in the future.

USE OF ESTIMATES

The preparation of our financial statements in conformity with ~~accounting principles generally accepted in the United States (“GAAP”)~~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 the customer can benefit from the services either on their own or together with other resources readily available to the customer and whether the services are separately identifiable from other promises in the contract. The transaction price is allocated to the distinct performance obligations on a relative SSP basis. We determine the SSP based on our overall pricing objectives, taking into consideration market conditions and other factors, including the value of our contracts, the applications sold, customer demographics, and the number and types of users within our contracts. Revenue is recognized net of allowances for sales adjustments and any taxes collected from customers, which are subsequently remitted to governmental authorities.

Significant Judgments:

Our contracts with customers often include multiple performance obligations to a customer. When a software arrangement (license or subscription) includes both software licenses and software services, judgment is required to determine whether the software license is considered distinct and accounted for separately, or not distinct and accounted for together with the software services and recognized over time.

The transaction price is allocated to the separate performance obligations on a relative SSP basis. We determine the SSP based on our overall pricing objectives, taking into consideration market conditions and other factors, including the value of our contracts, the applications sold, customer demographics, and the number and types of users within our contracts. We use a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there is a discount to be allocated based on the relative SSP of the various products and services. In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine SSP using the expected cost-plus margin approach.

For arrangements that involve significant production, modification or customization of the software, or where software services otherwise cannot be considered distinct, we recognize revenue as control is transferred to the customer over time using progress-to-completion methods. Depending on the contract, we measure progress-to-completion primarily using labor hours incurred, or value added. The progress-to-completion method generally results in the recognition of reasonably consistent profit margins over the life of a contract because we can provide reasonably dependable estimates of contract billings and contract costs. We use the level of profit margin that is most likely to occur on a contract. If the most likely profit margin cannot be precisely determined, the lowest probable level of profit margin in the range of estimates is used until the results can be estimated more precisely. These arrangements are often implemented over an extended time period and occasionally require us to revise total cost estimates. Amounts recognized in revenue are calculated using the progress-to-completion measurement after giving effect to any changes in our cost estimates. Changes to total estimated contract costs, if any, are recorded in the period they are determined. Estimated losses on uncompleted contracts are recorded in the period in which we first determine that a loss is apparent.

Typically, the structure of our arrangements does not give rise to variable consideration. However, in those instances whereby variable consideration exists, we include in our estimates additional revenue for variable consideration when we believe we have an enforceable right, the amount can be estimated reliably and its realization is probable.

Refer to Note 13 - "Disaggregation of Revenue" for further information, including the economic factors that affect the nature, amount, timing, and uncertainty of revenue and cash flows of our various revenue categories.

Contract Balances:

Accounts receivable and allowance for losses and sales adjustments

Timing of revenue recognition may differ from the timing of invoicing to customers. We record an unbilled receivable when revenue is recognized prior to invoicing, or deferred revenue when revenue is recognized subsequent to invoicing. For multi-year agreements, we generally invoice customers annually at the beginning of each annual coverage period. We record an unbilled receivable related to revenue recognized for on-premises licenses as we have an unconditional right to invoice and receive payment in the future related to those licenses.

At ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, total current and long-term accounts receivable, net of allowance for losses and sales adjustments, was ~~$387.1~~$354.6 million and ~~$396.5~~$403.7 million, respectively. We have recorded unbilled receivables of ~~$138.2~~$145.7 million and ~~$134.0~~$140.8 million at ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, respectively. Included in unbilled receivables are retention receivables of ~~$13.6~~$10.4 million and $13.1 million at ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, 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 included with accounts receivable, current portion in the accompanying condensed consolidated balance sheets. Unbilled receivables and retention receivables expected to be 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 ~~$9.8~~$8.2 million at ~~September 30, 2020,~~March 31, 2021, does not include provisions for credit losses. As of January 1, 2020, we adopted ASU 2016-13, Financial Instruments - Credit Losses, and primarily evaluated our historical experience with credit losses related to trade and other receivables. Because we have not experienced any historical credit losses with the majority of our clients, we have no basis to record a reserve for credit losses as defined by the standard.

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

We assess goodwill for impairment annually, ~~as of April 1,~~ 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. If it is determined through the evaluation of events or circumstances that the carrying value may not be recoverable, we perform a comparison of the estimated fair value of the reporting unit to which the goodwill has been assigned to the sum of the carrying value of the assets and liabilities of that unit. If the sum of the carrying value of the assets and liabilities of a reporting unit exceeds the estimated fair value of that reporting unit, the carrying value of the reporting unit's goodwill is reduced to its fair value through an adjustment to the goodwill balance, resulting in an impairment charge. The fair values calculated in our impairment tests are determined using discounted cash flow models involving several assumptions. The assumptions that are used are based upon what we believe a hypothetical marketplace participant would use in estimating fair value. 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.

~~During the second quarter, as~~As part of our annual impairment test in fiscal year 2020, we performed qualitative assessments for all reporting units except for the data and insights reporting unit. As a result of these qualitative assessments, we determined that it was not more likely than not that an impairment existed; therefore, we did not perform a Step 1 quantitative impairment test. We did perform a quantitative assessment for goodwill of $75.7 million associated with our data and insights business unit and concluded no impairment ~~exists~~existed as of our annual assessment date. For most of our reporting units, goodwill relates to a combination of legacy and acquired businesses and as a result those units have fair values that substantially exceed their underlying carrying values. For other reporting units, in particular our ~~case management and business process management~~platform technologies and data and insights units, goodwill entirely relates to recently acquired businesses and as a result those units do not have significant excess fair values over carrying values. The ~~case management and business process management~~platform technologies and data and insights business units combined goodwill was ~~$152.0~~$158.6 million, or ~~18%~~19%, of total goodwill as of ~~September 30, 2020.~~March 31, 2021. Since our assessment in the second quarter of 2020, we have recorded no impairment to goodwill as no triggering events or changes in circumstances indicating a potential impairment have occurred as of period-end.

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 the COVID-19 pandemic, 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.

109

~~Other Intangible Assets~~

We make judgments about the recoverability of purchased intangible assets other than goodwill whenever events or changes in circumstances indicate that an impairment may exist. Customer base and acquired software each comprise approximately half of our purchased intangible assets other than goodwill. We review our customer turnover each year for indications of impairment. Our customer turnover has historically been very low. If indications of impairment are determined to exist, we measure the recoverability of assets by a comparison of the carrying amount of the asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of the assets exceeds their estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the assets exceeds the fair value of the assets. There have been no impairments of intangible assets in any of the periods presented.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

In ~~June 2016,~~August 2020, the FASB issued ASU ~~2016-13,~~ ~~Financial Instruments - Credit Losses,~~ (“2020-06, which simplifies the accounting for convertible instruments by removing the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. As a result, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost. These changes will reduce reported interest expense and increase reported net income for entities that have issued a convertible instrument that was bifurcated according to previously existing rules. ASU ~~2016-13”). ASU 2016-13 changes~~2020-06 also requires the ~~impairment model~~application of the if-converted method for ~~most financial assets~~calculating diluted earnings per share and certain other instruments, including trade and other receivables, available for-sale debt securities, held-to-maturity debt securities and loans, and requires entities to use a new forward-looking expected loss model thatthe treasury stock method will ~~result in the earlier recognition of an allowance for losses.~~be no longer available. This ~~update is~~standard will be effective for the Company’s fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for a fiscal year beginning after December 15, 2018, including interim periods within that fiscal year. Entities apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning ofin the first ~~reporting period in which the guidance is adopted. As~~quarter of 2022, with early adoption permitted. The Company has elected to early adopt this standard as of January 1, ~~2020, we adopted the new standard with no material impact of credit losses~~2021. Our accounting and disclosures related to our ~~trade and other receivables, held-to-maturity debt securities and retained earnings included in our condensed consolidated financial statements.~~convertible senior notes issued on March 9, 2021, reflect the requirements of this standard. For further information, please refer to Note 7,

~~RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS~~

~~Accounting for Income Taxes~~Debt.

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, ("ASU 2019-12") which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. The new standard is effective for fiscal years beginning after December 15, 2020. ~~Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis.~~ We ~~do not expect~~adopted ASU 2019-12 as of January 1, 2021. The adoption of this standard todid not have a material ~~effect~~impact on our consolidated financial statements.

(3) Acquisitions

On ~~February 28, 2019,~~March 31, 2021, we acquired all the equity interest of ~~the~~Glass Arc, Inc. (dba ReadySub). Readysub is a cloud-based platform that assists school districts with absence tracking, filling substitute teacher assignments, and automating essential payroll processes. The total purchase price was approximately $6.3 million, net of cash acquired, of which $6.2 million was paid in cash and approximately $98,000 was accrued for a working capital ~~stock~~holdback subject to certain post-closing adjustments.

On March 31, 2021, we acquired substantially all assets of ~~MP Holdings Parent,~~DataSpec, Inc. ~~dba MicroPact~~ ("~~MicroPact"~~DataSpec"), a ~~leading~~ provider of ~~commercial off-the-shelf solutions, including entellitrak®,~~ a ~~low-code application development platform~~software-as-a-service (SaaS) solution that allows for ~~case management~~secure electronic claims submission to the federal Department of Veterans Affairs (VA) and ~~business process management used extensively~~reporting capabilities, in addition to scheduling, calendaring, and payments. The total purchase price was approximately $5.9 million of which $5.8 million was paid in cash and approximately $63,000 was accrued for a working capital holdback, subject to certain post-closing adjustments.

Our balance sheet as of March 31, 2021, reflects the allocation of the purchase price to the assets acquired based on their fair value at the date of each acquisition, subject to post closing adjustments. The fair value of the assets acquired and liabilities assumed are based on valuations using Level III, unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The operating results for ReadySub and DataSpec are included in the ~~public sector. In the nine months ended September 30, 2020, we paid $5.6 million in contingent consideration. We have 0 contingent consideration accrued as of September 30, 2020.~~ES segment.

(4) Shareholders’ Equity

The following table details activity in our common stock:


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended March 31,
		2020			2019			2020			2019				2021			2020
		Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount			Shares	Amount		Shares	Amount
Purchases of treasury shares	Purchases of treasury shares	0	$	(2)	0	$	0	(59)	$	(15,484)	(72)	$	(14,289)	Purchases of treasury shares	0	$	0	(59)	$	(15,482)
Stock option exercises	Stock option exercises	72	8,395		395	40,163		989	100,732		691	62,295		Stock option exercises	120	18,102		481	46,236
Employee stock plan purchases	Employee stock plan purchases	11	3,032		15	2,718		31	8,209		43	7,327		Employee stock plan purchases	8	3,038		10	2,469
Restricted stock units vested, net of withheld shares upon award settlement	Restricted stock units vested, net of withheld shares upon award settlement	2	$	(316)	1	$	(191)	45	$	(7,208)	38	$	(3,572)	Restricted stock units vested, net of withheld shares upon award settlement	56	$	(8,958)	10	$	(2,301)

As of ~~September 30, 2020,~~March 31, 2021, we have authorization from our board of directors to repurchase up to 2.5 million additional shares of our common stock.

1110

(5) Deferred Commissions

Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for initial contracts are deferred and then amortized commensurate with the recognition of associated revenue over a period of benefit that we have determined to be three to seven years. Deferred commissions were ~~$31.3~~$32.6 million and ~~$29.8~~$32.3 million as of ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, respectively. Amortization expense was ~~$4.2 million and $11.7~~$3.0 million for both the three ~~and nine~~ months ended ~~September 30, 2020, respectively,~~March 31, 2021, and ~~$4.4 million and $12.3 million for the three and nine months ended September 30, 2019, respectively.~~March 31, 2020. There were 0 indicators of impairment in relation to the costs capitalized for the periods presented. Deferred commissions have been included with prepaid expenses for the current portion and non-current other assets for the long-term portion in the accompanying condensed consolidated balance sheets. Amortization expense related to deferred commissions is included in selling, general and administrative expenses in the accompanying condensed consolidated statements of income.

(6) Other Assets

As of ~~September 30, 2020,~~March 31, 2021, we have ~~$130.9~~$171.9 million in investment grade corporate and municipal bonds with varying maturity dates through ~~2025.~~2026. We intend to hold these bonds to maturity and have classified them as such. It is not more than likely that these bonds will be required to sell before recovery of their amortized costs. We believe cost approximates fair value ~~because~~given the portfolio consists of ~~the relatively short duration of these~~fixed income and high credit investments. The fair values of these securities are considered Level II as they are based on inputs from quoted prices in markets that are not active or other observable market data. These investments are presented at amortized cost and are included in short-term investments and non-current investments in the accompanying condensed consolidated balance sheets. As of ~~September 30, 2020,~~March 31, 2021, we have an accrued interest receivable balance of ~~$684,000~~$1.0 million 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 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 nine~~ months ended ~~September 30, 2020,~~March 31, 2021, we have recorded 0 credit ~~losses.~~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.

~~During the nine months ended September 30,~~In 2020, we ~~sold our $15~~purchased $10 million ~~investment~~ in ~~convertible preferred~~common stock representing a ~~20%~~18% interest in ~~Record Holdings Pty Limited ("Record Holdings")~~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, to BFTR, LLC, a wholly owned subsidiary of Bison Capital Partners V L.P. During the same period, we purchased $10 million in common stock representing a 18% interest in BFTR, LLC.~~proceedings. The investment in common stock is accounted under the cost method because we do not have the ability to exercise significant influence over the investee and the securities do not have readily determinable fair values. Our investment is carried at cost less any impairment write-downs. Annually, our cost method investments are assessed for impairment. We do not reassess the fair value of cost method investments if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investments. No events or changes in have occurred during the period that require reassessment. This investment is included in other non-current assets in the accompanying condensed consolidated balance sheets.

(7) Debt

Revolving Line of Credit

On September 30, 2019, we entered into a $400 million credit agreement with various lender parties and Wells Fargo Bank, National Association, as Administrative Agent (the “Credit Facility”). The Credit Facility provides for a revolving credit line up to $400 million, including a $25 million sublimit for letters of credit. The Credit Facility matures on September 30, 2024.

Borrowings under the Credit Facility bear interest at a rate of either (1) Wells Fargo Bank’s prime rate (subject to certain higher rate determinations) plus a margin of 0.125% to 0.75% or (2) the one-, two-, three-, or six-month LIBOR rate plus a margin of 1.125% to 1.75%. As of ~~September 30, 2020,~~March 31, 2021, the interest rates were 3.38% under the Wells Fargo Bank's prime rate and approximately ~~1.27%~~1.24% under the 30-day LIBOR option. The Credit Facility requires us to maintain certain financial ratios and other financial conditions and prohibits us from making certain investments, advances, cash dividends or loans, and limits incurrence of additional indebtedness and liens. As of ~~September 30, 2020,~~March 31, 2021, we were in compliance with those covenants.

As of ~~September 30, 2020,~~March 31, 2021, we had 0 outstanding borrowings under the Credit Facility, and available borrowing capacity was ~~$400.0~~$400 million. In addition, as of March 31, 2021 we had one outstanding standalone letter of credit totaling $2 million. The letter of credit guarantees our performance under a client contract and expires in third quarter of 2021.

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 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 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 governing the notes);

•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 March 31, 2021, 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 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.

The net carrying value of the Convertible Senior Notes, net of unamortized debt discount and unamortized debt issuance costs were as follows (in thousands):


	March 31, 2021
Convertible Senior Notes due 2026	$	600,000
Less unamortized debt discount	(5,934)
Less unamortized debt issuance costs	(2,583)
Carrying value as of March 31, 2021	$	591,483

The carrying amount is the par value of the Convertible Senior Notes 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.

The effective interest rate for the Convertible Senior Notes is 0.36%. The following sets forth the interest expense recognized related to the Convertible Senior Notes (in thousands):


	Three Months Ended March 31,
	2021
Contractual interest expense	$	83
Amortization of debt discount	66
Amortization of debt issuance costs	29
Total	$	178

New 2021 Credit Agreement

(8) Income Tax Provision

We had an effective income tax rate of 21.3% and negative 11.1% for the three and nine months ended September 30, 2020, respectively, compared to 0.4% and 11.0% for the three and nine months ended September 30, 2019, respectively. The increase in the effective tax rates3.4% for the three months ended ~~September 30, 2020, as~~March 31, 2021, compared to negative 36.3% for the ~~same periods in 2019, was principally driven by the decrease in the excess tax benefits related to stock incentive awards.~~three months ended March 31, 2020. The ~~decrease in the~~higher effective tax rate for the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, as compared to the same period in ~~2019,~~2020, was principally driven by ~~an increase~~a decrease in the excess tax benefits related to stock incentive awards.

The effective income tax rates for the periods presented were different from the statutory United States federal income tax rate of 21% primarily due to excess tax benefits related to stock incentive awards ~~state income taxes, non-deductible business expenses,~~ and the tax benefit of research tax ~~credits.~~credits offset by state income taxes and non-deductible business expenses. The excess tax benefits related to stock incentive awards realized ~~was $2.5 million and $48.0~~were $8.8 million for the three ~~and nine~~ months ended ~~September 30, 2020, respectively,~~March 31, 2021, compared to ~~$11.6 million and $18.6~~$22.1 million for the three ~~and nine~~ months ended ~~September 30, 2019, respectively.~~March 31, 2020. Excluding the excess tax benefits, the effective tax rate was ~~26.2% and 26.7%~~26.4% for the three ~~and nine~~ months ended ~~September 30, 2020, respectively,~~March 31, 2021, compared to ~~28.9 % and 27.6 %~~27% for the three ~~and nine~~ months ended ~~September 30, 2019, respectively.~~March 31, 2020.

We made tax payments of ~~$2.6 million~~$59,000 and ~~$18.1 million~~$176,000 in the ~~nine~~three months ended ~~September 30,~~March 31, 2021, and 2020, ~~and 2019,~~ respectively.

(9) Earnings Per Share

The following table details the reconciliation of basic earnings per share to diluted earnings per share:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2020		2019		2020		2019			2021		2020
Numerator for basic and diluted earnings per share:	Numerator for basic and diluted earnings per share:									Numerator for basic and diluted earnings per share:
Net income	Net income	$	39,284	$	40,390	$	140,726	$	99,737	Net income	$	36,976	$	47,550
Denominator:	Denominator:									Denominator:
Weighted-average basic common shares outstanding	Weighted-average basic common shares outstanding	40,261		38,765		40,013		38,614		Weighted-average basic common shares outstanding	40,611		39,500
Assumed conversion of dilutive securities:	Assumed conversion of dilutive securities:									Assumed conversion of dilutive securities:
Stock awards	Stock awards	1,345		1,515		1,480		1,401		Stock awards	1,445		1,644
Convertible senior notes										Convertible senior notes	0		0
Denominator for diluted earnings per share - Adjusted weighted-average shares	Denominator for diluted earnings per share - Adjusted weighted-average shares	41,606		40,280		41,493		40,015		Denominator for diluted earnings per share - Adjusted weighted-average shares	42,056		41,144
Earnings per common share:	Earnings per common share:									Earnings per common share:
Basic	Basic	$	0.98	$	1.04	$	3.52	$	2.58	Basic	$	0.91	$	1.20
Diluted	Diluted	$	0.94	$	1.00	$	3.39	$	2.49	Diluted	$	0.88	$	1.16

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ stock awards, representing the right to purchase common stock of approximately ~~215,000 and 140,000~~141,000 shares and ~~443,000 and 815,000~~79,000 shares, respectively, were not included in the computation of diluted earnings per share because their inclusion would have had an antidilutive effect.

We have used the if-converted method for calculating any potential dilutive effect of these notes on our diluted net income per share. Under the if-converted method, the Convertible Senior Notes are assumed to be converted at the beginning of the period and the resulting 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 added back to the numerator, only in the periods in which such effect is dilutive. The approximately 1.2 million resulting common shares related to the Convertible Senior Notes are not included in the dilutive weighted-average common shares outstanding calculation for the three months ended March 31, 2021, respectively, as their effect would be anti-dilutive given none of the conversion features have been triggered. See Note 7, Debt for discussion on the conversion features related to the Convertible Senior Notes.

(10) Leases

We lease office facilities for use in our operations, as well as transportation and other equipment. Most of our leases are non-cancelable operating lease agreements ~~and they expire from~~ with original maturities between one ~~year~~ to eight ~~years.~~years from the execution date. Some of these leases include options to extend for up to 10 years. We have no finance leases and no related party lease agreements as of ~~September 30, 2020.~~March 31, 2021. Operating lease costs were approximately ~~$2.5 million and $7.6~~$2.6 million for both the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021, and March 31, 2020, ~~respectively, and $2.6 million and $7.3 million for the three and nine months ended September 30, 2019,~~ respectively.

1314

The components of operating lease expense were as follows:

Lease Costs Financial Statement Classification Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Operating lease cost Selling, general and administrative expenses $ 1,595 $ 1,692 $ 4,867 $ 4,726
Short-term lease cost Selling, general and administrative expenses 453 545 1,474 1,707
Variable lease cost Selling, general and administrative expenses 458 370 1,306 901
Net lease cost $ 2,506 $ 2,607 $ 7,647 $ 7,334


Lease Costs	Financial Statement Classification	Three Months Ended March 31,
		2021		2020
Operating lease cost	Selling, general and administrative expenses	$	1,722	$	1,666
Short-term lease cost	Selling, general and administrative expenses	481		574
Variable lease cost	Selling, general and administrative expenses	431		394
Net lease cost		$	2,634	$	2,634

Right-of-use lease assets and lease liabilities for our operating leases were recorded in the condensed consolidated balance sheets as follows:

September 30, 2020 December 31, 2019
Assets:
Operating lease right-of-use assets $ 15,321 $ 18,992
Liabilities:
Operating leases, short-term 5,780 6,387
Operating leases, long-term 12,870 16,822
Total lease liabilities $ 18,650 $ 23,209


	March 31, 2021		December 31, 2020
Assets:
Operating lease right-of-use assets	$	19,192	$	18,734
Liabilities:
Operating leases, short-term	5,913		5,904
Operating leases, long-term	16,636		16,279
Total lease liabilities	$	22,549	$	22,183

Supplemental information related to leases is as follows:


Other Information	Other Information	Nine Months Ended September 30,						Other Information	Three Months Ended March 31,
		2020			2019				2021			2020
Cash flows:	Cash flows:							Cash flows:
Cash amounts paid included in the measurement of lease liabilities:	Cash amounts paid included in the measurement of lease liabilities:							Cash amounts paid included in the measurement of lease liabilities:
Operating cash outflows from operating leases	Operating cash outflows from operating leases	$	5,665		$	5,141		Operating cash outflows from operating leases	$	1,829		$	1,873

Right-of-use assets obtained in exchange for lease obligations (non-cash):	Right-of-use assets obtained in exchange for lease obligations (non-cash):							Right-of-use assets obtained in exchange for lease obligations (non-cash):
Operating leases	Operating leases	$	562		$	3,350		Operating leases	$	2,005		$	457

Lease term and discount rate:	Lease term and discount rate:							Lease term and discount rate:
Weighted average remaining lease term (years)	Weighted average remaining lease term (years)	4			4			Weighted average remaining lease term (years)	4.6			4
Weighted average discount rate	Weighted average discount rate	4.00		%	4.00		%	Weighted average discount rate	2.69		%	4.00		%

As of ~~September 30, 2020,~~March 31, 2021, maturities of lease liabilities were as follows:

Year ending December 31, Amount
2020 (Remaining 2020) $ 2,111
2021 6,405
2022 4,054
2023 3,017
2024 2,557
Thereafter 2,073
Total lease payments 20,217
Less: Interest (1,567)
Present value of operating lease liabilities $ 18,650


Year ending December 31,	Amount
2021 (Remaining 2021)	$	5,537
2022	5,220
2023	4,197
2024	3,712
2025	2,576
Thereafter	2,545
Total lease payments	23,787
Less: Interest	(1,238)
Present value of operating lease liabilities	$	22,549

Rental Income from third parties

We own office buildings in Bangor, Falmouth and Yarmouth, Maine; Lubbock and Plano, Texas; Troy, Michigan; Latham, New York; and Moraine, Ohio. We lease space in some of these buildings to third-party tenants. The property we lease to others under operating leases consists primarily of specific facilities where one tenant obtains substantially all of the economic benefit from the asset and has the right to direct the use of the asset. These non-cancelable leases expire between ~~2020~~2021 and 2025, and some have options to extend the lease for up to five years. We determine if an arrangement is a lease at inception. None of our leases allow the lessee to purchase the leased asset.

Rental income from third-party tenants for the three ~~and nine~~ months ended ~~September 30, 2020,~~March 31, 2021, totaled ~~$284,000 and $850,000, respectively,~~$294,000 and for the three ~~and nine~~ months ended ~~September 30, 2019,~~March 31, 2020, totaled ~~$261,000 and $815,000, respectively.~~$274,000. Rental income is included in ~~Hardware~~hardware and other revenue on the condensed consolidated statements of income. As of ~~September 30, 2020,~~March 31, 2021, future minimum operating rental income based on contractual agreements is as follows:


Year ending December 31,	Year ending December 31,	Amount		Year ending December 31,	Amount
2020 (Remaining 2020)		$	338
2021		1,372
2021 (Remaining 2021)				2021 (Remaining 2021)	$	1,068
2022	2022	1,402		2022	1,449
2023	2023	1,432		2023	1,479
2024	2024	1,462		2024	1,510
2025				2025	966
Thereafter	Thereafter	858		Thereafter	0
Total	Total	$	6,864	Total	$	6,472

As of ~~September 30, 2020,~~March 31, 2021, we had no additional significant operating or finance leases that had not yet commenced.

(11) Share-Based Compensation

The following table summarizes share-based compensation expense related to share-based awards recorded in the condensed consolidated statements of income, pursuant to ASC 718, Stock Compensation:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2020		2019		2020		2019			2021		2020
Cost of subscriptions, software services and maintenance	Cost of subscriptions, software services and maintenance	$	4,555	$	3,612	$	13,176	$	11,166	Cost of subscriptions, software services and maintenance	$	5,000	$	4,252
Selling, general and administrative expenses	Selling, general and administrative expenses	13,869		11,275		40,936		33,203		Selling, general and administrative expenses	20,724		13,050
Total share-based compensation expense	Total share-based compensation expense	$	18,424	$	14,887	$	54,112	$	44,369	Total share-based compensation expense	$	25,724	$	17,302

(12) Segment and Related Information

We provide integrated information management solutions and services for the public sector, with a focus on local governments.

We provide our software systems and services and appraisal services through 6 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 ~~management~~ software solutions;

•courts and justice and public safety software solutions;

•data and insights solutions;

•~~case management and business process management solutions;~~platform technologies; and

•appraisal and tax software solutions, ~~property appraisal services and~~ land and vital records management software ~~solutions.~~solutions, and property appraisal services.

In accordance with ASC 280-10, Segment Reporting, ~~the~~we report our results in 2 segments. The financial management, education and planning, regulatory and maintenance software solutions unit; financial management, municipal courts, planning, regulatory and maintenance software solutions unit; courts and justice and public safety software solutions unit; the data and insights solutions unit; and ~~case management and business process management~~platform technologies solutions unit meet the criteria for aggregation and are presented in 1one reportable segment, the Enterprise Software (“ES”) ~~segment.~~. The ES segment provides public sector entities with software systems and services to meet their information technology and automation needs for mission-critical “back-office” functions such as: financial management and education, courts and justice, public safety, planning, regulatory and maintenance, data and insights, ~~case management~~ and ~~business process management.~~platform technologies processes. The Appraisal and Tax (“A&T”) segment provides systems and software that automate the appraisal and assessment of real and personal property, land and vital records management as well as provides property appraisal outsourcing services for local governments and taxing authorities. Property appraisal outsourcing services include: the physical inspection of commercial and residential properties; data collection and processing; computer analysis for property valuation; preparation of tax rolls; community education; and arbitration between taxpayers and the assessing jurisdiction.

We evaluate performance based on several factors, of which the primary financial measure is business segment operating income. We define segment operating income for our business units as income before non-cash amortization of intangible assets associated with their acquisitions, interest expense and income taxes. Segment operating income includes intercompany transactions. The majority of intercompany transactions relate to contracts involving more than one unit and are valued based on the contractual arrangement. Corporate segment operating income primarily consists of compensation costs for the executive management team and certain accounting and administrative staff and share-based compensation expense for the entire company. Corporate segment operating income also includes revenues and expenses related to a company-wide user conference. ~~Due to the shelter-in-place orders caused by the COVID-19 pandemic, we cancelled our company-wide user conference for the current year.~~

As of January 1, ~~2020, the land~~2021, certain administrative costs related to information technology, which were previously allocated and ~~vital records management business unit, which was previously~~ reported in the ES ~~segment, was~~and A&T segments, were moved to the ~~A&T~~Corporate segment to reflect changes in the way in which management makes operating decisions, allocates resources, and manages the growth and profitability of the Company. Prior year amounts for ~~the ES and A&T~~all segments have been adjusted to reflect the segment change.


For the three months ended September 30, 2020
For the three months ended March 31, 2021										For the three months ended March 31, 2021
		Enterprise Software		Appraisal and Tax		Corporate		Totals			Enterprise Software		Appraisal and Tax		Corporate		Totals
Revenues	Revenues									Revenues
Software licenses and royalties	Software licenses and royalties	$	17,798	$	2,139	$	0	$	19,937	Software licenses and royalties	$	13,047	$	1,886	$	0	$	14,933
Subscriptions	Subscriptions	82,972		6,318		—		89,290		Subscriptions	94,831		7,648		0		102,479
Software services	Software services	42,640		5,306		0		47,946		Software services	42,560		5,080		0		47,640
Maintenance	Maintenance	108,270		9,709		0		117,979		Maintenance	109,783		9,329		0		119,112
Appraisal services	Appraisal services	0		5,394		0		5,394		Appraisal services	0		6,465		0		6,465
Hardware and other	Hardware and other	5,131		69		0		5,200		Hardware and other	4,126		47		0		4,173
Intercompany	Intercompany	5,128		38		(5,166)		—		Intercompany	5,261		15		(5,276)		—
Total revenues	Total revenues	$	261,939	$	28,973	$	(5,166)	$	285,746	Total revenues	$	269,608	$	30,470	$	(5,276)	$	294,802
Segment operating income	Segment operating income	$	79,911	$	8,318	$	(25,216)	$	63,013	Segment operating income	$	92,874	$	9,259	$	(50,549)	$	51,584

For the three months ended September 30, 2019
Enterprise
Software Appraisal and Tax Corporate Totals
Revenues
Software licenses and royalties $ 22,954 $ 2,425 $ 0 $ 25,379
Subscriptions 70,833 4,439 0 75,272
Software services 44,752 10,245 0 54,997
Maintenance 100,519 9,314 0 109,833
Appraisal services 0 6,008 0 6,008
Hardware and other 3,887 38 (14) 3,911
Intercompany 3,995 34 (4,029) —
Total revenues $ 246,940 $ 32,503 $ (4,043) $ 275,400
Segment operating income $ 62,539 $ 9,178 $ (18,043) $ 53,674

For the nine months ended September 30, 2020
Enterprise Software Appraisal and Tax Corporate Totals
Revenues
Software licenses and royalties $ 48,432 $ 7,267 $ 0 $ 55,699
Subscriptions $ 238,744 $ 17,907 0 $ 256,651
Software services $ 126,488 $ 17,245 0 $ 143,733
Maintenance $ 320,447 $ 28,657 0 $ 349,104
Appraisal services 0 $ 15,853 0 $ 15,853
Hardware and other $ 12,222 $ 114 $ 2 $ 12,338
Intercompany 13,662 58 (13,720) —
Total revenues $ 759,995 $ 87,101 $ (13,718) $ 833,378
Segment operating income $ 209,408 $ 21,374 $ (65,718) $ 165,064

For the nine months ended September 30, 2019
Enterprise Software Appraisal and Tax Corporate Totals
Revenues
Software licenses and royalties $ 59,031 $ 8,816 $ 0 $ 67,847
Subscriptions 203,474 12,548 0 216,022
Software services 133,612 27,229 0 160,841
Maintenance 289,348 27,326 0 316,674
Appraisal services 0 17,455 0 17,455
Hardware and other 12,510 105 6,136 18,751
Intercompany 11,055 187 (11,242) —
Total revenues $ 709,030 $ 93,666 $ (5,106) $ 797,590
Segment operating income $ 177,681 $ 24,196 $ (52,260) $ 149,617

Three Months Ended September 30, Nine Months Ended September 30,
Reconciliation of reportable segment operating income to the Company's consolidated totals: 2020 2019 2020 2019
Total segment operating income $ 63,013 $ 53,674 $ 165,064 $ 149,617
Amortization of acquired software (7,965) (7,975) (23,998) (22,645)
Amortization of customer and trade name intangibles (5,392) (5,646) (16,176) (15,762)
Other income, net 280 499 1,740 838
Income before income taxes $ 49,936 $ 40,552 $ 126,630 $ 112,048


For the three months ended March 31, 2020
	Enterprise Software		Appraisal and Tax		Corporate		Totals
Revenues
Software licenses and royalties	$	15,951	$	2,786	$	0	$	18,737
Subscriptions	76,644		5,079		0		81,723
Software services	44,949		7,184		0		52,133
Maintenance	104,841		9,524		0		114,365
Appraisal services	0		5,763		0		5,763
Hardware and other	3,791		27		2		3,820
Intercompany	4,001		18		(4,019)		—
Total revenues	$	250,177	$	30,381	$	(4,017)	$	276,541
Segment operating income	$	73,667	$	8,541	$	(34,896)	$	47,312


	Three Months Ended March 31,
Reconciliation of reportable segment operating income to the Company's consolidated totals:	2021		2020
Total segment operating income	$	51,584	$	47,312
Amortization of acquired software	(7,964)		(8,027)
Amortization of customer and trade name intangibles	(5,412)		(5,392)
Other income, net	88		990
Income before income taxes	$	38,296	$	34,883

(13) Disaggregation of Revenue

The tables below show disaggregation of revenue into categories that reflect how economic factors affect the nature, amount, timing, and uncertainty of revenue and cash flows.

Timing of Revenue Recognition

Timing of revenue recognition by revenue category during the period is as follows:

For the three months ended September 30, 2020
Products and services transferred at a point in time Products and services transferred over time Total
Revenues
Software licenses and royalties $ 16,777 $ 3,160 $ 19,937
Subscriptions 0 89,290 89,290
Software services 0 47,946 47,946
Maintenance 0 117,979 117,979
Appraisal services 0 5,394 5,394
Hardware and other 5,200 0 5,200
Total $ 21,977 $ 263,769 $ 285,746

For the three months ended September 30, 2019
Products and services transferred at a point in time Products and services transferred over time Total
Revenues
Software licenses and royalties $ 21,362 $ 4,017 $ 25,379
Subscriptions 0 75,272 75,272
Software services 0 54,997 54,997
Maintenance 0 109,833 109,833
Appraisal services 0 6,008 6,008
Hardware and other 3,911 0 3,911
Total $ 25,273 $ 250,127 $ 275,400


For the three months ended March 31, 2021
	Products and services transferred at a point in time		Products and services transferred over time		Total
Revenues
Software licenses and royalties	$	12,058	$	2,875	$	14,933
Subscriptions	0		102,479		102,479
Software services	0		47,640		47,640
Maintenance	0		119,112		119,112
Appraisal services	0		6,465		6,465
Hardware and other	4,173		0		4,173
Total	$	16,231	$	278,571	$	294,802

For the nine months ended September 30, 2020
Products and services transferred at a point in time Products and services transferred over time Total
Revenues
Software licenses and royalties $ 47,311 $ 8,388 $ 55,699
Subscriptions 0 256,651 256,651
Software services 0 143,733 143,733
Maintenance 0 349,104 349,104
Appraisal services 0 15,853 15,853
Hardware and other 12,338 0 12,338
Total $ 59,649 $ 773,729 $ 833,378


For the nine months ended September 30, 2019
For the three months ended March 31, 2020								For the three months ended March 31, 2020
		Products and services transferred at a point in time		Products and services transferred over time		Total			Products and services transferred at a point in time		Products and services transferred over time		Total
Revenues	Revenues							Revenues
Software licenses and royalties	Software licenses and royalties	$	54,074	$	13,773	$	67,847	Software licenses and royalties	$	16,066	$	2,671	$	18,737
Subscriptions	Subscriptions			216,022		216,022		Subscriptions	0		81,723		81,723
Software services	Software services	0		160,841		160,841		Software services	0		52,133		52,133
Maintenance	Maintenance	0		316,674		316,674		Maintenance	0		114,365		114,365
Appraisal services	Appraisal services	0		17,455		17,455		Appraisal services	0		5,763		5,763
Hardware and other	Hardware and other	18,751		0		18,751		Hardware and other	3,820		0		3,820
Total	Total	$	72,825	$	724,765	$	797,590	Total	$	19,886	$	256,655	$	276,541

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 significant source of recurring revenue. We generally provide maintenance and support for our on-premises clients under annual, or in some cases, multi-year contracts. The contract terms for subscription arrangements range from one to 10 years but are typically contracted for initial periods of three to five years, providing a significant source of recurring revenues on an annual basis. We consider all other revenue categories to be non-recurring revenues.

Recurring revenues and non-recurring revenues recognized during the period are as follows:


For the three months ended September 30, 2020
For the three months ended March 31, 2021										For the three months ended March 31, 2021
		Enterprise Software		Appraisal and Tax		Corporate		Totals			Enterprise Software		Appraisal and Tax		Corporate		Totals

Recurring revenues	Recurring revenues	$	191,242	$	16,026	$	0	$	207,268	Recurring revenues	$	204,614	$	16,977	$	0	$	221,591
Non-recurring revenues	Non-recurring revenues	65,569		12,909		0		78,478		Non-recurring revenues	59,733		13,478		0		73,211
Intercompany	Intercompany	5,128		38		(5,166)		—		Intercompany	5,261		15		(5,276)		—
Total revenues	Total revenues	$	261,939	$	28,973	$	(5,166)	$	285,746	Total revenues	$	269,608	$	30,470	$	(5,276)	$	294,802


For the three months ended March 31, 2020
	Enterprise Software		Appraisal and Tax		Corporate		Totals

Recurring revenues	$	181,485	$	14,603	$	0	$	196,088
Non-recurring revenues	64,691		15,760		2		80,453
Intercompany	4,001		18		(4,019)		—
Total revenues	$	250,177	$	30,381	$	(4,017)	$	276,541

For the three months ended September 30, 2019
Enterprise
Software Appraisal and Tax Corporate Totals
Recurring revenues $ 171,352 $ 13,753 $ 0 $ 185,105
Non-recurring revenues 71,593 18,716 (14) 90,295
Intercompany 3,995 34 (4,029) —
Total revenues $ 246,940 $ 32,503 $ (4,043) $ 275,400

For the nine months ended September 30, 2020
Enterprise
Software Appraisal and Tax Corporate Totals
Recurring revenues $ 559,191 $ 46,563 $ 0 $ 605,754
Non-recurring revenues 187,142 40,480 2 227,624
Intercompany 13,662 58 (13,720) —
Total revenues $ 759,995 $ 87,101 $ (13,718) $ 833,378

For the nine months ended September 30, 2019
Enterprise
Software Appraisal and Tax Corporate Totals
Recurring revenues $ 492,822 $ 39,874 $ 0 $ 532,696
Non-recurring revenues 205,153 53,605 6,136 264,894
Intercompany 11,055 187 (11,242) —
Total revenues $ 709,030 $ 93,666 $ (5,106) $ 797,590

(14) Deferred Revenue and Performance Obligations

Total deferred revenue, including long-term, by segment is as follows:


		September 30, 2020		December 31, 2019			March 31, 2021		December 31, 2020
Enterprise Software	Enterprise Software	$	410,796	$	375,838	Enterprise Software	$	395,374	$	422,742
Appraisal and Tax	Appraisal and Tax	23,764		35,487		Appraisal and Tax	23,551		36,945
Corporate	Corporate	2,062		1,369		Corporate	1,693		1,691
Totals	Totals	$	436,622	$	412,694	Totals	$	420,618	$	461,378

Changes in total deferred revenue, including long-term, were as follows:


	~~Nine~~Three months ended ~~September 30, 2020~~March 31, 2021
Balance as of December 31, ~~2019~~2020	$	~~412,694~~461,378
Deferral of revenue	~~798,656~~231,991
Recognition of deferred revenue	~~(774,728)~~(272,751)





Balance as of ~~September 30, 2020~~March 31, 2021	$	~~436,622~~420,618

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 ~~September 30, 2020,~~March 31, 2021, was $1.55 billion, of which we expect to recognize approximately ~~49%~~47% as revenue over the next 12 months and the remainder thereafter.

(15) Commitments and Contingencies

Security Incident

~~On September 29, 2020,~~As previously disclosed, we ~~filed a Current Report on Form 8-K reporting~~experienced a security incident in September 2020 (the "Incident") involving ransomware disrupting access to some of our internal information technology (IT) systems and telephone systems. ~~We currently have no evidence that the environments where we host client applications were affected, and our hosting services to those clients were not interrupted.While our investigation is ongoing,~~Although we believe we have contained and recovered from the Incident, and we ~~continue with our recovery~~have taken and ~~remediation efforts.~~

As part of our immediate response to the Incident, we (1) shut down points of access to external systems and began investigating and remediating the problem; (2) engaged outside IT security and forensics experts to conduct a detailed review and help securely restore affected systems; (3) implemented targeted monitoring systems to supplement the systems we already had in place; and (4) notified law enforcement. We are cooperating with their investigation.

~~Because this is an active investigation, we are not providing additional specifics relating to the ransomware at this time. We promptly notified our clients of the Incident and~~will continue to ~~provide timely updates to our clients through direct communications and updates to our website. Currently,~~take appropriate remediation steps, we ~~have no evidence of malicious activity on client networks, and we continue to work closely with our clients.~~

We are subject to risk and uncertainties as a result of the Incident. ~~Our~~We have completed our investigation ~~remains ongoing~~ and ~~there can be no assurance as~~remediation efforts related to ~~what~~ the ~~impact~~Incident. For the three months period ended March 31, 2021, we have recorded $215,000 of ~~the Incident will be.~~expenses and recorded approximately $573,000 of accrued insurance recoveries. The ~~Incident has caused~~recorded costs consist primarily of payments to third-party service providers and ~~may continue~~consultants, including legal fees, and enhancements to ~~cause an interruption in parts of~~ our ~~business.Such interruption may result in a loss of revenue and incremental costs that may adversely impact the Company’s financial results.~~cybersecurity measures. We maintain cybersecurity insurance coverage in an amount that we believe is adequate. We incurred immaterial costs associated with the Incident during the three months ended September 30, 2020. It is expected that we will continue to incur costs related to our response, remediation, and investigatory efforts relating to the Incident. Due to the timing of the Incident and ongoing investigatory efforts, we are unable at this time to determine whether any loss has been incurred as a result of the Incident as of September 30, 2020.

Litigation

Other than routine litigation incidental to our business, there are 0 material legal proceedings pending to which we are party or to which any of our properties are subject.

(16) Subsequent Events

~~There~~The following events or transactions have ~~been no material events and transactions that~~ occurred subsequent to March 31, 2021:

On April 21, 2021, the Company consummated the acquisition of NIC contemplated by the Agreement and Plan of Merger dated February 9, 2021, (the “Merger Agreement”), by and among the Company, Topos Acquisition, Inc., a Delaware corporation and wholly owned subsidiary of the Company (“Merger Sub”), and NIC. On April 21, 2021, Merger Sub merged with and into NIC, with NIC surviving as a wholly owned subsidiary of the Company (the “Merger”). As result of the Merger, NIC became a direct subsidiary of the Company and NIC’s subsidiaries became indirect subsidiaries of the Company.

In connection with the completion of the Merger and on the Closing Date, the Company, as borrower, entered into a new $1.4 billion Credit Agreement with the various lenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent, Swingline Lender, and Issuing Lender. The New 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 “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 New Credit Agreement matures on April 21, 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 will be required (i) upon the issuance or incurrence of additional debt not otherwise permitted under the New Credit Agreement and (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 New Credit Agreement. The New Credit Agreement replaces and terminates the Company’s existing $400 million credit facility pursuant to the Credit Agreement dated as of September 30, ~~2020.~~2019 (the “2019 Credit Agreement”). The Company’s previously announced commitment from Goldman Sachs Bank USA for a $1.6 billion 364-day senior unsecured bridge loan facility also terminated on the Closing Date.

Borrowings under the Revolving Credit Facility and the Term Loan A-1 will bear interest, at the Company’s option, at a per annum rate of either (1) the Administrative Agent’s prime commercial lending rate (subject to certain higher rate determinations) (the “Base Rate”) plus a margin of 0.125% to 0.75% or (2) the one-, three-, six-, or, subject to approval by all lenders, twelve-month LIBOR rate plus a margin of 1.125% to 1.75%. The Term Loan A-2 will bear interest, at the Company’s option, at a per annum rate of either (1) the Base Rate plus a margin of 0.00% to 0.50% or (2) the one-, three-, or six-, or, subject to approval by all lenders, twelve-month LIBOR rate plus a margin of 0.875% to 1.50%. The margin in each case is based upon the Company’s total net leverage ratio, as determined pursuant to the New Credit Agreement. The New Credit Agreement has customary benchmark replacement language with respect to the replacement of LIBOR once LIBOR becomes unavailable. In addition to paying interest on the outstanding principal of loans under the Revolving Credit Facility, the Company is required to pay a commitment fee on the average daily unused portion of the Revolving Credit Facility, initially 0.25% per annum, ranging from 0.15% to 0.30% based upon the Company’s total net leverage ratio.

On the Closing date, the Company paid approximately $2.3 billion in cash for the purchase of NIC. The Term Loans of $900 million and a portion of the proceeds of the Revolving Credit Facility, in the amount of $250 million, together with cash available to the Company of $609 million and the proceeds of its Convertible Senior Notes of $594 million, were used to complete the Merger, and pay fees and expenses in connection with the Merger and the New Credit Agreement. The remaining portion of the Revolving Credit Facility may be used for working capital requirements, acquisitions, and capital expenditures of the Company and its subsidiaries.

The foregoing is a summary of the material terms and conditions of the New Credit Agreement and not a complete description of the New Credit Agreement. Accordingly, the foregoing is qualified in its entirety by reference to the full text of the New Credit Agreement attached to the Current Report on Form 8-K as Exhibit 10.1, dated April 21, 2021, which is incorporated by reference herein.

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; (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; (5) our ability to achieve growth or operational synergies through the integration of acquired businesses, while avoiding unanticipated costs and disruptions to existing operations; (6) material portions of our business require the Internet infrastructure to be adequately maintained; (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; (8) general economic, political and market conditions; (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; (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; (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 (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.” We expressly disclaim any obligation to publicly update or revise our forward-looking statements.

GENERAL

We provide integrated information management solutions and services for the public sector, with a focus on local governments. We develop and market a broad line of software products and services to address the IT needs of public 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 such as software as a service (“SaaS”), which primarily utilize the Tyler private cloud, and electronic document filing solutions (“e-filing”), which simplify the filing and management of court related documents. Revenues for e-filing are derived from transaction fees and, in some cases, fixed fee arrangements. Other transaction-based fees primarily relate to online payment services. We also provide property appraisal outsourcing services for taxing jurisdictions.

Our products generally automate eight 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 (6) land and vital records management, (7) data and insights and (8) ~~case management and business process management.~~platform technologies. We report our results in two segments. The Enterprise Software (“ES”) segment provides public sector entities with software systems and services to meet their information technology and automation needs for mission-critical “back-office” functions such as: financial management; courts and justice processes; public safety; planning, regulatory and maintenance; data analytics; and ~~case management and business process management.~~platform technologies. The Appraisal and Tax (“A&T”) segment provides systems and software that automate the appraisal and assessment of real and personal property, land and vital records management as well as provides property appraisal outsourcing services for local governments and taxing authorities. Property appraisal outsourcing services include: the physical inspection of commercial and residential properties; data collection and processing; computer analysis for property valuation; preparation of tax rolls; community education; and arbitration between taxpayers and the assessing jurisdiction.

As of January 1, ~~2020, the land and vital records management business unit,~~2021, certain administrative costs related to information technology, which ~~was~~were previously reported in the ES ~~segment, was~~and A&T segments, were moved to the ~~A&T~~Corporate segment to reflect changes in the way ~~in which~~ management makes operating decisions, allocates resources, and manages the growth and profitability of the Company. Prior year amounts for ~~the ES and A&T~~all segments have been adjusted to reflect the segment change.

Our total employee count increased to ~~5,511~~5,579 at ~~September 30, 2020,~~March 31, 2021, from ~~5,291~~5,449 at ~~September 30, 2019.~~March 31, 2020.

For the three ~~and nine~~ months ended ~~September 30, 2020,~~March 31, 2021, total revenues increased ~~3.8% and 4.5%, respectively,~~6.6% compared to the prior year ~~periods.~~period.

Subscriptions revenue grew ~~18.6% and 18.8%~~25.4% for the three ~~and nine~~ months ended ~~September 30, 2020, respectively, compared to the prior year periods,~~March 31, 2021, due to an ongoing shift toward cloud-based, software as a service business, as well as continued growth in our transaction-based revenues related to online-payment services. ~~Excluding the impact of recent acquisitions, subscriptions revenue increased 18.3% and 17.5% for the three and nine months ended September 30, 2020, respectively, compared to the prior year periods.~~

Our backlog as of ~~September 30, 2020,~~March 31, 2021, was $1.55 billion, a ~~9.2%~~3.0% increase from last year.

~~Impact~~Impacts of the COVID-19 Pandemic

ability to complete certain implementations, negatively impacting our revenue. Because an increasing portion of our revenues are recurring, the effect of COVID-19 on our results of operations may also not be fully reflected for some time. We expect to see some impact on our business in the near term with delays in government procurement processes and between uncertainty around public sector budgets, as well as delays in implementations caused by travel restrictions, closed offices, or clients shifting focus to more pressing issues. We are working to address those challenges through adapting the way we do business – encouraging web and video conferencing, conducting sales demonstrations and delivering professional services remotely.

For the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, the impact of the COVID-19 pandemic resulted in lower revenues from software licenses and software ~~services, appraisal services, and other revenues.~~services. Lower software licenses compared to prior periods are attributed to slower sales cycles as government procurement processes are delayed and contract signings have been pushed to future periods. ~~Software services and appraisal~~The software services revenue ~~declines are~~decline is attributed to delays in implementations caused by travel restrictions ~~and shelter-in-place orders~~ in effect during the period. ~~Other revenues were lower compared to prior periods primarily as a result of the cancellation of our 2020 Connect user conference.~~ Lower revenues compared to prior periods were partially offset by cost savings attributed to lower spend on travel, user conferences and trade show expenses, health claims and other employee-related expenses. ~~If and as~~As travel restrictions ~~and shelter-in-place orders~~ are relaxed, we expect software services and appraisal services revenues to increase as the limited number of our clients who ~~insist on or~~ require that all or a portion of their services be delivered onsite will be able to receive those services. Also, we are adapting to the way we do business by encouraging web and video conferencing, conducting virtual sales demonstrations and delivering professional services remotely, which result in increases in staff utilization rates and billable time.

Recurring revenues from subscriptions and maintenance comprised ~~73%~~75% of our total consolidated revenue for the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, and include transaction-based revenue streams such as e-filing and online payments. On March 9, 2021, we issued 0.25% Convertible Senior Notes due 2026 (the "Convertible Senior Notes") in the aggregate principal amount of $600 million. The net proceeds from the issuance of the Convertible Senior Notes of $594 million were used as one of the funding sources to complete the acquisition of NIC Inc ("NIC"), see Note 16 Subsequent Events. As of ~~September 30, 2020,~~March 31, 2021, we had ~~$649.6 million~~$1.4 billion in cash and investments and no outstanding borrowings under our credit facility.

We also have substantial additional liquidity available through our undrawn $400.0 million credit facility, which can be expanded through an accordion feature. During the second quarter of 2020, we completed our annual assessment of goodwill which did not result in an impairment charge. Since our assessment in the second quarter of 2020, we have recorded no impairment to goodwill ~~as no triggering events~~ or ~~changes in circumstances occurred as of period-end. No impairments of~~ other assets ~~were recorded~~ as of the balance sheet date, as no triggering events or changes in circumstances indicating a potential impairment have occurred as of period-end to require such an impairment; however, due to significant uncertainty surrounding the pandemic and market conditions, management’s judgment regarding this could change in the future.

~~Security Incident~~

On September 29, 2020, we filed a Current Report on Form 8-K reporting a security incident (the "Incident") involving ransomware disrupting access to some of our internal information technology (IT) systems and telephone systems. We currently have no evidence that the environments where we host client applications were affected, and our hosting services to those clients were not interrupted.~~While our investigation is ongoing, we believe we have contained the Incident, and we continue with our recovery and remediation efforts.~~

Because this is an active investigation, we are not providing additional specifics relating to the ransomware at this time. We promptly notified our clients of the Incident and continue to provide timely updates to our clients through direct communications and updates to our website. Currently, we have no evidence of malicious activity on client networks, and we continue to work closely with our clients.

We are subject to risk and uncertainties as a result of the Incident. Our investigation remains ongoing and there can be no assurance as to what the impact of this Incident will be. The Incident has caused and may continue to cause an interruption in parts of our business.Such interruption may result in a loss of revenue and incremental costs that may adversely impact the Company’s financial results. We maintain cybersecurity insurance coverage in an amount that we believe is adequate. We estimate that as a result of the Incident, revenue (primarily software services) for the quarter ended September 30, 2020 was reduced by approximately $1.5 million; however, insurance reimbursements pertaining to lost revenue represent a contingent gain and any recovery of these revenues will be recorded when received. We incurred immaterial costs, net of insurance reimbursements we deem as probable, associated with the Incident during the three months ended September 30, 2020. It is expected that we will continue to incur costs related to our response, remediation, and investigatory efforts relating to the Incident. Due to the timing of the Incident and ongoing investigatory efforts, we are unable at this time to determine whether any loss has been incurred or is probable of being incurred as a result of the Incident as of September 30, 2020.

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", included in our Form 10-K for the year ended December 31, ~~2019.~~2020. Except for the accounting policies for ~~credit losses~~convertible senior notes updated as a result of adopting Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40) ("ASU ~~No. 2016-13,~~ ~~Financial Instruments - Credit losses~~2020-06"), 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, ~~2019.~~2020.

ANALYSIS OF RESULTS OF OPERATIONS


	Percent of Total Revenues
	Three Months Ended March 31,
	2021		2020
Revenues:
Software licenses and royalties	5.1	%	6.8	%
Subscriptions	34.7		29.5
Software services	16.2		18.8
Maintenance	40.4		41.4
Appraisal services	2.2		2.1
Hardware and other	1.4		1.4
Total revenues	100.0		100.0
Cost of revenues:
Software licenses, royalties and acquired software	3.1		3.2
Subscriptions, software services and maintenance	45.6		47.7
Appraisal services	1.6		1.6
Hardware and other	0.8		0.9
Selling, general and administrative expenses	26.7		24.4
Research and development expense	7.4		8.1
Amortization of customer and trade name intangibles	1.8		1.9
Operating income	13.0		12.2
Other income, net	—		0.4
Income before income taxes	13.0		12.6
Income tax provision (benefit)	0.4		(4.6)
Net income	12.6	%	17.2	%

~~Goodwill~~

During the second quarter, as part of our annual impairment test, we performed qualitative assessments for all reporting units except for the data and insights reporting unit. As a result of these qualitative assessments, we determined that it was not more likely than not that an impairment existed; therefore, we did not perform a Step 1 quantitative impairment test. We did perform a quantitative assessment for goodwill of $75.7 million associated with our data and insights business unit and concluded no impairment exists as of our annual assessment date. For most of our reporting units, goodwill relates to a combination of legacy and acquired businesses and as a result those units have fair values that substantially exceed their underlying carrying values. For other reporting units, in particular our case management and business process management and data and insights units, goodwill entirely relates to recently acquired businesses, and as a result those units do not have significant excess fair values over carrying values. The case management and business process management and data and insights business units combined goodwill was $152.0 million, or 18%, of total goodwill as of September 30, 2020. Since our assessment in the second quarter of 2020, we have recorded no impairment to goodwill as no triggering events or changes in circumstances indicating a potential impairment have occurred as of period-end.

~~Refer to Footnote 2,~~ ~~Accounting Standards and Significant Accounting Policies, of the Notes to Condensed Consolidated Financial Statements (Unaudited) of the Form 10-Q for more discussion of our annual assessment of goodwill.~~

~~ANALYSIS OF RESULTS OF OPERATIONS~~

Percent of Total Revenues
Three Months Ended Nine Months Ended
2020 2019 2020 2019
Revenues:
Software licenses and royalties 7.0 % 9.2 % 6.7 % 8.5 %
Subscriptions 31.2 27.3 30.8 27.1
Software services 16.8 20.0 17.2 20.2
Maintenance 41.3 39.9 41.9 39.6
Appraisal services 1.9 2.2 1.9 2.2
Hardware and other 1.8 1.4 1.5 2.4
Total revenues 100.0 100.0 100.0 100.0
Cost of revenues:
Software licenses, royalties and acquired software 3.2 3.2 3.2 3.2
Subscriptions, software services and maintenance 44.0 46.7 46.0 46.6
Appraisal services 1.2 1.5 1.4 1.4
Hardware and other 1.3 1.1 1.0 1.9
Selling, general and administrative expenses 23.4 23.2 23.6 23.5
Research and development expense 7.6 7.7 7.9 7.5
Amortization of customer and trade name intangibles 1.9 2.1 1.9 2.0
Operating income 17.4 14.5 15.0 13.9
Other income, net 0.1 0.2 0.2 0.1
Income before income taxes 17.5 14.7 15.2 14.0
Income tax provision (benefit) 3.7 0.1 (1.7) 1.5
Net income 13.8 % 14.6 % 16.9 % 12.5 %

Revenues

On February 28, 2019, we acquired all of the capital stock of MP Holdings Parent, Inc. dba MicroPact ("MicroPact"), a leading provider of commercial off-the-shelf solutions, including entellitrak®, a low-code application development platform for case management and business process management used extensively in the public sector. The following table details revenue for MicroPact for the three and nine months ended September 30, 2020 and 2019, which is included in our condensed consolidated statements of income from the date of acquisition:

Three Months Ended Nine Months Ended
2020 2019 2020 2019
Revenues:
  Software licenses and royalties $ 1,784 $ 1,109 5,118 1,869
  Subscriptions 2,745 2,024 7,798 4,606
  Software services 5,476 5,100 16,088 12,055
  Maintenance 10,193 8,120 30,208 17,854
  Appraisal services — — — —
  Hardware and other 8 3 26 24
        Total revenues $ 20,206 $ 16,356 $ 59,238 $ 36,408

Software licenses and royalties

The following table sets forth a comparison of our software licenses and royalties revenue for the periods presented as of ~~September 30:~~March 31:


		Three Months Ended				Change				Nine Months Ended				Change					Three Months Ended				Change
		2020		2019		$		%		2020		2019		$		%			2021		2020		$		%
ES	ES	$	17,798	$	22,954	$	(5,156)	(22)	%	$	48,432	$	59,031	$	(10,599)	(18)	%	ES	$	13,047	$	15,951	$	(2,904)	(18)	%
A&T	A&T	2,139		2,425		(286)		(12)		7,267		8,816		(1,549)		(18)		A&T	1,886		2,786		(900)		(32)
Total software licenses and royalties revenue	Total software licenses and royalties revenue	$	19,937	$	25,379	$	(5,442)	(21)	%	$	55,699	$	67,847	$	(12,148)	(18)	%	Total software licenses and royalties revenue	$	14,933	$	18,737	$	(3,804)	(20)	%

Software licenses and royalties revenue decreased ~~21% and 18%~~20% for the three ~~and nine~~ months ended ~~September 30, 2020, respectively,~~March 31, 2021, compared to the prior year ~~periods.~~period. The decline in software licenses and royalties revenue for the three ~~and nine~~ months ~~September 30, 2020,~~March 31, 2021, is primarily due to longer sales cycles attributed to our ~~ERP~~education suite and appraisal ~~software~~ products as the impact of COVID-19 has slowed government procurement processes and some contract signings have been pushed to future periods. ~~Software licenses revenue was also negatively impacted by delayed deliveries attributed to the IT security incident that occurred in late September 2020. Also contributing to~~Offsetting the decline in software license revenue is a shift in the mix of new software contracts toward more ~~subscription agreements~~perpetual software license arrangements compared to the prior year. Our total new client mix for the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, was approximately ~~38%~~45% perpetual software license arrangements and approximately ~~62%~~55% subscription-based arrangements compared to total new client mix for the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, of approximately ~~46%~~39% perpetual software license arrangements and approximately ~~54%~~61% subscription-based arrangements.

Although the mix of new contracts between subscription-based and perpetual license arrangements may vary from quarter to quarter and year to year, we expect our longer-term software license growth rate to slow as a growing number of clients choose our subscription-based options, rather than purchasing the software under a traditional perpetual software license arrangement. Subscription-based arrangements generally do not result in license revenue in the initial year as compared to perpetual software license arrangements but generate higher overall revenue over the term of the contract.

Subscriptions

The following table sets forth a comparison of our subscriptions revenue for the periods presented as of ~~September 30:~~March 31:


		Three Months Ended				Change				Nine Months Ended				Change					Three Months Ended				Change
		2020		2019		$		%		2020		2019		$		%			2021		2020		$		%
ES	ES	$	82,972	$	70,833	$	12,139	17	%	$	238,744	$	203,474	$	35,270	17	%	ES	$	94,831	$	76,644	$	18,187	24	%
A&T	A&T	6,318		4,439		1,879		42		17,907		12,548		5,359		43		A&T	7,648		5,079		2,569		51
Total subscriptions revenue	Total subscriptions revenue	$	89,290	$	75,272	$	14,018	19	%	$	256,651	$	216,022	$	40,629	19	%	Total subscriptions revenue	$	102,479	$	81,723	$	20,756	25	%

Subscriptions revenue primarily consists of revenue derived from our SaaS arrangements, which generally utilize the Tyler private cloud. As part of our subscription-based services, we also provide e-filing arrangements that simplify the filing and management of court related documents for courts and law offices. E-filing revenue is derived from transaction fees and fixed fee arrangements. Other sources of subscription-based services are derived from transaction-based fees primarily related to online payment services.

Subscriptions revenue grew ~~19% both~~25% for the three ~~and nine~~ months ending ~~September 30, 2020,~~March 31, 2021, compared to the prior year. New SaaS clients as well as existing clients who converted to our SaaS model provided the majority of the subscriptions revenue increase. In the three ~~and nine~~ months ending ~~September 30, 2020, respectively,~~March 31, 2021, we added ~~114 and 370~~84 new SaaS clients and ~~46 and 107~~39 existing on-premises clients converted to our SaaS model. Since ~~September 30, 2019,~~March 31, 2020, we have added ~~534~~441 new SaaS clients while ~~125~~177 existing on-premises clients converted to our SaaS model. Also, transaction-based fees contributed ~~$1.9 million and $4.8~~$4.9 million to the increase in ~~subscription~~subscriptions revenue for the three ~~and nine~~ months ended ~~September 30, 2020, respectively,~~March 31, 2021, due to the increased volumes of online payments from utility ~~billings, offset slightly by the decrease in e-filing services volumes.~~billings.

Software services

The following table sets forth a comparison of our software services revenue for the periods presented as of ~~September 30:~~March 31:


		Three Months Ended				Change				Nine Months Ended				Change					Three Months Ended				Change
		2020		2019		$		%		2020		2019		$		%			2021		2020		$		%
ES	ES	$	42,640	$	44,752	$	(2,112)	(5)	%	$	126,488	$	133,612	$	(7,124)	(5)	%	ES	$	42,560	$	44,949	$	(2,389)	(5)	%
A&T	A&T	5,306		10,245		(4,939)		(48)		17,245		27,229		(9,984)		(37)		A&T	5,080		7,184		(2,104)		(29)
Total software services revenue	Total software services revenue	$	47,946	$	54,997	$	(7,051)	(13)	%	$	143,733	$	160,841	$	(17,108)	(11)	%	Total software services revenue	$	47,640	$	52,133	$	(4,493)	(9)	%

Software services revenue primarily consists of professional services delivered in connection with implementing our software, converting client data, training client personnel, custom development activities and consulting. New clients who acquire our software generally also contract with us to provide the related software services. Existing clients also periodically purchase additional training, consulting and minor programming services. Software services revenue decreased ~~13% and 11%~~9% for the three ~~and nine~~ months ended ~~September 30, 2020, respectively,~~March 31, 2021, compared to the prior year ~~periods.~~period. The decline in software services revenue is due to delays in client implementations caused by COVID-19 ~~travel~~ restrictions, ~~and shelter-in-place orders and~~together with a decline in billable travel revenue, as most services are now being delivered virtually rather than on-site. Software services revenue was also lower due to interruptions caused by the IT security incident that occurred in late September 2020. We estimate that as a result of the Incident, revenue (primarily software services) for the quarter ended September 30, 2020 was reduced by approximately $1.5 million; however, insurance reimbursements pertaining to lost revenue represent a contingent gain and any recovery of these revenues will be recorded when received. Also contributing to the decline is the increase of clients selecting our cloud solutions instead of our on-premises license arrangements which typically require more professional services.

Maintenance

The following table sets forth a comparison of our maintenance revenue for the periods presented as of ~~September 30:~~March 31:


		Three Months Ended				Change				Nine Months Ended				Change					Three Months Ended				Change
		2020		2019		$		%		2020		2019		$		%			2021		2020		$		%
ES	ES	$	108,270	$	100,519	$	7,751	8	%	$	320,447	$	289,348	$	31,099	11	%	ES	$	109,783	$	104,841	$	4,942	5	%
A&T	A&T	9,709		9,314		395		4		28,657		27,326		1,331		4.9		A&T	9,329		9,524		(195)		(2)
Total maintenance revenue	Total maintenance revenue	$	117,979	$	109,833	$	8,146	7	%	$	349,104	$	316,674	$	32,430	10	%	Total maintenance revenue	$	119,112	$	114,365	$	4,747	4	%

We provide maintenance and support services for our software products and certain third-party software. Maintenance revenue grew ~~7% and 10%~~4% for the three ~~and nine~~ months ended ~~September 30, 2020, respectively,~~March 31, 2021, compared to the prior year ~~periods.~~period. Maintenance revenue increased mainly due to contributions of maintenance revenue from recent acquisitions and ~~completing~~completion of the recognition of the majority of acquisition-related deferred maintenance revenue that was fair valued at rates below Tyler's average maintenance rate in prior periods. The remainder of the increase is attributed to annual maintenance rate increases and growth in our installed customer base from new software license sales, partially offset by attrition and clients converting from on-premises license arrangements to SaaS.

Appraisal services

The following table sets forth a comparison of our appraisal services revenue for the periods presented as of ~~September 30:~~March 31:


		Three Months Ended				Change				Nine Months Ended				Change					Three Months Ended				Change
		2020		2019		$		%		2020		2019		$		%			2021		2020		$		%
ES	ES	$	—	$	—	$	—	—	%	$	—	$	—	$	—	—	%	ES	$	—	$	—	$	—	—	%
A&T	A&T	5,394		6,008		(614)		(10)		15,853		17,455		(1,602)		(9)		A&T	6,465		5,763		702		12
Total appraisal services revenue	Total appraisal services revenue	$	5,394	$	6,008	$	(614)	(10)	%	$	15,853	$	17,455	$	(1,602)	(9)	%	Total appraisal services revenue	$	6,465	$	5,763	$	702	12	%

Appraisal services revenue for the three ~~and nine~~ months ended ~~September 30, 2020, decreased~~March 31, 2021, increased by ~~10% and 9%~~12%, ~~respectively,~~ compared to the prior year primarily due to the addition of several new revaluation contracts which started during the fourth quarter of 2020, offset somewhat by delays to several ongoing projects as a result of travel ~~restrictions~~ and ~~shelter-in-place orders~~social distancing restrictions related to COVID-19. The appraisal services business is somewhat cyclical and driven in part by statutory revaluation cycles in various states.

2826

Cost of Revenues and Gross Margins

The following table sets forth a comparison of the key components of our cost of revenues for the periods presented as of ~~September 30:~~March 31:


		Three Months Ended				Change				Nine Months Ended				Change					Three Months Ended				Change
		2020		2019		$		%		2020		2019		$		%			2021		2020		$		%
Software licenses and royalties	Software licenses and royalties	$	1,177	$	971	$	206	21	%	$	3,047	$	2,680	$	367	14	%	Software licenses and royalties	$	1,236	$	740	$	496	67	%
Acquired software	Acquired software	7,965		7,975		(10)		(0.1)		23,998		22,645		1,353		6		Acquired software	7,964		8,027		(63)		(0.8)
Subscriptions, software services and maintenance	Subscriptions, software services and maintenance	125,881		128,545		(2,664)		(2)		381,947		371,464		10,483		3		Subscriptions, software services and maintenance	134,320		131,779		2,541		2
Appraisal services	Appraisal services	3,434		4,096		(662)		(16)		11,795		11,306		489		4		Appraisal services	4,617		4,385		232		5
Hardware and other	Hardware and other	3,780		3,096		684		22		8,748		14,870		(6,122)		(41)		Hardware and other	2,458		2,479		(21)		(1)
Total cost of revenues	Total cost of revenues	$	142,237	$	144,683	$	(2,446)	(2)	%	$	429,535	$	422,965	$	6,570	2	%	Total cost of revenues	$	150,595	$	147,410	$	3,185	2	%

The following table sets forth a comparison of gross margin percentage by revenue type for the periods presented as of ~~September 30:~~March 31:


		Three Months Ended						Nine Months Ended							Three Months Ended
		2020		2019		Change		2020		2019		Change			2021		2020		Change
Software licenses, royalties and acquired software	Software licenses, royalties and acquired software	54.1	%	64.8	%	(10.7)	%	51.4	%	62.7	%	(11.3)	%	Software licenses, royalties and acquired software	38.4	%	53.2	%	(14.8)	%
Subscriptions, software services and maintenance	Subscriptions, software services and maintenance	50.7		46.5		4.2		49.0		46.4		2.6		Subscriptions, software services and maintenance	50.1		46.9		3.2
Appraisal services	Appraisal services	36.3		31.8		4.5		25.6		35.2		(9.6)		Appraisal services	28.6		23.9		4.7
Hardware and other	Hardware and other	27.3		20.8		6.5		29.1		20.7		8.4		Hardware and other	41.1		35.1		6.0
Overall gross margin	Overall gross margin	50.2	%	47.5	%	2.7	%	48.5	%	47.0	%	1.5	%	Overall gross margin	48.9	%	46.7	%	2.2	%

Software licenses, royalties and acquired software. Amortization expense for acquired software comprises the majority of costs of software licenses, royalties and acquired software. We do not have any direct costs associated with royalties. In the three ~~and nine~~ months ended ~~September 30, 2020, respectively,~~March 31, 2021, our software licenses, royalties and acquired software gross margin decreased ~~10.7% and 11.3%~~14.8% compared to the prior year periods due to lower revenue from software ~~licenses and increased amortization expense for acquired software resulting from acquisitions.~~licenses.

Subscriptions, software services and maintenance. Cost of subscriptions, software services and maintenance 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 ongoing operation of SaaS and e-filing arrangements. The subscriptions, software services and maintenance gross margin in the three ~~and nine~~ months ended ~~September 30, 2020, respectively,~~March 31, 2021, increased ~~4.2% and 2.6%~~3.2% from the comparable prior year ~~periods.~~period. Margins have increased primarily due to a reduction in software services revenues from reimbursable travel that has little to no margin, as well as improved utilization of our professional services staff resulting from the shift to virtual delivery of most implementation ~~services, offset somewhat by the reduction in software services revenues as a result of the Incident in late September 2020.~~services. Our implementation and support staff has grown by ~~171~~25 employees since ~~September 30, 2019,~~March 31, 2020, as we accelerated hiring to ensure that we are well-positioned to deliver our current backlog and anticipated new business. Costs related to maintenance and various other services such as SaaS and e-filing typically grow at a slower rate than related revenue due to leverage in the utilization of support and maintenance staff and economies of scale.

Appraisal services. Appraisal services revenue was approximately ~~1.9%~~2.2% of total revenue for ~~both~~ the ~~three and nine months ended September 30, 2020, respectively. For~~ three months ended ~~September 30, 2020,~~March 31, 2021. The appraisal services ~~revenue has declined~~gross margin for the three months ended March 31, 2021, increased 4.7% compared to the same period ~~over period, however margins have increased 4.5%~~in 2020. The increase in margin is primarily due to cost savings attributed to lower travel expenses associated with appraisal projects. The appraisal services gross margin for the nine months ended September 30, 2020, decreased 9.6% compared to the same periods in 2019. The appraisal gross margin decline is attributed to lower staff utilization as a result of COVID-19 shelter-in-place orders. The appraisal services business is somewhat cyclical and driven in part by statutory revaluation cycles in various states.

2927

For the three ~~and nine~~ months ended ~~September 30, 2020, respectively,~~March 31, 2021, our overall gross margin increased ~~2.7% and 1.5%~~2.2% compared to the prior year ~~periods.~~period. The increase in overall ~~margins~~margin is attributed to a higher revenue mix for subscription revenues compared to the prior year periods resulting in an increase in incremental margin related to software services, maintenance and subscriptions. Margins have also increased due a reduction in software services revenue from reimbursable travel that that has little to no margin, as well as improved utilization of our professional services staff resulting from the shift to virtual delivery of most implementation ~~services, offset somewhat by the reduction in software services revenues as a result of the Incident in late September 2020.~~services. 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 leveraging utilization of support and maintenance staff and economies of scale. In addition, the cancellation of our Connect user conference scheduled for April 2020 and the related elimination of approximately $6 million of revenues with no associated margin also had a positive impact on our overall gross margin. The increase in overall gross margin is partially offset by lower margins from software licenses due to lower software license ~~revenue and higher amortization expense for acquired software resulting from acquisitions as well as lower staffing utilization attributable to appraisal services.~~revenue.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses consist primarily of salaries, employee benefits, travel, share-based compensation expense, commissions and related overhead costs for administrative and sales and marketing employees, as well as professional fees, trade show activities, advertising costs and other marketing related costs.

The following table sets forth a comparison of our SG&A expenses for the periods presented as of ~~September 30:~~March 31:

Three Months Ended Change Nine Months Ended Change
2020 2019 $ % 2020 2019 $ %
Selling, general and administrative expenses $ 66,819 $ 63,888 $ 2,931 5 % $ 196,825 $ 187,481 $ 9,344 5 %


	Three Months Ended				Change
	2021		2020		$		%
Selling, general and administrative expenses	$	78,774	$	67,485	$	11,289	17	%

SG&A as a percentage of revenues was ~~23.4% and 23.6%~~26.7% for the three ~~and nine~~ months ended ~~September 30, 2020, respectively,~~March 31, 2021, compared to ~~23.2% and 23.5%~~24.4% for the three ~~and nine~~ months ended ~~September 30, 2019, respectively. SG&A expense increased 5% both for the three and nine months ended September 30,~~March 31, 2020. The increase in SG&A expense for the three ~~and nine~~ months ending ~~September 30, 2020,~~March 31, 2021, is attributed to ~~increased~~higher stock compensation expense, increased staff levels and other administrative expenses compared to prior periods. For the three ~~and nine~~ months ended ~~September 30, 2020, respectively,~~March 31, 2021, stock compensation expense rose ~~$2.6 million and~~ $7.7 million compared to the same ~~periods~~period in ~~2019,~~2020, primarily due to an increase in share-based awards issued in connection with our stock compensation plan coupled with the higher fair value of each share-based award due to the increase in our stock price. We have added 24 SG&A employees mainly to our sales and finance teams, since March 31, 2020. For the three months ended March 31, 2021, SG&A expense includes $3.2 million related to an accrual for litigation and $813,000 of transaction costs related the NIC acquisition. These increases in SG&A were partially offset by ~~lower bonus and commission expense as a result of lower sales,~~ lower travel expenses associated with sales and marketing activities, including trade shows, as a result of COVID-19 travel ~~restrictions, and lower health claim expenses during the current period.~~restrictions.

Research and Development Expense

The following table sets forth a comparison of our research and development expense for the periods presented as of ~~September 30:~~March 31:

Three Months Ended Change Nine Months Ended Change
2020 2019 $ % 2020 2019 $ %
Research and development expense $ 21,642 $ 21,130 $ 512 2 % $ 65,952 $ 60,172 $ 5,780 10 %


	Three Months Ended				Change
	2021		2020		$		%
Research and development expense	$	21,813	$	22,361	$	(548)	(2)	%

Research and development expense consists mainly of costs associated with development of new products and technologies from which we do not currently generate significant revenue.

Research and development expense in the three ~~and nine~~ months ended ~~September 30, 2020, respectively, increased~~March 31, 2021, decreased 2% ~~and 10%~~ compared to the prior ~~periods~~period mainly due to a ~~number~~shift of ~~new Tyler product~~some development ~~initiatives across our product suites,~~resources to certain projects which meet the criteria for capitalization, as well as lower investments needed related to recently acquired businesses. ~~To support these initiatives, our research and development staff has grown by 43 since September 30, 2019.~~

Amortization of Other Intangibles

Acquisition intangibles are comprised of the excess of the purchase price over the fair value of net tangible assets acquired that is ~~primarily~~ allocated to acquired software and customer and trade name intangibles. The remaining excess purchase price is allocated to goodwill that is not subject to amortization. Amortization expense related to acquired software is included with cost of revenues while amortization expense of customer and trade name intangibles is recorded as operating expense. ~~The decrease in amortization expense for~~For the three months ended ~~September 30, 2020 is attributed~~March 31, 2021, amortization expense was relatively flat compared to prior period due to no new acquisitions in fiscal year 2020. ~~The increase in amortization of other intangibles for the nine months ended September 30, 2020 is primarily attributed to the acquisitions closed in 2019.~~

The following table sets forth a comparison of amortization of customer and trade name intangibles for the periods presented as of ~~September 30:~~March 31:

Three Months Ended Change Nine Months Ended Change
2020 2019 $ % 2020 2019 $ %
Amortization of other intangibles $ 5,392 $ 5,646 $ (254) (4) % $ 16,176 $ 15,762 $ 414 3 %


	Three Months Ended				Change
	2021		2020		$		%
Amortization of other intangibles	$	5,412	$	5,392	$	20	—	%

Other Income, Net

The following table sets forth a comparison of our other income, net, for the periods presented as of ~~September 30:~~March 31:

Three Months Ended Change Nine Months Ended Change
2020 2019 $ % 2020 2019 $ %
Other income, net $ 280 $ 499 $ (219) (44) $ 1,740 $ 838 $ 902 108


	Three Months Ended				Change
	2021		2020		$		%
Other income, net	$	88	$	990	$	(902)	(91)

Other income, net, is comprised of interest income from invested cash, net of interest expense and non-usage and other fees associated with our revolving credit agreem~~ent.~~ent and Convertible Senior Notes. The decrease in other income, net, in the three months ended ~~September 30, 2020,~~March 31, 2021, compared to the prior period is attributable to the significant decrease in interest rates on cash balances since March 2020, partially offset by higher levels of invested cash. ~~The increase~~Also contributing to the decrease in other income ~~net, in the nine months ended September 30, 2020, compared~~is interest related to the ~~prior period is attributed to the increased interest income from higher levels of invested cash, partially offset by lower interest rates.~~Convertible Senior Notes.

Income Tax Provision

The following table sets forth a comparison of our income tax provision for the periods presented as of ~~September 30:~~March 31:


		Three Months Ended						Change			Nine Months Ended						Change				Three Months Ended						Change
		2020			2019			$		%	2020			2019			$		%		2021			2020			$		%
Income tax provision (benefit)	Income tax provision (benefit)	$	10,652		$	162		$	10,490	NM	$	(14,096)		$	12,311		$	(26,407)	NM	Income tax provision (benefit)	$	1,320		$	(12,667)		$	13,987	NM

Effective income tax rate	Effective income tax rate	21.3		%	0.4		%				(11.1)		%	11.0		%				Effective income tax rate	3.4		%	(36.3)		%

The change in effective tax rate for the three ~~and nine~~ months ended ~~September 30, 2020, respectively,~~March 31, 2021, as compared to the same period in ~~2019,~~2020, was principally driven by the change in the excess tax benefits related to stock incentive awards. The effective income tax rates for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019, respectively,~~ were different from the statutory United States federal income tax rate of 21% due to excess tax benefits related to stock incentive awards ~~state income taxes, non-deductible business expenses~~ and the tax benefit of research tax ~~credits.~~credits offset by state income taxes and non-deductible business expenses. The excess tax benefits related to stock incentive awards realized were ~~$2.5 million and $48.0~~$8.8 million for the three ~~and nine~~ months ended ~~September 30, 2020, respectively,~~March 31, 2021, compared to ~~$11.6 million and $18.6~~$22.1 million for the three ~~and nine~~ months ended ~~September 30, 2019, respectively.~~March 31, 2020. Excluding the excess tax benefits, the effective tax rate was ~~26.2% and 26.7%~~26.4% for the three ~~and nine~~ months ended ~~September 30, 2020, respectively,~~March 31, 2021, compared to ~~28.9 % and 27.6 %~~27.0% for the three ~~and nine~~ months ended ~~September 30, 2019, respectively.~~

March 31,

2020.

FINANCIAL CONDITION AND LIQUIDITY

As of ~~September 30, 2020,~~March 31, 2021, we had cash and cash equivalents of ~~$518.7 million~~$1.3 billion compared to ~~$232.7~~$603.6 million at December 31, ~~2019.~~2020. We also had ~~$130.9~~$171.9 million invested in investment grade corporate and municipal bonds as of ~~September 30, 2020.~~March 31, 2021. These investments have varying maturity dates through ~~2025,~~2026, and we intend to hold these investments until maturity. As of ~~September 30, 2020,~~March 31, 2021, we believe our cash from operating activities, revolving line of credit, cash on hand and access to the capital markets provides us with sufficient flexibility to meet our long-term financial needs.

The following table sets forth a summary of cash flows for the ~~nine~~three months ended ~~September 30:~~March 31:


		2020		2019			2021		2020
Cash flows provided (used) by:	Cash flows provided (used) by:					Cash flows provided (used) by:
Operating activities	Operating activities	$	266,328	$	178,527	Operating activities	$	71,703	$	56,706
Investing activities	Investing activities	(68,163)		(203,204)		Investing activities	(39,694)		(15,007)
Financing activities	Financing activities	87,838		51,836		Financing activities	615,120		27,604
Net increase in cash and cash equivalents	Net increase in cash and cash equivalents	$	286,003	$	27,159	Net increase in cash and cash equivalents	$	647,129	$	69,303

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 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, debt servicing obligations, and share repurchases for at least the next twelve months.

For the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, operating activities provided cash of ~~$266.3~~$71.7 million. Operating activities that provided cash were primarily comprised of net income of ~~$140.7~~$37.0 million, non-cash depreciation and amortization charges of ~~$60.7~~$21.1 million, non-cash share-based compensation expense of ~~$54.1~~$25.7 million and a non-cash decrease in operating lease right-of-use assets of ~~$4.2~~$1.5 million. Working capital, excluding cash, ~~decreased~~increased approximately ~~$6.5~~$13.6 million mainly due to decline in deferred revenue balances, timing of ~~bonuses and tax~~bonus payments, ~~timing of prepaid maintenance subscriptions,~~ decreases in operating lease liabilities and deferred taxes associated with stock option activity during the ~~period,~~period. These increases were offset by ~~a decrease~~the collections of annual maintenance renewals and subscription renewal billings that are billed in ~~accounts receivables due to collections and increase in deferred revenue during~~ the ~~period.~~fourth quarter. 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 ~~114~~101 days at ~~September 30, 2020,~~March 31, 2021, compared to ~~117~~121 days at December 31, ~~2019,~~2020, and ~~114~~104 days at ~~September 30, 2019.~~March 31, 2020. The decrease in DSO compared to December 31, ~~2019~~2020, is due to collections from our maintenance billing cycle, which typically peaks at its highest level in June and second highest level in December of each year, followed by collections in the subsequent quarter. DSO is calculated based on quarter-end accounts receivable divided by the quotient of annualized quarterly revenues divided by 360 days.

Investing activities used cash of ~~$68.2~~$39.7 million in the ~~nine~~three months ending ~~September 30, 2020.~~March 31, 2021. On March 31, 2021, we completed two acquisitions with the total purchase price of $12.2 million, net of cash acquired, including $12.0 million paid in cash and accrued working capital holdbacks of $161,000. Approximately ~~$19.1~~$6.6 million was invested in property and equipment, including ~~$8.2~~$2.7 million related to real estate. In addition, approximately $4.3 million of software development was capitalized. During the nine months ending September 30, 2020, we received $15 million in proceeds from the sale of the investment in convertible preferred stock representing a 20% interest in Record Holdings to BFTR, LLC, a wholly owned subsidiary of Bison Capital Partners V.L.P. During the same period, we purchased $10 million in common stock representing a 18% interest in BFTR, LLC. The remaining additions were for computer equipment and furniture and fixtures in support of internal growth, particularly with respect to data centers supporting growth in our cloud-based offerings.

Investing activities used cash of $203.2 million in the nine months ending September 30, 2019, primarily for business acquisitions. On February 28, 2019, we acquired all of the capital stock of MicroPact. The total purchase price, net of cash acquired of $2.0 million, was approximately $203.7 million for MicroPact, including $198.2 million paid in cash, accrued contingent consideration of $6.6 million and $1.0 million accrued for certain holdbacks. On February 1, 2019, we acquired all the assets of MyCivic. The total purchase price was $3.7 million in cash paid. Approximately $28.8 million was invested in property and equipment, including $15 million related to real estate. In addition, approximately $3.5 million of software development ~~was~~costs were capitalized. ~~The remaining additions were for computer equipment and furniture and fixtures in support of internal growth, particularly with respect to data centers supporting growth in our cloud-based offerings.~~

Financing activities provided cash of ~~$87.8~~$615.1 million in the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, and were primarily comprised of proceeds from issuance of Convertible Senior Notes. On March 9, 2021, we issued $600 million aggregate principal amount of Convertible Senior Notes. The net proceeds from the issuance of the Convertible Senior Notes were $591.4 million, net of initial purchasers’ discounts of $6.0 million paid and debt issuance costs of $2.6 million accrued as of March 31, 2021. The remainder of the financing activities were attributed to stock option exercises and employee stock purchase plan activity. We paid $5.6 million in contingent consideration resulting from the MicroPact acquisition. During the nine months ended September 30, 2020, we repurchased approximately 59,000 shares of our common stock for an aggregate purchase price of $15.5 million, with an average price per share of $263.29.

Financing activities provided cash of $51.8 million in the nine months ended September 30, 2019, and were comprised of purchases of treasury shares, net borrowings from our revolving line of credit, proceeds from stock option exercises and employee stock purchase plan activity. During the nine months ended September 30, 2019, we repurchased approximately 72,000 shares of our common stock for an aggregate purchase price of $14.3 million, with an average price per share of $199.03.

In February 2019, our board of directors authorized the repurchase of an additional 1.5 million shares of our common 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 2019. As of ~~September 30, 2020,~~March 31, 2021, we have authorization from our board of directors to repurchase up to 2.5 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 ~~$2.6 million~~$59,000 and ~~$18.1 million~~$176,000 in the ~~nine~~three months ended ~~September 30,~~March 31, 2021, and 2020, ~~and 2019,~~ respectively.

~~We anticipate that 2020 capital spending will be between $30~~See Note 7, Debt to the Condensed Consolidated Financial Statements for discussions of the Convertible Senior Notes.

On April 21, 2021, the Company consummated the acquisition of NIC contemplated by the Agreement and Plan of Merger dated February 9, 2021. In connection with the completion of the acquisition and on the Closing Date, the Company, as borrower, entered into a new $1.4 billion Credit Agreement with the various lenders consisting of a unsecured revolving credit facility of up to $500 million and ~~$31~~aggregate unsecured term loans totaling $900 million. On the Closing date, the Company paid approximately $2.3 billion in cash for the purchase of NIC. The Term Loans of $900 million ~~including approximately $10 million related to real estate~~ and ~~approximately $6 million of capitalized software development. We expect the majority~~a portion of the ~~other capital spending will consist~~proceeds of ~~computer equipment~~the Revolving Credit Facility, in the amount of $250 million, together with cash available to the Company of $609 million and ~~software for infrastructure replacements~~the proceeds of its Convertible Senior Notes of $594 million, were used to complete the Merger, and ~~expansion. Capital spending is expected to be funded from existing cash balances~~pay fees and ~~cash flows from operations.~~expenses in connection with the Merger and the New Credit Agreement. For more information on the acquisition of NIC and the New Credit Agreement, see Note 16 Subsequent Events.

From time to time we engage in discussions with potential acquisition candidates. In order to pursue 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 acquisition opportunities and how such opportunities will be financed.

We anticipate that 2021 capital spending will be between $39 million and $40 million, including approximately $3 million related to real estate and approximately $17 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 2028.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of loss that may affect us due to adverse changes in financial market prices and interest rates.

As of ~~September 30, 2020,~~March 31, 2021, we had no outstanding borrowings under our Credit Facility and available borrowing capacity under the Credit Agreement was $400 million.

As of ~~September 30, 2020,~~March 31, 2021, our interest rate was 3.38% under the Wells Fargo Bank prime rate and approximately ~~1.27%~~1.24% under the 30-day LIBOR option.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act) designed to provide reasonable assurance that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms. These include controls and procedures designed to ensure that this information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. Management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of ~~September 30, 2020.~~March 31, 2021.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the three months ended ~~September 30, 2020,~~March 31, 2021, 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 ~~2019~~2020 Annual Report on Form 10-K. We believe those risk factors are the most relevant to our business and could cause our results to differ materially from the forward-looking statements made by us. Please note, however, that those are not the only risk factors facing us. Additional risks that we do not consider material, or of which we are not currently aware, may also have an adverse impact on us. Our business, financial condition and results of operations could be seriously harmed if any of these risks or uncertainties actually occurs or materializes. In that event, the market price for our common stock could decline, and our shareholders may lose all or part of their investment. During the three months ended ~~September 30, 2020,~~March 31, 2021, except for the risk factors described below, there were no material changes in the information regarding risk factors contained in our Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

~~COVID-19 will~~Risks Related to Our Indebtedness

Servicing our indebtedness requires a significant amount of cash. We may not have sufficient cash flow from our business to pay our indebtedness, and we may not otherwise have the ability to raise the funds necessary to settle for cash conversions of the Convertible Senior Notes or to repurchase the Convertible Senior Notes upon a fundamental change, or to repay our indebtedness obligations under our New Credit Agreement (defined below), each of which could adversely affect our business and results of operations.

~~We expect that~~As of March 31, 2021, we had outstanding an aggregate principal amount of $600 million of our Convertible Senior Notes. On April 21, 2021, we entered into a new Credit Agreement (the “New Credit Agreement”) with significantly increased borrowing capacity of up to $1.4 billion and on the ~~global emergence~~closing date of ~~COVID-19 (novel coronavirus) will negatively impact~~April 21, 2021, we borrowed initial loans in the aggregate principal amount of $1.15 billion. Our New Credit Agreement also has an option to increase the amount available up to an additional $435 million, subject to our leverage and other factors. The proceeds from the Convertible Senior Notes and loans under the New Credit Agreement were used as sources of funding for the purchase of NIC. Our indebtedness may increase our vulnerability to any generally adverse economic and industry conditions, and we and our subsidiaries may, subject to the limitations in the terms of our existing and future indebtedness, incur additional debt, secure existing or future debt or recapitalize our debt. If we incur additional indebtedness, the risks related to our business would increase and ~~financial results~~our ability to service or repay our indebtedness may be adversely impacted.

Pursuant to their terms, holders may convert their Convertible Senior Notes at their option prior to the scheduled maturities of their Convertible Senior Notes under certain circumstances. Upon conversion of the Convertible Senior Notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in ~~fiscal year 2020. As~~lieu of delivering any fractional share), we will be obligated to make cash payments. In addition, holders of our Convertible Senior Notes will have the ~~virus has spread,~~right to require us to repurchase their Convertible Senior Notes upon the occurrence of a fundamental change (as defined in the Indenture, dated as of March 9, 2021, between the Company and U.S. Bank National Association, as trustee (the “Trustee”) (the “Indenture”), at a repurchase price equal to 100% of the principal amount of the Convertible Senior Notes to be repurchased, plus accrued and unpaid interest, if any. Although it ~~has resulted~~is our intention, and we currently expect to have the ability, to settle the Convertible Senior Notes in ~~authorities implementing numerous measures~~cash, there is a risk that we may not have enough available cash or be able to ~~contain~~obtain financing at the ~~virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns.~~ ~~While~~time we are ~~unable~~required to ~~accurately predict~~make repurchases of Convertible Senior Notes surrendered or Convertible Senior Notes being converted. In addition, our ability to make payments may be limited by law, by regulatory authority, or by agreements governing our future indebtedness. Our failure to repurchase Convertible Senior Notes at a time when the ~~full impact that COVID-19 will have~~repurchase is required by the Indenture or to pay any cash payable on ~~our results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity~~future conversions of the ~~pandemic~~Convertible Senior Notes as required by the Indenture would constitute a default under the Indenture. A default under the Indenture or the fundamental change itself could also lead to a default under agreements governing our other existing or future indebtedness. If the repayment of other indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the other indebtedness and ~~containment measures and associated compliance, we do expect~~repurchase the ~~pandemic will negatively impact our revenues and other financial results.~~

We expect to see some impact on our business in the near term, with delays in government procurement processes and uncertainty around public sector budgets, as well as delays in implementations caused by travel restrictions, closed offices,Convertible Senior Notes or ~~clients shifting focus to more pressing issues.~~make cash payments upon conversions thereof.

3432

~~We expect appraisal and software implementations projects delays as clients put projects on hold or slow projects by extending go-lives dates. While we have the~~Our ability to ~~deliver most~~make scheduled payments of the principal and interest on our ~~professional services remotely, some of~~indebtedness when due or to make payments upon conversion or repurchase demands with respect to our ~~professional services, including appraisal assessments,~~Convertible Senior Notes, or to refinance our indebtedness as we may need or desire, depends on our future performance, which is subject to economic, financial, competitive, and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to satisfy our obligations under our existing indebtedness, and any future indebtedness we may incur, and to make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more ~~effective when performed on-site,~~alternatives, such as reducing or delaying investments or capital expenditures, selling assets, refinancing, or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance existing or future indebtedness will depend on the capital markets and ~~certain clients~~our financial condition at such time. We may ~~insist on on-site services~~not be able to engage in any ~~event. In addition, some professional services relate to training and require the availability~~ of ~~the client. We expect~~these activities or engage in these activities on desirable terms, which could result in a ~~negative impact~~default on our ~~software services~~existing or future indebtedness and appraisal services revenues and respective margins throughout the fiscal year 2020. Also, we expect software licenses and subscriptions revenues to be negatively affected due to delays in procurement processes. Some clients may request changes to payment terms, negatively impacting the timing of collections of accounts receivables in future periods. For the nine months ended September 30, 2020, 73% ofhave a material adverse effect on our total revenue and earnings are relatively predictable as a result of our subscription and maintenance revenue, which is recurring in nature; thus the effect of the COVID-19 pandemic will not be fully reflected in ourbusiness, results of operations, and ~~overall~~ financial ~~performance until~~condition.

Covenant restrictions under the Company’s indebtedness may limit our ability to operate our business and may adversely affect our financial condition, results of operations, and earnings per share.

The Indenture governing the Notes and the New Credit Agreement do, and our future ~~periods.~~

~~We perform our annual goodwill impairment analysis as~~indebtedness agreements may, contain covenants that may restrict the Company’s ability to finance future operations or capital needs or to engage in other business activities. Subject to customary carve-outs, thresholds and baskets, the New Credit Agreement (and the Indenture by means of a cross-default) restricts, absent consent of the ~~first day~~agent and lenders under the New Credit Agreement, our ability and the ability of our restricted subsidiaries to, among other things:

• Incur additional indebtedness,

• Permit liens on our assets,

• Make certain investments, acquisitions and dispositions,

• Make certain specified fundamental changes, and

• Make certain restricted payments.

In addition, the ~~second quarter~~New Credit Agreement (and the Indenture by means of ~~each year. Subsequent~~a cross-default) contains other customary affirmative and negative covenants, and events of default. The New Credit Agreement is unsecured but requires us to maintain certain financial ratios regarding our ~~annual goodwill impairment analysis, we monitor for any events or~~total leverage and interest coverage and other financial conditions in addition to the restrictions described above. Events beyond the Company’s control, including changes in ~~circumstances, such as significant adverse changes~~general economic and business conditions, may result in business climate or operating results, changes in management’s business strategy, an inability to successfully introduce new products in the marketplace, an inability to successfully achieve internal forecasts or significant declines in our stock price, which may represent an indicator of impairment. The occurrencea breach of any of these ~~events,~~covenants and result in a default under the New Credit Agreement that may, in turn, result in a default under the Indenture. If an event of default under the New Credit Agreement occurs, the lenders could terminate all commitments to lend and elect to declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable. If the Company was unable to pay such amounts, the lenders could proceed against the guarantees by our direct and indirect material domestic subsidiaries. Should the lenders proceed against the guarantees, we cannot give assurance that we would have sufficient assets to pay amounts due on the New Credit Agreement and the Convertible Senior Notes.

Variable rate indebtedness subjects the Company to interest rate risk, which could cause our debt service obligations to increase significantly.

Our borrowings under the New Credit Agreement are, and are expected to continue to be, ~~caused or impacted by~~at variable rates of interest and expose the ~~COVID-19 pandemic, may require us~~Company to ~~record future goodwill impairment charges.~~

~~Cyber-attacks and security vulnerabilities can disrupt~~interest rate risk. If interest rates increase, our ~~business and harm our competitive position.~~

Threats to IT security can take a variety of forms. Individuals and groups of hackers, and sophisticated organizations including state-sponsored organizations, may take steps that pose threats to our clientsdebt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our ~~IT. They may, for example, develop~~net income would decrease. Revolving credit facility loans and ~~deploy malicious software~~Term A-1 Loans under the New Credit Agreement bear interest at a per annum rate equal to, ~~attack~~at our ~~products and services and/~~option, either (1) the administrative agent’s prime commercial lending rate (subject to certain higher rate determinations) (the “Base Rate”) plus a margin of 0.125% to 0.75% or ~~gain access~~(2) the one-, three-, six-, or, subject to approval by all lenders, twelve-month LIBOR rate plus a margin of 1.125% to 1.75%. Our Term A-2 Loans bear interest, our ~~networks and data centers~~option, at a per annum rate of either (1) the Base Rate plus a margin of 0.00% to 0.50% or ~~act~~(2) the one-, three-, six-, or, subject to approval by all lenders, twelve-month LIBOR rate plus a margin of 0.875% to 1.50%. The margin in each case is based upon our total net leverage ratio, as determined pursuant to the New Credit Agreement. Based upon initial borrowings under the New Credit Agreement on the closing date in the aggregate principal amount of $1.15 billion, each quarter point change in interest rates would result in a ~~coordinated manner to launch distributed denial of service or other coordinated attacks. Cyber threats are constantly evolving, thereby increasing~~$2.9 million change in annual interest expense under the difficulty of detecting and successfully defending against them. Cyber threats can have cascading impacts that unfold with increasing speed across our internal networks and systems and those of our partners and clients. Breaches of our network or data security could disrupt the security of our internal systems and business applications, impair our ability to provide services to our clients and protect the privacy of their data, result in product development delays, compromise confidential or technical business information harming our competitive position, result in theft or misuse of our intellectual property or other assets, require us to allocate more resources to improve technologies, or otherwise adversely affect our business. Our business policies and internal security controls may not keep pace with these evolving threats. Despite the network and application security, internal control measures, and physical security procedures we employ to safeguard our systems, we may still be vulnerable to a security breach, intrusion, loss or theft of confidential client data and transaction data, which may harm our business, reputation and future financial results. The lost revenue and containment, remediation, investigation, legal and other costs could be significant and may exceed our insurance policy limits or may not be covered by insurance at all. Further, we may be subject to regulatory enforcement actions and litigation that could result in financial judgments or the payment of settlement amounts, and disputes with insurance carriers concerning coverage.

On September 29, 2020, we filed a Current Report on Form 8-K reporting a security incident (the "Incident") involving ransomware disrupting access to some of our internal IT systems and telephone systems. We currently have no evidence that the environments where we host client applications were affected, and our hosting services to those clients were not interrupted.~~While our investigation is ongoing, we believe we have contained the Incident, and we continue with our recovery and remediation efforts.~~

3533

~~We are subject~~The conditional conversion feature of the Convertible Senior Notes, if triggered, may adversely affect our financial condition and results of operations.

In the event the conditional conversion feature of the notes is triggered, holders of our Convertible Senior Notes will be entitled to ~~risk and uncertainties~~convert the Convertible Senior Notes at any time during specified periods at their option. If one or more holders elect to convert their Convertible Senior Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their Convertible Senior Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the notes as a result of the Incident. Our investigation remains ongoing and there can be no assurance as to what the impact of the Incident will be. The Incident has caused and may continue to cause an interruption in parts of our business.~~Such interruption may~~current rather than long-term liability, which would result in a ~~loss~~material reduction of revenue and incremental costs that may adversely impact the Company’s financial results. We maintain cybersecurity insurance coverage in an amount that we believe is adequate. We incurred immaterial costs associated with the Incident during the three months ended September 30, 2020. It is expected that we will continue to incur costs relatedour net working capital.

Transactions relating to our ~~response, remediation, and investigatory efforts relating~~Convertible Senior Notes may affect the value of our common stock.

Our Convertible Senior Notes may become convertible in the future at the option of their holders under certain circumstances. If holders of our Convertible Senior Notes elect to ~~the Incident. Due~~convert their notes, we may settle our conversion obligation by delivering to ~~the timing~~them a significant number of ~~the Incident and ongoing investigatory efforts, we are unable at this time~~shares of our common stock, which would cause dilution to ~~determine whether any loss has been incurred or is probable of being incurred as a result of the Incident as of September 30, 2020.~~our existing shareholders.

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


Exhibit 31.1						Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2						Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32.1						Certifications Pursuant Certifications Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 4.1						Credit Agreement dated April 21, 2021, among Tyler Technologies, Inc. and Wells Fargo Bank, N. A. as Administrative Agent and other lenders party hereto (filed as Exhibit 10.1 to our Form 8-K dated April 21, 2021, and incorporated by reference herein).

Exhibit 101.INS						Inline XBRL Instance Document - the Instance Document does not appear in the interactive data file because its XBRL tags, including Cover Page XBRL tags, are embedded within the Inline XBRL Document.

Exhibit 101.SCH						Inline XBRL Taxonomy Extension Schema Document.

Exhibit 101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document.

Exhibit 101.LAB						Inline XBRL ~~Extenstion~~Extension Labels Linkbase Document.

Exhibit 101.DEF						Inline XBRL Taxonomy Extension Definition Linkbase Document.

Exhibit 101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase Document.

Exhibit 104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


			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: ~~November 4, 2020~~May 6, 2021

3735