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 ~~June~~September 30, 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 ~~July 30,~~October 29, 2021 was ~~40,843,408.~~40,976,329.

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 June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020			2021		2020		2021		2020
Revenues:	Revenues:									Revenues:
Software licenses and royalties	Software licenses and royalties	$	17,604	$	17,025	$	32,537	$	35,762	Software licenses and royalties	$	22,673	$	19,937	$	55,210	$	55,699
Subscriptions	Subscriptions	199,558		85,638		302,037		167,361		Subscriptions	252,942		89,290		554,979		256,651
Software services	Software services	53,337		43,654		100,977		95,787		Software services	54,624		47,946		155,601		143,733
Maintenance	Maintenance	119,621		116,760		238,733		231,125		Maintenance	117,833		117,979		356,566		349,104
Appraisal services	Appraisal services	6,265		4,696		12,730		10,459		Appraisal services	7,146		5,394		19,876		15,853
Hardware and other	Hardware and other	7,690		3,318		11,863		7,138		Hardware and other	4,655		5,200		16,518		12,338
Total revenues	Total revenues	404,075		271,091		698,877		547,632		Total revenues	459,873		285,746		1,158,750		833,378

Cost of revenues:	Cost of revenues:									Cost of revenues:
Software licenses and royalties	Software licenses and royalties	1,368		1,130		2,604		1,870		Software licenses and royalties	1,547		1,177		4,151		3,047
Acquired software	Acquired software	11,823		8,006		19,787		16,033		Acquired software	12,896		7,965		32,683		23,998
Subscriptions, software services and maintenance	Subscriptions, software services and maintenance	199,771		124,287		334,091		256,066		Subscriptions, software services and maintenance	241,944		125,881		576,035		381,947
Appraisal services	Appraisal services	4,429		3,976		9,046		8,361		Appraisal services	4,506		3,434		13,552		11,795
Hardware and other	Hardware and other	4,623		2,489		7,081		4,968		Hardware and other	2,764		3,780		9,845		8,748
Total cost of revenues	Total cost of revenues	222,014		139,888		372,609		287,298		Total cost of revenues	263,657		142,237		636,266		429,535

Gross profit	Gross profit	182,061		131,203		326,268		260,334		Gross profit	196,216		143,509		522,484		403,843

Selling, general and administrative expenses	Selling, general and administrative expenses	108,922		62,521		187,696		130,006		Selling, general and administrative expenses	101,847		66,819		289,543		196,825
Research and development expense	Research and development expense	23,428		21,949		45,241		44,310		Research and development expense	24,002		21,642		69,243		65,952
Amortization of other intangibles	Amortization of other intangibles	11,420		5,392		16,832		10,784		Amortization of other intangibles	14,183		5,392		31,015		16,176

Operating income	Operating income	38,291		41,341		76,499		75,234		Operating income	56,184		49,656		132,683		124,890

Other (expense) income including interest expense, net		(12,199)		470		(12,111)		1,460
Interest expense										Interest expense	(5,396)		(254)		(18,311)		(757)
Other income, net										Other income, net	445		534		1,249		2,497
Income before income taxes	Income before income taxes	26,092		41,811		64,388		76,694		Income before income taxes	51,233		49,936		115,621		126,630
Income tax provision (benefit)	Income tax provision (benefit)	562		(12,081)		1,882		(24,748)		Income tax provision (benefit)	7,063		10,652		8,945		(14,096)
Net income	Net income	$	25,530	$	53,892	$	62,506	$	101,442	Net income	$	44,170	$	39,284	$	106,676	$	140,726

Earnings per common share:	Earnings per common share:									Earnings per common share:
Basic	Basic	$	0.63	$	1.35	$	1.53	$	2.54	Basic	$	1.08	$	0.98	$	2.61	$	3.52
Diluted	Diluted	$	0.61	$	1.30	$	1.48	$	2.44	Diluted	$	1.04	$	0.94	$	2.53	$	3.39

See accompanying notes.

TYLER TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value and share amounts)


		June 30, 2021 (unaudited)		December 31, 2020			September 30, 2021 (unaudited)		December 31, 2020
ASSETS	ASSETS					ASSETS
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	216,773	$	603,623	Cash and cash equivalents	$	234,128	$	603,623
Accounts receivable (less allowance for losses and sales adjustments of $8,087 in 2021 and $9,255 in 2020)		584,156		382,319
Accounts receivable (less allowance for losses and sales adjustments of $10,575 in 2021 and $9,255 in 2020)						Accounts receivable (less allowance for losses and sales adjustments of $10,575 in 2021 and $9,255 in 2020)	538,119		382,319
Short-term investments	Short-term investments	51,223		72,187		Short-term investments	49,355		72,187
Prepaid expenses	Prepaid expenses	52,413		30,864		Prepaid expenses	47,546		30,864
Income tax receivable	Income tax receivable	20,404		21,598		Income tax receivable	3,509		21,598
Other current assets	Other current assets	3,959		2,479		Other current assets	5,599		2,479
Total current assets	Total current assets	928,928		1,113,070		Total current assets	878,256		1,113,070

Accounts receivable, long-term	Accounts receivable, long-term	15,744		21,417		Accounts receivable, long-term	14,917		21,417
Operating lease right-of-use assets	Operating lease right-of-use assets	28,230		18,734		Operating lease right-of-use assets	40,449		18,734
Property and equipment, net	Property and equipment, net	177,712		168,004		Property and equipment, net	176,745		168,004
Other assets:	Other assets:					Other assets:
Software development costs, net	Software development costs, net	17,179		9,121		Software development costs, net	22,570		9,121
Goodwill	Goodwill	2,309,434		838,428		Goodwill	2,355,144		838,428
Other intangibles, net	Other intangibles, net	1,045,580		322,068		Other intangibles, net	1,086,457		322,068
Non-current investments	Non-current investments	79,057		82,640		Non-current investments	64,916		82,640
Other non-current assets	Other non-current assets	39,139		33,792		Other non-current assets	43,484		33,792
Total assets	Total assets	$	4,641,003	$	2,607,274	Total assets	$	4,682,938	$	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	$	106,727	$	14,011	Accounts payable	$	100,569	$	14,011
Accrued liabilities	Accrued liabilities	134,904		83,084		Accrued liabilities	180,281		83,084
Operating lease liabilities	Operating lease liabilities	9,666		5,904		Operating lease liabilities	10,125		5,904

Deferred revenue	Deferred revenue	484,482		461,278		Deferred revenue	495,250		461,278
Current portion of term loans	Current portion of term loans	30,000		0		Current portion of term loans	30,000		—
Total current liabilities	Total current liabilities	765,779		564,277		Total current liabilities	816,225		564,277

Revolving credit facility	Revolving credit facility	65,000		0		Revolving credit facility	—		—
Term loans	Term loans	862,559		0		Term loans	805,535		—
Convertible senior notes, net		591,906		0
Convertible senior notes due 2026, net						Convertible senior notes due 2026, net	592,335		—
Deferred revenue, long-term	Deferred revenue, long-term	68		100		Deferred revenue, long-term	53		100
Deferred income taxes	Deferred income taxes	220,680		40,507		Deferred income taxes	227,537		40,507
Operating lease liabilities, long-term	Operating lease liabilities, long-term	22,118		16,279		Operating lease liabilities, long-term	37,348		16,279
Other long-term liabilities	Other long-term liabilities	4,902		0		Other long-term liabilities	3,132		—
Total liabilities						Total liabilities	2,482,165		621,163
Commitments and contingencies	Commitments and contingencies	0		0		Commitments and contingencies	—		—

Shareholders' equity:	Shareholders' equity:					Shareholders' equity:
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 June 30, 2021 and December 31, 2020		481		481
Preferred stock, $10.00 par value; 1,000,000 shares authorized; none issued						Preferred stock, $10.00 par value; 1,000,000 shares authorized; none issued	—		—
Common stock, $0.01 par value; 100,000,000 shares authorized; 48,147,969 shares issued and outstanding as of September 30, 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 September 30, 2021 and December 31, 2020	481		481
Additional paid-in capital	Additional paid-in capital	962,557		905,332		Additional paid-in capital	1,010,212		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	1,174,662		1,112,156		Retained earnings	1,218,832		1,112,156
Treasury stock, at cost; 7,315,159 and 7,608,627 shares in 2021 and 2020, respectively		(29,663)		(31,812)
Treasury stock, at cost; 7,197,156 and 7,608,627 shares in 2021 and 2020, respectively						Treasury stock, at cost; 7,197,156 and 7,608,627 shares in 2021 and 2020, respectively	(28,706)		(31,812)
Total shareholders' equity	Total shareholders' equity	2,107,991		1,986,111		Total shareholders' equity	2,200,773		1,986,111
Total liabilities and shareholders' equity	Total liabilities and shareholders' equity	$	4,641,003	$	2,607,274	Total liabilities and shareholders' equity	$	4,682,938	$	2,607,274

See accompanying notes.

TYLER TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


		Six Months Ended June 30,					Nine Months Ended September 30,
		2021		2020			2021		2020
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net income	Net income	$	62,506	$	101,442	Net income	$	106,676	$	140,726
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	60,976		40,270		Depreciation and amortization	97,864		60,746
Share-based compensation expense	Share-based compensation expense	50,899		35,688		Share-based compensation expense	80,360		54,112

Operating lease right-of-use assets expense	Operating lease right-of-use assets expense	4,034		2,843		Operating lease right-of-use assets expense	7,016		4,233
Deferred income tax benefit	Deferred income tax benefit	(6,430)		(3,729)		Deferred income tax benefit	(15,681)		(2,458)
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	(46,312)		(30,332)		Accounts receivable	2,403		9,394
Income tax receivable	Income tax receivable	7,276		(21,453)		Income tax receivable	24,171		(14,270)
Prepaid expenses and other current assets	Prepaid expenses and other current assets	(10,434)		(9,870)		Prepaid expenses and other current assets	(10,456)		(7,333)
Accounts payable	Accounts payable	(57,471)		(6,338)		Accounts payable	(64,383)		(3,904)
Operating lease liabilities	Operating lease liabilities	(4,361)		(3,375)		Operating lease liabilities	(3,904)		(5,121)
Accrued liabilities	Accrued liabilities	(30,217)		(19,136)		Accrued liabilities	4,817		6,276
Deferred revenue	Deferred revenue	20,868		10,510		Deferred revenue	29,609		23,927
Increase in other long term liabilities		22		0
Increase in other long-term liabilities						Increase in other long-term liabilities	(1,749)		—
Net cash provided by operating activities	Net cash provided by operating activities	51,356		96,520		Net cash provided by operating activities	256,743		266,328

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	(14,223)		(16,268)		Additions to property and equipment	(20,770)		(19,064)
Purchase of marketable security investments	Purchase of marketable security investments	(68,054)		(79,747)		Purchase of marketable security investments	(75,684)		(111,329)
Proceeds from marketable security investments	Proceeds from marketable security investments	91,395		40,020		Proceeds from marketable security investments	114,563		61,794
Purchase of investment in common shares	Purchase of investment in common shares	0		(10,000)		Purchase of investment in common shares	—		(10,000)
Proceeds from the sale of investment in preferred shares	Proceeds from the sale of investment in preferred shares	0		15,000		Proceeds from the sale of investment in preferred shares	—		15,000
Investment in software	Investment in software	(8,947)		(2,695)		Investment in software	(14,966)		(4,316)
Cost of acquisitions, net of cash acquired	Cost of acquisitions, net of cash acquired	(1,998,902)		(261)		Cost of acquisitions, net of cash acquired	(2,088,394)		(261)
Decrease (increase) in other		39		(328)
Other						Other	463		13
Net cash used by investing activities	Net cash used by investing activities	(1,998,692)		(54,279)		Net cash used by investing activities	(2,084,788)		(68,163)

Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Increase in net borrowings on revolving credit facility		65,000		0
Net borrowings on revolving credit facility						Net borrowings on revolving credit facility	—		—
Payment on term loans						Payment on term loans	(57,500)		—
Proceeds from term loans	Proceeds from term loans	900,000		0		Proceeds from term loans	900,000		—
Proceeds from issuance of convertible senior notes	Proceeds from issuance of convertible senior notes	600,000		0		Proceeds from issuance of convertible senior notes	600,000		—
Payment of debt issuance costs	Payment of debt issuance costs	(27,127)		0		Payment of debt issuance costs	(27,165)		—
Purchase of treasury shares	Purchase of treasury shares	(12,975)		(15,482)		Purchase of treasury shares	(12,975)		(15,484)
Payment of contingent consideration	Payment of contingent consideration	0		(5,619)		Payment of contingent consideration	—		(5,619)
Proceeds from exercise of stock options	Proceeds from exercise of stock options	29,388		92,337		Proceeds from exercise of stock options	46,433		100,732
Contributions from employee stock purchase plan	Contributions from employee stock purchase plan	6,200		5,177		Contributions from employee stock purchase plan	9,757		8,209
Net cash provided by financing activities	Net cash provided by financing activities	1,560,486		76,413		Net cash provided by financing activities	1,458,550		87,838

Net (decrease) increase in cash and cash equivalents	Net (decrease) increase in cash and cash equivalents	(386,850)		118,654		Net (decrease) increase in cash and cash equivalents	(369,495)		286,003
Cash and cash equivalents at beginning of period	Cash and cash equivalents at beginning of period	603,623		232,682		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	$	216,773	$	351,336	Cash and cash equivalents at end of period	$	234,128	$	518,685

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 March 31, 2021		48,148	$	481			$	941,960				$	(46)	$	1,149,132	(7,424)					$	(30,534)		$	2,060,993
Balance at June 30, 2021																						Balance at June 30, 2021	48,148			$	481		$	962,557			$	(46)		$	1,174,662			(7,315)		$	(29,663)		$	2,107,991
Net income	Net income	—	—		—				—			25,530		—		—			25,530			Net income	—			—		—				—			44,170				—		—			44,170
Exercise of stock options and vesting of restricted stock units	Exercise of stock options and vesting of restricted stock units	—	—		(9,544)				—			—		150		20,830			11,286			Exercise of stock options and vesting of restricted stock units	—			—		14,712				—			—				112		2,333			17,045
Employee taxes paid for withheld shares upon equity award settlement	Employee taxes paid for withheld shares upon equity award settlement	—	—		—				—			—		(18)		(7,052)			(7,052)			Employee taxes paid for withheld shares upon equity award settlement	—			—		—				—			—				(3)		(1,451)			(1,451)
Stock compensation	Stock compensation	—	—		25,175				—			—		—		—			25,175			Stock compensation	—			—		29,461				—			—				—		—			29,461
Issuance of shares pursuant to employee stock purchase plan	Issuance of shares pursuant to employee stock purchase plan	—	—		3,094				—			—		9		68			3,162			Issuance of shares pursuant to employee stock purchase plan	—			—		3,482				—			—				9		75			3,557
Treasury stock purchases	Treasury stock purchases	—	—		—				—			—		(32)		(12,975)			(12,975)			Treasury stock purchases	—			—		—				—			—				—		—			—
Purchase consideration for conversion of unvested restricted stock	Purchase consideration for conversion of unvested restricted stock	—	—		1,872				—			—		—		—			1,872			Purchase consideration for conversion of unvested restricted stock	—			—		—				—			—				—		—			—
Balance at June 30, 2021		48,148	$	481	$	962,557			$	(46)		$	1,174,662	(7,315)		$	(29,663)		$	2,107,991
Balance at September 30, 2021																						Balance at September 30, 2021	48,148			$	481	$	1,010,212			$	(46)		$	1,218,832			(7,197)		$	(28,706)		$	2,200,773


		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 March 31, 2020		48,148	$	481			$	798,089				$	(46)	$	964,886	(8,397)					$	(50,578)		$	1,712,832
Balance at June 30, 2020																						Balance at June 30, 2020	48,148			$	481		$	843,998			$	(46)		$	1,018,778			(7,917)		$	(33,883)		$	1,829,328
Net income	Net income	—	—		—				—			53,892		—		—			53,892			Net income	—			—		—				—			39,284				—		—			39,284
Exercise of stock options and vesting of restricted stock units	Exercise of stock options and vesting of restricted stock units	—	—		27,642				—			—		482		18,459			46,101			Exercise of stock options and vesting of restricted stock units	—			—		7,578				—			—				75		817			8,395
Employee taxes paid for withheld shares upon equity award settlement	Employee taxes paid for withheld shares upon equity award settlement	—	—		—				—			—		(12)		(4,591)			(4,591)			Employee taxes paid for withheld shares upon equity award settlement	—			—		—				—			—				(1)		(316)			(316)
Stock compensation	Stock compensation	—	—		18,386				—			—		—		—			18,386			Stock compensation	—			—		18,424				—			—				—		—			18,424
Issuance of shares pursuant to employee stock purchase plan	Issuance of shares pursuant to employee stock purchase plan	—	—		(119)				—			—		10		2,827			2,708			Issuance of shares pursuant to employee stock purchase plan	—			—		2,963				—			—				11		69			3,032
Treasury stock purchases	Treasury stock purchases	—	—		—				—			—		—		—			—			Treasury stock purchases	—			—		—				—			—				—		(2)			(2)
Balance at June 30, 2020		48,148	$	481	$	843,998			$	(46)		$	1,018,778	(7,917)		$	(33,883)		$	1,829,328
Balance at September 30, 2020																						Balance at September 30, 2020	48,148			$	481	$	872,963			$	(46)		$	1,058,062			(7,832)		$	(33,315)		$	1,898,145

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 December 31, 2020	Balance at December 31, 2020	48,148	$	481			$	905,332				$	(46)	$	1,112,156	(7,609)					$	(31,812)		$	1,986,111	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	—	—		—				—			62,506		—		—			62,506			Net income	—			—				—				—				106,676				—				—			106,676
Exercise of stock options and vesting of restricted stock units	Exercise of stock options and vesting of restricted stock units	—	—		(1,623)				—			—		346		31,011			29,388			Exercise of stock options and vesting of restricted stock units	—			—			13,089				—				—				458				33,344			46,433
Employee taxes paid for withheld shares for taxes upon equity award settlement	Employee taxes paid for withheld shares for taxes upon equity award settlement	—	—		—				—			—		(37)		(16,010)			(16,010)			Employee taxes paid for withheld shares for taxes upon equity award settlement	—			—			—				—				—				(40)				(17,461)			(17,461)
Stock compensation	Stock compensation	—	—		50,899				—			—		—		—			50,899			Stock compensation	—			—			80,360				—				—				—				—			80,360
Issuance of shares pursuant to employee stock purchase plan	Issuance of shares pursuant to employee stock purchase plan	—	—		6,077				—			—		17		123			6,200			Issuance of shares pursuant to employee stock purchase plan	—			—			9,559				—				—				26				198			9,757
Treasury stock purchases	Treasury stock purchases	—	—		—				—			—		(32)		(12,975)			(12,975)			Treasury stock purchases	—			—			—				—				—				(32)				(12,975)			(12,975)
Purchase consideration for conversion of unvested restricted stock awards	Purchase consideration for conversion of unvested restricted stock awards	—	—		1,872				—			—		—		—			1,872			Purchase consideration for conversion of unvested restricted stock awards	—			—			1,872				—				—				—				—			1,872
Balance at June 30, 2021		48,148	$	481	$	962,557			$	(46)		$	1,174,662	(7,315)		$	(29,663)		$	2,107,991
Balance at September 30, 2021																						Balance at September 30, 2021	48,148			$	481		$	1,010,212			$	(46)			$	1,218,832			(7,197)				$	(28,706)		$	2,200,773


		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 December 31, 2019	Balance at December 31, 2019	48,148	$	481			$	739,478				$	(46)	$	917,336	(8,839)					$	(40,191)		$	1,617,058	Balance at December 31, 2019		48,148			$	481			$	739,478			$	(46)			$	917,336			(8,839)			$	(40,191)	$	1,617,058
Net income	Net income	—	—		—				—			101,442		—		—			101,442			Net income	—			—				—				—				140,726				—				—			140,726
Exercise of stock options and vesting of restricted stock units	Exercise of stock options and vesting of restricted stock units	—	—		66,584				—			—		980		25,753			92,337			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	Employee taxes paid for withheld shares for taxes upon equity award settlement	—	—		—				—			—		(19)		(6,892)			(6,892)			Employee taxes paid for withheld shares for taxes upon equity award settlement	—			—			—				—				—				(20)				(7,208)			(7,208)
Stock compensation	Stock compensation	—	—		35,688				—			—		—		—			35,688			Stock compensation	—			—			54,112				—				—				—				—			54,112
Issuance of shares pursuant to employee stock purchase plan	Issuance of shares pursuant to employee stock purchase plan	—	—		2,248				—			—		20		2,929			5,177			Issuance of shares pursuant to employee stock purchase plan	—			—			5,211				—				—				31				2,998			8,209
Treasury stock purchases	Treasury stock purchases	—	—		—				—			—		(59)		(15,482)			(15,482)			Treasury stock purchases	—			—			—				—				—				(59)				(15,484)			(15,484)
Balance at June 30, 2020		48,148	$	481	$	843,998			$	(46)		$	1,018,778	(7,917)		$	(33,883)		$	1,829,328
Balance at September 30, 2020																						Balance at September 30, 2020	48,148			$	481		$	872,963			$	(46)			$	1,058,062			(7,832)				$	(33,315)		$	1,898,145

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 ~~June~~September 30, 2021, and December 31, 2020, and operating result amounts are for the three and ~~six~~nine months ended ~~June~~September 30, 2021, and 2020, 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, 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 ~~six~~nine months ended ~~June~~September 30, 2021, and ~~2020~~2020.

On April 21, 2021, the Company acquired NIC, Inc. (“NIC”) as contemplated by the Agreement and Plan of Merger dated February 9, 2021. The results of NIC are include in condensed consolidated financial statements since the date of acquisition. See Note 3, Acquisitions for further information.

(2) Accounting Standards and Significant Accounting Policies

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Except for the 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 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, 2020, filed with the SEC on February 19, 2021, that have had a material impact on our condensed consolidated financial statements and related notes. See ~~recently adopted accounting pronouncements~~Recently Adopted Accounting Pronouncements below.

Impacts of the COVID-19 Pandemic

The pandemic continues to delay some government procurement processes and is expected to impact our 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. 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 ~~six~~nine months ended ~~June~~September 30, 2021, excluding the impact of ~~recent~~2021 acquisitions, the impact of the COVID-19 pandemic resulted in lower revenues from software licenses and software services. Lower software licenses compared to prior periods are in part attributed to slower sales cycles as some government procurement processes ~~are~~have been delayed and contract signings have been pushed to future periods. ~~The software~~Software services revenues have been affected by a decline in billable travel revenue, ~~decline is attributed to delays in implementations caused by travel restrictions in effect during the period.~~as most services are now being delivered virtually rather than on-site. 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. As travel restrictions 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.~~are increasing. Also, we ~~are adapting~~have adapted 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.

For the three and nine months ended September 30, 2021, total revenues include subscriptions revenue and software services revenues of $43.3 million and $58.4 million, respectively, from NIC's TourHealth and pandemic unemployment services offerings. We currently expect these COVID-related revenues to decrease significantly in the fourth quarter of 2021 and wind down in the first half of 2022.

Recurring revenues from subscriptions and maintenance comprised ~~77%~~79% of our total consolidated revenue for the ~~six~~nine months ended ~~June~~September 30, 2021, and include transaction-based revenue streams such as e-filing, online payments, and ~~online payments.~~digital government services. 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. As of ~~June~~September 30, 2021, we had ~~$347.1~~$348.4 million in cash and investments and ~~$965~~$842.5 million of principal outstanding borrowings under our 2021 Credit Agreement executed on April 21, 2021. As of ~~June~~September 30, 2021, we had available borrowing capacity of ~~$435~~$500 million under our 2021 Credit Agreement.

We have recorded no impairment to goodwill or other assets as of the balance sheet date. 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 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 orand 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.

For e-filing transaction fees and ~~other~~ transaction-based revenues from digital government services and online payments, we have the right to charge the customer an amount that directly corresponds with the value to the customer of our performance to date. Therefore, we recognize revenue for these services over time based on the amount billable to the customer in accordance with the 'as invoiced' practical expedient in ASC 606-10-55-18. In some cases, we are paid on a fixed fee basis and recognize the revenue ratably over the contractual period. Typically, the structure of our arrangements does not give rise to variable consideration. However, in those instances whereby variable consideration exists, we include in our estimates, additional revenue for variable consideration when we believe we have an enforceable right, the amount can be estimated reliably and its realization is probable.

Refer to Note 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~~invoicing occurs prior to ~~invoicing.~~recognizing revenue. For multi-year agreements, we generally invoice customers annually at the beginning of each annual coverage period. We record an unbilled receivable related to revenue recognized for on-premises licenses as we have an unconditional right to invoice and receive payment in the future related to those licenses.

At ~~June~~September 30, 2021, and December 31, 2020, total current and long-term accounts receivable, net of allowance for losses and sales adjustments, was ~~$599.9~~$553.0 million and $403.7 million, respectively. We have recorded unbilled receivables of ~~$156.0~~$147.4 million and $140.8 million at ~~June~~September 30, 2021 and December 31, 2020, respectively. Included in unbilled receivables are retention receivables of ~~$11.0~~$8.2 million and $13.1 million at ~~June~~September 30, 2021 and December 31, 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 ~~$8.1~~$10.6 million and $9.3 million at ~~June~~September 30, 2021, and December 31, 2020, respectively, 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~~rarely experience credit losses with ~~the majority of~~ our clients, we have ~~no basis to record~~not recorded a material reserve for credit ~~losses as defined by the standard.~~losses.

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

We assess goodwill for impairment annually, or more frequently whenever events or changes in circumstances indicate its carrying value may not be recoverable. We begin with the qualitative assessment of whether it is more likely than not that a reporting unit's fair value is less than its carrying value before applying the quantitative assessment described below. 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.~~assumptions (Level 3 inputs). The assumptions that are used are based upon what we believe a hypothetical marketplace participant would use in estimating fair value. We 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.

We have historically evaluated goodwill for impairment annually as of April 1, or more frequently if impairment indicators arose. During the second quarter 2021, we voluntarily changed the date of our annual assessment of goodwill to October 1 for all reporting units. The change in testing date for goodwill impairment is a change in accounting principle, which management believes is preferable as the new date of the assessment better aligns with our annual planning process. The change in the assessment date does not delay or avoid a potential impairment ~~charge.~~ charge nor does it change our requirement~~This change in the date for the annual impairment assessment for goodwill noted no change in our requirements~~ to assess goodwill on an interim date between scheduled annual testing dates if triggering events are present. To ensure that no lapse in an assessment ~~occurring~~occurred since the prior period, we performed qualitative assessments for all reporting units except for the data and insights and platform technologies reporting units. 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 Step 1 quantitative impairment test. We did perform a quantitative assessment for goodwill of ~~$75.7~~$75.6 million and ~~$78.4~~$78.3 million associated with our data and insights reporting unit and platform technologies ~~unit,~~units, respectively. 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 data and insights and platform technologies units, goodwill entirely relates to recently acquired businesses and as a result those units do not have significant excess fair values over carrying values. As a result of our interim qualitative and quantitative assessments, we concluded no impairment existed as of ~~June~~second quarter 2021. Since our assessment, we had no triggering events as of September 30, 2021.

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.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

In August 2020, the FASB issued ASU 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 2020-06 also requires the application of the if-converted method for calculating diluted earnings per share and the treasury stock method will be no longer available. This standard will be effective for the Company’s fiscal years beginning in the first quarter of 2022, with early adoption permitted. The Company has elected to early adopt this standard as of January 1, 2021. Our accounting and disclosures related to our convertible senior notes issued on March 9, 2021, reflect the requirements of this standard. For further information, please refer to Note 7, 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. We adopted ASU 2019-12 as of January 1, 2021. The adoption of this standard did not have a material impact on our consolidated financial statements.

(3) Acquisitions

On September 9, 2021, we acquired all the equity interest of Ultimate Information Systems, Inc. (dba Arx). Arx is a cloud-based platform which creates accessible technology to enable a modern-day police force that is fully transparent, accountable, and a trusted resource to the community it serves. The total purchase price, net of cash acquired, was approximately $12.8 million, of which $12.4 million was paid in cash and approximately $0.5 million was accrued for indemnity holdbacks, subject to certain post-closing adjustments.

On September 1, 2021, we acquired VendEngine, Inc. (VendEngine) as contemplated by the Agreement and Plan of Merger dated June 3, 2021. As result of the merger, VendEngine became a direct subsidiary of the Company. VendEngine is a cloud-based software provider focused on financial technology for the corrections market. The total purchase price, net of cash acquired of $3.0 million, was approximately $83.1 million, consisting of $80.2 million paid in cash, and approximately $5.9 million related to indemnity holdbacks, subject to certain post-closing adjustments.

In connection with this transaction, we acquired total tangible assets of $6.6 million and assumed liabilities of approximately $4.3 million. We recorded goodwill of approximately $58.7 million, none of which is expected to be deductible for tax purposes, and other identifiable intangible assets of approximately $32.0 million. The $32.0 million of intangible assets are attributable to customer relationships, acquired software, trade name and will be amortized over a weighted average period of approximately 17 years. We recorded net deferred tax liabilities of $7.5 million related to the tax effect of our estimated fair value allocations.

VendEngine provides a suite of financial and communications applications ranging from deposit technologies for commissary, ordering, and warehouse technology to a host of informational, electronic communications, security, accounting, and financial trust management components for more than 300 correctional facilities across 32 states and the Caribbean.Therefore, the goodwill of approximately $58.7 million arising from this acquisition is primarily attributed to our ability to generate increased revenues, earnings and cash flow by expanding our addressable market and client base.

On April 21, 2021 ~~(“Closing~~(the “Closing Date”), ~~the Company~~we acquired NIC as contemplated by the Agreement and Plan of Merger dated February 9, ~~2021, (the “Merger Agreement”).~~2021. As result of the merger, NIC became a direct subsidiary of the Company and NIC’s subsidiaries became indirect ~~subsidiaries of the Company.~~subsidiaries. NIC is a leading digital government solutions and payment company that primarily serves federal ~~state~~ and ~~local~~state government agencies. The total purchase price, net of cash acquired of $331.8 million, was approximately $2.0 billion, consisting of cash paid of $2.3 billion and $1.9 million of purchase consideration related to the conversion of unvested restricted stock awards.

We have performed a preliminary valuation analysis of the fair market value of NIC’s assets and liabilities. The following table summarizes the preliminary allocation of the purchase price as of the acquisition date:


(In thousands)
Cash	$	331,783
Accounts receivable	~~149,632~~149,515
Other current assets	12,988
Other noncurrent assets	20,974
Identifiable intangible assets	~~754,000~~790,000
Goodwill	~~1,464,084~~1,438,603
Accounts payable	(150,099)
Accrued expenses	(63,809)
Other noncurrent liabilities	(11,493)
Deferred revenue	~~(1,522)~~(3,294)
Deferred tax liabilities, net	~~(186,046)~~(194,676)
Total consideration	$	2,320,492

In connection with this transaction, we acquired total tangible assets of ~~$515.4~~$515.3 million and assumed liabilities of approximately ~~$226.9~~$228.7 million. We recorded goodwill of approximately ~~$1.5~~$1.4 billion, none of which is expected to be deductible for tax purposes, and other identifiable intangible assets of approximately ~~$754.0~~$790.0 million. The ~~$754.0~~$790.0 million of intangible assets are attributable to customer relationships, acquired software and trade name and will be amortized over a weighted average period of approximately 17 years. We recorded net deferred tax liabilities of ~~$186.0~~$194.7 million related to the tax effect of our estimated fair value allocations.

In the nine months ended September 30, 2021, we recorded adjustments to the preliminary opening balance sheet attributed to a decrease to accounts receivable and increases in identifiable intangible assets, deferred revenue and related deferred taxes resulting in a net decrease to goodwill of approximately $25.5 million.

NIC delivers user-friendly digital services that make it easier and more efficient for citizens and businesses to interact with government - providing valuable conveniences like applying for unemployment insurance, submitting business filings, renewing licenses, accessing information and making secure payments without visiting a government office. In addition, NIC has extensive expertise and scale in the government payments arena which will accelerate ~~the Company’s~~our strategic payments initiatives. Therefore, the goodwill of approximately ~~$1.5~~$1.4 billion arising from this acquisition is primarily attributed to our ability to generate increased revenues, earnings and cash flow by expanding our addressable market and client base.

The following unaudited pro forma consolidated operating results information has been prepared as if the acquisition of NIC had occurred on January 1, 2020, after giving effect to certain adjustments, including amortization of intangibles, interest, transaction costs, and tax effects.


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020			2021		2020		2021		2020
Revenues	Revenues	$	433,739	$	364,680	$	862,181	$	732,340	Revenues	$	459,873	$	420,336	$	1,322,055	$	1,152,675
Net income	Net income	$	19,934	$	53,567	$	59,160	$	80,299	Net income	$	44,170	$	50,257	$	103,330	$	130,555
Basic earnings per share	Basic earnings per share	$	0.49	$	1.34	$	1.45	$	2.01	Basic earnings per share	$	1.08	$	1.25	$	2.53	$	3.26
Diluted earnings per share	Diluted earnings per share	$	0.47	$	1.29	$	1.40	$	1.93	Diluted earnings per share	$	1.04	$	1.21	$	2.45	$	3.15

The pro forma information above does not include acquisitions that are not considered material to our results of operations. The pro forma information does not purport to represent what our results of operations actually would have been had such transaction occurred on the date specified or to project our results of operations for any future period.

On March 31, 2021, we acquired all the equity interest of 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~~cash price ofwas approximately $6.2 million, net of cash ~~acquired, was paid in cash.~~acquired.

On March 31, 2021, we acquired substantially all assets of DataSpec, Inc. ~~(“DataSpec”)~~(DataSpec), a provider of a SaaS solution that allows for secure electronic claims submission to the federal Department of Veterans Affairs ~~(“VA”)~~ and reporting capabilities, in addition to scheduling, calendaring, and payments. The total cash purchase price ofwas approximately $5.8 ~~million was paid in cash.~~million.

The operating results of Arx, DataSpec, ReadySub, and ~~ReadySub~~VendEngine are included with the operating results of the Enterprise Software segment since their date of acquisition. The impact of the Arx, DataSpec, ReadySub, and ~~ReadySub~~VendEngine acquisitions, individually and in the aggregate, on our operating results, assets and liabilities is not material. The operating results of NIC are disclosed separately as a reportable segment. Revenues from NIC included in Tyler's results of operations totaled approximately ~~$99.1~~$249.7 million and ~~the~~ net income ~~loss~~ was approximately ~~$9.7~~$27.2 million from the date of acquisition through ~~June~~September 30, 2021. In 2021, we incurred fees of approximately ~~$18.3~~$22.7 million for financial advisory, legal, accounting, due diligence, valuation and other various services necessary to complete these acquisitions. The Company also incurred $1.6 million of expense related to a separation agreement with NIC's former Chief Executive Officer. These costs were expensed in 2021 and are included in selling, general and administrative expenses in the accompanying condensed consolidated ~~statements~~statement of income.

As of ~~June~~September 30, 2021, the purchase price allocations for Arx, DataSpec, NIC, ReadySub and ~~NIC~~VendEngine are not yet complete; therefore, the preliminary valuation estimates of fair value assumed at the acquisition date for intangible assets, receivables, ~~and~~ deferred revenue and related deferred taxes are subject to change as valuations are finalized. Our balance sheet as of ~~June~~September 30, 2021, reflects the allocation of the purchase price to the net assets acquired based on their estimated fair value at the date of each acquisition. The fair value of the assets and liabilities acquired 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.

(4) Shareholders’ Equity

The following table details activity in our common stock:


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended September 30,						Nine Months Ended September 30,
		2021			2020			2021			2020				2021			2020			2021			2020
		Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount			Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount
Purchases of treasury shares	Purchases of treasury shares	(32)	$	(12,975)	0	$	0	(32)	$	(12,975)	(59)	$	(15,482)	Purchases of treasury shares	—	$	—	—	$	(2)	(32)	$	(12,975)	(59)	$	(15,484)
Stock option exercises	Stock option exercises	89	11,286		436	46,101		210	29,388		917	92,337		Stock option exercises	103	17,045		72	8,395		313	46,433		989	100,732
Employee stock plan purchases	Employee stock plan purchases	9	3,162		10	2,708		17	6,200		20	5,177		Employee stock plan purchases	9	3,557		11	3,032		26	9,757		31	8,209
Restricted stock units vested, net of withheld shares upon award settlement	Restricted stock units vested, net of withheld shares upon award settlement	43	$	(7,052)	33	$	(4,591)	99	$	(16,010)	43	$	(6,892)	Restricted stock units vested, net of withheld shares upon award settlement	5	$	(1,451)	2	$	(316)	104	$	(17,461)	45	$	(7,208)

As of ~~June~~September 30, 2021, we have authorization from our board of directors to repurchase up to 2.4 million additional shares of our common stock.

(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 ~~$33.6~~$36.2 million and $32.3 million as of ~~June~~September 30, 2021, and December 31, 2020, respectively. Amortization expense related to deferred commissions was ~~$3.1~~$3.5 million and ~~$6.1~~$9.6 million for the three and ~~six~~nine months ended ~~June~~September 30, 2021, respectively, and ~~$2.9~~$3.0 million and ~~$5.9~~$8.9 million for the three and ~~six~~nine months ended ~~June~~September 30, 2020, respectively. There were 0no 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 ~~June~~September 30, 2021, we have ~~$130.3~~$114.3 million in investment grade corporate and municipal bonds with varying maturity dates through ~~2026.~~2027. We intend to hold these bonds to maturity and have classified them as such. It is not more likely than not that we will be required to sell these bonds before recovery of their amortized costs. ~~We believe cost approximates fair value given the~~The portfolio consists of fixed income and high credit ~~investments.~~investments with fair values that approximate costs. 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 ~~June~~September 30, 2021, we have an accrued interest receivable balance of approximately ~~$663,000~~$689,000 which is included in accounts receivable, net. We do not measure an allowance for credit losses for accrued interest receivables. We record any losses within the maturity period of the investment and any write-offs to accrued interest receivables are recorded as a reduction to interest income in the period of the loss. During the three and ~~six~~nine months ended ~~June~~September 30, 2021, we have recorded 0no credit losses for accrued interest receivables. Interest income and amortization of discounts and premiums are included in other ~~(expense)~~ income, net in the accompanying condensed consolidated statements of income.

In 2020, we purchased $10 million in common stock representing an 18% interest in BFTR, LLC., a wholly owned subsidiary of Bison Capital Partners V L.P. BFTR, LLC, a privately held Australian company specializing in digitizing the spoken word in court and legal proceedings. The investment in common stock is accounted for under the ~~cost~~equity method because we do not have the ability to exercise significant influence over the ~~investee~~investee; and as the securities do not have readily determinable fair ~~values. Our~~values, our investment is carried at cost less any impairment write-downs. Annually, our ~~cost~~equity method investments are assessed for impairment. We do not reassess the fair value of ~~cost~~equity method investments if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investments. No events or changes 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

2021 Credit Agreement

In connection with the completion of the acquisition of NIC on the Closing Date the Company, as borrower, entered into a new $1.4 billion Credit Agreement (the “2021 Credit Agreement”) with the various lenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent, Swingline Lender, and Issuing Lender. The 2021 Credit Agreement provides for (1) a senior unsecured revolving credit facility in an aggregate principal amount of up to $500 million, including sub-facilities for standby letters of credit and swingline loans (the “Revolving Credit Facility”), (2) an amortizing five-year term loan in the aggregate amount of $600 million (the “Term Loan A-1”), and (3) a non-amortizing three-year term loan in the aggregate amount of $300 million (the “Term Loan A-2”) and, together (the “Term Loans”). The 2021 Credit Agreement matures on April 20, 2026, and the loans may be prepaid at any time, without premium or penalty, subject to certain minimum amounts and payment of any LIBOR breakage costs. In addition to the required amortization payments on the Term Loan A-1 of 5% annually, certain mandatory quarterly prepayments of the Term Loans and the Revolving Credit Facility will be required (i) upon the issuance or incurrence of additional debt not otherwise permitted under the 2021 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 2021 Credit Agreement.

Borrowings under the Revolving Credit Facility and the Term Loan A-1 bear interest, at the Company’s option, at a per annum rate of either (1) 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 bears interest, at the Company’s option, at a per annum rate of either (1) the Base Rate plus a margin of 0% to 0.5% or (2) the one-, three-, 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 2021 Credit Agreement. The 2021 Credit Agreement has customary benchmark replacement language with respect to the replacement of LIBOR once LIBOR becomes unavailable. In addition to paying interest 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.

The net proceeds from the borrowings under the 2021 Credit Agreement were $1.1 billion, net of debt discounts of $7.2 million and debt issuance costs of $4.9 million and $6.4 million of commitment fees paid related to the terminated $1.6 billion unsecured bridge loan facility. 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 net proceeds of its Convertible Senior Notes of $594 million, were used to complete the acquisition and pay fees and expenses in connection with the acquisition and the 2021 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 2021 Credit Agreement requires us to maintain certain financial ratios and other financial conditions and prohibits us from making certain investments, advances, cash dividends or loans, and limits incurrence of additional indebtedness and liens. As of ~~June~~September 30, 2021, we were in compliance with those covenants.

The following table summarizes the Company's total outstanding borrowings related to the 2021 Credit Agreement (in thousands):

~~June~~September 30, 2021

Maturity Date

Revolving Credit Facility

~~65,000~~—

April 20, 2026

Term Loan A-1

~~600,000~~592,500

April 20, 2026

Term Loan A-2

~~300,000~~250,000

April 20, 2024

Total borrowings under the 2021 Credit Agreement

~~965,000~~842,500

Less: unamortized debt discount and debt issuance costs related to term loans

~~(7,441)~~(6,965)

Total borrowings, net

~~957,559~~835,535

Less: current portion of debt

(30,000)

Carrying value ~~of long-term debt~~ as of ~~June~~September 30, 2021

~~927,559~~805,535

The carrying amount is the par value of the Revolving Credit Facility and Term Loans less the debt discount and debt issuance costs that are amortized to interest expense using the effective interest method over the ~~term~~terms of the Term Loans. Interest expense is included in ~~other (expense) income, net in~~ the accompanying condensed consolidated statements of income. We believe the carrying amount of our debt approximates its fair value at September 30, 2021.

The effective interest rate for the borrowings under the 2021 Credit Agreement is ~~1.79%~~3.25% as of ~~June~~September 30, 2021. The following sets forth the interest expense recognized related to the borrowings under the 2021 Credit Agreement included in ~~other (expense) income, net~~interest expense in the accompanying condensed consolidated statements of income (in thousands):


		Three Months Ended June 30,		Six Months Ended June 30,			Three Months Ended September 30,		Nine Months Ended September 30,
		2021		2021			2021		2021
Contractual interest expense - Revolving Credit Facility	Contractual interest expense - Revolving Credit Facility	$	(534)	$	(534)	Contractual interest expense - Revolving Credit Facility	$	(84)	$	(618)
Contractual interest expense - Term Loans	Contractual interest expense - Term Loans	(2,660)		(2,660)		Contractual interest expense - Term Loans	(3,492)		(6,153)
Amortization of debt discount and debt issuance costs	Amortization of debt discount and debt issuance costs	(531)		(531)		Amortization of debt discount and debt issuance costs	(692)		(1,223)
Total	Total	$	(3,725)	$	(3,725)	Total	$	(4,268)	$	(7,994)

As of ~~June~~September 30, 2021, we had ~~$65.0 million in~~no outstanding borrowings under the 2021 Revolving Credit Facility, and our available borrowing capacity was ~~$435.0~~$500.0 million. In addition, as of ~~June~~September 30, 2021, we had one outstanding standalone letter of credit totaling $2.0 million. The letter of credit, which guarantees our performance under a client contract, renews automatically annually unless canceled in writing, and expires in the third quarter of ~~2021.~~2026.

Terminated Debt Agreements

The 2021 Credit Agreement replaces and terminates the Company’s previous $400 million credit facility pursuant to the Credit Agreement dated as of September 30, 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. ~~Below~~The following summarizes the interest expense and related amortization of debt issuance costs associated with the terminated debt agreements incurred through the Closing Date, included in ~~other (expense) income, net~~interest expense in the accompanying condensed consolidated statements of income (in thousands).


		Three Months Ended June 30,		Six Months Ended June 30,			Three Months Ended September 30,		Nine Months Ended September 30,
		2021		2021			2021		2021
Contractual interest expense - 2019 Credit Agreement	Contractual interest expense - 2019 Credit Agreement	$	(163)	$	(313)	Contractual interest expense - 2019 Credit Agreement	$	—	$	(313)
Unsecured bridge loan facility commitment fee	Unsecured bridge loan facility commitment fee	(6,407)		(6,407)		Unsecured bridge loan facility commitment fee	—		(6,407)
Amortization of debt issuance costs	Amortization of debt issuance costs	(1,340)		(1,489)		Amortization of debt issuance costs	—		(1,489)
Total	Total	$	(7,910)	$	(8,209)	Total	$	—	$	(8,209)

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 ~~June~~September 30, 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):


	~~June~~September 30, 2021
Convertible Senior Notes due 2026	$	600,000
Less: unamortized debt discount and debt issuance costs	~~(8,094)~~(7,665)
Carrying value as of ~~June~~September 30, 2021	$	~~591,906~~592,335

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. Interest expense is included in ~~other (expense) income, net in~~ the accompanying condensed consolidated statements of income. The fair value of our convertible senior notes due 2026 is determined based on quoted market prices for a similar liability when traded as an asset in an active market, a Level 2 input. We believe the fair value amount of our Convertible Senior Notes is approximately $659.4 million at September 30, 2021.

As of ~~June~~September 30, 2021, the effective interest rate as for the Convertible Senior Notes is ~~0.54%~~1.19%. The following sets forth the interest expense recognized related to the Convertible Senior Notes (in thousands):


		Three Months Ended June 30,		Six Months Ended June 30,			Three Months Ended September 30,		Nine Months Ended September 30,
		2021		2021			2021		2021
Contractual interest expense	Contractual interest expense	$	(375)	$	(458)	Contractual interest expense	$	(379)	$	(838)
Amortization of debt discount and debt issuance costs	Amortization of debt discount and debt issuance costs	(428)		(523)		Amortization of debt discount and debt issuance costs	(430)		(953)
Total	Total	$	(803)	$	(981)	Total	$	(809)	$	(1,791)

~~Below are the components of other (expense) income, net included in the accompanying condensed consolidated statements of income:~~

Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Interest expense, including amortization of debt discounts and debt issuance costs $ (12,438) $ (251) $ (12,915) $ (502)
Interest income 492 752 1,202 2,244
Other (253) (31) (398) (282)
Total other (expense) income including interest expense, net $ (12,199) $ 470 $ (12,111) $ 1,460

(8) Income Tax Provision

We had an effective income tax rate of ~~2.2%~~13.8% and ~~2.9%~~7.7% for the three and ~~six~~nine months ended ~~June~~September 30, 2021, respectively, compared to ~~negative 28.9%~~21.3% and negative ~~32.3%~~11.1% for the three and ~~six~~nine months ended ~~June~~September 30, 2020, respectively. The ~~higher~~decrease in the effective tax rate for the three ~~and six~~ months ended ~~June~~September 30, 2021, as compared to the same ~~periods~~period in 2020, was principally driven by athe increase in the excess tax benefits related to stock incentive awards. The increase in the effective tax rate for the nine months ended September 30, 2021, as compared to the same period in 2020, was principally driven by the 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, ~~and~~ the tax benefit of research tax credits and the release of reserves for unrecognized income tax benefits resulting from expiration of the statutes of limitations for certain tax years, offset by state income taxes and non-deductible business expenses. The excess tax benefits related to stock incentive awards realized were ~~$6.4~~$6.3 million and ~~$15.2~~$21.5 million for the three and ~~six~~nine months ended ~~June~~September 30, 2021, respectively, as compared to ~~$23.4~~$2.5 million and ~~$45.5~~$48.0 million for the three and ~~six~~nine months ended ~~June~~September 30, 2020, respectively. Excluding the excess tax benefits, the effective tax rate was ~~26.7%~~26.1% and ~~26.5%~~26.3% for the three and ~~six~~nine months ended ~~June~~September 30, 2021, respectively, compared to ~~27.2%~~26.2% and ~~27.1%~~26.7% for the three and ~~six~~nine months ended ~~June~~September 30, 2020, respectively.

We made tax payments of ~~$967,000~~$1.7 million and ~~$422,000~~$2.6 million in the ~~six~~nine months ended ~~June~~September 30, 2021, and 2020, respectively.

(9) Earnings Per Share

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


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020			2021		2020		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	$	25,530	$	53,892	$	62,506	$	101,442	Net income	$	44,170	$	39,284	$	106,676	$	140,726
Denominator:	Denominator:									Denominator:
Weighted-average basic common shares outstanding	Weighted-average basic common shares outstanding	40,765		39,963		40,761		39,984		Weighted-average basic common shares outstanding	40,888		40,261		40,805		40,013
Assumed conversion of dilutive securities:	Assumed conversion of dilutive securities:									Assumed conversion of dilutive securities:
Stock awards	Stock awards	1,329		1,453		1,387		1,548		Stock awards	1,398		1,345		1,391		1,480
Convertible Senior Notes	Convertible Senior Notes	0		0		0		0		Convertible Senior Notes	—		—		—		—
Denominator for diluted earnings per share - Adjusted weighted-average shares	Denominator for diluted earnings per share - Adjusted weighted-average shares	42,094		41,416		42,148		41,532		Denominator for diluted earnings per share - Adjusted weighted-average shares	42,286		41,606		42,196		41,493
Earnings per common share:	Earnings per common share:									Earnings per common share:
Basic	Basic	$	0.63	$	1.35	$	1.53	$	2.54	Basic	$	1.08	$	0.98	$	2.61	$	3.52
Diluted	Diluted	$	0.61	$	1.30	$	1.48	$	2.44	Diluted	$	1.04	$	0.94	$	2.53	$	3.39

For the three and ~~six~~nine months ended ~~June~~September 30, 2021 and 2020, stock awards, representing the right to purchase common stock of approximately ~~191,000~~109,000 shares and ~~166,000~~147,000 shares and ~~124,000~~215,000 shares and ~~102,000~~140,000 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 the Convertible Senior Notes on our diluted net income per share. Under the if-converted method, the Notes are assumed to be converted at the beginning of the period and 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 Notes are not included in the dilutive weighted-average common shares outstanding calculation for the three and ~~six~~nine months ended ~~June~~September 30, 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 with original maturities between one to ~~seven~~ten 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 ~~June~~September 30, 2021. Operating lease costs were approximately ~~$5.6~~$5.3 million and ~~$8.2~~$13.5 million for the three and ~~six~~nine months ended ~~June~~September 30, 2021, respectively, and $2.5 million and ~~$5.1~~$7.6 million for the three and ~~six~~nine months ended ~~June~~September 30, 2020, respectively.

The components of operating lease expense were as follows:

Lease Costs Financial Statement Classification Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Operating lease cost Selling, general and administrative expenses $ 4,388 $ 1,606 $ 6,110 $ 3,272
Short-term lease cost Selling, general and administrative expenses 731 447 1,212 1,021
Variable lease cost Selling, general and administrative expenses 496 454 927 848
Net lease cost $ 5,615 $ 2,507 $ 8,249 $ 5,141


Lease Costs	Financial Statement Classification	Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020
Operating lease cost	Selling, general and administrative expenses	$	4,344	$	1,595	$	10,454	$	4,867
Short-term lease cost	Selling, general and administrative expenses	547		453		1,759		1,474
Variable lease cost	Selling, general and administrative expenses	378		458		1,305		1,306
Net lease cost		$	5,269	$	2,506	$	13,518	$	7,647

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


		June 30, 2021		December 31, 2020			September 30, 2021		December 31, 2020
Assets:	Assets:					Assets:
Operating lease right-of-use assets	Operating lease right-of-use assets	$	28,230	$	18,734	Operating lease right-of-use assets	$	40,449	$	18,734
Liabilities:	Liabilities:					Liabilities:
Operating leases, short-term	Operating leases, short-term	9,666		5,904		Operating leases, short-term	10,125		5,904
Operating leases, long-term	Operating leases, long-term	22,118		16,279		Operating leases, long-term	37,348		16,279
Total lease liabilities	Total lease liabilities	$	31,784	$	22,183	Total lease liabilities	$	47,473	$	22,183

Supplemental information related to leases is as follows:


Other Information	Other Information	Six Months Ended June 30,						Other Information	Nine Months Ended September 30,
		2021			2020				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	$	6,203		$	3,379		Operating cash outflows from operating leases	$	7,856		$	5,665

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	$	2,961		$	510		Operating leases	$	17,633		$	562

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)	3.85			4			Weighted average remaining lease term (years)	6			4
Weighted average discount rate	Weighted average discount rate	2.51		%	4.00		%	Weighted average discount rate	1.91		%	4.00		%

As of ~~June~~September 30, 2021, maturities of lease liabilities were as follows:


Year ending December 31,	Year ending December 31,	Amount		Year ending December 31,	Amount
2021 (Remaining 2021)	2021 (Remaining 2021)	$	6,060	2021 (Remaining 2021)	$	3,408
2022	2022	9,161		2022	11,215
2023	2023	6,570		2023	8,500
2024	2024	5,225		2024	7,211
2025	2025	3,410		2025	5,230
Thereafter	Thereafter	2,849		Thereafter	14,265
Total lease payments	Total lease payments	33,275		Total lease payments	49,829
Less: Interest	Less: Interest	(1,491)		Less: Interest	(2,356)
Present value of operating lease liabilities	Present value of operating lease liabilities	$	31,784	Present value of operating lease liabilities	$	47,473

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 2021 and 2025, and some have options to extend the lease for up to seven years. We determine if an arrangement is a lease at inception. None of our leases allow the lessee to purchase the leased asset.

Rental income from third-party tenants for the three and ~~six~~nine months ended ~~June~~September 30, 2021, totaled ~~$296,000~~$301,000 and ~~$590,000~~$891,000, respectively, and for the three and ~~six~~nine months ended ~~June~~September 30, 2020, totaled ~~$292,000~~$284,000 and ~~$566,000,~~$850,000, respectively. Rental income is included in hardware and other revenue in the condensed consolidated statements of income. As of ~~June~~September 30, 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
2021 (Remaining 2021)	2021 (Remaining 2021)	$	713	2021 (Remaining 2021)	$	358
2022	2022	1,449		2022	1,449
2023	2023	1,479		2023	1,479
2024	2024	1,510		2024	1,510
2025	2025	966		2025	965
Thereafter	Thereafter	0		Thereafter	—
Total	Total	$	6,117	Total	$	5,761

As of ~~June~~September 30, 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 June 30,				Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020			2021		2020		2021		2020
Cost of subscriptions, software services and maintenance		$	5,909	$	4,369	$	10,909	$	8,621
Subscriptions, software services and maintenance										Subscriptions, software services and maintenance	$	6,303	$	4,555	$	17,212	$	13,176
Selling, general and administrative expenses	Selling, general and administrative expenses	19,266		14,017		39,990		27,067		Selling, general and administrative expenses	23,158		13,869		63,148		40,936
Total share-based compensation expense	Total share-based compensation expense	$	25,175	$	18,386	$	50,899	$	35,688	Total share-based compensation expense	$	29,461	$	18,424	$	80,360	$	54,112

(12) Segment and Related Information

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

We provide our software systems and services and appraisal services through 7 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 software solutions;

•courts and justice and public safety software solutions;

•data and insights solutions;

•platform technologies solutions including case management and business management processing;

•NIC digital government and payments solutions; and

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

In accordance with ASC 280-10, Segment Reporting, we report our results in 3 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; data and insights solutions; and platform technologies solutions meet the criteria for aggregation and are presented in the Enterprise Software (“ES”) reportable 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, and 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. On April 21, 2021, the Company acquired NIC resulting in a new reportable segment, as its operating results meet the criteria of a reportable segment. The operating results of NIC are included with the operating results of the NIC segment from the date of acquisition.

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~~shared services staff, and share-based compensation expense for the entire company. Corporate segment operating income also includes revenues and expenses related to a company-wide user conference.

As of January 1, 2021, certain administrative costs related to information technology, which were previously allocated and reported in the ES and A&T segments, were moved to the 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 all segments have been adjusted to reflect the segment change.

For the three months ended June 30, 2021
Enterprise
Software Appraisal and Tax NIC Corporate Totals
Revenues
Software licenses and royalties $ 15,779 $ 1,825 $ 0 $ 0 $ 17,604
Subscriptions 98,407 7,870 93,281 0 199,558
Software services 42,972 4,722 5,643 0 53,337
Maintenance 110,010 9,456 155 0 119,621
Appraisal services 0 6,265 0 0 6,265
Hardware and other 4,728 23 0 2,939 7,690
Intercompany 5,605 16 0 (5,621) —
Total revenues $ 277,501 $ 30,177 $ 99,079 $ (2,682) $ 404,075
Segment operating income $ 94,561 $ 8,689 $ 22,931 $ (64,647) $ 61,534


For the three months ended June 30, 2020
For the three months ended September 30, 2021												For the three months ended September 30, 2021
		Enterprise Software		Appraisal and Tax		NIC		Corporate		Totals			Enterprise Software		Appraisal and Tax		NIC		Corporate		Totals
Revenues	Revenues											Revenues
Software licenses and royalties	Software licenses and royalties	$	14,683	$	2,342	$	0	$	0	$	17,025	Software licenses and royalties	$	21,238	$	1,435	$	—	$	—	$	22,673
Subscriptions	Subscriptions	79,128		6,510		0		0		85,638		Subscriptions	102,285		8,311		142,346		—		252,942
Software services	Software services	38,899		4,755		0		0		43,654		Software services	41,985		4,603		8,036		—		54,624
Maintenance	Maintenance	107,336		9,424		0		0		116,760		Maintenance	110,231		7,399		203		—		117,833
Appraisal services	Appraisal services	0		4,696		0		0		4,696		Appraisal services	—		7,146		—		—		7,146
Hardware and other	Hardware and other	3,300		18		0		0		3,318		Hardware and other	4,558		9		—		88		4,655
Intercompany	Intercompany	4,533		2		0		(4,535)		—		Intercompany	5,123		20		—		(5,143)		—
Total revenues	Total revenues	$	247,879	$	27,747	$	0	$	(4,535)	$	271,091	Total revenues	$	285,420	$	28,923	$	150,585	$	(5,055)	$	459,873
Segment operating income	Segment operating income	$	82,080	$	7,767	$	0	$	(35,108)	$	54,739	Segment operating income	$	97,378	$	6,928	$	34,586	$	(55,629)	$	83,263


For the six months ended June 30, 2021
For the three months ended September 30, 2020												For the three months ended September 30, 2020
		Enterprise Software		Appraisal and Tax		NIC		Corporate		Totals			Enterprise Software		Appraisal and Tax		NIC		Corporate		Totals
Revenues	Revenues											Revenues
Software licenses and royalties	Software licenses and royalties	$	28,826	$	3,711	$	0	$	0	$	32,537	Software licenses and royalties	$	17,798	$	2,139	$	—	$	—	$	19,937
Subscriptions	Subscriptions	193,238		15,518		93,281		0		302,037		Subscriptions	82,972		6,318		—		—		89,290
Software services	Software services	85,532		9,802		5,643		0		100,977		Software services	42,640		5,306		—		—		47,946
Maintenance	Maintenance	219,793		18,785		155		0		238,733		Maintenance	108,270		9,709		—		—		117,979
Appraisal services	Appraisal services	0		12,730		0		0		12,730		Appraisal services	—		5,394		—		—		5,394
Hardware and other	Hardware and other	8,854		70		0		2,939		11,863		Hardware and other	5,131		69		—		—		5,200
Intercompany	Intercompany	10,866		31		0		(10,897)		—		Intercompany	5,128		38		—		(5,166)		—
Total revenues	Total revenues	$	547,109	$	60,647	$	99,079	$	(7,958)	$	698,877	Total revenues	$	261,939	$	28,973	$	—	$	(5,166)	$	285,746
Segment operating income	Segment operating income	$	187,435	$	17,948	$	22,931	$	(115,196)	$	113,118	Segment operating income	$	92,964	$	9,938	$	—	$	(39,889)	$	63,013


For the six months ended June 30, 2020
For the nine months ended September 30, 2021												For the nine months ended September 30, 2021
		Enterprise Software		Appraisal and Tax		NIC		Corporate		Totals			Enterprise Software		Appraisal and Tax		NIC		Corporate		Totals
Revenues	Revenues											Revenues
Software licenses and royalties	Software licenses and royalties	$	30,634	$	5,128	$	0	$	0	$	35,762	Software licenses and royalties	$	50,064	$	5,146	$	—	$	—	$	55,210
Subscriptions	Subscriptions	155,772		11,589		0		0		167,361		Subscriptions	295,523		23,829		235,627		—		554,979
Software services	Software services	83,848		11,939		0		0		95,787		Software services	127,517		14,405		13,679		—		155,601
Maintenance	Maintenance	212,177		18,948		0		0		231,125		Maintenance	330,024		26,184		358		—		356,566
Appraisal services	Appraisal services	0		10,459		0		0		10,459		Appraisal services	—		19,876		—		—		19,876
Hardware and other	Hardware and other	7,091		45		0		2		7,138		Hardware and other	13,412		79		—		3,027		16,518
Intercompany	Intercompany	8,534		20		0		(8,554)		—		Intercompany	15,989		51		—		(16,040)		—
Total revenues	Total revenues	$	498,056	$	58,128	$	0	$	(8,552)	$	547,632	Total revenues	$	832,529	$	89,570	$	249,664	$	(13,013)	$	1,158,750
Segment operating income	Segment operating income	$	155,747	$	16,309	$	0	$	(70,005)	$	102,051	Segment operating income	$	284,813	$	24,876	$	57,517	$	(170,825)	$	196,381

Three Months Ended June 30, Six Months Ended June 30,
Reconciliation of reportable segment operating income to the Company's consolidated totals: 2021 2020 2021 2020
Total segment operating income $ 61,534 $ 54,739 $ 113,118 $ 102,051
Amortization of acquired software (11,823) (8,006) (19,787) (16,033)
Amortization of customer and trade name intangibles (11,420) (5,392) (16,832) (10,784)
Other (expense) income including interest expense, net (12,199) 470 (12,111) 1,460
Income before income taxes $ 26,092 $ 41,811 $ 64,388 $ 76,694


For the nine months ended September 30, 2020
	Enterprise Software		Appraisal and Tax		NIC		Corporate		Totals
Revenues
Software licenses and royalties	$	48,432	$	7,267	$	—	$	—	$	55,699
Subscriptions	238,744		17,907		—		—		256,651
Software services	126,488		17,245		—		—		143,733
Maintenance	320,447		28,657		—		—		349,104
Appraisal services	—		15,853		—		—		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	$	248,711	$	26,246	$	—	$	(109,893)	$	165,064


	Three Months Ended September 30,				Nine Months Ended September 30,
Reconciliation of reportable segment operating income to the Company's consolidated totals:	2021		2020		2021		2020
Total segment operating income	$	83,263	$	63,013	$	196,381	$	165,064
Amortization of acquired software	(12,896)		(7,965)		(32,683)		(23,998)
Amortization of customer and trade name intangibles	(14,183)		(5,392)		(31,015)		(16,176)
Interest expense	(5,396)		(254)		(18,311)		(757)
Other income, net	445		534		1,249		2,497
Income before income taxes	$	51,233	$	49,936	$	115,621	$	126,630

(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 June 30, 2021
For the three months ended September 30, 2021								For the three months ended September 30, 2021
		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	$	14,755	$	2,849	$	17,604	Software licenses and royalties	$	19,170	$	3,503	$	22,673
Subscriptions	Subscriptions	0		199,558		199,558		Subscriptions	—		252,942		252,942
Software services	Software services	0		53,337		53,337		Software services	—		54,624		54,624
Maintenance	Maintenance	0		119,621		119,621		Maintenance	—		117,833		117,833
Appraisal services	Appraisal services	0		6,265		6,265		Appraisal services	—		7,146		7,146
Hardware and other	Hardware and other	7,690		0		7,690		Hardware and other	4,655		—		4,655
Total	Total	$	22,445	$	381,630	$	404,075	Total	$	23,825	$	436,048	$	459,873

For the three months ended June 30, 2020
Products and services transferred at a point in time Products and services transferred over time Total
Revenues
Software licenses and royalties $ 14,468 $ 2,557 $ 17,025
Subscriptions 0 85,638 85,638
Software services 0 43,654 43,654
Maintenance 0 116,760 116,760
Appraisal services 0 4,696 4,696
Hardware and other 3,318 0 3,318
Total $ 17,786 $ 253,305 $ 271,091


For the six months ended June 30, 2021
For the three months ended September 30, 2020								For the three months ended September 30, 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	$	26,813	$	5,724	$	32,537	Software licenses and royalties	$	16,777	$	3,160	$	19,937
Subscriptions	Subscriptions	0		302,037		302,037		Subscriptions	—		89,290		89,290
Software services	Software services	0		100,977		100,977		Software services	—		47,946		47,946
Maintenance	Maintenance	0		238,733		238,733		Maintenance	—		117,979		117,979
Appraisal services	Appraisal services	0		12,730		12,730		Appraisal services	—		5,394		5,394
Hardware and other	Hardware and other	11,863		0		11,863		Hardware and other	5,200		—		5,200
Total	Total	$	38,676	$	660,201	$	698,877	Total	$	21,977	$	263,769	$	285,746


For the six months ended June 30, 2020
For the nine months ended September 30, 2021								For the nine months ended September 30, 2021
		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	$	30,534	$	5,228	$	35,762	Software licenses and royalties	$	45,983	$	9,227	$	55,210
Subscriptions	Subscriptions	0		167,361		167,361		Subscriptions	—		554,979		554,979
Software services	Software services	0		95,787		95,787		Software services	—		155,601		155,601
Maintenance	Maintenance	0		231,125		231,125		Maintenance	—		356,566		356,566
Appraisal services	Appraisal services	0		10,459		10,459		Appraisal services	—		19,876		19,876
Hardware and other	Hardware and other	7,138		0		7,138		Hardware and other	16,518		—		16,518
Total	Total	$	37,672	$	509,960	$	547,632	Total	$	62,501	$	1,096,249	$	1,158,750


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	—		256,651		256,651
Software services	—		143,733		143,733
Maintenance	—		349,104		349,104
Appraisal services	—		15,853		15,853
Hardware and other	12,338		—		12,338
Total	$	59,649	$	773,729	$	833,378

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 June 30, 2021
Enterprise
Software Appraisal and Tax NIC Corporate Totals
Recurring revenues $ 208,417 $ 17,326 $ 93,436 $ 0 $ 319,179
Non-recurring revenues 63,479 12,835 5,643 2,939 84,896
Intercompany 5,605 16 0 (5,621) —
Total revenues $ 277,501 $ 30,177 $ 99,079 $ (2,682) $ 404,075

For the three months ended June 30, 2020
Enterprise
Software Appraisal and Tax NIC Corporate Totals
Recurring revenues $ 186,464 $ 15,934 $ 0 $ 0 $ 202,398
Non-recurring revenues 56,882 11,811 0 0 68,693
Intercompany 4,533 2 0 (4,535) —
Total revenues $ 247,879 $ 27,747 $ 0 $ (4,535) $ 271,091


For the six months ended June 30, 2021
For the three months ended September 30, 2021												For the three months ended September 30, 2021
		Enterprise Software		Appraisal and Tax		NIC		Corporate		Totals			Enterprise Software		Appraisal and Tax		NIC		Corporate		Totals

Recurring revenues	Recurring revenues	$	413,031	$	34,303	$	93,436	$	0	$	540,770	Recurring revenues	$	212,517	$	15,709	$	142,549	$	—	$	370,775
Non-recurring revenues	Non-recurring revenues	123,212		26,313		5,643		2,939		158,107		Non-recurring revenues	67,780		13,194		8,036		88		89,098
Intercompany	Intercompany	10,866		31		0		(10,897)		—		Intercompany	5,123		20		—		(5,143)		—
Total revenues	Total revenues	$	547,109	$	60,647	$	99,079	$	(7,958)	$	698,877	Total revenues	$	285,420	$	28,923	$	150,585	$	(5,055)	$	459,873


For the six months ended June 30, 2020
For the three months ended September 30, 2020												For the three months ended September 30, 2020
													Enterprise Software		Appraisal and Tax		NIC		Corporate		Totals
		Enterprise Software		Appraisal and Tax		NIC		Corporate		Totals
Recurring revenues	Recurring revenues	$	367,949	$	30,537	$	0	$	0	$	398,486	Recurring revenues	$	191,242	$	16,026	$	—	$	—	$	207,268
Non-recurring revenues	Non-recurring revenues	121,573		27,571		0		2		149,146		Non-recurring revenues	65,569		12,909		—		—		78,478
Intercompany	Intercompany	8,534		20		0		(8,554)		—		Intercompany	5,128		38		—		(5,166)		—
Total revenues	Total revenues	$	498,056	$	58,128	$	0	$	(8,552)	$	547,632	Total revenues	$	261,939	$	28,973	$	—	$	(5,166)	$	285,746


For the nine months ended September 30, 2021
	Enterprise Software		Appraisal and Tax		NIC		Corporate		Totals

Recurring revenues	$	625,548	$	50,012	$	235,985	$	—	$	911,545
Non-recurring revenues	190,992		39,507		13,679		3,027		247,205
Intercompany	15,989		51		—		(16,040)		—
Total revenues	$	832,529	$	89,570	$	249,664	$	(13,013)	$	1,158,750


For the nine months ended September 30, 2020
	Enterprise Software		Appraisal and Tax		NIC		Corporate		Totals
Recurring revenues	$	559,191	$	46,564	$	—	$	—	$	605,755
Non-recurring revenues	187,142		40,479		—		2		227,623
Intercompany	13,662		58		—		(13,720)		—
Total revenues	$	759,995	$	87,101	$	—	$	(13,718)	$	833,378

(14) Deferred Revenue and Performance Obligations

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


		June 30, 2021		December 31, 2020			September 30, 2021		December 31, 2020
Enterprise Software	Enterprise Software	$	442,822	$	422,742	Enterprise Software	$	452,435	$	422,742
Appraisal and Tax	Appraisal and Tax	37,419		36,945		Appraisal and Tax	31,300		36,945
NIC	NIC	2,719		0		NIC	9,525		—
Corporate	Corporate	1,590		1,691		Corporate	2,043		1,691
Totals	Totals	$	484,550	$	461,378	Totals	$	495,303	$	461,378

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


	~~Six~~Nine months ended ~~June~~September 30, 2021
Balance as of December 31, 2020	$	461,378
Deferral of revenue	~~569,106~~868,125
Recognition of deferred revenue	~~(545,934)~~(834,200)





Balance as of ~~June~~September 30, 2021	$	~~484,550~~495,303

Transaction Price Allocated to the Remaining Performance Obligations

The aggregate amount of transaction price allocated to the remaining performance obligations represents contracted revenue that has not yet been recognized (“backlog”), which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. Backlog as of ~~June~~September 30, 2021, was ~~$1.63~~$1.77 billion, of which we expect to recognize approximately 47% as revenue over the next 12 months and the remainder thereafter.

(15) Commitments and Contingencies

Security Incident

As previously disclosed, we 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. Although we believe we have contained and recovered from the Incident, and that we have taken and will continue to take appropriate remediation steps, we are subject to risk and uncertainties as a result of the Incident. We have completed our investigation and remediation efforts related to the Incident. For the ~~six~~nine months ~~period~~ ended ~~June~~September 30, 2021, we have recorded ~~$336,000~~$410,000 of expenses and ~~recorded~~ approximately ~~$637,000~~$195,000 of accrued insurance ~~recoveries.~~recoveries and received $755,000 of insurance recoveries. The recorded costs consist primarily of payments to third-party service providers and consultants, including legal fees, and enhancements to our cybersecurity measures. We maintain cybersecurity insurance coverage in an amount that we believe is adequate.

Litigation

Other than routine litigation incidental to our business, there are 0no material legal proceedings pending to which we are party or to which any of our properties are subject.

(16) Subsequent Events

On June 3, 2021, the Company announced that it signed an agreement to acquire VendEngine, Inc., a privately-held cloud-based software provider focused on financial technology for the corrections market. The purchase price is approximately $84 million in cash, subject to certain customary adjustments at closing, ~~which is expected in late third quarter of 2021.~~ There have been no material events or transactions that occurred subsequent to ~~June~~September 30, 2021.

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.~~sector. 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”) 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. Also included in subscription-based services are other transaction-based fees primarily related to online payment services. We also provide property appraisal outsourcing services for taxing jurisdictions.

Our products generally automate nine 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, (8) platform technologies, and (9) NIC digital government and payments. We report our results in three 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 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. On April 21, 2021, the Company acquired in NIC resulting in a new reportable segment, as its operating results meet the criteria as a reportable segment. The operating results of NIC are included with the operating results of the NIC segment from the date of acquisition.

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

Our total employee count increased to ~~6,593~~6,718 at ~~June~~September 30, 2021, including ~~993~~1,046 employees from ~~recent~~2021 acquisitions, from ~~5,495~~5,511 at ~~June~~September 30, 2020.

On September 1, 2021, we acquired VendEngine, Inc (VendEngine) as contemplated by the Agreement and Plan of Merger dated June 3, 2021. As result of the merger, VendEngine became a direct subsidiary of the Company. VendEngine is a cloud-based software provider focused on financial technology for the corrections market. The total purchase price, net of cash acquired of $3.0 million, was approximately $83.1 million, consisting of $80.2 million paid in cash, and approximately $5.9 million related to indemnity holdbacks, subject to certain post-closing adjustments.

On April 21, 2021, ~~(“the Closing Date”), the Company~~we acquired NIC ~~Inc. (“NIC”)~~ as contemplated by the Agreement and Plan of Merger dated February 9, ~~2021, (the “Merger Agreement”).~~2021. As result of the merger, NIC became a direct subsidiary of the Company and NIC’s subsidiaries became indirect ~~subsidiaries of the Company.~~subsidiaries. NIC is a leading digital government solutions and payment company that primarily serves federal ~~state~~ and ~~local~~state government agencies. The total purchase price, net of cash acquired of $331.8 million, was approximately $2$2.0 billion, consisting of cash paid of $2.3 billion and $1.9 million of purchase consideration related to the conversion of unvested restricted stock awards.

On March 31, 2021, we completed two acquisitions, Glass Arc, Inc. (dba ReadySub) and DataSpec, Inc. (DataSpec), for the total combined purchase price of $12.1 million.

For the three and ~~six~~nine months ended ~~June~~September 30, 2021, total revenues increased ~~49.1%~~60.9% and ~~27.6%~~39.0%, respectively, compared to the prior year periods. Excluding the impact of ~~recent~~2021 acquisitions, revenue increased ~~12.4%~~7.6% and ~~9.5%~~8.4% for the three and ~~six~~nine months ended ~~June~~September 30, 2021, respectively, compared to the prior year periods. Revenues from acquisitions completed in 2021 contributed ~~36.7%~~53.4% and ~~18.2%~~30.7% for the three and ~~six~~nine months ended ~~June~~September 30, 2021, respectively.

Subscriptions revenue grew ~~133.0%~~183.3% and ~~80.5%~~116.2% for the three and ~~six~~nine months ended ~~June~~September 30, 2021, respectively, compared to the prior year periods, primarily due the impact of the NIC acquisition, as well as an ongoing shift toward SaaS arrangements, along with growth in our transaction-based revenues such as e-filing and online payment services. Excluding the impact of ~~recent~~2021 acquisitions, subscriptions revenue increased ~~23.6%~~21.8% and ~~24.5%~~23.6% for the three and ~~six~~nine months ended ~~June~~September 30, 2021, respectively, compared to the prior year periods. Subscription revenues from acquisitions completed in 2021 contributed ~~109.4%~~161.4% and ~~56.0%~~92.7% for the three and ~~six~~nine months periods ended ~~June~~September 30, 2021, respectively.

Our backlog as of ~~June~~September 30, 2021, was ~~$1.63~~$1.77 billion, a ~~5.6%~~14.3% increase from last year.

Impacts of the COVID-19 Pandemic

The pandemic continues to ~~cause delays in~~delay some government procurement processes and is expected to impact our 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. 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 ~~six~~nine months ended ~~June~~September 30, 2021, excluding the impact of ~~recent~~2021 acquisitions, the impact of the COVID-19 pandemic resulted in lower revenues from software licenses and software services. Lower software licenses compared to prior periods are in part ~~are~~ attributed to slower sales cycles as some government procurement processes ~~are~~have been delayed and contract signings have been pushed to future periods. ~~The software~~Software services revenue have been affected by a decline ~~is attributed to delays~~ in ~~implementations caused by~~billable travel ~~restrictions in effect during the period.~~revenue, as most services are now being delivered virtually rather than on-site. 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. As travel restrictions are relaxed, ~~we expect~~ software services and appraisal services revenues ~~to increase for the limited number of our clients who require that all or a portion of their services be delivered onsite.~~are increasing. Also, we ~~are adapting~~have adapted 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.

For the three and nine months ended September 30, 2021, total revenues include subscriptions revenue and software services revenues of $43.3 million and $58.4 million,respectively, from NIC's TourHealth and pandemic unemployment services offerings. We currently expect these COVID-related revenues to decrease significantly in the fourth quarter of 2021 and wind down in the first half of 2022.

Recurring revenues from subscriptions and maintenance comprised ~~77%~~79% of our total consolidated revenue for the ~~six~~nine months ended ~~June~~September 30, 2021, and include transaction-based revenue streams such as e-filing, online payments, and ~~online payments.~~digital government services. 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. As of ~~June~~September 30, 2021, we had ~~$347.1~~$348.4 million in cash and investments and ~~$965~~$842.5 million ~~principal~~of outstanding borrowings under our 2021 Credit Agreement executed on April 21, 2021. As of ~~June~~September 30, 2021, we had available borrowing capacity of ~~$435~~$500 million under our 2021 Credit Agreement.

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 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, 2020. Except for the accounting policies for 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 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, 2020.

ANALYSIS OF RESULTS OF OPERATIONS


		Percent of Total Revenues									Percent of Total Revenues
		Three Months Ended June 30,				Six Months Ended					Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020			2021		2020		2021		2020
Revenues:	Revenues:									Revenues:
Software licenses and royalties	Software licenses and royalties	4.4	%	6.3	%	4.7	%	6.5	%	Software licenses and royalties	4.9	%	7.0	%	4.8	%	6.7	%
Subscriptions	Subscriptions	49.4		31.6		43.2		30.6		Subscriptions	55.0		31.2		47.9		30.8
Software services	Software services	13.1		16.1		14.4		17.5		Software services	11.9		16.8		13.4		17.2
Maintenance	Maintenance	29.6		43.1		34.2		42.2		Maintenance	25.6		41.3		30.8		41.9
Appraisal services	Appraisal services	1.6		1.7		1.8		1.9		Appraisal services	1.6		1.9		1.7		1.9
Hardware and other	Hardware and other	1.9		1.2		1.7		1.3		Hardware and other	1.0		1.8		1.4		1.5
Total revenues	Total revenues	100.0		100.0		100.0		100.0		Total revenues	100.0		100.0		100.0		100.0
Cost of revenues:	Cost of revenues:									Cost of revenues:
Software licenses, royalties and acquired software	Software licenses, royalties and acquired software	3.3		3.4		3.2		3.3		Software licenses, royalties and acquired software	3.1		3.2		3.2		3.2
Subscriptions, software services and maintenance	Subscriptions, software services and maintenance	49.4		45.8		47.8		46.8		Subscriptions, software services and maintenance	52.6		44.0		49.7		46.0
Appraisal services	Appraisal services	1.1		1.5		1.3		1.5		Appraisal services	1.0		1.2		1.2		1.4
Hardware and other	Hardware and other	1.1		0.9		1.0		0.9		Hardware and other	0.6		1.3		0.8		1.0
Selling, general and administrative expenses	Selling, general and administrative expenses	27.0		23.1		26.9		23.7		Selling, general and administrative expenses	22.1		23.4		25.0		23.6
Research and development expense	Research and development expense	5.8		8.1		6.5		8.1		Research and development expense	5.2		7.6		6.0		7.9
Amortization of customer and trade name intangibles	Amortization of customer and trade name intangibles	2.8		2.0		2.4		2.0		Amortization of customer and trade name intangibles	3.1		1.9		2.7		1.9
Operating income	Operating income	9.5		15.2		10.9		13.7		Operating income	12.2		17.4		11.5		15.0
Other (expense) income including interest expense, net		(3.0)		0.2		(1.7)		0.3
Interest expense										Interest expense	(1.2)		(0.1)		(1.6)		(0.1)
Other income, net										Other income, net	0.1		0.2		0.1		0.3
Income before income taxes	Income before income taxes	6.5		15.4		9.2		14.0		Income before income taxes	11.1		17.5		10.0		15.2
Income tax provision (benefit)	Income tax provision (benefit)	0.1		(4.5)		0.3		(4.5)		Income tax provision (benefit)	1.5		3.7		0.8		(1.7)
Net income	Net income	6.4	%	19.9	%	8.9	%	18.5	%	Net income	9.6	%	13.8	%	9.2	%	16.9	%

Revenues

~~Acquisition~~sAcquisitions

On April 21, 2021, ~~the Company~~we acquired NIC and as result of the merger, NIC became a direct subsidiary of the Company and NIC’s subsidiaries became indirect subsidiaries of the Company. NIC is a leading digital government solutions and payment company that serves federal, state and local government agencies.

The following table details revenue for NIC for the three and ~~six~~nine months ended ~~June~~September 30, 2021, which is included in our condensed consolidated statements of income from the date of acquisition. The results of NIC are included with the operating results of the NIC segment from the date of acquisition.


	Three Months Ended September 30,		Nine Months Ended September 30,
	2021		2021
Revenues:
Software licenses and royalties	$	—	$	—
Subscriptions	142,346		235,627
Software services	8,035		13,679
Maintenance	202		358
Appraisal services	—		—
Hardware and other	—		—
Total revenues	$	150,583	$	249,664

On September 9, 2021, we acquired all of equity interest of Arx, a cloud-based platform which creates accessible technology to enable a modern-day police force that is fully transparent, accountable, and a trusted resource to the community it serves.

Three Months Ended June 30, Six Months Ended June 30,
2021 2021
Revenues:
Software licenses and royalties $ — $ —
Subscriptions 93,281 93,281
Software services 5,643 5,643
Maintenance 155 155
Appraisal services — —
Hardware and other — —
Total revenues $ 99,079 $ 99,079

On September 1, 2021, we acquired VendEngine, a cloud-based software provider focused on financial technology for the corrections market. On March 31, 2021, we completed two acquisitions, ~~Glass Arc, Inc. (dba ReadySub)~~ReadySub and ~~DataSpec, Inc., for the total combined purchase price of $12.1 million.~~ DataSpec.

The impact of ~~these~~the Arx, VendEngine, ReadySub and DataSpec acquisitions on our operating results is not considered material and is not included in the table above. The results of these acquisitions are included with the operating results of the ES segment from their dates of acquisition.

Software licenses and royalties

The following table sets forth a comparison of our software licenses and royalties revenue for the periods presented as of ~~June~~September 30:
Three Months Ended Change Six Months Ended Change
2021 2020 $ % 2021 2020 $ %
ES $ 15,779 $ 14,683 $ 1,096 7 % $ 28,826 $ 30,634 $ (1,808) (6) %
A&T 1,825 2,342 (517) (22) 3,711 5,128 (1,417) (28)
NIC — — — — — — — —
Total software licenses and royalties revenue $ 17,604 $ 17,025 $ 579 3 % $ 32,537 $ 35,762 $ (3,225) (9) %


	Three Months Ended				Change				Nine Months Ended				Change
	2021		2020		$		%		2021		2020		$		%
ES	$	21,238	$	17,798	$	3,440	19	%	$	50,064	$	48,432	$	1,632	3	%
A&T	1,435		2,139		(704)		(33)		5,146		7,267		(2,121)		(29)
NIC	—		—		—		—		—		—		—		—
Total software licenses and royalties revenue	$	22,673	$	19,937	$	2,736	14	%	$	55,210	$	55,699	$	(489)	(1)	%

Software licenses and royalties revenue increased 3%14% and decreased 9%1% for the three and ~~six~~nine months ended ~~June~~September 30, 2021, respectively, compared to the prior year periods. The increase in software ~~license~~licenses and royalties revenue for the three months ended ~~June~~September 30, 2021, is attributed to several large on-premise sales of our enterprise and courts and justice ~~and public safety~~ solutions partially offset by more clients choosing our SaaS offering, rather than purchasing the software under a traditional perpetual software arrangement. Slower sales cycles as government procurement processes were delayed and contract signings were pushed to future periods also negatively affected software licenses and royalties revenue. The decline in software licenses and royalties revenue for the ~~six~~nine months ended ~~June~~September 30, 2021, is primarily attributed to a shift in the mix of new software contracts from on-premise license sales to SaaS services compared to the prior year. Our total contract value mix for the ~~six~~nine months ended ~~June~~September 30, 2021, was approximately ~~35%~~34% perpetual software license arrangements and approximately ~~65%~~66% subscription-based arrangements, compared to total new contract value mix for the ~~six~~nine months ended ~~June~~September 30, 2020, of approximately ~~36%~~42% perpetual software license arrangements and approximately ~~64%~~58% subscription-based arrangements. Also contributing to the decline in software licenses and royalty revenue ~~are~~were slower sales cycles as government procurement processes ~~are~~were delayed and contract signings ~~have been~~were pushed to future periods.

Although the mix of new contracts between SaaS-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 SaaS-based options, rather than purchasing the software under a traditional perpetual software license arrangement. SaaS-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 ~~June~~September 30:


		Three Months Ended				Change				Six Months Ended				Change					Three Months Ended				Change				Nine Months Ended				Change
		2021		2020		$		%		2021		2020		$		%			2021		2020		$		%		2021		2020		$		%
ES	ES	$	98,407	$	79,128	$	19,279	24	%	$	193,238	$	155,772	$	37,466	24	%	ES	$	102,285	$	82,972	$	19,313	23	%	$	295,523	$	238,744	$	56,779	24	%
A&T	A&T	7,870		6,510		1,360		21		15,518		11,589		3,929		34		A&T	8,311		6,318		1,993		32		23,829		17,907		5,922		33
NIC	NIC	93,281		—		93,281		100		93,281		—		93,281		100		NIC	142,346		—		142,346		100		235,627		—		235,627		100
Total subscriptions revenue	Total subscriptions revenue	$	199,558	$	85,638	$	113,920	133	%	$	302,037	$	167,361	$	134,676	80	%	Total subscriptions revenue	$	252,942	$	89,290	$	163,652	183	%	$	554,979	$	256,651	$	298,328	116	%

Subscriptions revenue primarily consists of revenue derived from our SaaS arrangements. 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~~payments and digital government services.

Subscriptions revenue grew ~~133%~~183% and ~~80%~~116% for the three and ~~six~~nine months ending ~~June~~September 30, 2021, respectively, compared to the prior periods, primarily due to the inclusion of NIC’s revenues from the date of acquisition. Excluding the impact of revenue from ~~recent~~2021 acquisitions of ~~$93.7~~$144.2 million ~~subscriptions revenue increased 23.6%~~ and ~~24.5%~~$237.8 million for the three and ~~six~~nine months ended ~~June~~September 30, 2021, respectively, subscriptions revenue increased 21.8% and 23.6% for the three and nine months ended September 30, 2021, respectively. New SaaS clients as well as existing clients who converted to our SaaS model provided the majority of the subscriptions revenue increase. In the three and ~~six~~nine months ending ~~June~~September 30, 2021, respectively, we added ~~170~~144 and 398 new SaaS clients and 6267 and 168 existing on-premises clients converted to our SaaS model. Since ~~June~~September 30, 2020, we have added ~~486~~516 new SaaS clients while ~~197~~218 existing on-premises clients converted to our SaaS ~~model.~~offerings. Also excluding the impact of revenue from ~~recent~~2021 acquisitions, transaction-based fees contributed ~~$5.1~~$5.6 million and ~~$10.0~~$15.7 million to the increase in subscriptions revenue for the three and ~~six~~nine months ended ~~June~~September 30, 2021, respectively, due to the increased volumes of online payments from utility billings.

Software services

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


		Three Months Ended				Change				Six Months Ended				Change					Three Months Ended				Change				Nine Months Ended				Change
		2021		2020		$		%		2021		2020		$		%			2021		2020		$		%		2021		2020		$		%
ES	ES	$	42,972	$	38,899	$	4,073	10	%	$	85,532	$	83,848	$	1,684	2	%	ES	$	41,985	$	42,640	$	(655)	(2)	%	$	127,517	$	126,488	$	1,029	1	%
A&T	A&T	4,722		4,755		(33)		(1)		9,802		11,939		(2,137)		(18)		A&T	4,603		5,306		(703)		(13)		14,405		17,245		(2,840)		(16)
NIC	NIC	5,643		—		5,643		100		5,643		—		5,643		100		NIC	8,036		—		8,036		100		13,679		—		13,679		100
Total software services revenue	Total software services revenue	$	53,337	$	43,654	$	9,683	22	%	$	100,977	$	95,787	$	5,190	5	%	Total software services revenue	$	54,624	$	47,946	$	6,678	14	%	$	155,601	$	143,733	$	11,868	8	%

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 increased ~~22%~~14% and 5%8% for the three and ~~six~~nine months ended ~~June~~September 30, 2021, respectively, compared to the prior year periods. Excluding the impact of revenue from ~~recent~~2021 acquisitions of ~~$5.6~~$8.1 million ~~software services increased 9.2%~~ and ~~declined 0.5%~~$17.4 million for the three and ~~six~~nine months ended ~~June~~September 30, 2021, respectively, software services declined 2.9% and 3.8% for the three and nine months ended September 30, 2021, respectively. ~~The increased software services revenue~~That decline for ~~the~~ three and nine months ended June 30, 2021 is attributed to improved utilization of our professional services staff resulting from the shift to virtual delivery of most implementation services as a result of the COVID-19 pandemic. The decline for six months ended JuneSeptember 30, 2021, in software services revenue is primarily attributed to a decline in billable travel revenue, as most services are now being delivered virtually rather than on-site.

Maintenance

The following table sets forth a comparison of our maintenance revenue for the periods presented as of ~~June~~September 30:
Three Months Ended Change Six Months Ended Change
2021 2020 $ % 2021 2020 $ %
ES $ 110,010 $ 107,336 $ 2,674 2 % $ 219,793 $ 212,177 $ 7,616 4 %
A&T 9,456 9,424 32 — 18,785 18,948 (163) (0.9)
NIC 155 — 155 100 155 — 155 100
Total maintenance revenue $ 119,621 $ 116,760 $ 2,861 2 % $ 238,733 $ 231,125 $ 7,608 3 %


	Three Months Ended				Change				Nine Months Ended				Change
	2021		2020		$		%		2021		2020		$		%
ES	$	110,231	$	108,270	$	1,961	2	%	$	330,024	$	320,447	$	9,577	3	%
A&T	7,399		9,709		(2,310)		(24)		26,184		28,657		(2,473)		(8.6)
NIC	203		—		203		100		358		—		358		100
Total maintenance revenue	$	117,833	$	117,979	$	(146)	—	%	$	356,566	$	349,104	$	7,462	2	%

We provide maintenance and support services for our software products and certain third-party software. Maintenance revenue was essentially flat and grew 2% ~~and 3%~~ for the three and ~~six~~nine months ended ~~June~~September 30, 2021, respectively, compared to the prior year periods. ~~Maintenance~~For the nine months ended September 30, 2021, maintenance revenue increased mainly due to the 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 ~~June~~September 30:


		Three Months Ended				Change				Six Months Ended				Change					Three Months Ended				Change				Nine Months Ended				Change
		2021		2020		$		%		2021		2020		$		%			2021		2020		$		%		2021		2020		$		%
ES	ES	$	—	$	—	$	—	—	%	$	—	$	—	$	—	—	%	ES	$	—	$	—	$	—	—	%	$	—	$	—	$	—	—	%
A&T	A&T	6,265		4,696		1,569		33		12,730		10,459		2,271		22		A&T	7,146		5,394		1,752		32		19,876		15,853		4,023		25
NIC	NIC	—		—		—		—		—		—		—		—		NIC	—		—		—		—		—		—		—		—
Total appraisal services revenue	Total appraisal services revenue	$	6,265	$	4,696	$	1,569	33	%	$	12,730	$	10,459	$	2,271	22	%	Total appraisal services revenue	$	7,146	$	5,394	$	1,752	32	%	$	19,876	$	15,853	$	4,023	25	%

Appraisal services revenue for the three and ~~six~~nine months ended ~~June~~September 30, 2021, increased by ~~33%~~32% and ~~22%~~25%, respectively, compared to the prior year primarily due to relaxed travel restrictions allowing for the ~~addition~~ramp-up of appraisal services for several new revaluation contracts which started ~~during the fourth quarter of 2020.~~in recent quarters. The appraisal services business is somewhat cyclical and driven in part by statutory revaluation cycles in various states.

Cost of Revenues and Gross Margins

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


		Three Months Ended				Change				Six Months Ended				Change					Three Months Ended				Change				Nine Months Ended				Change
		2021		2020		$		%		2021		2020		$		%			2021		2020		$		%		2021		2020		$		%
Software licenses and royalties	Software licenses and royalties	$	1,368	$	1,130	$	238	21	%	$	2,604	$	1,870	$	734	39	%	Software licenses and royalties	$	1,547	$	1,177	$	370	31	%	$	4,151	$	3,047	$	1,104	36	%
Acquired software	Acquired software	11,823		8,006		3,817		48		19,787		16,033		3,754		23		Acquired software	12,896		7,965		4,931		62		32,683		23,998		8,685		36
Subscriptions, software services and maintenance	Subscriptions, software services and maintenance	199,771		124,287		75,484		61		334,091		256,066		78,025		30		Subscriptions, software services and maintenance	241,944		125,881		116,063		92		576,035		381,947		194,088		51
Appraisal services	Appraisal services	4,429		3,976		453		11		9,046		8,361		685		8		Appraisal services	4,506		3,434		1,072		31		13,552		11,795		1,757		15
Hardware and other	Hardware and other	4,623		2,489		2,134		86		7,081		4,968		2,113		43		Hardware and other	2,764		3,780		(1,016)		(27)		9,845		8,748		1,097		13
Total cost of revenues	Total cost of revenues	$	222,014	$	139,888	$	82,126	59	%	$	372,609	$	287,298	$	85,311	30	%	Total cost of revenues	$	263,657	$	142,237	$	121,420	85	%	$	636,266	$	429,535	$	206,731	48	%

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


		Three Months Ended						Six Months Ended							Three Months Ended						Nine Months Ended
		2021		2020		Change		2021		2020		Change			2021		2020		Change		2021		2020		Change
Software licenses, royalties and acquired software	Software licenses, royalties and acquired software	25.1	%	46.3	%	(21.2)	%	31.2	%	49.9	%	(18.7)	%	Software licenses, royalties and acquired software	36.3	%	54.1	%	(17.8)	%	33.3	%	51.4	%	(18.1)	%
Subscriptions, software services and maintenance	Subscriptions, software services and maintenance	46.4		49.5		(3.1)		47.9		48.2		(0.3)		Subscriptions, software services and maintenance	43.1		50.7		(7.6)		46.0		49.0		(3.0)
Appraisal services	Appraisal services	29.3		15.3		14.0		28.9		20.1		8.8		Appraisal services	36.9		36.3		0.6		31.8		25.6		6.2
Hardware and other	Hardware and other	39.9		25.0		14.9		40.3		30.4		9.9		Hardware and other	40.6		27.3		13.3		40.4		29.1		11.3
Overall gross margin	Overall gross margin	45.1	%	48.4	%	(3.3)	%	46.7	%	47.5	%	(0.8)	%	Overall gross margin	42.7	%	50.2	%	(7.5)	%	45.1	%	48.5	%	(3.4)	%

Software licenses, royalties and acquired software. Amortization expense for acquired software comprises the majority of costs of software licenses, royalties and acquired software. We do not have any direct costs associated with royalties. In the three and ~~six~~nine months ended ~~June~~September 30, 2021, our software licenses, royalties and acquired software gross margin decreased ~~21.2%~~17.8% and ~~18.7%~~18.1%, respectively, compared to the prior year periods due to lower revenue from software licenses and increased amortization expense related to acquired software from ~~recent acquisitions.~~acquisitions completed in 2021.

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 ~~six~~nine months ended ~~June~~September 30, 2021, decreased ~~3.1%~~7.6% and ~~0.3%~~3.0%, respectively, from the comparable prior year periods, primarily due to the inclusion of NIC’s revenues, which historically have lower margins than Tyler. Excluding the impact from ~~recent~~2021 acquisitions, gross margins are ~~49.8%~~47.9% and ~~50.0%~~49.0% for the three and ~~six~~nine months ended ~~June~~September 30, 2021, ~~respectively, increases of 0.3% and 2% for~~respectively. For the three months ending September 30, 2021, margins declined by 2.8%, due to higher employee head count. Excluding employees added through acquisitions, our implementation and ~~six~~support staff has grown by 75 employees since September 30, 2020. For the nine months ended ~~June~~September 30, 2021, ~~respectively, from the comparable prior periods primarily~~margins remained constant due to ~~a reduction in software services revenues from reimbursable travel that have little to no margin. Margins have also increased from~~ improved utilization of our professional services staff resulting from the shift to virtual delivery of most implementation services. ~~Excluding the impact of recent acquisitions, our implementation and support staff has declined slightly since June 30, 2020.~~ 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 1.6% and ~~1.8%~~1.7% of total revenue for the three and ~~six~~nine months ended ~~June~~September 30, 2021, respectively. The appraisal services gross margin for the three and ~~six~~nine months ended ~~June~~September 30, 2021, increased ~~14.0%~~0.6% and ~~8.8%~~6.2%, respectively, compared to the same periods in 2020. The increase in margin is primarily due to cost savings attributed to lower travel expenses associated with appraisal projects. The appraisal services business is somewhat cyclical and driven in part by statutory revaluation cycles in various states.

For the three and ~~six~~nine months ended ~~June~~September 30, 2021, our overall gross margin decreased ~~3.3%~~7.5% and ~~0.8%~~3.4%, respectively, compared to the prior year ~~periods.~~periods, primarily due to the inclusion of NIC’s revenues, which historically have lower margins than Tyler. Excluding the impact from ~~recent~~2021 acquisitions, overall gross margins were ~~49.0%~~48.3% and ~~48.9%~~48.5% for the three and ~~six~~nine months ended ~~June~~September 30, 2021, ~~respectively, increases of 0.6% and 1.4% for the three and six months ended June 30, 2021, respectively, from the comparable prior periods.~~respectively. For the three months ended ~~June~~September 30, 2021, the ~~increase~~decrease in ~~overall~~gross margin ~~is attributed to a higher revenue mix for subscription revenues~~ compared to the prior year ~~periods resulting in an increase in incremental margin~~period is due to lower revenue from software licenses and increased amortization expense related to acquired software ~~services, maintenance and subscriptions. Margins have also increased due~~from recent acquisitions, partially offset by a reduction in software services revenue 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. 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. ~~The increase in overall gross margin is partially offset by lower margins from software licenses due to lower software license 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 ~~June~~September 30:
Three Months Ended Change Six Months Ended Change
2021 2020 $ % 2021 2020 $ %
Selling, general and administrative expenses $ 108,922 $ 62,521 $ 46,401 74 % $ 187,696 $ 130,006 $ 57,690 44 %


	Three Months Ended				Change				Nine Months Ended				Change
	2021		2020		$		%		2021		2020		$		%
Selling, general and administrative expenses	$	101,847	$	66,819	$	35,028	52	%	$	289,543	$	196,825	$	92,718	47	%

SG&A as a percentage of revenues was ~~27.0%~~22.1% and ~~26.9%~~25.0% for the three and ~~six~~nine months ended ~~June~~September 30, 2021, respectively, compared to ~~23.1%~~23.4% and ~~23.7%~~23.6% for the three and ~~six~~nine months ended ~~June~~September 30, 2020, respectively. Excluding the impact of SG&A expense from ~~recent~~2021 acquisitions of ~~$13.5~~$17.2 million ~~for both the three~~ and ~~six months ended June 30, 2021, SG&A increased 52.6% and 34.0%~~$30.7 million, for the three and ~~six~~nine months ended September 30, 2021, respectively, SG&A increased 26.6% and 31.5% for the three and nine months ending ~~June~~September 30, 2021, respectively, compared to prior year periods. The increase in SG&A is attributed to acquisition costs related to recent acquisitions, higher stock compensation expense, increased staff levels and other administrative expenses compared to prior periods. For the three and ~~six~~nine months ended ~~June~~September 30, 2021, SG&A includes ~~$17.5~~$2.9 million and ~~$18.3~~$22.7 million, respectively, of transaction expenses related to acquisitions completed in 2021. WeFor the nine months ended September 30, 2021, we also incurred $1.6 million of expense related to a separation agreement with NIC's former Chief Executive Officer. For the three and ~~six~~nine months ended ~~June~~September 30, 2021, stock compensation expense rose ~~$5.2~~$9.3 million and ~~$12.9~~$22.2 million, respectively compared to prior ~~year,~~periods, 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 1813 SG&A employees, mainly to our sales and finance teams, since ~~June~~September 30, 2020. For the ~~six~~nine months ended ~~June~~September 30, 2021, SG&A expense also includes $3.2 million related to an accrual for litigation. These increases in SG&A were partially offset by lower travel expenses associated with administrative, sales and marketing activities, including trade shows, as a result of COVID-19 travel restrictions.

Research and Development Expense

The following table sets forth a comparison of our research and development expense for the periods presented as of ~~June~~September 30:
Three Months Ended Change Six Months Ended Change
2021 2020 $ % 2021 2020 $ %
Research and development expense $ 23,428 $ 21,949 $ 1,479 7 % $ 45,241 $ 44,310 $ 931 2 %


	Three Months Ended				Change				Nine Months Ended				Change
	2021		2020		$		%		2021		2020		$		%
Research and development expense	$	24,002	$	21,642	$	2,360	11	%	$	69,243	$	65,952	$	3,291	5	%

Research and development ("R&D") expense consists mainly of costs associated with development of new products and technologies from which we do not currently generate significant revenue. R&D expense in the three and ~~six~~nine months ended ~~June~~September 30, 2021, increased 7%11% and 2%5%, respectively, compared to the prior periods. Excluding the impact of R&D expense from ~~recent~~2021 acquisitions of ~~$381,000~~$557,000 and $938,000 for both the three and ~~six~~nine months ended ~~June~~September 30, 2021, respectively, R&D expense increased ~~5.0%~~8.3% and ~~1.2%~~3.6% for the three and ~~six~~nine months ending ~~June~~September 30, 2021, respectively, compared to prior year periods, mainly due to a number of new Tyler product development initiatives across our product suites offset by a shift of some development resources to certain projects which meet the criteria for capitalization.

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 are allocated to acquired software and customer and trade name intangibles. The remaining excess purchase price is allocated to goodwill that is not subject to amortization. Amortization expense related to acquired software is included with cost of revenues while amortization expense of customer and trade name intangibles is recorded as operating expense. For the three and ~~six~~nine months ended ~~June~~September 30, 2021, amortization expense increased compared to prior periods due to acquisitions completed in fiscal year 2021.

The following table sets forth a comparison of amortization of customer and trade name intangibles for the periods presented as of ~~June~~September 30:
Three Months Ended Change Six Months Ended Change
2021 2020 $ % 2021 2020 $ %
Amortization of other intangibles $ 11,420 $ 5,392 $ 6,028 112 % $ 16,832 $ 10,784 $ 6,048 56 %


	Three Months Ended				Change				Nine Months Ended				Change
	2021		2020		$		%		2021		2020		$		%
Amortization of other intangibles	$	14,183	$	5,392	$	8,791	163	%	$	31,015	$	16,176	$	14,839	92	%

~~Other (Expense) Income Including~~ Interest Expense ~~Net~~

The following table sets forth a comparison of our ~~other (expense) income, net,~~interest expense for the periods presented as of ~~June~~September 30:
Three Months Ended Change Six Months Ended Change
2021 2020 $ % 2021 2020 $ %
Other (expense) income including interest expense, net $ (12,199) $ 470 $ (12,669) NM $ (12,111) $ 1,460 $ (13,571) NM


	Three Months Ended				Change			Nine Months Ended				Change
	2021		2020		$		%	2021		2020		$		%
Interest expense	$	(5,396)	$	(254)	$	(5,142)	NM	$	(18,311)	$	(757)	$	(17,554)	NM

~~Other (expense) income, net,~~Interest expense is primarily comprised of interest ~~income from invested cash, net of interest~~ expense and non-usage and other fees associated with our borrowings. The change in ~~other (expense) income, net,~~interest expense in the three and ~~six~~nine months ended ~~June~~September 30, 2021, compared to the prior periods is attributable to higher levels of borrowings related to the 2021 Credit Agreement and Convertible Senior ~~Notes~~Notes.

Other Income, Net

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


	Three Months Ended				Change			Nine Months Ended				Change
	2021		2020		$		%	2021		2020		$		%
Other income, net	$	445	$	534	$	(89)	(17)	$	1,249	$	2,497	$	(1,248)	(50)	%

Other income, net, is primarily comprised of interest income from invested cash. The change in other income, net, in the three and nine months ended September 30, 2021, compared to the prior periods is attributed to lower levels of invested ~~cash. Below are the components of other (expense) income, net included in the accompanying condensed consolidated statements of income:~~cash and lower interest rates.

Income Tax Provision

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


		Three Months Ended						Change			Six Months Ended						Change				Three Months Ended						Change			Nine Months Ended						Change
		2021			2020			$		%	2021			2020			$		%		2021			2020			$		%	2021			2020			$		%
Income tax provision (benefit)	Income tax provision (benefit)	$	562		$	(12,081)		$	12,643	NM	$	1,882		$	(24,748)		$	26,630	NM	Income tax provision (benefit)	$	7,063		$	10,652		$	(3,589)	(34)	$	8,945		$	(14,096)		$	23,041	(163)

Effective income tax rate	Effective income tax rate	2.2		%	(28.9)		%				2.9		%	(32.3)		%				Effective income tax rate	13.8		%	21.3		%				7.7		%	(11.1)		%

The change in effective tax rate for the three and ~~six~~nine months ended ~~June~~September 30, 2021, as compared to the same periods in 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 ~~six~~nine months ended ~~June~~September 30, 2021 and 2020, were different from the statutory United States federal income tax rate of 21% due to excess tax benefits related to stock incentive awards, ~~and~~ the tax benefit of research tax credits and the release of reserves for unrecognized income tax benefits resulting from expiration of the statutes of limitations for certain tax years, offset by state income taxes and non-deductible business expenses. The excess tax benefits related to stock incentive awards realized were ~~$6.4~~$6.3 million and ~~$15.2~~$21.5 million for the three and ~~six~~nine months ended ~~June~~September 30, 2021, respectively, compared to ~~$23.4~~$2.5 million and ~~$45.5~~$48.0 million for the three and ~~six~~nine months ended ~~June~~September 30, 2020, respectively. Excluding the excess tax benefits, the effective tax rate was ~~26.7%~~26.1% and ~~26.5%~~26.3% for the three and ~~six~~nine months ended ~~June~~September 30, 2021, respectively, compared to ~~27.2%~~26.2% and ~~27.1%~~26.7% for the three and ~~six~~nine months ended ~~June~~September 30, 2020, respectively.

FINANCIAL CONDITION AND LIQUIDITY

As of ~~June~~September 30, 2021, we had cash and cash equivalents of ~~$216.8~~$234.1 million compared to $603.6 million at December 31, 2020. We also had ~~$130.3~~$114.3 million invested in investment grade corporate and municipal bonds as of ~~June~~September 30, 2021. These investments have varying maturity dates through ~~2026,~~2027, and we intend to hold these investments until maturity. As of ~~June~~September 30, 2021, we believe our cash from operating activities, revolving credit facility, cash on hand and access to the capital markets provides us with sufficient flexibility to meet our long-term financial needs.

The following table sets forth a summary of cash flows for the ~~six~~nine months ended ~~June~~September 30:


		2021		2020			2021		2020
Cash flows provided (used) by:	Cash flows provided (used) by:					Cash flows provided (used) by:
Operating activities	Operating activities	$	51,356	$	96,520	Operating activities	$	256,743	$	266,328
Investing activities	Investing activities	(1,998,692)		(54,279)		Investing activities	(2,084,788)		(68,163)
Financing activities	Financing activities	1,560,486		76,413		Financing activities	1,458,550		87,838
Net (decrease) increase in cash and cash equivalents	Net (decrease) increase in cash and cash equivalents	$	(386,850)	$	118,654	Net (decrease) increase in cash and cash equivalents	$	(369,495)	$	286,003

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.

For the ~~six~~nine months ended ~~June~~September 30, 2021, operating activities provided cash of ~~$51.4~~$256.7 million. Operating activities that provided cash were primarily comprised of net income of ~~$62.5~~$106.7 million, non-cash depreciation and amortization charges of ~~$61.0~~$97.9 million, non-cash share-based compensation expense of ~~$50.9~~$80.4 million and a non-cash decrease in operating lease right-of-use assets of ~~$4.0~~$7.0 million. Working capital, excluding cash, increased approximately ~~$127.1~~$35.2 million mainly due to higher accounts receivable because of an increase in unbilled receivables attributed to revenues recognized prior to billings and our maintenance billing cycle peaking in June, the timing of bonuses and tax payments, timing of payments to and receipts from our government partners and end-user consumers, timing of prepaid expenses, and deferred taxes associated with stock option activity during the period. These increases were offset by the timing of tax payments and an increase in deferred revenue during the period. 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 ~~128~~105 days at ~~June~~September 30, 2021, compared to 121 days at December 31, 2020, and ~~135~~114 days at ~~June~~September 30, 2020. The ~~increase~~decrease in DSO compared to December 31, 2020, is primarily attributed to our maintenance billing cycle, which typically peaks at its highest level in June and second highest level in December of each year, followed by collections in the subsequent quarter. DSO is calculated based on quarter-end accounts receivable divided by the quotient of annualized quarterly revenues divided by 360 days. The decrease in DSO compared to September 30, 2020, is attributed to improved collection efforts.

Investing activities used cash of ~~$2.0~~$2.1 billion in the ~~six~~nine months ending ~~June~~September 30, 2021. On March 31, 2021, we completed two acquisitions with the total purchase price of $12.1 million, net of cash acquired, including $12.0 million paid in cash. On April 21, 2021, we completed the acquisition of NIC for the total purchase price of $2.0 billion, net of cash acquired of $331.8 million, including cash paid of $2.3 billion and $1.9 million of purchase consideration related to the conversion of unvested restricted stock awards. On September 9, 2021, we acquired all of the equity interest of Arx for the total purchase price, net of cash acquired, of approximately $12.8 million, of which $12.4 million was paid in cash and approximately $0.5 million was accrued for indemnity holdbacks, subject to certain post-closing adjustments. On September 1, 2021, we acquired VendEngine for the total purchase price, net of cash acquired of $3.0 million, of approximately $83.1 million consisting of $80.2 million paid in cash and approximately $5.9 million related to indemnity holdbacks, subject to certain post-closing adjustments. Approximately ~~$14.2~~$20.8 million was invested in property and equipment, including ~~$4.9~~$8.6 million related to real estate. 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. In addition, approximately ~~$8.9~~$15.0 million of software development costs were capitalized.

Financing activities provided cash of ~~$1.6~~$1.5 billion in the ~~six~~nine months ended ~~June~~September 30, 2021, and were primarily comprised of proceeds from the issuance of the Convertible Senior Notes and the 2021 Credit Agreement. 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 and debt issuance costs of $2.6 million. On April 21, 2021, in connection with the completion of the NIC acquisition, the Company, as borrower, entered into a new 2021 Credit Agreement with various lenders consisting of an unsecured revolving credit facility of up to $500 million and aggregate unsecured term loans totaling $900 million. The net proceeds from the borrowings under the 2021 Credit Agreement were $1.1 billion, net of debt discounts of $7.2 million and debt issuance costs of $4.9 million and $6.4 million of commitment fees paid related to the terminated $1.6 billion unsecured bridge loan facility. During the ~~six~~nine months ended ~~June~~September 30, 2021, we repaid $250 million of the unsecured revolving credit facility and $57.5 million of the unsecured term loans. During the nine months ended September 30, 2021, we repurchased approximately 33,000 shares of our common stock for an aggregate purchase price of $13.0 million, with an average price per share of $398.02. The remainder of the financing activities were attributed to stock option exercises and employee stock purchase plan activity.

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 ~~June~~September 30, 2021, we have authorization from our board of directors to repurchase up to 2.4 million additional shares of our common stock. Our share repurchase program allows us to repurchase shares at our discretion. Market conditions influence the timing of the buybacks and the number of shares repurchased, as well as the volume of employee stock option exercises. Share repurchases are generally funded using our existing cash balances and borrowings under our credit facility and may occur through open market purchases and transactions structured through investment banking institutions, privately negotiated transactions and/or other mechanisms. There is no expiration date specified for the authorization, and we intend to repurchase stock under the plan from time to time.

We made tax payments of ~~$967,000~~$1.7 million and ~~$422,000~~$2.6 million in the ~~six~~nine months ended ~~June~~September 30, 2021, and 2020, respectively.

See Note 7, Debt, to the Condensed Consolidated Financial Statements for discussions of the Convertible Senior Notes and the 2021 Credit Agreement.

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 ~~$48~~$47 million and ~~$50~~$49 million, including approximately ~~$10 million related to real estate and approximately $22~~$21 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 2025.

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 ~~June~~September 30, 2021, we had ~~$965.0~~$842.5 million principal outstanding borrowings under our 2021 Credit Agreement and available borrowing capacity under the 2021 Credit Agreement was ~~$435.0~~$500.0 million.

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% to 0.5% 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%.

During the ~~six~~nine months ended ~~June~~September 30, 2021, our effective average interest rate for our borrowings was ~~1.79%~~3.25%. As of ~~June~~September 30, 2021, our interest rate was ~~3.5 % under~~1.51% for our outstanding borrowings. Based on the ~~Wells Fargo Bank prime rate and approximately 1.54% under the 30-day LIBOR option. Based upon initial borrowings~~debt under the 2021 Credit Agreement, ~~on the closing date in~~ the aggregate principal ~~amount~~outstanding balance as of ~~$1.15 billion,~~September 30, 2021 is $842.5 million, and each quarter point change in interest rates would result in a ~~$2.9~~$2.1 million change in annual interest ~~expense under the 2021 Credit Agreement.~~expense.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

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.

As of ~~June~~September 30, 2021, we had outstanding an aggregate principal amount of $600 million of our Convertible Senior Notes and ~~$965~~$842.5 million ofunder our 2021 Credit Agreement. On April 21, 2021, we entered into the 2021 Credit Agreement with significantly increased borrowing capacity of up to $1.4 billion and on the closing date of April 21, 2021, ~~and~~ we borrowed initial loans in the aggregate principal amount of $1.15 billion. The 2021 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 2021 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 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 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 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 is our intention, and we currently expect to have the ability, to settle the Convertible Senior Notes in cash, there is a risk that we may not have enough available cash or be able to obtain financing at the time we are required to 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 repurchase is required by the Indenture or to pay any cash payable on future conversions of the 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 repurchase the Convertible Senior Notes or make cash payments upon conversions thereof.

Our ability to make scheduled payments of the principal and interest on our indebtedness when due or to make payments upon conversion or repurchase demands with respect to our 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 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 our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our existing or future indebtedness and have a material adverse effect on our business, results of operations, and financial 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 2021 Credit Agreement do, and our future 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 2021 Credit Agreement (and the Indenture by means of a cross-default) restricts, absent consent of the agent and lenders under the 2021 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 2021 Credit Agreement (and the Indenture by means of a cross-default) contains other customary affirmative and negative covenants, and events of default. The 2021 Credit Agreement is unsecured but requires us to maintain certain financial ratios regarding our 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 general economic and business conditions, may result in a breach of any of these covenants and result in a default under the 2021 Credit Agreement that may, in turn, result in a default under the Indenture. If an event of default under the 2021 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 2021 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 2021 Credit Agreement are, and are expected to continue to be, at variable rates of interest and expose the Company to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income would decrease. Revolving credit facility loans and Term A-1 Loans under the 2021 Credit Agreement bear interest at a per annum rate equal to, at our 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 (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 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-, 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 2021 Credit Agreement. Based ~~upon initial borrowings~~on the debt under the 2021 Credit Agreement, ~~on the closing date in~~ the aggregate principal ~~amount~~outstanding balance as of ~~$1.15 billion,~~September 30, 2021 is $842.5 million, and each quarter point change in interest rates would result in a ~~$2.9~~$2.1 million change in annual interest ~~expense under the 2021 Credit Agreement.~~expense.

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 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 current rather than long-term liability, which would result in a material reduction of our net working capital.

Transactions relating to our 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 convert their notes, we may settle our conversion obligation by delivering to them a significant number of shares of our common stock, which would cause dilution to 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 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: ~~August 3,~~November 1, 2021