Tyler Technologies Inc 10-Q for FY2024 Q3
Tyler Technologies Inc (TYL)
10-Q
2024-10-23
For: 2024-09-30
View Original
Added on
April 08, 2026
About this 10-Q
Tyler Technologies Inc filed this 10-Q on October 23, 2024, covering the quarter ended September 30, 2024 (FY2024 Q3).
Headline figures
Quarter ended September 30, 2024, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $543.34M
- up 9.8% from $494.68M a year earlier
- Net income
- $75.9M
- up 61.4% from net income of $47.01M a year earlier
- Diluted EPS
- $1.74
- up 58.2% from $1.10 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. | |||||
For the quarterly period ended September 30, 2024
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. | |||||
Commission File Number 1-10485
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. employer identification no.) | |||||||
| (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 | ||||||
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):
| ☒ | 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 October 21, 2024 was 42,798,585 .
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
TYLER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||
| Subscriptions | $ | $ | $ | $ | ||||||||||||||||||||||
| Maintenance | ||||||||||||||||||||||||||
| Professional services | ||||||||||||||||||||||||||
| Software licenses and royalties | ||||||||||||||||||||||||||
| Hardware and other | ||||||||||||||||||||||||||
| Total revenues | ||||||||||||||||||||||||||
| Cost of revenues: | ||||||||||||||||||||||||||
| Subscriptions, maintenance, and professional services | ||||||||||||||||||||||||||
| Software licenses and royalties | ||||||||||||||||||||||||||
| Amortization of software development | ||||||||||||||||||||||||||
| Amortization of acquired software | ||||||||||||||||||||||||||
| Hardware and other | ||||||||||||||||||||||||||
| Total cost of revenues | ||||||||||||||||||||||||||
| Gross profit | ||||||||||||||||||||||||||
| Sales and marketing expense | ||||||||||||||||||||||||||
| General and administrative expense | ||||||||||||||||||||||||||
| Research and development expense | ||||||||||||||||||||||||||
| Amortization of other intangibles | ||||||||||||||||||||||||||
| Operating income | ||||||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | ||||||||||||||||||||||
| Other income, net | ||||||||||||||||||||||||||
| Income before income taxes | ||||||||||||||||||||||||||
Income tax provision | ||||||||||||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||||||||||||
| Earnings per common share: | ||||||||||||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||||||||||||
See accompanying notes.
2
TYLER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||||||||||||
| Other comprehensive income, net of tax: | ||||||||||||||||||||||||||
| Securities available-for-sale and transferred securities: | ||||||||||||||||||||||||||
Change in net unrealized holding gain on available for sale securities during the period | ||||||||||||||||||||||||||
| Reclassification adjustment for net income (loss) on sale of available for sale securities, included in net income | ( | ( | ||||||||||||||||||||||||
| Other comprehensive income, net of tax | ||||||||||||||||||||||||||
| Comprehensive income | $ | $ | $ | $ | ||||||||||||||||||||||
See accompanying notes.
3
TYLER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and share amounts)
| September 30, 2024 (unaudited) | December 31, 2023 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Accounts receivable (less allowance for losses and sales adjustments of $ | |||||||||||
| Short-term investments | |||||||||||
| Prepaid expenses | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Accounts receivable, long-term | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Property and equipment, net | |||||||||||
| Other assets: | |||||||||||
| Software development costs, net | |||||||||||
| Goodwill | |||||||||||
| Other intangibles, net | |||||||||||
| Non-current investments | |||||||||||
| Other non-current assets | |||||||||||
| $ | $ | ||||||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued liabilities | |||||||||||
| Operating lease liabilities | |||||||||||
| Current income tax payable | |||||||||||
| Deferred revenue | |||||||||||
| Current portion of term loans | |||||||||||
| Total current liabilities | |||||||||||
| Convertible senior notes due 2026, net | |||||||||||
| Deferred revenue, long-term | |||||||||||
| Deferred income taxes | |||||||||||
| Operating lease liabilities, long-term | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies | |||||||||||
| Shareholders' equity: | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated other comprehensive loss, net of tax | ( | ( | |||||||||
| Retained earnings | |||||||||||
Treasury stock, at cost; | ( | ( | |||||||||
| Total shareholders' equity | |||||||||||
| $ | $ | ||||||||||
See accompanying notes.
4
TYLER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Nine Months Ended September 30, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| Cash flows from operating activities: | ||||||||||||||
| Net income | $ | $ | ||||||||||||
| Adjustments to reconcile net income to cash provided by operating activities: | ||||||||||||||
| Depreciation and amortization | ||||||||||||||
| (Gains) losses from sale of investments | ( | |||||||||||||
| Share-based compensation expense | ||||||||||||||
| Amortization of operating lease right-of-use assets | ||||||||||||||
| Deferred income tax benefit | ( | ( | ||||||||||||
| Other | ||||||||||||||
| Changes in operating assets and liabilities, exclusive of effects of acquired companies: | ||||||||||||||
| Accounts receivable | ( | ( | ||||||||||||
| Income tax payable | ( | |||||||||||||
| Prepaid expenses and other current assets | ( | ( | ||||||||||||
| Accounts payable | ( | |||||||||||||
| Operating lease liabilities | ( | ( | ||||||||||||
| Accrued liabilities | ( | |||||||||||||
| Deferred revenue | ||||||||||||||
| Other long-term liabilities | ||||||||||||||
| Net cash provided by operating activities | ||||||||||||||
| Cash flows from investing activities: | ||||||||||||||
| Additions to property and equipment | ( | ( | ||||||||||||
| Purchase of marketable security investments | ( | |||||||||||||
| Proceeds and maturities from marketable security investments | ||||||||||||||
| Investment in software development | ( | ( | ||||||||||||
| Cost of acquisitions, net of cash acquired | ( | ( | ||||||||||||
| Other | ||||||||||||||
| Net cash used by investing activities | ( | ( | ||||||||||||
| Cash flows from financing activities: | ||||||||||||||
| Payment on term loans | ( | ( | ||||||||||||
| Payment of debt issuance costs | ( | |||||||||||||
| Proceeds from exercise of stock options, net of withheld shares for taxes upon equity award settlement | ||||||||||||||
| Contributions from employee stock purchase plan | ||||||||||||||
| Net cash provided (used) by financing activities | ( | |||||||||||||
| Net increase (decrease) in cash and cash equivalents | ( | |||||||||||||
| Cash and cash equivalents at beginning of period | ||||||||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||||||||
See accompanying notes.
5
| Nine Months Ended September 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Supplemental cash flow information: | |||||||||||
| Cash paid for interest | $ | $ | |||||||||
| Cash paid for income taxes, net | |||||||||||
| Non-cash investing and financing activities: | |||||||||||
| Non-cash additions to property and equipment | $ | $ | |||||||||
6
TYLER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
| Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Treasury Stock | Total Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2024 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options and vesting of restricted stock units | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Employee taxes paid for withheld shares upon equity award settlement | — | — | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Stock compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Issuance of shares pursuant to employee stock purchase plan | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Reimbursement of shares from escrow | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2024 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Treasury Stock | Total Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options and vesting of restricted stock units | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Employee taxes paid for withheld shares upon equity award settlement | — | — | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Stock compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Issuance of shares pursuant to employee stock purchase plan | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
7
TYLER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
| Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Treasury Stock | Total Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options and vesting of restricted stock units | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Employee taxes paid for withheld shares for taxes upon equity award settlement | — | — | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Stock compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Issuance of shares pursuant to employee stock purchase plan | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Reimbursement of shares from escrow | — | — | — | — | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2024 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Treasury Stock | Total Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options and vesting of restricted stock units | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Employee taxes paid for withheld shares for taxes upon equity award settlement | — | — | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Stock compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Issuance of shares pursuant to employee stock purchase plan | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
8
Tyler Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Tables in thousands, except per share data)
(1) Basis of Presentation
We prepared the accompanying condensed consolidated financial statements following the requirements of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States, or GAAP, for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted for interim periods. Balance sheet amounts are as of September 30, 2024, and December 31, 2023, and operating result amounts are for the three and nine months ended September 30, 2024, and 2023, 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, 2023. 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 previous years have been reclassified to conform to the current year presentation.
(2) Accounting Standards and Significant Accounting Policies
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, 2023, filed with the SEC on February 21, 2024, that have had a material impact on our condensed consolidated financial statements and related notes. See Recently Adopted Accounting Pronouncements below.
REVENUE RECOGNITION
Nature of Products and Services
We earn the majority of our revenues from subscription-based services and post-contract customer support (“PCS” or “maintenance”). Other sources of revenue are professional services, software licenses and royalties, and hardware and other. Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We determine revenue recognition through the following steps:
•Identification of the contract, or contracts, with a customer
•Identification of the performance obligations in the contract
•Determination of the transaction price
•Allocation of the transaction price to the performance obligations in the contract
•Recognition of revenue when, or as, we satisfy a performance obligation
Subscription-based services consist primarily of revenues derived from software as a service (“SaaS”) arrangements and transactions from digital government services; payment processing; and electronic filing (‘‘e-filing”). We recognize SaaS arrangements ratably over the terms of the arrangements, which range from to 10 years, but are typically for periods of generally to three years . In certain cases, we have concluded that some services with SaaS arrangements are not distinct and therefore we recognize the revenue ratably of the remaining contractual period once we have provided the customer assess to the SaaS deliverable. We record amounts that have been invoiced in accounts receivable and in deferred revenue or revenues, depending on whether the revenue recognition criteria have been met.
9
In those instances where 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. For transaction-based fees, 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 as invoiced based on the amount billable to the customer. In some cases, we are paid on a fixed-fee basis and recognize the revenue ratably over the contractual period.
Transaction-based fees primarily relate to digital government services and online payment services, which are sometimes offered with the assistance of third-party vendors. In general, when we are the principal in a transaction, we record the revenue and related costs on a gross basis. Otherwise, we net the cost of revenue associated with the service against the gross revenue (amount billed to the customer) and record the net amount as revenue.
Other software arrangements with customers contain multiple performance obligations that range from software licenses; services such as installation, training, consulting, software modification and customization to meet specific customer needs; 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 professional services, such as training or installation, are evaluated to determine whether those services are highly interdependent or interrelated to the product’s functionality. The transaction price is allocated to the distinct performance obligations on a relative standalone selling price (“SSP”) basis. We determine the SSP based on our overall pricing objectives, taking into consideration market conditions and other factors, including the value of our contracts, the applications sold, customer demographics, and the number and types of users within our contracts. For arrangements that involve significant production, modification, or customization of the software, or where professional 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. 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.
Refer to Note 4, “Disaggregation of Revenue” for further information, including the economic factors that affect the nature, amount, timing, and uncertainty of revenues 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 invoicing occurs prior to revenue recognition. For multi-year agreements, we generally invoice customers annually at the beginning of each annual coverage period.
As of September 30, 2024, and December 31, 2023, total current and long-term accounts receivable, net of allowance for losses and sales adjustments was $626.8 million and $628.7 million, respectively. We have recorded unbilled receivables of $114.3 million and $119.2 million as of September 30, 2024, and December 31, 2023, respectively. Included in unbilled receivables are retention receivables of $11.1 million and $9.8 million as of September 30, 2024, and December 31, 2023, 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 the current portion of accounts receivable in the accompanying condensed consolidated balance sheets. Unbilled receivables and retention receivables expected to be collected past one year have been included with long-term portion of accounts receivable 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. Because 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. Consequently, we have not recorded a reserve for credit losses. 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 allowances for losses and sales adjustments are $18.4 million and $22.8 million as of September 30, 2024, and December 31, 2023, respectively.
10
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 the likelihood of impairment of each reporting unit. If the conclusion of this assessment is that it is more likely than not that a reporting unit's fair value is more than its carrying value, we are not required to perform a quantitative impairment test. When testing goodwill for impairment quantitatively, we first compare the estimated fair value of each reporting unit with its carrying amount. If the carrying amount of a reporting unit exceeds the fair value of that reporting unit, an impairment loss is recognized. The fair values calculated in our impairment tests are determined using discounted cash flow models involving several assumptions (Level 3 inputs). The assumptions that are used are based upon what we believe a hypothetical marketplace participant would use in estimating fair value. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain.
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, such as weighted average cost of capital and revenue growth rates which are forward-looking and affected by expectations about future market or economic conditions. Similarly, in a specific period, a reporting unit could significantly underperform relative to its historic 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 PRONOUNCED ACCOUNTING STANDARDS
In November 2023, the FASB issued Accounting Standards Update (ASU) 2023-07 - Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures. ASU 2023-07 enhances the disclosures required for reportable segments in annual and interim consolidated financial statements. The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. We are currently evaluating the impact that the new guidance will have on our consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09 – Income Taxes (Topic ASC 740) Income Taxes. The ASU improves the transparency of income tax disclosures by requiring (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2) income taxes paid disaggregated by jurisdiction. It also includes certain other amendments to improve the effectiveness of income tax disclosures. ASU 2023-09 is effective for annual periods beginning after December 15, 2024. Early adoption is permitted. This guidance will not have a material impact upon our financial position and results of operations.
(3) Segment and Related Information
We report our results in two reportable segments. Business units that have met the aggregation criteria have been combined into our two reportable segments. The Enterprise Software (“ES”) reportable 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: public administration solutions; courts and public safety solutions; education solutions; and property and recording solutions. The Platform Technologies (“PT”) reportable segment provides public sector entities with platform and transformative solutions including digital solutions, payment processing, streamlined data processing, and improved operations and workflows.
We evaluate performance based on several factors. 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 our intercompany transactions relate to contracts involving more than one business unit and are valued based on the contractual arrangement. Corporate segment operating loss primarily consists of compensation costs for the executive management team, certain shared services staff, and share-based compensation expense for the entire company. Corporate segment operating loss also includes revenues and expenses related to a company-wide user conference.
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| For the three months ended September 30, 2024 | Enterprise Software | Platform Technologies | Corporate | Totals | ||||||||||||||||||||||
| Revenues | ||||||||||||||||||||||||||
| Subscriptions: | ||||||||||||||||||||||||||
| SaaS | $ | $ | $ | $ | ||||||||||||||||||||||
| Transaction-based fees | ||||||||||||||||||||||||||
| Maintenance | ||||||||||||||||||||||||||
| Professional services | ||||||||||||||||||||||||||
| Software licenses and royalties | ||||||||||||||||||||||||||
| Hardware and other | ||||||||||||||||||||||||||
| Intercompany | ( | — | ||||||||||||||||||||||||
| Total revenues | $ | $ | $ | ( | $ | |||||||||||||||||||||
| Segment operating income (loss) | $ | $ | $ | ( | $ | |||||||||||||||||||||
| For the three months ended September 30, 2023 | Enterprise Software | Platform Technologies | Corporate | Totals | ||||||||||||||||||||||
| Revenues | ||||||||||||||||||||||||||
| Subscriptions: | ||||||||||||||||||||||||||
| SaaS | $ | $ | $ | $ | ||||||||||||||||||||||
| Transaction-based fees | ||||||||||||||||||||||||||
| Maintenance | ||||||||||||||||||||||||||
| Professional services | ||||||||||||||||||||||||||
| Software licenses and royalties | ||||||||||||||||||||||||||
| Hardware and other | ( | |||||||||||||||||||||||||
| Intercompany | ( | — | ||||||||||||||||||||||||
| Total revenues | $ | $ | $ | ( | $ | |||||||||||||||||||||
| Segment operating income (loss) | $ | $ | $ | ( | $ | |||||||||||||||||||||
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| For the nine months ended September 30, 2024 | Enterprise Software | Platform Technologies | Corporate | Totals | ||||||||||||||||||||||
| Revenues | ||||||||||||||||||||||||||
| Subscriptions: | ||||||||||||||||||||||||||
| SaaS | $ | $ | $ | $ | ||||||||||||||||||||||
| Transaction-based fees | ||||||||||||||||||||||||||
| Maintenance | ||||||||||||||||||||||||||
| Professional services | ||||||||||||||||||||||||||
| Software licenses and royalties | ||||||||||||||||||||||||||
| Hardware and other | ||||||||||||||||||||||||||
| Intercompany | ( | — | ||||||||||||||||||||||||
| Total revenues | $ | $ | $ | ( | $ | |||||||||||||||||||||
| Segment operating income (loss) | $ | $ | $ | ( | $ | |||||||||||||||||||||
| For the nine months ended September 30, 2023 | Enterprise Software | Platform Technologies | Corporate | Totals | ||||||||||||||||||||||
| Revenues | ||||||||||||||||||||||||||
| Subscriptions: | ||||||||||||||||||||||||||
| SaaS | $ | $ | $ | $ | ||||||||||||||||||||||
| Transaction-based fees | ||||||||||||||||||||||||||
| Maintenance | ||||||||||||||||||||||||||
| Professional services | ||||||||||||||||||||||||||
| Software licenses and royalties | ||||||||||||||||||||||||||
| Hardware and other | ||||||||||||||||||||||||||
| Intercompany | ( | — | ||||||||||||||||||||||||
| Total revenues | $ | $ | $ | ( | $ | |||||||||||||||||||||
| Segment operating income (loss) | $ | $ | $ | ( | $ | |||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| Reconciliation of reportable segment operating income to the Company's consolidated totals: | 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||||
| Total segment operating income | $ | $ | $ | $ | ||||||||||||||||||||||
| Amortization of acquired software | ( | ( | ( | ( | ||||||||||||||||||||||
| Amortization of other intangibles | ( | ( | ( | ( | ||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | ||||||||||||||||||||||
| Other income, net | ||||||||||||||||||||||||||
| Income before income taxes | $ | $ | $ | $ | ||||||||||||||||||||||
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(4) 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 revenues and cash flows.
Timing of Revenue Recognition
Timing of revenue recognition by revenue category during the period is as follows:
| For the three months ended September 30, 2024 | Products and services transferred at a point in time | Products and services transferred over time | Total | |||||||||||||||||
| Revenues | ||||||||||||||||||||
| Subscriptions: | ||||||||||||||||||||
| SaaS | $ | $ | $ | |||||||||||||||||
| Transaction-based fees | ||||||||||||||||||||
| Maintenance | ||||||||||||||||||||
| Professional services | ||||||||||||||||||||
| Software licenses and royalties | ||||||||||||||||||||
| Hardware and other | ||||||||||||||||||||
| Total | $ | $ | $ | |||||||||||||||||
| For the three months ended September 30, 2023 | Products and services transferred at a point in time | Products and services transferred over time | Total | |||||||||||||||||
| Revenues | ||||||||||||||||||||
| Subscriptions: | ||||||||||||||||||||
| SaaS | $ | $ | $ | |||||||||||||||||
| Transaction-based fees | ||||||||||||||||||||
| Maintenance | ||||||||||||||||||||
| Professional services | ||||||||||||||||||||
| Software licenses and royalties | ||||||||||||||||||||
| Hardware and other | ||||||||||||||||||||
| Total | $ | $ | $ | |||||||||||||||||
| For the nine months ended September 30, 2024 | Products and services transferred at a point in time | Products and services transferred over time | Total | |||||||||||||||||
| Revenues | ||||||||||||||||||||
| Subscriptions: | ||||||||||||||||||||
| SaaS | $ | $ | $ | |||||||||||||||||
| Transaction-based fees | ||||||||||||||||||||
| Maintenance | ||||||||||||||||||||
| Professional services | ||||||||||||||||||||
| Software licenses and royalties | ||||||||||||||||||||
| Hardware and other | ||||||||||||||||||||
| Total | $ | $ | $ | |||||||||||||||||
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| For the nine months ended September 30, 2023 | Products and services transferred at a point in time | Products and services transferred over time | Total | |||||||||||||||||
| Revenues | ||||||||||||||||||||
| Subscriptions: | ||||||||||||||||||||
| SaaS | $ | $ | $ | |||||||||||||||||
| Transaction-based fees | ||||||||||||||||||||
| Maintenance | ||||||||||||||||||||
| Professional services | ||||||||||||||||||||
| Software licenses and royalties | ||||||||||||||||||||
| Hardware and other | ||||||||||||||||||||
| Total | $ | $ | $ | |||||||||||||||||
Recurring Revenues
The majority of our revenues are comprised of revenues from subscriptions and maintenance, which we consider to be recurring revenues. Subscriptions revenues primarily consist of revenues derived from our SaaS arrangements and transaction-based fees. These revenues are considered recurring because revenues from these sources are expected to re-occur in similar annual amounts for the term of our relationship with the client. Transaction-based fees are generally the result of multi-year contracts with our clients that result in fees generated by payment transactions and digital government services and are collected on a recurring basis during the contract term. The contract terms for subscription arrangements range from to 10 years but are typically contracted for initial periods of generally to three years . Nearly all of our on-premises software clients contract with us for maintenance and support. Maintenance and support are generally provided under auto-renewing annual contracts or multi-year contracts. We consider all other revenue categories to be non-recurring revenues.
Recurring revenues and non-recurring revenues recognized during the period are as follows:
| For the three months ended September 30, 2024 | Enterprise Software | Platform Technologies | Corporate | Totals | ||||||||||||||||||||||
| Recurring revenues | $ | $ | $ | $ | ||||||||||||||||||||||
| Non-recurring revenues | ||||||||||||||||||||||||||
| Intercompany | ( | — | ||||||||||||||||||||||||
| Total revenues | $ | $ | $ | ( | $ | |||||||||||||||||||||
| For the three months ended September 30, 2023 | Enterprise Software | Platform Technologies | Corporate | Totals | ||||||||||||||||||||||
| Recurring revenues | $ | $ | $ | $ | ||||||||||||||||||||||
| Non-recurring revenues | ( | |||||||||||||||||||||||||
| Intercompany | ( | — | ||||||||||||||||||||||||
| Total revenues | $ | $ | $ | ( | $ | |||||||||||||||||||||
| For the nine months ended September 30, 2024 | Enterprise Software | Platform Technologies | Corporate | Totals | ||||||||||||||||||||||
| Recurring revenues | $ | $ | $ | $ | ||||||||||||||||||||||
| Non-recurring revenues | ||||||||||||||||||||||||||
| Intercompany | ( | — | ||||||||||||||||||||||||
| Total revenues | $ | $ | $ | ( | $ | |||||||||||||||||||||
| For the nine months ended September 30, 2023 | Enterprise Software | Platform Technologies | Corporate | Totals | ||||||||||||||||||||||
| Recurring revenues | $ | $ | $ | $ | ||||||||||||||||||||||
| Non-recurring revenues | ||||||||||||||||||||||||||
| Intercompany | ( | — | ||||||||||||||||||||||||
| Total revenues | $ | $ | $ | ( | $ | |||||||||||||||||||||
15
(5) Deferred Revenue and Performance Obligations
Total deferred revenue, including long-term, by segment is as follows:
| September 30, 2024 | December 31, 2023 | |||||||||||||
| Enterprise Software | $ | $ | ||||||||||||
| Platform Technologies | ||||||||||||||
| Corporate | ||||||||||||||
| Totals | $ | $ | ||||||||||||
Changes in total deferred revenue, including long-term, were as follows:
| Nine months ended September 30, 2024 | ||||||||
| Balance as of December 31, 2023 | $ | |||||||
| Deferral of revenue | ||||||||
| Recognition of deferred revenue | ( | |||||||
| Balance as of September 30, 2024 | $ | |||||||
Transaction Price Allocated to the Remaining Performance Obligations
The aggregate amount of transaction price allocated to the remaining performance obligations represents contracted revenue that has not yet been recognized (“backlog”), which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. Backlog as of September 30, 2024, was $2.13 billion, of which we expect to recognize approximately 45 % as revenue over the next 12 months and the remainder thereafter.
(6) 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 generally to seven years . Deferred commissions were $53.1 million and $49.2 million as of September 30, 2024, and December 31, 2023, respectively. Amortization expense was $4.8 million and $14.5 million for the three and nine months ended September 30, 2024, respectively, and $5.0 million and $13.6 million for the three and nine months ended September 30, 2023, respectively. There were no
(7) Acquisitions
We did not complete any acquisitions during the nine months ended September 30, 2024.
During the nine months ended September 30, 2024, the Company resolved an outstanding matter related to the acquisition of Resource Exploration, Inc. (“ResourceX”) for $60,000 . The matter was fully indemnified and reimbursed using a combination of cash from acquisition date holdback and return of shares of our common stock from escrow.
During the nine months ended September 30, 2024, the Company settled litigation for $9.5 million related to a case that was assumed with the 2022 purchase of Rapid Financial Solutions, LLC. Our purchase agreement included an escrow that fully indemnified and reimbursed Tyler under the terms of the purchase agreement.
16
(8) Debt
The following table summarizes our outstanding borrowings:
| Rate | Maturity Date | September 30, 2024 | December 31, 2023 | ||||||||||||||||||||
| Revolving credit facility | S + | September 2029 | $ | $ | |||||||||||||||||||
| 2021 Credit Agreement | |||||||||||||||||||||||
| Revolving credit facility | S + | April 2026 | |||||||||||||||||||||
| Term Loan A-1 | S + | April 2026 | |||||||||||||||||||||
| Convertible Senior Notes due 2026 | March 2026 | ||||||||||||||||||||||
| Total borrowings | |||||||||||||||||||||||
| Less: unamortized debt discount and debt issuance costs | ( | ( | |||||||||||||||||||||
| Total borrowings, net | |||||||||||||||||||||||
| Less: current portion of debt | ( | ||||||||||||||||||||||
| Carrying value | $ | $ | |||||||||||||||||||||
2024 Credit Agreement
On September 25, 2024, the Company entered into a $700.0 million credit agreement with the various lenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent, Swingline Lender, and Issuing Lender (the “2024 Credit Agreement”). The 2024 Credit Agreement provides for an unsecured revolving credit facility in an aggregate principal amount of up to $700.0 million, including subfacilities for standby letters of credit and swingline loans. The 2024 Credit Agreement matures on September 25, 2029, and loans may be prepaid at any time, without premium or penalty, subject to certain minimum amounts and payment of any SOFR breakage costs. The Company incurred issuance fees of $2.6 million in connection with the 2024 Credit Agreement. The 2024 Credit Agreement replaces Tyler’s existing $500.0 million unsecured credit facility under the credit agreement dated April 21, 2021, among the Company and various lenders party thereto (the “2021 Credit Agreement”), which was scheduled to mature in April 2026.
The 2024 Credit Agreement contains certain customary representations and warranties, affirmative and negative covenants, and events of defaults. The 2024 Credit Agreement requires us to maintain certain financial ratios and other financial conditions and limits us from making certain investments, advances, cash dividends or loans, and limits incurrence of additional indebtedness and liens.
Loans under the revolving credit facility 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) plus a margin of 0.125 % to 0.75 1.125 % to 1.75 %. The margin in each case is based upon Tyler’s total net leverage ratio, as determined pursuant to the 2024 Credit Agreement. 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 initially in the amount of 0.125 % per annum, ranging from 0.125 % to 0.25 % based upon the Company’s total net leverage ratio. Borrowings under the 2024 Credit Agreement may be used for general corporate purposes, including working capital requirements, acquisitions and capital expenditures.
As of September 30, 2024, we had no borrowings outstanding and were in compliance with our covenants under the 2024 Credit Agreement. For the nine months ended September 30, 2024, we repaid $50.0 million of the Term Loans and had no borrowings outstanding under the 2021 Credit Agreement prior to its termination on September 25, 2024.
Convertible Senior Notes due 2026
On March 9, 2021, we issued 0.25 % Convertible Senior Notes due in 2026 in the aggregate principal amount of $600.0 million (“the Convertible Senior Notes” or “the Notes”). The Convertible Senior Notes were issued pursuant to, and are governed by, an indenture (the “Indenture”), dated as of March 9, 2021, with U.S. Bank National Association as trustee. The net proceeds from the issuance of the Convertible Senior Notes were $591.4 million, net of initial purchasers’ discounts of $6.0 million and debt issuance costs of $2.6 million.
17
The Convertible Senior Notes are senior, unsecured obligations and are (i) equal in right of payment to 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. The Convertible Senior Notes mature on March 15, 2026, unless earlier repurchased, redeemed, or converted.
Before September 15, 2025, holders of the Convertible Senior Notes have the right to convert their Convertible Senior Notes only upon the occurrence of certain events. Under the terms of the Indenture, the Convertible Senior Notes are convertible into common stock of Tyler Technologies, Inc. (referred to as “our common stock” herein) at the following times or circumstances:
•during any calendar quarter commencing after the calendar quarter ended June 30, 2021, if the last reported sale price per share of our common stock exceeds 130 % of the conversion price for each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter;
•during the five consecutive business days immediately after any five consecutive trading day period (such five consecutive trading day period, the “Measurement Period”) if the trading price per $1,000 principal amount of Convertible Senior Notes, as determined following a request by their holder in accordance with the procedures in the Indenture, for each trading day of the Measurement Period was less than 98 % of the product of the last reported sale price per share of our common stock on such trading day and the conversion rate on such trading day;
•upon the occurrence of certain corporate events or distributions on our common stock, including but not limited to a “Fundamental Change” (as defined in the Indenture);
•upon the occurrence of specified corporate events; or
•on or after September 15, 2025, until the close of business on the second scheduled trading day immediately preceding the maturity date, March 15, 2026.
With certain exceptions, upon a change of control or other fundamental change (both as defined in the Indenture governing the Convertible Senior Notes), the holders of the Convertible Senior Notes may require us to repurchase all or part of the principal amount of the Convertible Senior Notes at a repurchase price equal to 100 % of the principal amount of the Convertible Senior Notes, plus any accrued and unpaid interest up to, but excluding, the redemption date.
As of September 30, 2024, 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 our 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 30 th 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.
18
Effective Interest Rate
The weighted average interest rate for the borrowings under the Convertible Senior Notes was 0.25 % as of September 30, 2024. For the nine months ended September 30, 2024, the effective interest rate was 8.66 % for the Term Loans under the 2021 Credit Agreement and 0.54 % for the Convertible Senior Notes. The following sets forth the interest expense recognized related to the borrowings and commitment fees for unused portions under the 2024 Credit Agreement, the 2021 Credit Agreement and Convertible Senior Notes and is included in interest expense in the accompanying condensed consolidated statements of income:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Contractual interest expense - 2024 Revolving Credit Facility | $ | $ | $ | $ | |||||||||||||||||||
| Contractual interest expense - 2021 Revolving Credit Facility | ( | ( | ( | ( | |||||||||||||||||||
| Contractual interest expense - Term Loans | ( | ( | ( | ||||||||||||||||||||
| Contractual interest expense - Convertible Senior Notes | ( | ( | ( | ( | |||||||||||||||||||
| Amortization of debt discount and debt issuance costs | ( | ( | ( | ( | |||||||||||||||||||
| Total | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
As of September 30, 2024, we had one outstanding standalone letter of credit totaling $500,000 . The letter of credit, which guarantees our performance under a client contract, automatically renews annually unless canceled in writing, and expires in the third quarter of 2025.
(9) Financial Instruments
The following table presents our financial instruments:
| September 30, 2024 | December 31, 2023 | |||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Available-for-sale investments | ||||||||||||||
| Equity investments | ||||||||||||||
| Total | $ | $ | ||||||||||||
Cash and cash equivalents consist primarily of money market funds with original maturity dates of three months or less, for which we determine fair value through quoted market prices.
Our investment portfolio is classified as available-for-sale in order to have the flexibility to buy and sell investments and maximize cash liquidity. Our available-for-sale investments primarily consist of investment grade corporate bonds, municipal bonds, and asset-backed securities with maturity dates through 2027. These investments are presented at fair value and are included in short-term investments and non-current investments in the accompanying condensed consolidated balance sheets. Unrealized gains or losses associated with the investments are included in accumulated other comprehensive loss, net of tax in the accompanying condensed consolidated balance sheets and statements of comprehensive income. For our available-for-sale investments, we do not have the intent to sell, nor is it more likely than not that we would be required to sell before recovery of their cost basis.
As of September 30, 2024, we have an accrued interest receivable balance of approximately $43,000 which is included in accounts receivable, net. We record any losses within the maturity period or at the time of sale of the investment, and any write-offs to accrued interest receivables are recorded as reductions to interest income in the period of the loss. During the three and nine months ended September 30, 2024, we have recorded no
19
The following table presents the components of our available-for-sale investments:
| September 30, 2024 | December 31, 2023 | ||||||||||
| Amortized cost | $ | $ | |||||||||
| Unrealized gains | |||||||||||
| Unrealized losses | ( | ( | |||||||||
| Estimated fair value | $ | $ | |||||||||
As of September 30, 2024, we have $6.0 million of available-for-sale debt securities with contractual maturities of one year or less and $3.9 million with contractual maturities greater than one year. As of September 30, 2024, no available-for-sale security has been in a loss position for one year or less and 10 securities with a fair value of $9.6 million have been in a loss position for greater than one year.
The following table presents the activity on our available-for-sale investments:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Proceeds from sales and maturities | $ | $ | $ | $ | |||||||||||||||||||
Realized gains (losses) on sales, net of tax | ( | ||||||||||||||||||||||
Our equity investments consist of an 18 % interest in BFTR, LLC, a wholly owned subsidiary of Bison Capital Partners V L.P. BFTR, LLC is a privately held Australian company specializing in digitizing the spoken word in court and legal proceedings. The investment in common stock is carried at cost less any impairment write-downs because we do not have the ability to exercise significant influence over the investee and the securities do not have readily determinable fair values.
(10) Other Comprehensive Income (Loss)
The following table presents the changes in the balances of accumulated other comprehensive loss, net of tax by component:
| Unrealized Loss On Available-for-Sale Securities | Other | Accumulated Other Comprehensive Loss | |||||||||||||||
| Balance as of June 30, 2024 | $ | ( | $ | $ | ( | ||||||||||||
| Other comprehensive income before reclassifications | |||||||||||||||||
| Reclassification adjustment for net income on sale of available-for-sale securities, included in net income | ( | ( | |||||||||||||||
Other comprehensive income | |||||||||||||||||
| Balance as of September 30, 2024 | $ | ( | $ | $ | ( | ||||||||||||
| Unrealized Loss On Available-for-Sale Securities | Other | Accumulated Other Comprehensive Loss | |||||||||||||||
| Balance as of June 30, 2023 | $ | ( | $ | $ | ( | ||||||||||||
| Other comprehensive income before reclassifications | |||||||||||||||||
| Reclassification adjustment for net loss on sale of available-for-sale securities, included in net income | |||||||||||||||||
| Other comprehensive income | |||||||||||||||||
| Balance as of September 30, 2023 | $ | ( | $ | $ | ( | ||||||||||||
20
| Unrealized Loss On Available-for-Sale Securities | Other | Accumulated Other Comprehensive Loss | |||||||||||||||
| Balance as of December 31, 2023 | $ | ( | $ | $ | ( | ||||||||||||
| Other comprehensive income before reclassifications | |||||||||||||||||
| Reclassification adjustment for net income on sale of available-for-sale securities, included in net income | ( | ( | |||||||||||||||
| Other comprehensive income | |||||||||||||||||
| Balance as of September 30, 2024 | $ | ( | $ | $ | ( | ||||||||||||
| Unrealized Loss On Available-for-Sale Securities | Other | Accumulated Other Comprehensive Loss | |||||||||||||||
| Balance as of December 31, 2022 | $ | ( | $ | $ | ( | ||||||||||||
| Other comprehensive income before reclassifications | |||||||||||||||||
| Reclassification adjustment for net loss on sale of available-for-sale securities, included in net income | |||||||||||||||||
| Other comprehensive income | |||||||||||||||||
| Balance as of September 30, 2023 | $ | ( | $ | $ | ( | ||||||||||||
(11) Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market for that asset or liability. Guidance on fair value measurements and disclosures establishes a valuation hierarchy for disclosure of inputs used in measuring fair value defined as follows:
•Level 1—Inputs are unadjusted quoted prices that are available in active markets for identical assets or liabilities.
•Level 2—Inputs include quoted prices for similar assets and liabilities in active markets and quoted prices in non-active markets, inputs other than quoted prices that are observable, and inputs that are not directly observable, but are corroborated by observable market data.
•Level 3—Inputs that are unobservable and are supported by little or no market activity and reflect the use of significant management judgment.
The classification of a financial asset or liability within the hierarchy is determined based on the least reliable level of input that is significant to the fair value measurement. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. We also consider the counterparty and our own non-performance risk in our assessment of fair value.
The following table presents fair values of our financial and debt instruments categorized by their fair value hierarchy as of September 30, 2024:
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | |||||||||||||||||||
| Available-for-sale investments | |||||||||||||||||||||||
| Equity investments | |||||||||||||||||||||||
| Convertible Senior Notes due 2026 | |||||||||||||||||||||||
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The following table presents fair values of our financial and debt instruments categorized by their fair value hierarchy as of December 31, 2023:
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | |||||||||||||||||||
| Available-for-sale investments | |||||||||||||||||||||||
| Equity investments | |||||||||||||||||||||||
| 2021 Credit Agreement | |||||||||||||||||||||||
| Term Loan A-1 | |||||||||||||||||||||||
| Convertible Senior Notes due 2026 | |||||||||||||||||||||||
Assets that are measured at fair value on a recurring basis
Accounts receivables, accounts payables, short-term obligations and certain other assets carrying value approximate fair value because of the short maturity of these instruments.
As of September 30, 2024, we have $9.9 million in investment grade corporate bonds, municipal bonds and asset-backed securities with maturity dates through 2027. The fair values of these securities are considered Level 2 as they are based on inputs from quoted prices in markets that are not active or other observable market data.
Assets that are measured at fair value on a nonrecurring basis
As of September 30, 2024, we have an 18 % interest in BFTR, LLC. As we do not have the ability to exercise significant influence over the investee and the securities do not have readily determinable fair values, our investment is carried at cost less any impairment write-downs. Periodically, our investment is assessed for impairment. We do not reassess the fair value of the investments if there are no identified events or changes in circumstances that indicate fair value of the investment or indicate impairment. No events or changes in circumstances have occurred during the period that require reassessment. There has been no impairment of this investment for the periods presented. This investment is included in other non-current assets in the accompanying condensed consolidated balance sheets.
As described in Note 2, “Summary of Significant Accounting Policies”, we assess goodwill for impairment annually on October 1. In addition, we review goodwill, property and equipment, and other intangibles for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. During the fourth quarter of 2023, we completed our annual assessment of goodwill which did not result in an impairment charge. Further, in 2024 we identified no indicators of impairment to goodwill, property and equipment, and other intangibles. Therefore, no impairment was recorded as of or for the nine months ended September 30, 2024.
Financial instruments measured at fair value only for disclosure purposes
The carrying amount of the Term Loan under the 2021 Credit Agreement is the par value less the debt discount and debt issuance costs that are amortized to interest expense using the effective interest method over the term of the Term Loan. Interest expense is included in the accompanying condensed consolidated statements of income.
The fair value of our Convertible Senior Notes is determined based on quoted market prices for a similar liability when traded as an asset in an active market, a Level 2 input. See Note 8, “Debt,” for further discussion.
The carrying amount of the Convertible Senior Notes is the par value less the debt discount and debt issuance costs that are amortized to interest expense using the effective interest method over the term of the Convertible Senior Notes. Interest expense is included in the accompanying condensed consolidated statements of income.
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The following table presents the fair value and carrying value, net, of the Term Loan under the 2021 Credit Agreement and our Convertible Senior Notes:
| Fair Value at | Carrying Value at | ||||||||||||||||||||||
| September 30, 2024 | December 31, 2023 | September 30, 2024 | December 31, 2023 | ||||||||||||||||||||
| 2021 Credit Agreement | |||||||||||||||||||||||
| Term Loan A-1 | $ | $ | $ | $ | |||||||||||||||||||
| Convertible Senior Notes due 2026 | |||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
(12) Income Tax Provision
We had an effective income tax rate of 11.8 % and 14.5 % for the three and nine months ended September 30, 2024, respectively, compared to 20.2 % and 17.3 % for the three and nine months ended September 30, 2023, respectively. The decrease in the effective tax rate for the three and nine months ended September 30, 2024, as compared to the prior period, is due to an increase in excess tax benefits related to stock incentive awards in the current year and lower non-deductible business expenses and liabilities for uncertain tax positions, partially offset by an increase in state taxes and lower research tax credit benefits.
The effective income tax rates for the periods presented are different from the statutory United States federal income tax rate of 21% primarily due to research tax credits and excess tax benefits related to stock incentive awards, offset by state income taxes, liabilities for uncertain tax positions, and non-deductible business expenses.
(13) Share-Based Compensation
The following table summarizes share-based compensation expense related to share-based awards recorded in the condensed consolidated statements of income:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||||||
| Subscriptions, maintenance, and professional services | $ | $ | $ | $ | ||||||||||||||||||||||
| Sales and marketing expense | ||||||||||||||||||||||||||
| General and administrative expense | ||||||||||||||||||||||||||
| Total share-based compensation expense | $ | $ | $ | $ | ||||||||||||||||||||||
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(14) Earnings Per Share
The following table details the reconciliation of basic earnings per share to diluted earnings per share:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Numerator for basic and diluted earnings per share: | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted-average basic common shares outstanding | |||||||||||||||||||||||
| Assumed conversion of dilutive securities: | |||||||||||||||||||||||
| Stock awards | |||||||||||||||||||||||
| Convertible Senior Notes | |||||||||||||||||||||||
| Denominator for diluted earnings per share - Adjusted weighted-average shares | |||||||||||||||||||||||
| Earnings per common share: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
For the three and nine months ended September 30, 2024, and 2023, stock awards representing the right to purchase common stock of approximately 500 and 79,000 shares and 260,000 and 369,000 shares, respectively, were not included in the computation of diluted earnings per share because their inclusion would have had an antidilutive effect.
(15) Leases
We lease office facilities, transportation, and other equipment for use in our operations. Most of our leases are non-cancelable operating lease agreements with remaining terms of to 10 years. Some of these leases include options to extend for up to six years . We have no finance leases as of September 30, 2024. Right-of-use lease assets and lease liabilities for our operating leases are recorded in the condensed consolidated balance sheets. We had no 3.1 million and $4.5 million of operating lease costs.
The components of operating lease expense were as follows:
| Lease Costs | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||||||
| Operating lease cost | $ | $ | $ | $ | ||||||||||||||||||||||
| Short-term lease cost | ||||||||||||||||||||||||||
| Variable lease cost | ||||||||||||||||||||||||||
| Net lease cost | $ | $ | $ | $ | ||||||||||||||||||||||
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Supplemental information related to leases is as follows:
| Other Information | Nine Months Ended September 30, | |||||||||||||
| 2024 | 2023 | |||||||||||||
Cash flows: | ||||||||||||||
| Cash paid amounts included in the measurement of lease liabilities: | ||||||||||||||
| Operating cash outflows from operating leases | $ | $ | ||||||||||||
| Right-of-use assets obtained in exchange for lease obligations (non-cash): | ||||||||||||||
| Operating leases | $ | $ | ||||||||||||
| Lease term and discount rate: | ||||||||||||||
| Weighted average remaining lease term (years) | ||||||||||||||
| Weighted average discount rate | % | % | ||||||||||||
Rental income from third parties
We own office buildings in Bangor, Falmouth, Yarmouth, and Orono, Maine; Lubbock and Plano, Texas; Troy, Michigan; Latham, New York; Moraine, Ohio; and Kingston Springs, Tennessee. We lease space in some of these buildings to third-party tenants, one of which was formerly a related party (see Note 16, "Related Party Transactions"). 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 2024 and 2028, and some have options to extend the lease for up to 10 years. We determine if an arrangement is a lease at inception. None of our leases allow the lessee to purchase the leased asset.
Rental income from third-party tenants for the three and nine months ended September 30, 2024 and 2023, totaled $809,000 and $2.4 million and $552,000 and $1.6 million, respectively. Rental income is included in hardware and other revenue on the consolidated statements of income. As of September 30, 2024, future minimum operating rental income based on contractual agreements is as follows:
| Year ending December 31, | Amount | |||||||
| 2024 (Remaining) | $ | |||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| Thereafter | ||||||||
| Total | $ | |||||||
(16) Related Party Transactions
In April 2023, we entered into an arm’s length lease agreement under which we lease 25,000 square feet of office space in our Lubbock, Texas, office facility to a company co-owned by a former member of our board of directors. The lease agreement, which commenced on April 1, 2023, and was amended on April 8, 2024, has an initial term of five years with a pro-rata base rent of $25,000 per month until December 1, 2023, followed by a base rent of $58,000 for the next year and a 2.5 % annual increase thereafter. We recognized rental income of $174,000 and $522,000 under this lease for the three and nine months ended September 30, 2024, respectively, and $150,000 for the nine months ended September 30, 2023.
(17) Commitments and Contingencies
Litigation
During the first quarter of 2022, we received a notice of termination for convenience under a contractual arrangement with a state government client. Upon receipt of the termination notice, we ceased performing services under the contractual arrangement and sought payment of contractually owed fees of approximately $15 million in connection with the termination for convenience.
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The client was unresponsive to our outreach for several months, and on August 23, 2022, we filed a lawsuit to enforce our rights and remedies under the applicable contractual arrangement. The client subsequently asked us to negotiate directly with the client to attempt to resolve the dispute. The negotiations were not successful, and on March 20, 2024, we reinitiated our lawsuit. Although we believe our products and services were delivered in accordance with the terms of our contract and that we are entitled to payment in connection with the termination for convenience, at this time the matter remains unresolved. We can provide no assurances that we will not incur additional costs as we pursue our rights and remedies under the contract.
Purchase Commitments
(18) Subsequent Events
There have been no material events or transactions that occurred subsequent to September 30, 2024.
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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) changes in the budgets or regulatory environments of our clients, primarily local and state governments, that could negatively impact information technology spending; (2) disruption to our business and harm to our competitive position resulting from cyber-attacks, security vulnerabilities and software updates; (3) our ability to protect client information from security breaches and provide uninterrupted operations of data centers; (4) our ability to achieve growth or operational synergies through the integration of acquired businesses, while avoiding unanticipated costs and disruptions to existing operations; (5) material portions of our business require the Internet infrastructure to be adequately maintained; (6) our ability to achieve our financial forecasts due to various factors, including project delays by our clients, reductions in transaction size, fewer transactions, delays in delivery of new products or releases or a decline in our renewal rates for service agreements; (7) general economic, political and market conditions, including continued inflation and rising interest rates; (8) technological and market risks associated with the development of new products or services or of new versions of existing or acquired products or services; (9) competition in the industry in which we conduct business and the impact of competition on pricing, client retention and pressure for new products or services; (10) the ability to attract and retain qualified personnel and dealing with rising labor costs, the loss or retirement of key members of management or other key personnel; and (11) costs of compliance and any failure to comply with government and stock exchange regulations. 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. We develop and market a broad line of software products and services to address the IT needs of public sector entities. We provide subscription-based services such as software as a service (“SaaS”) and transaction-based services primarily related to digital government services and payment processing. 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. Additionally, we provide property appraisal services for taxing jurisdictions.
We report our results in two reportable segments. Business units that have met the aggregation criteria have been combined into our two reportable segments. The Enterprise Software (“ES”) reportable 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: public administration solutions; courts and public safety solutions; education solutions; and property and recording solutions. The Platform Technologies (“PT”) reportable segment provides public sector entities with platform and transformative solutions including digital solutions, payment processing, streamlined data processing, and improved operations and workflows.
We evaluate performance based on several factors. 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 our intercompany transactions relate to contracts involving more than one business unit and are valued based on the contractual arrangement. Corporate segment operating loss primarily consists of compensation costs for the executive management team, certain shared services staff, and share-based compensation expense for the entire company. Corporate segment operating loss also includes revenues and expenses related to a company-wide user conference.
See Note 3, “Segment and Related Information,” in the notes to the financial statements for additional information.
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Recent Acquisitions
2024
We did not complete any acquisitions during the nine months ended September 30, 2024.
2023
On October 31, 2023, we acquired Resource Exploration, Inc. (“ResourceX”), a leading provider of budgeting software to the public sector. Also on October 31, 2023, we acquired ARInspect, Inc. (“ARInspect”), a leading provider of AI-powered machine learning solutions for public sector field operations. On August 8, 2023, we acquired Computing System Innovations, LLC (“CSI”), a leading provider of artificial intelligence automation, redaction, and indexing solution for courts, recorders, attorneys, and others.
The actual operating results of CSI and ResourceX are included in the operating results of the ES segment from their respective dates of acquisition. The operating results of ARInspect are included in the operating results of the PT segment since the date of acquisition.
Operating Results
For the three and nine months ended September 30, 2024, total revenues increased 10% and 9%, respectively, compared to the prior period primarily due to an increase in subscription revenue. Revenues from recent acquisitions contributed $3.0 million, or 1%, and $9.8 million, or 1%, to the total revenue increase for the three and nine months ended September 30, 2024, respectively, compared to the prior period.
Subscriptions revenue grew 18% and 14% for the three and nine months ended September 30, 2024, respectively, compared to the prior period, primarily due to an ongoing shift toward SaaS arrangements for both new and existing clients, along with growth in certain transaction-based revenues.
Our backlog as of September 30, 2024, was $2.13 billion, a 9% increase compared to September 30, 2023.
Our total employee count increased to 7,386 as of September 30, 2024, including 50 employees who joined us through acquisitions completed since September 30, 2023, from 7,301 as of September 30, 2023.
Annualized Recurring Revenues
Subscriptions and maintenance are considered recurring revenue sources. Annualized recurring revenues (ARR) are calculated by annualizing the current quarter’s recurring revenues from maintenance and subscriptions as reported in our statement of income. Management believes ARR is an indicator of the annual run rate of our recurring revenues, as well as a measure of the effectiveness of the strategies we deploy to drive revenue growth over time. ARR is a metric we believe is widely used by companies in the technology sector and by investors, which we believe offers insight to the stability of our maintenance and subscription revenues to be recognized within the year, which are considered recurring in nature, with some seasonality.
Subscriptions revenues primarily consist of revenues derived from our SaaS arrangements and transaction-based fees. These revenues are considered recurring because revenues from these sources are expected to re-occur in similar annual amounts for the term of our relationship with the client. Transaction-based fees are generally the result of multi-year contracts with our clients that result in fees generated by payment transactions and digital government services and are collected on a recurring basis during the contract term. Transaction-based revenues are historically highest in the second quarter, which coincides with peak outdoor recreation seasons and statutory filing deadlines in many jurisdictions, and lowest in the fourth quarter due to fewer business days and lower transaction volumes around holidays. Because ARR is an annualized revenue amount, the metric can fluctuate from quarter to quarter due to this seasonality.
ARR was $1.85 billion and $1.65 billion as of September 30, 2024, and 2023, respectively. ARR increased 12% compared to the prior period primarily due to an increase in subscriptions revenue resulting from an ongoing shift toward SaaS arrangements for both new and existing clients and expansion in transaction-based fees.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations is 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, 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, 2023. 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, 2023.
ANALYSIS OF RESULTS OF OPERATIONS
| Percent of Total Revenues | |||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Subscriptions | 63.9 | % | 59.7 | % | 62.2 | % | 59.4 | % | |||||||||||||||
| Maintenance | 21.3 | 23.7 | 21.8 | 23.6 | |||||||||||||||||||
| Professional services | 11.9 | 12.4 | 12.6 | 12.8 | |||||||||||||||||||
| Software licenses and royalties | 1.1 | 2.1 | 1.3 | 2.1 | |||||||||||||||||||
| Hardware and other | 1.8 | 2.1 | 2.1 | 2.1 | |||||||||||||||||||
| Total revenues | 100.0 | 100.0 | 100.0 | 100.0 | |||||||||||||||||||
| Cost of revenues: | |||||||||||||||||||||||
| Subscriptions, maintenance, and professional services | 52.2 | 50.1 | 52.0 | 51.4 | |||||||||||||||||||
| Software licenses, royalties, and amortization of acquired software | 2.0 | 2.5 | 2.0 | 2.4 | |||||||||||||||||||
| Amortization of software development | 0.9 | 0.6 | 0.9 | 0.6 | |||||||||||||||||||
| Hardware and other | 1.1 | 1.3 | 1.3 | 1.6 | |||||||||||||||||||
| Sales and marketing expense | 7.0 | 7.3 | 7.3 | 7.5 | |||||||||||||||||||
| General and administrative expense | 13.3 | 15.9 | 13.8 | 15.5 | |||||||||||||||||||
| Research and development expense | 5.5 | 5.7 | 5.5 | 5.7 | |||||||||||||||||||
Amortization of other intangibles | 2.5 | 3.7 | 2.9 | 3.7 | |||||||||||||||||||
| Operating income | 15.5 | 12.9 | 14.3 | 11.6 | |||||||||||||||||||
| Interest expense | (0.2) | (1.2) | (0.3) | (1.4) | |||||||||||||||||||
| Other income, net | 0.8 | 0.2 | 0.5 | 0.2 | |||||||||||||||||||
| Income before income taxes | 16.1 | 11.9 | 14.5 | 10.4 | |||||||||||||||||||
Income tax provision | 1.9 | 2.4 | 2.1 | 1.8 | |||||||||||||||||||
| Net income | 14.2 | % | 9.5 | % | 12.4 | % | 8.6 | % | |||||||||||||||
Revenues
Subscriptions
The following table sets forth a comparison of our subscriptions revenue for the three and nine months ended September 30 ($ in thousands):
| Three Months Ended | Change | Nine Months Ended | Change | |||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | $ | % | 2024 | 2023 | $ | % | |||||||||||||||||||||||||||||||||||||||||||
| ES | $206,006 | $165,923 | $40,083 | 24% | $577,778 | $468,889 | $108,889 | 23% | ||||||||||||||||||||||||||||||||||||||||||
| PT | 141,164 | 129,267 | 11,897 | 9 | 416,317 | 404,555 | 11,762 | 3 | ||||||||||||||||||||||||||||||||||||||||||
| Total subscriptions revenue | $347,170 | $295,190 | $51,980 | 18% | $994,095 | $873,444 | $120,651 | 14% | ||||||||||||||||||||||||||||||||||||||||||
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Subscriptions revenue consists of revenue derived from our SaaS arrangements and transaction-based fees primarily related to digital government services and payment processing. We also provide electronic document filing ("e-filing") solutions for which revenue is derived from transaction fees and fixed-fee arrangements.
Subscriptions revenue grew 18% and 14% for the three and nine months ended September 30, 2024, respectively, compared to the prior period, primarily due to an ongoing shift toward SaaS arrangements, along with growth in certain transaction-based revenues. Subscription revenues from recent acquisitions contributed $1.3 million, or 0.4%, and $3.8 million, or 0.4%, to the increase for the three and nine months ended September 30, 2024, respectively.
Total subscriptions revenue derived from SaaS fees was $166.6 million and $471.4 million for the three and nine months ended September 30, 2024, respectively, compared to $138.5 million and $387.0 million for the three and nine months ended September 30, 2023, respectively. For the three and nine months ended September 30, 2024, SaaS fees grew 20%, or $28.1 million, and 22%, or $84.4 million, respectively, compared to prior period. New SaaS clients as well as existing on-premises clients who converted to our SaaS model provided the majority of the subscriptions revenue increase. In the three and nine months ended September 30, 2024, we added 181 and 584 new SaaS clients, respectively, and 108 and 309 existing on-premises clients, respectively, elected to convert to our SaaS model. Since September 30, 2023, we have added 740 new SaaS clients, while 401 existing on-premises clients have converted to our SaaS offerings. Our new software contract mix for the nine months ended September 30, 2024, was approximately 11% perpetual software license arrangements and approximately 89% subscription-based arrangements, compared to approximately 19% perpetual software license arrangements and approximately 81% subscription-based arrangements for the nine months ended September 30, 2023.
Total subscriptions revenue derived from transaction-based fees was $180.6 million and $522.7 million for the three and nine months ended September 30, 2024, respectively, compared to $156.7 million and $486.4 million for the three and nine months ended September 30, 2023, respectively. For the three and nine months ended September 30, 2024, transaction-based fees for both periods grew 15%, or $23.9 million, and 7%, or $36.3 million, respectively, compared to prior period. Contributing to the growth in transaction-based fees for the three and nine months ended September 30, 2024, are the new transaction customers and volume increases from online payments and e-filing services, as well as the impact of transaction-based fees from recent acquisitions of $1.3 million and $3.8 million, respectively, compared to prior period. These increases compared to prior period are partially offset by a change from the gross revenue model to the net revenue model for payments revenue under one of our state enterprise agreements that results in merchant fees recorded as a reduction in revenue rather than as cost of revenues.
Maintenance
The following table sets forth a comparison of our maintenance revenue for the three and nine months ended September 30 ($ in thousands):
| Three Months Ended | Change | Nine Months Ended | Change | |||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | $ | % | 2024 | 2023 | $ | % | |||||||||||||||||||||||||||||||||||||||||||
| ES | $ | 109,346 | $ | 111,574 | $ | (2,228) | (2) | % | $ | 329,724 | $ | 331,609 | $ | (1,885) | (1) | % | ||||||||||||||||||||||||||||||||||
| PT | 6,241 | 5,910 | 331 | 6 | 18,390 | 17,545 | 845 | 5 | ||||||||||||||||||||||||||||||||||||||||||
| Total maintenance revenue | $ | 115,587 | $ | 117,484 | $ | (1,897) | (2) | % | $ | 348,114 | $ | 349,154 | $ | (1,040) | — | % | ||||||||||||||||||||||||||||||||||
We provide maintenance and support services for our software products and certain third-party software. Maintenance revenue decreased 2% for the three months ended September 30, 2024, and was flat for the nine months ended September 30, 2024, compared to the prior period. For the three and nine months ended September 30, 2024, maintenance revenue declined primarily due to the impact of clients converting from on-premises license arrangements to SaaS, partially offset by maintenance price increases.
Professional services
The following table sets forth a comparison of our professional services revenue for the three and nine months ended September 30 ($ in thousands):
| Three Months Ended | Change | Nine Months Ended | Change | |||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | $ | % | 2024 | 2023 | $ | % | |||||||||||||||||||||||||||||||||||||||||||
| ES | $ | 53,947 | $ | 52,413 | $ | 1,534 | 3 | % | $ | 167,571 | $ | 159,168 | $ | 8,403 | 5 | % | ||||||||||||||||||||||||||||||||||
| PT | 10,515 | 8,713 | 1,802 | 21 | 33,625 | 29,307 | 4,318 | 15 | ||||||||||||||||||||||||||||||||||||||||||
| Total professional services revenue | $ | 64,462 | $ | 61,126 | $ | 3,336 | 5 | % | $ | 201,196 | $ | 188,475 | $ | 12,721 | 7 | % | ||||||||||||||||||||||||||||||||||
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Professional services revenue primarily consists of professional services billed in connection with implementing our software, converting client data, training client personnel, custom development activities, consulting, and property appraisal services. New clients who implement our software generally contract with us to provide the related professional services. Existing clients also periodically purchase additional training, consulting and minor programming services.
Professional services revenue increased 5% and 7% for the three and nine months ended September 30, 2024, respectively, compared to the prior period. The increase is primarily attributable to higher new contract volume along with increased billing rates.
Software licenses and royalties
The following table sets forth a comparison of our software licenses and royalties revenue for the three and nine months ended September 30 ($ in thousands):
| Three Months Ended | Change | Nine Months Ended | Change | |||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | $ | % | 2024 | 2023 | $ | % | |||||||||||||||||||||||||||||||||||||||||||
| ES | $ | 5,424 | $ | 7,531 | $ | (2,107) | (28) | % | $ | 19,314 | $ | 25,078 | $ | (5,764) | (23) | % | ||||||||||||||||||||||||||||||||||
| PT | 764 | 3,023 | (2,259) | (75) | 937 | 5,385 | (4,448) | (83) | ||||||||||||||||||||||||||||||||||||||||||
| Total software licenses and royalties revenue | $ | 6,188 | $ | 10,554 | $ | (4,366) | (41) | % | $ | 20,251 | $ | 30,463 | $ | (10,212) | (34) | % | ||||||||||||||||||||||||||||||||||
Software licenses and royalties revenue decreased 41% and 34% for the three and nine months ended September 30, 2024, respectively, compared to the prior period. The decrease is primarily attributed to the shift in the mix of new software contracts toward more SaaS.
Although the mix of new contracts between subscription-based and perpetual license arrangements may vary from quarter to quarter and year to year, we expect that software license revenues will continue to decline as we shift our model away from perpetual licenses to SaaS. Subscription-based arrangements result in lower software license revenue in the initial year as compared to perpetual software license arrangements, but generate higher overall revenue over the term of the contract.
Cost of revenues and overall gross margin
The following table sets forth a comparison of the key components of our cost of revenues for the three and nine months ended September 30 ($ in thousands):
| Three Months Ended | Change | Nine Months Ended | Change | |||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | $ | % | 2024 | 2023 | $ | % | |||||||||||||||||||||||||||||||||||||||||||
| Subscriptions, maintenance, and professional services | $ | 283,750 | $ | 247,781 | $ | 35,969 | 15 | % | $ | 829,765 | $ | 755,985 | $ | 73,780 | 10 | % | ||||||||||||||||||||||||||||||||||
| Software licenses and royalties | 1,870 | 3,120 | (1,250) | (40) | 4,995 | 7,865 | (2,870) | (36) | ||||||||||||||||||||||||||||||||||||||||||
| Amortization of software development | 4,961 | 3,083 | 1,878 | 61 | 13,808 | 8,568 | 5,240 | 61 | ||||||||||||||||||||||||||||||||||||||||||
| Amortization of acquired software | 9,244 | 9,035 | 209 | 2 | 27,723 | 26,879 | 844 | 3 | ||||||||||||||||||||||||||||||||||||||||||
| Hardware and other | 6,052 | 6,505 | (453) | (7) | 21,439 | 23,346 | (1,907) | (8) | ||||||||||||||||||||||||||||||||||||||||||
| Total cost of revenues | $ | 305,877 | $ | 269,524 | $ | 36,353 | 13 | % | $ | 897,730 | $ | 822,643 | $ | 75,087 | 9 | % | ||||||||||||||||||||||||||||||||||
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Subscriptions, maintenance, and professional services. Cost of subscriptions, maintenance and professional services primarily consist of personnel costs related to installation of our software, conversion of client data, training client personnel and support activities, including enhancing existing solutions, and various other services such as custom development, ongoing operation of SaaS, property appraisal outsourcing activities, digital government services, and other transaction-based services such as e-filing. Other costs included are interchange fees required to process credit/debit card transactions and bank fees to process automated clearinghouse transactions related to our payments business.
The cost of subscriptions, maintenance, and professional services for the three and nine months ended September 30, 2024, increased $36.0 million, or 15%, and $73.8 million, or 10%, respectively, compared to the prior period. The impact from recent acquisitions was $1.3 million and $5.0 million for the three and nine months ended September 30, 2024, respectively. The remaining subscriptions, maintenance and professional services expenses increased 14% and 9% for the three and nine months ended September 30, 2024, respectively, due to increased hosting costs as we expand our SaaS client base and transition from our proprietary data centers to the public cloud, together with higher personnel costs. Our professional services staff grew by 127 employees since September 30, 2023, as we increased hiring to ensure that we are well-positioned to deliver our current backlog and anticipated new business. The increases were partially offset by a reduction in merchant fees associated with the change from the gross model to the net model for payments revenue under one of our state enterprise agreements.
Software licenses and royalties. Costs of software licenses and royalties primarily consist of direct third-party software costs. We do not have any direct costs associated with royalties.
The cost of software licenses and royalties for the three and nine months ended September 30, 2024, decreased $1.3 million, or 40%, and $2.9 million, or 36%, respectively, compared to the prior period due to lower third-party software costs.
Amortization of software development. Software development costs included in cost of revenues primarily consist of personnel costs. We begin to amortize capitalized costs when a product is available for general release to customers. Amortization expense is determined on a product-by-product basis at a rate not less than straight-line basis over the software’s remaining estimated economic life of, generally, three to five years.
For the three and nine months ended September 30, 2024, amortization of software development costs increased $1.9 million, or 61%, and $5.2 million, or 61%, respectively, compared to the prior period, and is attributable to new capitalized software development projects going into service in the past year.
Amortization of acquired software. Amortization expense related to acquired software attributed to business combinations is included with cost of revenues. The estimated useful lives of other intangibles range from five to 10 years.
For the three and nine months ended September 30, 2024, amortization of acquired software increased 2%, or $0.2 million, and 3%, or $0.8 million, respectively, compared to the prior period, due to amortization of newly acquired software from recent acquisitions completed in fiscal year 2023, partially offset by assets becoming fully amortized in the fourth quarter 2023.
The following table sets forth a comparison of overall gross margin for the periods presented as of September 30:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | Change | 2024 | 2023 | Change | |||||||||||||||||||||||||||||||||
| Overall gross margin | 43.7 | % | 45.5 | % | (1.8) | % | 43.8 | % | 44.1 | % | (0.3) | % | ||||||||||||||||||||||||||
Overall Gross Margin. For the three and nine months ended September 30, 2024, our overall gross margin decreased 1.8% and 0.3%, respectively, compared to the prior period. For the three and nine months ended September 30, 2024, respectively, the decline in the overall gross margin compared to prior period is attributed to lower revenue from software licenses and maintenance, higher software development amortization expense, and higher personnel costs. The decline in overall gross margin compared to the prior period was partially offset by a higher revenue mix for subscription revenues compared to the prior period, resulting in an increase in incremental margin related to software services, maintenance and subscriptions.
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Sales and marketing expense
Sales and marketing (“S&M”) expense consists primarily of salaries, employee benefits, travel, share-based compensation expense, commissions and related overhead costs for sales and marketing employees, as well as professional fees, trade show activities, advertising costs and other marketing costs. The following table sets forth a comparison of our S&M expense for the three and nine months ended September 30 ($ in thousands):
| Three Months Ended | Change | Nine Months Ended | Change | |||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | $ | % | 2024 | 2023 | $ | % | |||||||||||||||||||||||||||||||||||||||||||
| Sales and marketing expense | $ | 38,203 | $ | 35,898 | $ | 2,305 | 6 | % | $ | 116,195 | $ | 110,104 | $ | 6,091 | 6 | % | ||||||||||||||||||||||||||||||||||
S&M expense as a percentage of revenues was 7.0% and 7.3%, respectively, for the three and nine months ended September 30, 2024, compared to 7.3% and 7.5%, for the three and nine months ended September 30, 2023, respectively. For both the three and nine months ended September 30, 2024, S&M expense increased approximately 6%, compared to the prior period. The increase in S&M expense is primarily attributed to higher bonus, commission, and trade show expenses, offset by lower professional fees related to marketing and advertising.
General and administrative expense
General and administrative (“G&A”) expense consists primarily of personnel salaries and share-based compensation expense for general corporate functions, including senior management, finance, accounting, legal, human resources and corporate development, as well as third-party professional fees, travel-related expenses, insurance, allocation of depreciation, facilities and IT support costs, amortization of software development for internal use, acquisition-related expenses and other administrative expenses. The following table sets forth a comparison of our G&A expense for the three and nine months ended September 30 ($ in thousands):
| Three Months Ended | Change | Nine Months Ended | Change | |||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | $ | % | 2024 | 2023 | $ | % | |||||||||||||||||||||||||||||||||||||||||||
| General and administrative expense | $ | 72,460 | $ | 78,519 | $ | (6,059) | (8) | % | $ | 220,590 | $ | 228,560 | $ | (7,970) | (3) | % | ||||||||||||||||||||||||||||||||||
G&A expense as a percentage of revenue was 13.3% and 13.8%, respectively, for the three and nine months ended September 30, 2024, compared to 15.9% and 15.5% for the three and nine months ended September 30, 2023. G&A expense decreased 8% and 3% for the three and nine months ended September 30, 2024, respectively, compared to the prior period. For the three months ended September 30, 2024, the decrease in G&A expense, compared to prior period, is primarily attributed to lower facilities costs resulting from lease restructurings, along with lower depreciation expense. For the nine months ended September 30, 2024, the decline in G&A expense is primarily attributed to lower facilities costs resulting from lease restructurings, partially offset by higher share-based compensation costs and an increase in software and other IT support costs.
Research and development expense
Research and development expense consists primarily of salaries, employee benefits and related overhead costs associated with new product development. Research and development expense consists mainly of costs associated with development of new products and technologies.
The following table sets forth a comparison of our research and development expense for the three and nine months ended September 30 ($ in thousands):
| Three Months Ended | Change | Nine Months Ended | Change | |||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | $ | % | 2024 | 2023 | $ | % | |||||||||||||||||||||||||||||||||||||||||||
| Research and development expense | $ | 30,120 | $ | 28,282 | $ | 1,838 | 6 | % | $ | 88,504 | $ | 83,421 | $ | 5,083 | 6 | % | ||||||||||||||||||||||||||||||||||
Research and development expense increased 6%, for both the three and nine months ended September 30, 2024, compared to the prior period, mainly due to a number of product development initiatives shifting from capitalized development projects to projects that are expensed to research and development.
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Amortization of other intangibles
Other intangibles represents the portion of purchase price allocated to the identified intangible assets for customer-related intangibles, trade names and leases acquired. 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 other intangibles is recorded as operating expense. The estimated useful lives of other intangibles range from one to 25 years. The following table sets forth a comparison of amortization of other intangibles for the three and nine months ended September 30 ($ in thousands):
| Three Months Ended | Change | Nine Months Ended | Change | |||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | $ | % | 2024 | 2023 | $ | % | |||||||||||||||||||||||||||||||||||||||||||
| Amortization of other intangibles | $ | 13,850 | $ | 18,526 | $ | (4,676) | (25) | % | $ | 45,813 | $ | 55,300 | $ | (9,487) | (17) | % | ||||||||||||||||||||||||||||||||||
For the three and nine months ended September 30, 2024, amortization of other intangibles decreased compared to the prior period due to the impact of certain trade name intangible assets becoming fully amortized as a result of accelerated amortization expense in the fourth quarter of 2023 and partially in 2024.
Interest expense
The following table sets forth a comparison of our interest expense for the three and nine months ended September 30 ($ in thousands):
| Three Months Ended | Change | Nine Months Ended | Change | |||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | $ | % | 2024 | 2023 | $ | % | |||||||||||||||||||||||||||||||||||||||||||
| Interest expense | $ | (1,235) | $ | (5,808) | $ | 4,573 | (79) | % | $ | (4,672) | $ | (19,879) | $ | 15,207 | (76) | % | ||||||||||||||||||||||||||||||||||
Interest expense is comprised of interest expense and non-usage and other fees associated with our borrowings. The change in interest expense in the three and nine months ended September 30, 2024, compared to the prior period is primarily attributable to lower interest incurred as a result of our repayment of the Term Loans.
Other income, net
The following table sets forth a comparison of our other income, net, for the three and nine months ended September 30 ($ in thousands):
| Three Months Ended | Change | Nine Months Ended | Change | |||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | $ | % | 2024 | 2023 | $ | % | |||||||||||||||||||||||||||||||||||||||||||
| Other income, net | $ | 4,504 | $ | 787 | $ | 3,717 | 472 | % | $ | 8,232 | $ | 2,676 | $ | 5,556 | 208 | % | ||||||||||||||||||||||||||||||||||
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, 2024, compared to the prior period is due to increased interest income generated from higher invested cash balances and higher interest rates in 2024 compared to 2023.
Income tax provision
The following table sets forth a comparison of our income tax provision for the three and nine months ended September 30 ($ in thousands):
| Three Months Ended | Change | Nine Months Ended | Change | |||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | $ | % | 2024 | 2023 | $ | % | |||||||||||||||||||||||||||||||||||||||||||
Income tax provision | $ | 10,199 | $ | 11,903 | $ | (1,704) | (14) | % | $ | 33,595 | $ | 26,570 | $ | 7,025 | 26% | |||||||||||||||||||||||||||||||||||
| Effective income tax rate | 11.8 | % | 20.2 | % | 14.5 | % | 17.3 | % | ||||||||||||||||||||||||||||||||||||||||||
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The decrease in the effective tax rate for the three and nine months ended September 30, 2024, as compared to the prior period, is due to an increase in excess tax benefits related to stock incentive awards in the current year and lower non-deductible business expenses and liabilities for uncertain tax positions, partially offset by an increase in state taxes and lower research tax credit benefits.
The effective income tax rates for the periods presented are different from the statutory United States federal income tax rate of 21% primarily due to research tax credits and excess tax benefits related to stock incentive awards, offset by state income taxes, liabilities for uncertain tax positions, and non-deductible business expenses.
FINANCIAL CONDITION AND LIQUIDITY
As of September 30, 2024, we had cash and cash equivalents of $538.3 million, compared to $165.5 million as of December 31, 2023. We also had $9.9 million invested in investment grade corporate bonds, municipal bonds and asset-backed securities as of September 30, 2024. These investments have varying maturity dates through 2027 and are held as available-for-sale. We believe our cash on hand, cash from operating activities, availability under our revolving line of credit, and access to the capital markets provide us with sufficient flexibility to meet our long-term financial needs.
The following table sets forth a summary of cash flows for the nine months ended September 30:
| 2024 | 2023 | |||||||||||||
| Cash flows provided (used) by: | ||||||||||||||
| Operating activities | $ | 399,859 | $ | 233,021 | ||||||||||
| Investing activities | (34,673) | (40,610) | ||||||||||||
| Financing activities | 7,617 | (234,782) | ||||||||||||
| Net increase (decrease) in cash and cash equivalents | $ | 372,803 | $ | (42,371) | ||||||||||
Net cash provided by operating activities continues to be our primary source of funds to finance operating needs and capital expenditures. Other potential capital resources include cash on hand, public and private issuances of debt or equity securities, and bank borrowings. It is possible that our ability to access the capital and credit markets in the future may be limited by economic conditions or other factors. We believe that our cash on hand, cash provided by operating activities, and available credit are sufficient to fund our working capital requirements and capital expenditures for at least the next twelve months.
For the nine months ended September 30, 2024, operating activities provided cash of $399.9 million. Operating activities that provided cash were primarily comprised of net income of $197.8 million, non-cash depreciation and amortization charges of $108.8 million, non-cash share-based compensation expense of $88.5 million, and non-cash amortization of operating lease right-of-use assets of $7.3 million. Changes in working capital, excluding cash, decreased cash provided by operating activities by approximately $2.7 million, mainly due to higher accounts receivable, timing of prepaid expenses, timing of payments for operating leases, and deferred taxes associated with stock option activity during the period. These decreases were offset by an increase in deferred revenue during the period and an increase of income tax payable due to the timing of payments. In general, changes in deferred revenue are cyclical and primarily driven by the timing of our maintenance and subscription renewal billings. Our renewal dates occur throughout the year, but our largest maintenance billing cycles occur in the second and fourth quarters. Subscription renewals are billed throughout the year.
Investing activities used cash of approximately $34.7 million in the nine months ended September 30, 2024. We received $7.7 million in proceeds from investment grade corporate bonds, municipal bonds and asset-backed securities. Approximately $24.4 million of software development costs were capitalized. Approximately $16.7 million was invested in property and equipment, including $7.5 million related to real estate. The remaining additions were for computer equipment and furniture and fixtures in support of growth. We also paid $1.4 million for working capital holdbacks related to acquisitions completed in 2023.
Financing activities used cash of $7.6 million in the nine months ended September 30, 2024, which is attributable to repayment of $50.0 million of term debt, partially offset by $47.4 million in payments received from stock option exercises, net of withheld shares for taxes upon equity awards settlement and $12.8 million in contributions from employee stock purchase plan activity.
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In February 2019, our board of directors authorized the repurchase of 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 October 23, 2024, we have authorization from our board of directors to repurchase up to 2.2 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.
On September 25, 2024, the Company entered into a $700.0 million credit agreement with the various lenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent, Swingline Lender, and Issuing Lender (the “2024 Credit Agreement”). The 2024 Credit Agreement provides for an unsecured revolving credit facility in an aggregate principal amount of up to $700.0 million including subfacilities for standby letters of credit and swingline loans. The 2024 Credit Agreement matures on September 25, 2029, and loans may be prepaid at any time, without premium or penalty, subject to certain minimum amounts and payment of any SOFR breakage costs. The Company incurred issuance fees of $2.6 million in connection with the 2024 Credit Agreement. The 2024 Credit Agreement replaces Tyler’s existing $500.0 million unsecured credit facility under the credit agreement dated April 21, 2021, among the Company and various lenders party thereto (the “2021 Credit Agreement”), which was scheduled to mature in April 2026.
We repaid all amounts due under the Term Loans under the 2021 Credit Agreement and have no outstanding borrowings under the 2024 Credit Agreement, with an available borrowing capacity of $700.0 million as of September 30, 2024.
As of September 30, 2024, we had $600.0 million in outstanding principal for the Convertible Senior Notes due 2026.
In the nine months ended September 30, 2024, and 2023, we paid interest of $2.9 million and $16.8 million, respectively. See Note 8, “Debt,” to the condensed consolidated financial statements for discussions of the Convertible Senior Notes and the 2024 Credit Agreement.
We made income tax payments, net of refunds, of $45.7 million and $118.0 million in the nine months ended September 30, 2024, and 2023, respectively. In the nine months ended September 30, 2024, stock option exercise activity generated net tax benefits of $17.2 million and reduced tax payments accordingly, as compared to $5.6 million in the same period in 2023.
We anticipate that 2024 capital spending will be between $47.0 million and $49.0 million, including approximately $7.6 million related to real estate and approximately $31.0 million of 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 and cash tax payments are expected to be funded from existing cash balances and cash flows from operations.
We lease office facilities, transportation, and other equipment for use in our operations. Most of our leases are non-cancelable operating lease agreements with remaining terms of one to 10 years. Some of these leases include options to extend for up to six years.
Other than the accelerated repayment of $50.0 million of the Term Loans under the 2021 Credit Agreement, there were no material changes to our future minimum contractual obligations since December 31, 2023, as previously disclosed in our Annual Report on Form 10-K filed with the SEC on February 21, 2024. Our estimated future obligations consist of debt, uncertain tax positions, leases, and purchase commitments as of September 30, 2024. Refer to Note 8, “Debt,” Note 12, “Income Tax,” Note 15, “Leases,” and Note 17, “Commitment and Contingencies,” to the condensed consolidated financial statements for related discussions.
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.
In accordance with the 2024 Credit Agreement, the borrowings under the Revolving Credit Facility 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) plus a margin of 0.125% to 0.75% or (2) the one-, three-, or six-month SOFR rate plus a margin of 1.125% to 1.75%.
As of September 30, 2024, we had no outstanding borrowings under the 2024 Credit Agreement and therefore are not subject to any interest risk.
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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 periods 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 September 30, 2024. Based on this evaluation, the chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of September 30, 2024.
Changes in Internal Control over Financial Reporting
The Company completed its second phase implementation for our new accounting and financial management software effective July 1, 2024, which is expected to improve the efficiency of certain financial and related business processes. The second phase implementation was not made in response to any identified deficiency or weakness in our internal controls over financial reporting. The second phase implementation was subject to various testing and review procedures prior to and after execution. We have updated our internal controls over financial reporting, as necessary, to accommodate any modifications to our business processes or accounting procedures due to the implementation. Management will continue to monitor, test and evaluate the operating effectiveness of internal controls related to the new accounting and financial management software during the post-implementation period to ensure that effective controls over financial reporting continue to be maintained.
Other than as described in the preceding paragraph, there have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended September 30, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Part II. OTHER INFORMATION
ITEM 1. Legal Proceedings
During the first quarter of 2022, we received a notice of termination for convenience under a contractual arrangement with a state government client. Upon receipt of the termination notice, we ceased performing services under the contractual arrangement and sought payment of contractually owed fees of approximately $15 million in connection with the termination for convenience.
The client was unresponsive to our outreach for several months, and on August 23, 2022, we filed a lawsuit to enforce our rights and remedies under the applicable contractual arrangement. The client subsequently asked us to negotiate directly with the client to attempt to resolve the dispute. The negotiations were not successful, and on March 20, 2024, we reinitiated our lawsuit. Although we believe our products and services were delivered in accordance with the terms of our contract and that we are entitled to payment in connection with the termination for convenience, at this time the matter remains unresolved. We can provide no assurances that we will not incur additional costs as we pursue our rights and remedies under the contract.
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 2023 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 nine months ended September 30, 2024, 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, 2023.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Mine Safety Disclosures
None
ITEM 5. Other Information
(c) Trading Plans
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ITEM 6. Exhibits
| 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). | ||||||||||
*File herewith
39
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: October 23, 2024
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Exhibit 31.1
CERTIFICATIONS
I, H. Lynn Moore, Jr., certify that:
1.I have reviewed this quarterly report on Form 10-Q of Tyler Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over our financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for registrant and have:
a.Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its divisions, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (The registrant’s first quarter in the case of this quarterly report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
a.All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.
| Date: October 23, 2024 | By: | /s/ H. Lynn Moore, Jr. | ||||||||||||
| H. Lynn Moore, Jr. | ||||||||||||||
| President and Chief Executive Officer | ||||||||||||||
Exhibit 31.2
CERTIFICATIONS
I, Brian K. Miller, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Tyler Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over our financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for registrant and have:
a.Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its divisions, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (The registrant’s first quarter in the case of this quarterly report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
a.All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.
| Date: October 23, 2024 | By: | /s/ Brian K. Miller | ||||||||||||
| Brian K. Miller | ||||||||||||||
| Executive Vice President and Chief Financial Officer | ||||||||||||||
Exhibit 32.1
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
H. Lynn Moore, Jr., President and Chief Executive Officer of Tyler Technologies, Inc., (the “Company”) and Brian K. Miller, Executive Vice President and Chief Financial Officer of the Company, each certify pursuant to section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
1. The Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2024, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: October 23, 2024 | By: | /s/ H. Lynn Moore, Jr. | ||||||||||||
| H. Lynn Moore, Jr. | ||||||||||||||
| President and Chief Executive Officer | ||||||||||||||
| Date: October 23, 2024 | By: | /s/ Brian K. Miller | ||||||||||||
| Brian K. Miller | ||||||||||||||
| Executive Vice President and Chief Financial Officer | ||||||||||||||
A signed original of this written statement required by Section 906 has been provided to Tyler Technologies, Inc. and will be retained by Tyler Technologies, Inc. and furnished to the Securities and Exchange Commission upon request.